<PAGE>
As filed with the Securities and Exchange Commission on November 10, 1997
Registration No. 333-26137
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------------
Amendment No. 5 to
------------------
FORM S-1
REGISTRATION STATEMENT
under
THE SECURITIES ACT OF 1933
-----------------------------
PHYSICIANS QUALITY CARE, INC.
(Exact name of registrant as specified in its charter)
Delaware 8011 04-3267297
(State or other jurisdiction (Primary Standard Industrial (I.R.S. Employer
of incorporation or Classification Code Number) Identification No.)
organization)
950 Winter Street, Suite 2410
Waltham, Massachusetts 02154
(617) 890-5560
(Address, including zip code, and telephone number,
including area code of registrant's principal executive offices)
--------------------------------------
Jerilyn P. Asher
Chief Executive Officer and Chairman of the Board
PHYSICIANS QUALITY CARE, INC.
950 Winter Street, Suite 2410
Waltham, Massachusetts 02154
(617) 890-5560
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
------------------------------------
Copies to:
Thomas E. Neely, Esq.
Hale and Dorr LLP
60 State Street
Boston, Massachusetts 02109
(617) 526-6000
Approximate date of commencement of proposed
sale to the public: As promptly as practicable after
this Registration Statement becomes effective.
---------------------------------
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933 check the following box: [X]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering: [_]
--------------
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering: [_]
--------------
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box: [_]
---------------------------------
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant shall
file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
<PAGE>
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there be any sale of these securities
in any State in which such offer, solicitation or sale would be unlawful prior
to registration or qualification under the securities laws of any such state.
SUBJECT TO COMPLETION DATED NOVEMBER 10, 1997
PROSPECTUS
8,000,000 Shares
PHYSICIANS QUALITY CARE, INC.
Class A Common Stock
---------------------------------
This Prospectus relates to a total of 8,000,000 shares of Class A
Common Stock, $.01 par value per share (the "Common Stock"), of Physicians
Quality Care, Inc. ("PQC" or the "Company"). Of these shares, 4,800,000 are
being issued in connection with the merger of Clinical Associates, a Maryland
professional corporation ("Clinical Associates"), into Flagship Health P.A.
("Flagship"). For additional information regarding Clinical Associates and its
Affiliation transaction, see "Business - Clinical Associates Transaction."
3,200,000 shares of Common Stock may be offered and issued from time to time by
the Company in connection with future affiliation transactions with physician
practices (the "Affiliations") in accordance with Rule 415(a)(1)(viii) of
Regulation C under the Securities Act of 1933, as amended (the "Securities
Act"). These shares will ordinarily represent consideration paid upon the
affiliation of a physician practice with the Company, including up to 2,000,000
shares of Common Stock that may be issued as additional consideration in the
transaction with Clinical Associates. The Affiliations generally involve the
merger of a physician group into, or the sale of a physician group's assets to,
Flagship, Medical Care Partners, P.C., a Massachusetts professional corporation
("MCP"), or another professional corporation with which PQC may enter into a
long-term management agreement, pursuant to which the physicians receive cash
and/or Class A Common Stock, $.01 par value per share (the "Class A Common
Stock"). In most instances, the physicians also enter into long-term employment
agreements with Flagship or MCP. The compensation to be received by the
physician group, and the valuation of the Common Stock, are determined based
upon arms-length negotiations between PQC and the physician group. See "Business
Affiliation Structure." The Common Stock may also include shares to be delivered
upon the exercise or satisfaction of conversion or purchase rights which were
previously created or assumed by the medical practices whose businesses or
properties become affiliated with PQC.
---------------------------------
See "Risk Factors" beginning on page 10 for a
discussion of certain factors which should be considered
by prospective investors.
---------------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
October __, 1997
<PAGE>
THIS INVESTMENT INVOLVES A HIGH DEGREE OF RISK. NO ONE SHOULD INVEST WHO IS NOT
PREPARED TO LOSE HIS OR HER ENTIRE INVESTMENT. THERE IS NO PUBLIC MARKET FOR
THESE SECURITIES, THE SHARES WILL BE SUBJECT TO CONTRACTUAL RESTRICTIONS ON
RESALE, AND IT IS NOT EXPECTED THAT THERE WILL BE A MARKET FOR THE RESALE OF
THESE SECURITIES IN THE FORESEEABLE FUTURE.
IN MAKING AN INVESTMENT DECISION INVESTORS MUST RELY ON THEIR OWN EXAMINATION OF
THE COMPANY AND THE TERMS OF THE TRANSACTION DESCRIBED HEREIN, INCLUDING THE
MERITS AND RISKS INVOLVED. PROSPECTIVE INVESTORS SHOULD NOT CONSTRUE THE
CONTENTS OF THIS PROSPECTUS AS LEGAL OR INVESTMENT ADVICE. INVESTORS SHOULD
CONSULT THEIR OWN COUNSEL, ACCOUNTANTS OR BUSINESS ADVISORS AS TO LEGAL AND
RELATED MATTERS CONCERNING AN INVESTMENT IN THE SECURITIES OFFERED HEREBY.
THE COMPANY WILL MAKE AVAILABLE TO ANY PROSPECTIVE INVESTOR, PRIOR TO THE
CLOSING, THE OPPORTUNITY TO ASK QUESTIONS OF AND TO RECEIVE ANSWERS FROM THE
COMPANY CONCERNING THE TERMS AND CONDITIONS OF THE OFFERING, THE COMPANY OR ANY
OTHER RELEVANT MATTERS, AND TO OBTAIN ANY ADDITIONAL INFORMATION TO THE EXTENT
THE COMPANY POSSESSES SUCH INFORMATION OR CAN OBTAIN IT WITHOUT UNREASONABLE
EXPENSE.
BY ACCEPTING DELIVERY OF THIS PROSPECTUS, PROSPECTIVE INVESTORS RECOGNIZE AND
ACCEPT THE NEED TO CONDUCT THEIR OWN THOROUGH INVESTIGATION AND TO EXERCISE
THEIR OWN DUE DILIGENCE BEFORE CONSIDERING AN INVESTMENT IN THE COMPANY.
----------------------------------------------
AVAILABLE INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission") a registration statement on Form S-1 (the "Registration
Statement") under the Securities Act with respect to the shares of Common Stock
offered hereby. This Prospectus does not contain all of the information set
forth in the Registration Statement and the exhibits and schedules thereto, as
permitted by the rules and regulations of the Commission. For further
information with respect to the Company and the shares of Common Stock offered
hereby, reference is hereby made to such Registration Statement, exhibits and
schedules. Statements contained in this Prospectus as to the contents of any
contract or other document referred to are not necessarily complete, and in each
instance reference is made to the copy of such contract or other document filed
as an exhibit to the Registration Statement, each such statement being qualified
in all respects by such reference. A copy of the Registration Statement may be
examined without charge at the offices of the Commission at 450 Fifth Street,
N.W., Washington, D.C. 20549 and at regional offices of the Commission located
at 7 World Trade Center, 13th Floor, New York, New York 10048 and Citicorp
Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661-2511.
Copies of all or any part thereof may be obtained from the Public Reference
Section of the Commission, Washington, D.C. 20549 upon payment of the fees
prescribed by the Commission. The Commission maintains a website
(http://www.sec.gov) that contains the Registration Statement and exhibits.
----------------------------------------------
2
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TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Summary........................................................ 5
Risk Factors.............................................................. 13
Use of Proceeds........................................................... 23
Dilution.................................................................. 23
Dividend Policy........................................................... 24
Selected Financial Data................................................... 25
Management's Discussion and Analysis of Financial Condition and Results
of Operations............................................................ 29
Business.................................................................. 34
Management................................................................ 49
Certain Transactions...................................................... 54
Plan of Distribution...................................................... 54
Principal Stockholders.................................................... 56
Description of Capital Stock.............................................. 58
Shares Eligible for Future Sale........................................... 63
Legal Matters............................................................. 63
Index to Financial Statements.............................................F-1
</TABLE>
No person has been authorized in connection with the offering made
hereby to give any information or to make any representation not contained in
this Prospectus and, if given or made, such information or representation must
not be relied upon as having been authorized by the Company. This Prospectus
does not constitute an offer to sell or a solicitation of an offer to buy any of
the securities offered hereby to any person or by anyone in any jurisdiction in
which it is unlawful to make such offer or solicitation. Neither the delivery of
this Prospectus nor any sale made hereunder shall, under any circumstances,
create any implication that the information contained herein is correct as of
any date subsequent to the date hereof.
4
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PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and the Financial Statements and notes thereto appearing elsewhere
in this Prospectus, including the information under "Risk Factors."
The Company
Physicians Quality Care, Inc. ("PQC" or the "Company") provides
practice management services for multi-specialty medical practice groups. The
Company's objective is to establish networks of primary and specialty care
physicians and related diagnostic and therapeutic support services which can
provide comprehensive healthcare services in targeted geographic areas. PQC is a
development stage company that has actively managed physician practices since
August 1996. As a result of the costs associated with developing its network of
affiliated physicians, during most of which period PQC was not receiving any
revenue, PQC realized losses of approximately $2.1 million and $5 million for
the periods ending December 31, 1995 and 1996, respectively, and a loss of
approximately $2.5 million for the six month period ended June 30, 1997.
PQC was incorporated in March 1995 as a Delaware corporation. The
Company's executive offices are located at 950 Winter Street, Suite 2410,
Waltham, Massachusetts 02154 and its telephone number is (617) 890-5560.
PQC's strategy has four central elements:
. developing economies of scale in support services for physician
practices (i.e., administrative, billing and clerical staff), managed
care contracting and geographic penetration by affiliating with large
numbers of qualified physicians;
. assisting the affiliated practices in providing cost-effective
healthcare to special populations;
. building comprehensive local healthcare networks by developing
contractual or strategic relationships with providers of a full
continuum of health care services in the community; and
. improving the financial performance of affiliated physicians' practices
by seeking to maximize the value of each physician encounter.
The Company believes that this strategy will enable it to generate
increased demand for the services and capabilities of its affiliated physicians,
treat patients in lower cost settings and negotiate favorable managed care
contracts. The Company intends to achieve growth through the recruitment of
additional physicians, the expansion of managed care relationships and the
development of contractual or strategic relationships with providers of
ancillary services.
The core of PQC's proposed integrated healthcare delivery system is its
affiliation with groups of physicians who enter into long-term management
agreements with the Company. The Company assumes responsibility for non-medical
aspects of an affiliated physician's practice and focuses its efforts on
increasing revenues and improving operating margins, implementing management
information systems and negotiating managed care contracts. The physicians
remain responsible for, among other things, the medical, professional and
ethical aspects of their practices. By affiliating with the Company, physicians
have increased opportunity to access capital, continue to participate in the
profitability of their individual practices and, through stock ownership, share
a financial interest in the overall performance of the Company.
5
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General Affiliation Model. Although the details of each affiliation
transaction may differ, the Company has developed a general affiliation model
designed to capture the benefits of integration while preserving significant
physician autonomy (the "General Affiliation Model"). In the General Affiliation
Model, physicians initially affiliating with the Company in each geographic area
become stockholders of the Company and transfer their practices by merger or
asset sale to a newly-formed professional corporation or professional
association permitted to practice medicine under applicable law (each, an
"Affiliated Group"). These physicians, along with other physicians in that
geographic area who subsequently become part of an Affiliated Group and become
stockholders of the Company (collectively, the "Stockholder Physicians"),
execute multi-year employment agreements (each, an "Employment Agreement") with
the Affiliated Group at the time that they transfer their practice assets. The
Affiliated Group, in turn, enters into a 40-year agreement (a "Services
Agreement") with the Company pursuant to which the Company agrees to provide the
physicians in the Affiliated Group with comprehensive management services in
exchange for a fee. As consideration for transferring their practices to and
becoming employed by the Affiliated Group, Stockholder Physicians receive shares
of the Class A Common Stock and in some cases cash. The relative proportion of
the consideration to be paid in cash and Class A Common Stock is determined on
the basis of arms-length negotiations between PQC and the affiliating
physicians. In the case of affiliation transactions structured as tax-free
reorganizations, more than 50% (and in certain types of reorganizations 80%) of
the consideration must be received in Class A Common Stock. In the case of
physicians who have combined their practices into MCP, approximately $7.9
million (based upon a valuation of $2.50 per share) of the consideration has
been paid in the form of Common Stock and approximately $4.1 million in cash. In
the case of physicians who have combined their practices into Flagship,
approximately $17.1 million (based upon a valuation of $2.50 per share) of the
consideration to physicians has been paid in the form of Class A Common Stock
and approximately $2.3 million in the form of cash. Physicians who are not
stockholders of the Company may also be employed by the Affiliated Group.
The Employment Agreements with the Stockholder Physicians contain
certain restrictive covenants, including covenants relating to noncompetition,
confidentiality and nonsolicitation of employees. Each Employment Agreement
generally is terminable by the Affiliated Group with respect to any individual
Stockholder Physician upon the death or disability of such Stockholder Physician
or upon the occurrence of certain events that either interfere with the ability
of such Stockholder Physician to practice medicine or significantly diminish the
value of such Stockholder Physician's affiliation to the Affiliated Group. Each
Stockholder Physician may terminate his or her Employment Agreement under
certain circumstances, including without cause upon six months notice to the
Affiliated Group.
The two existing Affiliated Groups, Flagship and MCP, include both
primary care physicians and physicians with specialist practices and are
intended to be the only Affiliated Groups in their respective regions. At June
30, 1997, of the 98 physicians affiliated with the Company, 65 physicians have
primary care (including pediatric) practices and 33 physicians have specialist
practices. See " - Established Affiliations." PQC anticipates that future
Affiliated Groups similarly will be composed of both primary care physicians and
specialists in exclusive regions; however, the Company may pursue alternative
strategies in specific geographic regions.
Established Affiliations. The Company is in the early stages of its
development. The Company has completed affiliation transactions with (i)
thirty-nine (39) physicians in the Springfield, Massachusetts area who
transferred their practices to, and became employees of, a newly formed
Massachusetts professional corporation, MCP (the "Springfield Affiliated
Group"), which has a long-term Services Agreement with PQC and (ii) fifty-nine
(59) physicians in the greater Baltimore-Annapolis, Maryland area who
transferred their practices to, and became employees of, a newly formed Maryland
professional association, Flagship (the "Flagship Affiliated Group"), that also
has a long-term Services
6
<PAGE>
Agreement with PQC. The physicians in the Springfield Affiliated Group and
Flagship Affiliated Group remain in their pre-affiliation locations offering
their patients the continuity and convenience of decentralized offices.
Laboratory and administrative services are provided on a centralized basis,
however, thereby providing the Company with the potential for economies of scale
in purchasing and other administrative efficiencies.
The physicians in the Springfield Affiliated Group serve patients in
western Massachusetts and northern Connecticut. Twenty-four of the physicians
are engaged in primary care practices and 15 are engaged in specialist practices
including pulmonology, cardiology, oncology, infectious diseases, rheumatology
and gastroenterology. During 1996, the practices combined into the Springfield
Affiliated Group generated approximately $16.5 million in patient revenue. The
physicians in the Flagship Affiliated Group serve patients in the Baltimore-
Annapolis, Maryland area. Forty-one of the Flagship physicians are engaged in
primary care practices, including 20 physicians with pediatric practices.
Eighteen of the Flagship physicians are engaged in specialist practices,
including hematology, cardiology, oncology, infectious diseases, rheumatology,
gastroenterology and neurology. The practices combined into the Flagship
Affiliated Group generated approximately $25 million in patient revenue in 1996.
The Flagship Affiliated Group and the Springfield Affiliated Group are
structured in accordance with the General Affiliation Model, although there are
differences in the manner in which the fee earned by PQC is calculated. See
"Business -Affiliation Structure."
Clinical Associates. The Company has entered into an agreement with
Flagship, Clinical Associates and the stockholders and optionholders of Clinical
Associates pursuant to which Clinical Associates will become an affiliate of the
Company and subject to the Services Agreement between PQC and Flagship. The
Clinical Associates transaction is expected to close on June 30, 1997 or as soon
thereafter as practicable. The fifty-five stockholder and sixteen employee
physicians of Clinical Associates will become employees of the Flagship
Affiliated Group and will receive an aggregate of $3.0 million and 4,800,000
shares of the Common Stock. Within six months after the closing of the
affiliation transaction, the Clinical Associate physicians have the right to
elect to receive up to an additional 2,000,000 shares of Common Stock as
consideration for their affiliation with the Company. If the Clinical Associate
physicians elect in their sole discretion to receive such additional Common
Stock, the compensation arrangements discussed below will be amended so that an
aggregate annual allocation to PQC would be increased by $760,000 (or such
proportionately reduce amount if less than 2,000,000 shares of Common Stock
shares are elected).
The Clinical Associates transaction will add 71 physicians in the
Baltimore, Maryland area to the Flagship Affiliated Group, increasing the
Flagship Affiliated Group to 130 physicians and the total number of PQC
affiliated physicians to 169. Clinical Associates includes 29 primary care
physicians, including physicians with pediatric practices, and 42 physicians
engaged in specialist practices. Clinical Associates had patient service revenue
of approximately $__ million for the fiscal year ended June 30, 1997.
Approximately __% of such revenue was received under capitated contracts. The
method of determining the fees of PQC and the compensation of the Clinical
Associates physicians differs from the arrangements with respect to the current
Springfield and Flagship physicians. The Clinical Associates physicians have the
right to sell back the Common Stock to PQC at $3.00 per share if PQC has not
completed a public offering within four years of the closing of such
transaction. See "Business - Clinical Associates Transaction".
7
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The Offering
<TABLE>
<S> <C>
Common Stock offered by the Company............................................. 8,000,000 shares
Company Common Stock to be outstanding after this offering...................... 41,111,974 shares(1)
Use of Common Stock being offered............................................... To constitute all or a
portion of the purchase
price of the Affiliation with
Clinical Associates, and
future Affiliations. See "Use
of Proceeds."
</TABLE>
- ---------------
(1) Based upon shares outstanding on June 30, 1997, including outstanding shares
of Class A Common Stock, Class B-1 Common Stock, $.01 par value per share (the
"Class B-1 Common Stock"), Class B-2 Common Stock, $.01 par value per share (the
"Class B-2 Common Stock," and together with the Class B-1 Common Stock, the
"Class B Common Stock"), and Class C Common Stock, $.01 par value per share (the
"Class C Common Stock", and together with the Class A Common Stock and the Class
B Common Stock, the "Company Common Stock"). The number of shares to be
outstanding after the offering does not include any shares of Common Stock that
may be issued by the Company to finance its operations or cash payments in
Affiliations or shares issuable pursuant to outstanding options or warrants.
Such sources of equity financing may include certain institutional funds
affiliated with Bain Capital, Inc., ABS Capital Partners II, L.P., and Goldman,
Sachs & Co. (the "Institutional Investors") that have entered into an Amended
and Restated Class B and Class C Stock Purchase Agreement with the Company,
pursuant to which the Company sold 7,692,309 shares of Class C Common Stock to
the Institutional Investors on June 23, 1997 and the Institutional Investors
have the right to purchase up to an additional 6,153,846 shares of Class C
Common Stock at $3.25 per share. The Institutional Investors also received
warrants to purchase additional shares of Class C Common Stock. See "Business --
Equity Financing." On a fully diluted basis, assuming exercise of all
outstanding warrants and options, and the issuance of shares under certain earn-
out agreements, 61,478,167 shares of Class A, Class B and Class C Common Stock
were outstanding on June 23, 1997.
8
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Summary Financial Data
(in thousands, except per share data)
The following summary financial data for the Company should be read in
conjunction with the financial statements and notes thereto and "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
included elsewhere in this Prospectus. The summary financial data of the Company
for the period from March 20, 1995 (inception) through December 31, 1995 and for
the year ended December 31, 1996 have been derived from financial statements of
the Company which have been audited by Ernst & Young LLP, independent auditors.
Ernst & Young LLP's report on the financial statements of the Company for the
year ended December 31, 1996 and Note 2 to such financial statements which are
included in this Prospectus describe an uncertainty about the Company's ability
to continue as a going concern. The financial data as of June 30, 1997, and for
the six months ended June 30, 1996 and 1997 are derived from unaudited financial
statements of the Company. The unaudited financial statements include all
adjustments, consisting of normal recurring accruals, which management considers
necessary for a fair presentation of the financial position and the results of
operations for these periods. Operating results for the six months ending June
30, 1997 are not necessarily indicative of the results that may be expected for
the entire year ended December 31, 1997.
9
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<TABLE>
<CAPTION>
PQC
--------------------------------------------------------------------
Period from
March 20, 1995 Six months Six months
(inception) to Year Ended ended ended
December 31, December 31, June 30, June 30,
1995 1996 1996 1997
------ --------- ------ ------
<S> <C> <C> <C> <C>
Statement of Operations Data:
Net patient service revenue $ - $ 6,027 $ - $21,222
Retained by physicians - 2,195 - 7,467
Management fee revenue - 3,832 - 13,755
Nonphysician salaries and benefits - 1,816 - 6,382
Other practice expenses - 535 - 1,420
General corporate expenses 2,062 5,953 2,242 6,826
Depreciation and amortization 6 280 16 958
Provision for bad debts - 214 - 556
Operating income (loss) (2,068) (4,968) (2,258) (2,387)
Other, net 18 (13) (45) (69)
Income (loss) before income taxes (2,050) (4,881) (2,303) (2,456)
Income taxes (benefit) 32 78 9 -
Net income (loss) $(2,082) $(5,059) $(2,312) $(2,456)
Net income (loss) per common share $ (0.27) $ (1.81) $ (0.22) $ (0.35)
Weighted average common shares and
common share equivalents outstanding 7,706 10,786 10,399 25,746
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
PQC
-----------------------------
December 31, June 30,
1995 1996 1997
------ ------ ----------
<S> <C> <C> <C>
Balance Sheet Data:
Cash and cash equivalents............... $3,480 $136 $19,745
Net current assets ..................... 2,651 860 23,412
Total assets............................ 4,363 35,398 62,582
Total current liabilities............... 850 2,776 2,118
Long-term obligations................... 1,410 1,129 1,131
Class A Common Stock, subject to put.... - 31,851 39,939
Total stockholders' equity (deficiency). $2,104 $(358) $19,393
</TABLE>
12
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RISK FACTORS
In evaluating the Company and its business, prospective investors
should carefully consider the following risk factors, in addition to the other
information contained elsewhere in this Prospectus.
Lack of Operating History; History of Operating Losses; Going Concern
Qualification in Financial Statements
The Company was formed in March 1995, the first group of physicians
affiliated with the Company in August 1996 and a majority of the current
physicians affiliated with the Company in December 1996. Accordingly, the
Company's historical financial condition and results of operations may not be
indicative of the Company's results of operations and financial condition for
future periods. For the period from March 20, 1995 (inception) to December 31,
1995, the Company recorded a net loss of $2,082,264, for the year ended December
31, 1996, the Company recorded a net loss of $4,973,188 and for the six-month
period ended June 30, 1997, the Company recorded a net loss of $2,209,610. The
Company expects to incur operating losses for at least the immediate future and
to fund such operating losses through the issuance of additional equity and debt
securities. See "-- Need for Substantial Additional Capital." There can be no
assurance that the Company will achieve or maintain profitability. The report of
Ernst & Young LLP, PQC's independent public accountants, on the Company's
financial statements for the year ended December 31, 1996, and Note 2 to such
financial statements which are included in this Prospectus, describe an
uncertainty about the Company's ability to continue as a going concern. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Business."
Need for Substantial Additional Capital
The Company will require substantial capital resources to obtain the
necessary scale to become profitable and to fulfill its business plan.
Additional funds will be required to fund the acquisition, integration,
operation and expansion of affiliated practices, capital expenditures including
the development of the information systems to manage such practices, operating
losses and general corporate purposes. Through June 20, 1997, the Company has
satisfied its capital requirements through the issuance of $11.5 million of
Class B Common Stock to affiliates of Bain Capital, Inc. ("Bain Capital"),
private offerings of Class A Common Stock and a $3.5 million line of credit with
Banker's Trust Company ("Banker's Trust") as Agent, and the lenders from time to
time a party thereto (the "Credit Agreement"). On June 23, 1997, the Company
issued 7,692,309 shares of Class C Common Stock to the Institutional Investors
for an aggregate consideration of $25 million. Under the agreement with the
Institutional Investors (the "Equity Facility"), the Institutional Investors, at
their option, may purchase up to $20 million of Class C Common Stock in
addition to their rights under outstanding warrants. See "Business - Equity
Financing." The Company expects that this additional capital will be sufficient,
depending upon the Company's operating results and the consideration paid in
connection with the Affiliations, to satisfy the Company's projected capital
requirements for the next year. For the year ended December 31, 1996 and the
six-months ended June 30, 1997, net cash used by the Company in operating
activities were $5.7 million and $5.9 million respectively. If PQC continues to
incur operating losses, the Company would not be able to continue as a going
concern without access to additional sources of capital.
To date, a significant portion of the consideration paid in affiliation
transactions has been in the form of Class A Common Stock. If the percentage of
cash required to finance future affiliation transactions increases
significantly, the Company's capital requirement will also significantly
increase.
The Credit Agreement has significant financial and other conditions to
its continued availability and to avoid a default and there can be no assurance
that such conditions will be satisfied when capital is sought. The remaining
amount under the Equity Facility is only available with the consent of the
Institutional Investors. The Company's ability to meet the financial conditions
is dependent upon a significant increase in revenues and income from future
affiliation transactions and improved productivity of the Springfield and
Flagship Affiliated Groups. The Equity Facility also restricts the sources of
capital available to the Company without the consent of the Institutional
Investors. There can also be no assurance that the Company will be able to
refinance the Credit Agreement when the outstanding balance becomes due in
13
<PAGE>
January 1998. See "Business -- The Equity Financing" and "Business -- The Credit
Agreement." Except for the Credit Agreement, the Company has no committed
external sources of capital. Without the consent of the director elected by the
stockholders of the Class B-1 Common Stock (the "Class B-1 Director"), the
director elected by the stockholders of the Class B-2 Common Stock (the "Class
B-2 Director," and together with the Class B-1 Director the "Class B Directors")
and the directors elected by the holders of Class C Common Stock (the "Class C
Directors"), the Company may not obtain additional financing through external
borrowings or the issuance of additional securities. The issuance of additional
Capital Stock could have an adverse effect on the value of the shares of Common
Stock held by the then existing stockholders. There can be no assurance that the
Class B Directors and Class C Directors will approve such capital raising
activities or that the Company will be able to raise additional capital when
needed on satisfactory terms or at all. The failure to obtain additional
financing when needed and on appropriate terms could have a material adverse
effect on the Company.
Absence of Trading Market for Common Stock
No trading market for the Common Stock of the Company currently exists.
The Common Stock is not listed on a stock exchange or traded through the
National Association of Securities Dealers, Inc. There can be no assurance that
a public market in the Common Stock will develop in the future and the Company
does not expect such a market to develop until such time, if any, that the
Company completes a public offering of its securities other than to Stockholder
Physicians.
Contractual Restriction on Resale of Common Stock
The Equity Facility requires that most current and all future
stockholders of the Company become parties to a Stockholders Agreement dated as
of August 30, 1996 (the "Stockholders Agreement"), which agreement, among other
things, contains provisions which significantly limit the transferability of the
Class A Common Stock and provide the Company with a right to purchase Class A
Common Stock from Stockholder Physicians who are parties to such Stockholders
Agreement upon their termination of employment. Consequently, an investment in
the Common Stock should only be considered as a long-term investment and is
extremely illiquid. Stockholders will be required to make their own judgment as
to the value of their shares without the benefit of an independent market price.
In circumstances where the Company is entitled to repurchase the Common Stock of
a Physician Stockholder upon death or termination of the Physician Stockholder's
employment by an Affiliated Group or the right of the Physician Stockholders to
sell the Common Stock to the Company upon a Physician Stockholder's death, the
fair market value of the Common Stock, if a public market has not yet developed,
will be determined by the Board of Directors of the Company. See "Description of
Capital Stock -- Stockholders Agreement."
Risk that Future Affiliation Transactions Will Not Be Consummated; Costs of
Affiliation Transactions
There can be no assurance that the Clinical Associates transaction or
any future affiliation transactions will be consummated. There is no assurance
that the Company would be able to use the shares registered in this offering to
affiliate with additional medical practices on acceptable terms. In consummating
these future affiliation transactions, the Company will rely upon certain
representations, warranties and indemnities made by sellers with respect to the
affiliation transaction, as well as its own due diligence investigation. There
can be no assurance that such representations and warranties will be true and
correct, that the Company's due diligence will uncover all material adverse
facts relating to the operations and financial condition of the affiliated
medical practices or that all of the conditions to the Company's obligations to
consummate these future affiliations will be satisfied. Any material
misrepresentations could have a material adverse effect on the Company's
financial condition and results of operations. See "Business - Company
Strategy."
The Company has incurred significant (approximately $4.3 million during
1996) accounting, legal and other costs in developing its affiliation structure
and completing its initial affiliation transactions. The Company's ability to
enter into affiliation transactions with a significant number of physicians and
to achieve positive cash flow will be adversely affected unless it is able to
reduce the expenses associated with future
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transactions. There can be no assurance that the Company will be able to reduce
transaction costs on a per affiliated physician basis in the future.
Dependence upon Affiliated Medical Practices
Although the Company does not and will not employ physicians or control
the medical aspects of the practices of the physicians employed by the
Springfield Affiliated Group, the Flagship Affiliated Group or similar
Affiliated Groups, the Company's revenue and profitability are directly
dependent on the revenue generated by the operation and performance of and
referrals among the affiliated medical practices. The compensation to the
Company under its Services Agreements with the Affiliated Groups is based upon a
percentage of the profits or revenues generated by the Affiliated Groups'
practices with a substantial portion of the profits or revenues being allocated
to the physicians until threshold levels of income or revenues, based upon the
physicians' historical compensation or billings, are achieved. Accordingly, the
performance of affiliated physicians affects the Company's profitability and the
success of the Company depends, in part, upon an increase in net revenues from
the practice of affiliated physicians compared to historical levels. The
inability of the Company's Affiliated Groups to attract and retain patients, to
manage patient care effectively and to generate sufficient revenue or a material
decrease in the revenues of the Affiliated Groups would have a material adverse
effect on the financial performance of the Company. To the extent that the
physicians affiliated with the Company are concentrated in a limited number of
target markets, as is currently the case in western Massachusetts and Maryland,
deterioration in the economies of such markets could have a material adverse
effect upon the Company. See "Business - Company Strategy" and " - Affiliation
Structure".
Risks Related to Expansion of Operations
Integration Risks. The Company has completed in the past nine months
the initial transactions with the Springfield Affiliated Group and the Flagship
Affiliated Group, is in the process of closing the Clinical Associates
transaction, and is seeking to enter into Affiliations with additional
physicians. In the Springfield and Greater Baltimore-Annapolis areas and in
other potential affiliation markets, the Company is integrating physician
practice groups that have previously operated independently. The Company is
still in the process of integrating its affiliated practices. The Company may
encounter difficulties in integrating the operations of such physician practice
groups and the benefits expected from such affiliations may not be realized. Any
delays or unexpected costs incurred in connection with integrating such
operations could have an adverse effect on the Company's business, operating
results or financial condition.
While each Affiliation conforms to PQC's overall business plan, the
profitability, location and culture of the physician practices that have been
combined into Affiliated Groups are different in some respects. PQC's management
faces a significant challenge in its efforts to integrate and expand the
business of the Affiliated Groups. The need for management to focus upon such
integration and future Affiliations may limit resources available for the
day-to-day management of the Company's business. While management of the Company
believes that the combination of these practices will serve to strengthen the
Company, there can be no assurance that management's efforts to integrate the
operations of the Company will be successful. The profitability of the Company
is largely dependent on its ability to develop and integrate networks of
physicians from the affiliated practices, to manage and control costs and to
realize economies of scale. There can be no assurances that there will not be
substantial costs associated with such activities or that there will not be
other material adverse effects on the financial results of the Company as a
result of these integration and affiliation activities.
The Company intends to continue to pursue an aggressive growth strategy
through affiliations and internal development for the foreseeable future. The
Company's ability to pursue new growth opportunities successfully will depend on
many factors, including, among others, the Company's ability to identify
suitable growth opportunities and successfully integrate affiliated or acquired
businesses and practices. There can be no assurance that the Company will
anticipate all of the changing demands that expanding operations will impose on
its management, management information systems and physician network. Any
failure by the Company to adapt its systems and procedures to those changing
demands could have a material adverse effect on the operating results and
financial condition of the Company.
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Need to Hire and Retain Additional Physicians. The success of the
Company is dependent upon its ability to affiliate with a significant number of
qualified physicians and the willingness of such affiliated physicians to
maintain and enhance the productivity of their practices following affiliation
with PQC. The market for affiliation with physicians is highly competitive, and
the Company expects this competition to increase. The Company competes for
physician affiliations with many other entities, some of which have
substantially greater resources, greater name recognition and a longer operating
history than the Company and some of which offer alternative affiliation
strategies which the Company may not be able to offer. In addition, under
current law the Company has no or only limited ability to enforce restrictive
covenants in the employment agreements with the physicians with whom the Company
affiliates. The Company is subject to the risk that physicians who receive
affiliation payments may discontinue such affiliation with the Company,
resulting in a significant loss to the Company and a decrease in the patient
base associated with such affiliated physicians. There can be no assurance that
PQC will be able to attract and retain a sufficient number of qualified
physicians. If the Company were unable to affiliate with and retain a sufficient
number of physicians, the Company's operating results and financial condition
would be materially adversely affected. A material increase in costs of
affiliations could also adversely affect PQC and its stockholders.
Risk of Inability to Manage Expanding Operations. The Company is
seeking to expand its operations rapidly, which, if successful, will create
significant demands on the Company's administrative, operational and financial
personnel and systems. There can be no assurance that the Company's systems,
procedures, controls and staffing will be adequate to support the proposed
expansion of the Company's operations. The Company's future operating results
will substantially depend on the ability of its officers and key employees to
integrate the management of the Affiliated Groups, to implement and improve
operational, financial control and reporting systems and to manage changing
business conditions.
Dependence Upon the Growth of Numbers of Covered Lives. The Company is
also largely dependent on the continued increase in the number of covered lives
under managed care and capitated contracts. This growth may come from
affiliation with additional physicians, increased enrollment with managed care
payors currently contracting with the Affiliated Groups and additional
agreements with managed care payors. A decline in covered lives or an inability
to increase the number of covered lives under contractual arrangement with
managed care or capitated payors could have a material adverse effect on the
operating results and financial condition of the Company.
Risks of Industry Integration and Consolidation
The healthcare industry is in the process of rapid and fundamental
change, triggered by the deregulation of the acute care hospital reimbursement
system in many states and the growing strength of managed care plans. The growth
of the managed care industry is being driven, in part, by increasing pressure
from employers and other purchasers who are seeking to reduce their healthcare
premium costs. As the healthcare market in many states shifts from a heavily
regulated, largely fee-for-service payment system towards a deregulated,
capitated payment system, large integrated delivery systems are developing.
These systems are intended to provide adequate geographical coverage for major
purchasers of healthcare and to provide a system in which significant cost
savings can be realized from efficiencies resulting from the alignment of the
financial interests of physicians and other providers. Many of these integrated
systems may be substantially larger and better capitalized than the Company. In
addition, the rapidly changing alignment of numerous market participants creates
an uncertain environment in which it may be difficult for smaller market
participants, such as the Company, to implement an effective strategic plan. The
Company's inability to implement its business strategy could have a material
adverse effect on the Company. See "Business-Industry Overview" "- Competition."
Potential Regulatory Restraints Upon the Company's Operations
The healthcare industry is subject to extensive federal and state
regulation. Changes in the regulations or interpretations of existing
regulations could have a material adverse effect on the Company's business,
financial condition and results of operations. See "Business -- Governmental
Regulations."
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Prohibition on Corporate Practice of Medicine. The laws of most states,
including Massachusetts and Maryland, prohibit business corporations such as the
Company from practicing medicine or employing physicians to do so. The
contractual relationships with the Affiliated Groups are designed to comply with
these laws. Because there is very limited judicial or regulatory interpretation
of the scope of these laws in most states, however, there can be no assurance
that the Company's contractual arrangements will be found to comply with such
laws. Any determination that such contractual relationships violate such laws
could have a material adverse effect on the Company, and there can be no
assurance that the Company would be able to restructure its arrangements on
favorable terms or at all.
The Massachusetts Board of Registration in Medicine (the "BRM") has
proposed regulations that, if promulgated as proposed, might limit physicians
licensed within the Commonwealth of Massachusetts in entering into management
contracts with proprietary business entities unless a majority of the governing
board of those business entities are licensed physicians and certain other
conditions are met. The BRM also indicated that it may seek to limit
significantly the extent to which proprietary business entities may have control
or consultation rights with respect to medical decisions or business decisions
that may affect patient care, such as the amount of time each physician spends
with a patient. Extensive commentary has been filed in opposition to the
proposed regulations, and it is not known whether, when or in what form final
regulations will be promulgated. The final regulations may have a material
adverse effect on the Company's relationship with the Springfield Affiliated
Group and its ability to operate in Massachusetts as currently contemplated.
Comparable regulations have not been proposed in Maryland, but there can be no
assurance that such regulations will not be proposed or adopted.
Stark Law. The federal law commonly known as the "Stark law"
significantly limits the ability of physicians to maintain any ownership or
other financial relationship with an entity (including their own group practice)
to which they refer patients for a broad class of "designated health services",
including ancillary services such as laboratory and radiology services. The
Stark law is extremely broad and complex, and extensive regulations have been
promulgated governing the application of the Stark law to physician
relationships with clinical laboratories. These clinical laboratory regulations
are difficult to apply to many common situations, and regulations have not yet
been issued applying the law to other designated health services. However, the
government has indicated that it will look to the regulations applicable to
clinical laboratories for guidance with respect to the law's application to
other designated health services. Significant monetary penalties and denial of
reimbursement may be assessed for violation of the Stark law, and a provider may
be excluded from the Medicare and state health programs in certain instances. In
addition, violation of the Stark law may result in assertion of a federal false
claim, which could result in civil and criminal penalties. The assertion or
determination that the Company's contractual relationship with the physicians
employed by the Affiliated Groups or the relationship of the physicians within
one or more Affiliated Groups was in violation of the Stark law could have a
material adverse effect on the Company. In addition, there can be no assurance
that, in the event of such assertion, the Company would be able to restructure
its relationships with the Affiliated Groups upon favorable terms or at all.
Fraud and Abuse Laws. Federal law and the laws of many states prohibit
the offer, payment, solicitation or receipt of any form of remuneration in
return for the referral of Medicare or state health program (such as Medicaid)
patients or in return for the purchase or order of items or services that are
covered by Medicare or state health programs. These laws are commonly referred
to as the "fraud and abuse" laws. Violations of the fraud and abuse laws may
result in substantial civil or criminal penalties for individuals or entities,
including large monetary penalties and exclusion from participation in the
Medicare and state health programs. The Company has attempted to structure its
contractual relationships with the Affiliated Groups so as to avoid violating
the fraud and abuse laws, but in view of the broad and ambiguous nature of such
laws and the lack of applicable safe harbor exceptions, there can be no
assurance that the Company's contractual relationships with the Affiliated
Groups comply with such laws. Any allegation or determination that the Company
or the Affiliated Groups have violated the fraud and abuse laws could have a
material adverse effect on the Company.
Healthcare Reform. The United States Congress has considered various
types of healthcare reform, including comprehensive revisions to the current
healthcare system. It is uncertain what legislative proposals
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will be adopted in the future, if any, or what actions federal or state
legislatures or third party payors may take in anticipation of or in response to
any healthcare reform proposals or legislation. Healthcare reform legislation
adopted by Congress could, among other things, result in lower payment levels
for the services of physicians managed by the Company and lower profitability
for the Affiliated Groups, which could have a material adverse effect on the
operations of the Company.
Insurance Laws. Laws in all states regulate the business of insurance
and the operation of health maintenance organizations ("HMOs"). Many states also
regulated the establishment and operation of networks of healthcare providers.
While these laws do not generally apply to the hiring and contracting of
physicians by other healthcare providers, there can be no assurance that
regulatory authorities of the states in which the Company operates would not
apply these laws to require licensure of the Company's operations as an insurer,
as an HMO or as a provider network.
Risks of Capitated Contracts
The physician groups with which the Company is affiliated and proposes
to affiliate are parties to certain capitated contracts with third party payors,
such as insurance companies. The Company intends to seek to expand the capitated
patient base of its Affiliated Groups, particularly for Medicare enrollees. In
general, risk contracts pay a flat dollar amount per enrollee in exchange for
the physician's obligation to provide or arrange for the provision of a broad
range of healthcare services (including in-patient care) to the enrollee. A
significant difference between a full risk capitated contract and traditional
managed care contracts is that the physician is sometimes responsible for both
professional physician services and many other healthcare services, e.g.,
hospital, laboratory, nursing home and home health. The physician is not only
the "gatekeeper" for enrollees, but is also financially at risk for
over-utilization and for the actuarial risk that certain patients may consume
significantly more healthcare resources than average for patients of similar age
and sex (such patients are referred to herein as "high risk patients").
While physicians often purchase reinsurance to cover some of the
actuarial risk associated with high risk patients, such insurance typically does
not apply with respect to the risk of over-utilization until a relatively high
level of aggregate claims has been experienced and therefore does not completely
protect against any capitation risk assumed. If over-utilization occurs with
respect to a given physician's enrollees (or the physician's panel of enrollees
includes a disproportionate share of high risk patients not covered by
reinsurance), the physician is typically penalized by failing to receive some or
all of the physician's compensation under the contract that is contingent upon
the attainment of negotiated financial targets, or the physician may be required
to reimburse the payor for excess costs. In addition, a physician may be liable
for over-utilization by other physicians in the same "risk pool" and for
utilization of ancillary, in-patient hospital and other services when the
physician has agreed contractually to manage the use of those services. Neither
the Company nor the Affiliated Groups currently maintain any reinsurance
arrangement and, to date, the Affiliated Groups have not experienced losses from
participation in risk pools or incurred any material penalties or obligations
with respect to excess costs under capitated contracts. The participation of the
Flagship Affiliated Group under capitated contracts will significantly increase
after the Clinical Associates transaction. Also, the Company is pursuing a
strategy of seeking increased participation in capitated contracts for all of
its affiliated physicians. As the percentage of the Company's revenues derived
from capitated contracts increases, the risk of the Company experiencing losses
under capitated contracts increases. As the revenues from capitated contracts
became of increasing importance to PQC and its Affiliated Groups, the Company
will review the financial attractiveness of reinsurance arrangements.
Medical providers, such as the Affiliated Groups, are experiencing
increasing pricing pressure in negotiating capitated contracts while facing
increased demands on the quality of their services. If these trends continue,
the costs of providing physician services could increase while the level of
reimbursement could grow at a lower rate or decrease. Because the Company's
financial results are dependent upon the profitability of such capitated
contracts, the Company's results will reflect the financial risk associated with
such capitated contracts. See "Business -- Industry Overview." Liabilities or
insufficient revenues under capitated and other risk-sharing arrangements could
have a material adverse effect on the Company.
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Risks of Changes in Payment for Medical Services.
The profitability of the Company may be adversely affected by Medicare
and Medicaid regulations, cost containment decisions of third party payors and
other payment factors over which PQC and its Affiliated Groups have no control.
The federal Medicare program has undergone significant legislative and
regulatory changes in the reimbursement and fraud and abuse areas, including the
adoption of the resource-based relative value scale ("RBRVS") schedule for
physician compensation under Medicare, which may have a negative impact on PQC's
revenue. Efforts to control the cost of healthcare services are increasing.
PQC's Affiliated Groups contract with provider networks, managed care
organization and other organized healthcare systems, which often provided fixed
fee schedules or capitation payment arrangements which are lower than standard
charges. Future profitability in the changing healthcare environment, with
differing methods of payment for medical services, is likely to be affected
significantly by management of healthcare costs, pricing of services and
agreements with payors. Because PQC derives its revenues from the revenues
generated by its affiliated physician groups, further reductions in payment to
physicians generally or other changes in payment for healthcare services could
have an adverse effect on the Company.
Exposure to Professional Liability; Liability Insurance
In recent years, physicians, hospitals and other participants in the
healthcare industry have become subject to an increasing number of lawsuits
alleging medical malpractice, negligent credentialing of physicians, and related
legal theories. Many of these lawsuits involve large claims and substantial
defense costs. There can be no assurance that the Company will not become
involved in such litigation in the future. Through its management of practice
locations and provision of non-physician healthcare personnel, the Company could
be named in actions involving care rendered to patients by physicians or other
practitioners employed by Affiliated Groups. In addition, to the extent that
affiliated physicians are subject to such claims, the physicians may need to
devote time to defending such claims, adversely affecting their financial
performance for the Company, and potentially having an adverse effect upon their
reputations and client base. The Company and the Affiliated Groups maintain
professional and general liability insurance, which is currently maintained at
$1 million per occurrence and $3 million annually for each affiliated physician.
Nevertheless, certain types of risks and liabilities are not covered by
insurance, and there can be no assurance that the limits of coverage will be
adequate to cover losses in all instances.
Certain Federal Income Tax Considerations
Physician groups which operated as professional corporations ("PCs") in
Springfield prior to affiliating with the Company were merged into the
Springfield Affiliated Group, with stockholders of each PC receiving shares of
Class A Common Stock of the Company and cash in exchange for their capital stock
in the PC. Physician groups which operated as professional associations ("PAs")
in the greater Baltimore-Annapolis area prior to affiliating with the Company
were similarly merged into the Flagship Affiliated Group, with stockholders of
each PA receiving shares of Class A Common Stock of the Company and cash in
exchange for their capital stock in the PA. Each such merger is intended to
qualify as a "reorganization" under Section 368(a) of the Internal Revenue Code
of 1986, as amended (the "Code"), in which case no gain or loss would generally
be recognized by the PC or PA or the stockholders (other than as cash received)
of the PC or PA. The Company has not sought or obtained a ruling from the
Internal Revenue Service or an opinion of counsel with respect to the tax
treatment of the mergers of PCs or PAs into the Springfield or Flagship
Affiliated Groups. The Company does not believe that the Internal Revenue
Service is issuing rulings at this time on transactions using the Company's
affiliation structure. If a merger were not to so qualify, the exchange of
shares would be taxable to the stockholders of the PC or PA, and the
consideration (net of asset basis) issued in connection with the merger would be
taxable to the Affiliated Group into which such PC or PA was merged. Because of
such tax liability, failure of a merger or mergers to qualify as tax-free
reorganizations could have a material adverse effect on the applicable
Affiliated Group and the Company. Also, the inability to structure future
Affiliations on a tax deferred basis may adversely affect the Company's ability
to attract additional physicians.
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New Management; Dependence on Key Personnel
The current management structure and the senior management team of the
Company have been in place for a relatively short time. The Company's future
success depends, in large part, on the continued service of Jerilyn P. Asher,
the Chief Executive Officer, and on PQC's ability to continue to attract,
motivate and retain highly qualified senior management and employees. The
Company has an employment agreement with Ms. Asher. See "Management." The
Company does not maintain key person life insurance with respect to Ms. Asher.
As a development stage company, PQC has experienced some turnover in staff,
including two of the founding officers. The Company and one of the departed
founders are currently in a dispute concerning the vesting of approximately
400,000 shares of Class A Common Stock granted to the founder and the founder's
right to severance payments of approximately $440,000. See "Business - Legal
Proceedings." Although the Company has entered into employment agreements with
certain of its other executives that contain covenants not to compete with the
Company, there can be no assurance that the Company will be able to retain such
key executives or its senior managers and employees. The inability to hire and
retain qualified personnel or the loss of the services of personnel could have a
material adverse effect upon the Company's business and future business
prospects. The Company's Compensation Committee currently only has one member.
See "Management."
Risks Related to the Equity Financing
Risk of the unavailability of the Equity Facility. The $20 million
remaining under the Equity Facility is only available with the consent of the
Institutional Investors and there can be no assurance that the Institutional
Investors will be willing to provide additional capital when needed by the
Company. The Equity Facility also restricts the sources of capital available to
the Company without the consent of the Institutional Investors. Except for the
Equity Facility, the Company has no committed external sources of capital.
Except with the consent of the director elected by the Institutional Investors,
the Company may not obtain additional financing through external borrowings or
the issuance of additional securities. The Institutional Investors also have
received warrants to purchase a substantial number of shares of Class A Common
Stock. These warrants are exercisable at $2.50 or $3.25 per share, which
exercise price may be substantially below the fair market value of the Class A
Common Stock at the time of exercise. Any additional equity issuance could have
an adverse effect on the value of the shares of Class A Common Stock held by the
then existing stockholders. See "Business - Equity Financing."
Voting Control by Institutional Investors. Pursuant to the Company's
Restated Certificate of Incorporation (the "Restated Certificate") and the
Stockholders Agreement, the Institutional Investors have the right to appoint
the Class B and C Directors, four of the thirteen members (with one position to
remain vacant until such time as the remaining amount to be purchased by
affiliates of Goldman, Sachs & Co. under the Equity Facility is drawn down) of
the Board of Directors of the Company and the Institutional Investors have the
right to approve seven of the other directors. The Class B and C Directors are
entitled to five votes each, giving them a majority of the voting power of the
Board of Directors, (i) with respect to certain actions of the Company,
including public offerings, issuances and redemptions of equity securities,
declarations of dividends, incurrences of debt, mergers, assets sales and
liquidation of the Company and its affiliates, material amendments to the
management agreements between the Company and its affiliates and employment of
the Chief Executive Officer, and (ii) with respect to any matter before the
Board of Directors upon the occurrence of certain events, including the failure
of the Company to meet certain financial objectives. In addition to being
approved by the Board of Directors, certain actions of the Company, including
mergers, material asset sales, liquidation, certain medical practice affiliation
transactions, dividends, material changes in the business of the Company or its
affiliates, retention and dismissal of the Chief Operating and Financial
Officers, transactions with affiliates and commencement and management of
material litigation, must be approved by the Institutional Investors. See
"Business--Equity Financing" and "Description of Capital Stock." As a result of
those provisions of the Restated Certificate and "drag-along" rights in the
Stockholders Agreement, the Institutional Investors have significant control
over the actions of the Company including if and when the Company is sold to a
third party or a public market for the Company Common Stock is established.
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Risks from Put and Other Rights Held by Certain Stockholders.
Each physician and management stockholder who is a party to the
Stockholders Agreement, dated as of August 30, 1996, has the right to require
PQC to purchase the Common Stock owned by such stockholder at fair market value
upon their death or disability. Pursuant to the Stockholders Agreement, fair
market value, as determined by the Board of Directors, reflects an arms-length
private sale. In determining the fair market value, the Board is to consider
recent arms-length sales by the Company and the stockholders, as well as other
factors considered relevant. While the Stockholders Agreement does not limit the
Board's discretion, such other factors may include changes, since the last arms-
length sale, in the Company's financial conditions or prospects and any
valuation studies conducted by management of the Company or independent
valuation experts. Under the Stockholder Agreement, the Board is not permitted
to discount the fair market value of the Common Stock to reflect the fact that
the Common Stock being sold constitutes less than a majority of the outstanding
shares. The put option is only triggered by death or disability (and in a few
instances retirement) and will terminate upon the completion of a public
offering which results in at least $50.0 million in gross revenues to the
Company and which meets certain other criteria. To the extent that the "put
options" are likely to be exercised, the Company expects to fund such
repurchases from working capital, the Equity Facility or other sources. If the
Clinical Associates transaction is completed, the physician affiliated with
Clinical Associates will have the right to require the Company to repurchase
their Common Stock at $3.00 per share (in the form of a five year, non-interest
bearing note) in the event that the Company has not completed an initial public
offering with four years. The exercise of such right could have a material
adverse effect upon the Company.
Immediate and Substantial Dilution
Persons receiving shares of Class A Common Stock of the Company in the
expected transaction with Clinical Associates will incur an immediate and
substantial dilution of approximately 79% of their investment in such shares
because the net tangible book value of the Company Common Stock after such
transaction would be approximately $.63 per share as compared with the
anticipated $3.00 per share valuation of the Class A Common Stock in such
transactions. In addition, assuming the exercise of the repurchase rights
described above in determining such per-share dilution, recipients of such
shares, would incur immediate and substantial dilution of approximately 139% of
their investments in such shares because the net tangible book value of the
Company Common Stock after such transaction would be approximately $(1.18) per
share as compared with the anticipated $3.00 per share valuation of the Class A
Common Stock in such transaction. See "Dilution".
The Company expects to continue to issue Class A Common Stock as a
principal component of the consideration for future affiliation transactions. To
the extent that all or a portion of future affiliation transactions are paid in
cash, the Company may need to issue additional equity securities to fund such
payment or to fund anticipated operating losses. If the Company achieves its
goal of affiliating with a significant number of physicians, the number of
shares issued may be substantial, resulting in further dilution to the
stockholders of the Company at that time of any such affiliation.
Conflicts of Interest
Certain conflicts of interest are inherent in the structure of the
Company and its contractual and organizational relationships. The President of
the Springfield Affiliated Group (who is also a director of the Company) is a
practicing physician in the Springfield Affiliated Group, the president of the
Flagship Affiliated Group is a practicing physician in the Flagship Affiliated
Group and two directors of the Company, one of whom is also President of the
Company, are practicing physicians in the Flagship Affiliated Group. Four
directors of the Company are appointed by the Institutional Investors which are
the primary financing source for the Company. From time to time, the interests
of such persons, and persons serving in multiple roles in existing and future
affiliation transactions, may conflict with those of the Company due to such
relationships. The Company seeks to minimize or avoid such conflicts of interest
through contractual arrangements with the Affiliated Group that clearly specify
the responsibilities of PQC and the physicians in the Affiliated Groups, dispute
resolution structures, such as the Joint Policy Boards established with respect
to each Affiliated Group, at which certain issues are required to be addressed,
contractual arrangements with the Institutional Investors and the careful
selection of the individuals who occupy such multiple roles. See also "-- Voting
Control" and "Certain Transactions."
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Antitrust Considerations
The Company, its affiliated physicians and other entities with which it
contracts are subject to the United States and state antitrust statutes. Because
the Company will be contracting with third party payors and other entities who
could be deemed to compete with the Company or its Affiliated Groups, and for
other reasons, the Company, its affiliated physicians and other entities with
which it contracts could be subject to public and private investigations and
enforcement actions under such statutes. The Company believes that, given its
small size relative to its competitors and the overall market for physician
services, it is currently in compliance with applicable federal and state
anti-trust laws. However, as the Company and its Affiliated Groups increase in
size, particularly within specific markets, federal and state anti-trust laws
may act as a practical constraint upon the Company's expansion and operations.
Amortization of Intangible Assets
In connection with its Affiliations, the Company has recorded, and is
expected to continue to record, a significant amount of intangible assets as the
consideration paid to physicians exceeds the value of the practice assets. At
June 30, 1997, the Company had intangible assets of approximately $30.4 million
reflected on its balance sheet as long-term affiliation agreements. The Company
amortizes such intangible assets over a 30 year period. See the Notes to the
Company's Financial Statements. The amortization of these intangible assets,
while not affecting the Company's cash flow, has an ongoing negative impact upon
the Company's earnings. During the six month period ended June 30, 1997,
amortization of intangible assets contributed $777,036 to the Company's net loss
of $2.5 million. See "Managements' Discussion and Analysis of Financial
Condition and Results of Operations."
Competition
The business of providing healthcare related services is highly
competitive. Many companies, including professionally managed physician practice
management companies like the Company, have been organized to pursue the
acquisition of medical clinics, manage such clinics, employ clinic physicians or
provide services to IPAs. Large hospitals, other multi-speciality clinics and
other healthcare companies, HMOs and insurance companies are also involved in
activities similar to those of PQC. Some of these competitors have longer
operating histories and significantly greater resources than PQC. There can be
no assurance that PQC will be able to compete effectively, that additional
competitors will not enter the market, or that such competition will not make it
more difficult to acquire the assets of multi-speciality clinics on terms
beneficial to PQC. See "Business - Competition."
Risks Related to Penny Stock
As long as the Shares are not quoted by NASD or listed on a national
securities exchange and have a market value of less than $5.00, the Shares will
be "penny stock" for purposes of the Securities Exchange Act of 1934, as amended
(the "Exchange Act"). Prices of "penny stocks" are often not available and
investors may not be able to sell "penny stocks" once they purchase them.
Pursuant to the rules under the Exchange Act, broker-dealers effecting
transactions in "penny stocks," other than transactions with institutional
accredited investors, are subject to additional sales practice requirements. For
such transactions, a broker-dealer must reasonably determine that the securities
are suitable for the purchaser and that the purchaser is reasonably capable of
evaluating the risks of an investment in the securities. The broker-dealer must
also provide certain written disclosure of the risks of transaction in "penny
stock" to the investor and receive written consent to the transaction from the
investor prior to the sale. Consequently, in addition to the other restrictions
upon transfer of the Shares, the rules under the Exchange Act may adversely
affect the market price of the Shares, if a secondary market were to develop,
and the ability of broker-dealers to sell the Shares on behalf of an investor.
Forward-Looking Statements
Certain statements made in this Prospectus are forward-looking,
including without limitation statements with respect to the future affiliations,
capital requirements, future plans for expansion and future success of the
Company, and future development of the healthcare industry. Forward-looking
statements made herein are not guarantees of future performance and are subject
to risks and uncertainties, including without limitation the factors discussed
in this "Risk Factors" section, that could cause actual results to differ
materially from those described in the forward-looking statements.
22
<PAGE>
USE OF PROCEEDS
In exchange for the Common Stock (and other consideration in certain
cases), PQC expects that its Affiliated Groups will receive certain assets of or
ownership interests in physician practices, as well as certain contractual
rights.
Of the 8,000,000 shares of Common Stock covered by this Prospectus,
4,800,000 are being issued as partial consideration for the Clinical Associates
transaction. See "Business - Clinical Associates Transaction". The remaining
3,200,000 shares of Common Stock covered by the Prospectus may be issued in
future Affiliations, including up to 2,000,000 shares which may be issued as
additional consideration to Clinical Associates.
<TABLE>
<CAPTION>
Shares Value* %
<S> <C> <C> <C>
Clinical Associates 4,800,000 $14,400,000 60%
Future Affiliations 3,200,000 $ 9,600,000 40%
--------- ----------- ----
Total 8,000,000 $24,000,000 100%
*Assumes a value of $3.00 per share.
</TABLE>
For a discussion of the factors that the Company considers in selecting
medical groups with which to affiliate, see "Business - Company Strategy" and
"Business - Affiliation Structures."
DILUTION
The difference between the $3.00 per share valuation of the Company's
Class A Common Stock in the Clinical Associates transaction (the "Clinical
Transaction") and the pro forma net tangible book value per share of the Company
Common Stock after such transaction constitutes the dilution per share to
recipients of the Company's Class A Common Stock in the Clinical Transaction.
Net tangible book value per share is determined by dividing the net tangible
book value (total tangible assets less total liabilities) by the number of
outstanding shares of Company Common Stock. Because the number of shares
outstanding, the total liabilities of the Company and the net tangible book
value, and resulting dilution, per share of Company Common Stock all vary
significantly depending on whether certain repurchase rights discussed in
"Description of Capital Stock" are exercised by the Company's existing
stockholders, the following discussions of dilution assume, in turn, the
exercise and lack of exercise of such repurchase rights.
Dilution Assuming the Exercise of Repurchase Rights. Assuming the
exercise by stockholders of the Company of the repurchase rights described above
and based on the resulting 20,553,992 shares of Company Common Stock
outstanding, as of June 30, 1997, the Company had a pro forma net tangible book
value of $(15,657,462), or $(.76) per share of Company Common Stock. After
giving effect to the issuance of 4,800,000 shares of Class A Common Stock in the
Clinical Transaction at a valuation of $3.00 per share, the pro forma book value
of the Company at June 30, 1997 would have been $(30,009,462), or approximately
$(1.18) per share of Company Common Stock. This represents an immediate decrease
in net tangible book value of approximately $.42 per share to existing
shareholders and an immediate dilution of approximately $4.18 per share or
approximately 139% to recipients of Class A Common Stock in the Clinical
Transaction.
The following table illustrates the dilution per share of Company
Common Stock resulting from the Clinical Transaction, assuming the exercise of
the repurchase rights and without giving effect to the operating results of the
Company subsequent to June 30, 1997.
<TABLE>
<S> <C> <C>
Valuation of Class A Common Stock in Clinical Transaction............... $ 3.00
------
Pro forma net tangible book value before Clinical Transaction......... $(.76)
------
Decrease attributable to Clinical Transaction......................... (.42)
------
Pro forma net tangible book value after Clinical Transaction............ (1.18)
------
Dilution to recipients of Class A Common Stock in Clinical Transaction.. $ 4.18
------
</TABLE>
Dilution Assuming No Exercise of Repurchase Rights. Assuming no
exercise of the repurchase rights and based on the resulting 33,867,074 shares
of Company Common Stock outstanding, as of June 30, 1997, the Company had a pro
forma net tangible book value of $24,281,785, or $.72 per share of Company
common Stock. After giving effect to the issuance of 4,800,000 shares of Class A
Common Stock in the Clinical Transaction at a valuation of $3.00 per share the
pro forma book value of the Company at June 30, 1997 would have been
$24,281,785, or approximately $.63 per share of Company Common Stock. This
represents an immediate decrease in net tangible book value of $.09 per share to
existing shareholders and an immediate dilution of approximately $2.37 per share
or approximately 79% to recipients of Class A Common Stock in the Clinical
Transaction.
The following table illustrates the dilution per share of Company
Common Stock resulting from the Clinical Transaction, assuming no exercise of
the repurchase rights and without giving effect to the operating results of the
Company subsequent to June 30, 1997.
<TABLE>
<S> <C> <C>
Valuation of Class A Common Stock in Clinical Transaction............... $3.00
------
Pro forma net tangible book value before Clinical Transaction......... $ .72
------
Decrease attributable to Clinical Transaction......................... .09
------
Pro forma net tangible book value after Clinical Transaction............ .63
------
Dilution to recipients of Class A Common Stock in Clinical Transaction.. $2.37
------
</TABLE>
The following table summarizes the number of shares of Class A Common
Stock issued by the Company in the Clinical Transaction, such shares as a
percentage of outstanding Company Common Stock, the aggregate valuation of such
shares, such valuation as a percentage of consideration received by the Company
for shares of Company Common Stock, the average price per share paid by the
Company's existing shareholders and the per-share valuation of Class A Common
Stock in the Clinical Transaction. This table assumes no exercise of the
repurchase rights described above.
<TABLE>
<CAPTION>
Shares Issued Total Consideration Price/
--------------------- -------------------------- Valuation
Number Percent Amount Percent Per Share
---------- --------- ----------- ----------- ---------
<S> <C> <C> <C> <C> <C>
Existing Stockholders..... 24,671,615 83.7% $44,782,485 75.7% $1.82
New Investors............. 4,800,000 16.3% $14,400,000 24.3% $3.00
Total................... 29,471,615 100% $59,182,485 100.0%
</TABLE>
Jerilyn Asher, the Chief Executive Officer, Arlan Fuller, M.D., a
director, and Jay Greenberg, a former Executive Vice President of the Company,
received restricted stock grants of 4,162,500, 618,750 and 1,012,500 shares,
of Class A Common Stock respectively, in connection with the formation of the
Company and their employment agreements. Such stock is subject to vesting and
partial forfeiture in certain circumstances, including termination of employment
with the Company. The purchase price of the restricted stock was $0.01 per
share. Officers and employees of the Company have also received, as of March 31,
1997, options to purchase an aggregate of 574,836 shares of Class A Common Stock
at a weighted average exercise price of $0.49 per share. Other non-employees
hold additional options to purchase 17,500 shares of Class A Common Stock with
an exercise price of $0.85 per share. All other options or shares of the
Company's outstanding Class A and Class B Common Stock were issued at prices
between $2.40 and $2.50 per share. In addition, the Institutional Investors have
the right to purchase an additional 6,153,876 shares of Class C Common Stock
(and in connection with such purchase to receive warrants to purchase an
additional 6,153,846 shares of Class C Common Stock) at a purchase price of
$3.25 per share and there are warrants to purchase 6,415,000 shares of Class B
Common Stock at $2.50 per share and 7,692,309 shares of Class C Common Stock at
$3.25 per share outstanding. Since there is no public market for the Class A
Common Stock, future issuance of the Company Common Stock (except for shares
issued pursuant to the Equity Facility and related warrants which provided for
the purchase of shares, subject to adjustment to prevent dilution, of $3.25 per
share) will be issued at prices negotiated with physicians affiliating with the
Company and determined to reflect fair value at the time of issuance by the
Board of Directors. Any such future issuances or exercises of the rights
described above would result in further dilution to recipients of Class A Common
Stock of the Company in the Clinical Transaction.
23
<PAGE>
DIVIDEND POLICY
PQC has not declared or paid any dividends on the Company Common Stock
and does not anticipate paying cash dividends in the foreseeable future. The
terms of the Equity Facility restrict the payment of dividends. It is the
present intention of the Board of Directors to reinvest any earnings in the
business of the Company to support growth of its operations.
24
<PAGE>
Selected Financial Data
(in thousands, except per share data)
The following selected financial data for the Company should be read in
conjunction with the financial statements and notes thereto and "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
included elsewhere in this Prospectus. The selected financial data of the
Company for the period from March 20, 1995 (inception) through December 31, 1995
and for the year ended December 31, 1996, have been derived from financial
statements of the Company which have been audited by Ernst & Young LLP,
independent auditors. Ernst & Young LLP's report on the financial statements of
the Company for the year ended December 31, 1996 and Note 2 to such financial
statements which are included in this Prospectus describe an uncertainty about
the Company's ability to continue as a going concern. The financial data as of
June 30, 1997, and for the six months ended June 30, 1996 and 1997 are
derived from unaudited financial statements of the Company. The unaudited
financial statements include all adjustments, consisting of normal recurring
accruals, which management considers necessary for a fair presentation of the
financial position and the results of operations for these periods. Operating
results for the six months ending June 30, 1997 are not necessarily
indicative of the results that may be expected for the entire year ended
December 31, 1997.
25
<PAGE>
<TABLE>
<CAPTION>
PQC
---------------------------------------------------------------
Period from
March 20, 1995 Six months Six months
(inception) to Year ended ended ended
December 31, December 31, June 30, June 30,
1995 1996 1996 1997
------- ------- -------- --------
<S> <C> <C> <C> <C>
Statement of Operating Data:
Net patient service revenue........ $ - $ 6,027 $ - $21,222
Retained by physicians............. - 2,195 - 7,467
Management fee revenue............. - 3,832 - 13,755
Nonphysician salaries and benefits. - 1,816 - 6,382
Other practice expenses............ - 535 - 1,420
General corporate expenses......... 2,062 5,953 2,242 6,826
Depreciation and amortization...... 6 280 16 958
Provision for bad debts............ - 214 - 556
Operating income (loss)............ (2,068) (4,968) (2,258) (2,387)
Other, net......................... 18 (13) (45) (69)
Income (loss) before taxes......... (2,050) (4,881) (2,303) (2,456)
Income taxes (benefit)............. 32 78 9 -
Net income (loss).................. $(2,082) $(5,059) $(2,312) $(2,456)
Net income (loss) per common share. $ (0.27) $ (1.81) $(0.22) $(0.35)
Weighted average common shares and
common share equivalents
outstanding....................... 7,706 10,786 10,399 25,746
</TABLE>
<PAGE>
<TABLE>
<CAPTION> PQC
-----------------------------
December 31, June 30,
1995 1996 1997
------ ------ ----------
<S> <C> <C> <C>
Balance Sheet Data:
Cash and cash equivalents............... $3,480 $136 $19,745
Net current assets ..................... 2,651 860 23,412
Total assets............................ 4,363 35,398 62,582
Total current liabilities............... 850 2,776 2,118
Long-term obligations................... 1,410 1,129 1,131
Class A Common Stock, subject to put.... - 31,851 39,939
Total stockholders' equity (deficiency). $2,104 $(358) $19,393
</TABLE>
28
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with "Selected
Financial Data" and the Company's Financial Statements and Notes thereto
included elsewhere in this Prospectus.
Overview
The Company affiliates with and operates multi-specialty medical
practice groups. The first physician affiliation took place on August 30, 1996,
with 32 physicians in the Springfield, Massachusetts and Enfield, Connecticut
area. On December 11, 1996, PQC consummated the affiliation with the Flagship
Affiliated Group, which consisted of 59 physicians in Baltimore and Annapolis,
Maryland. PQC is working with these groups of physicians to improve operating
practices and to obtain managed care contracts.
On June 23, 1997, the Company issued 7,692,309 share of Class C Common
Stock for an aggregate consideration of $25 million. See "Business - Equity
Financing."
Results of Operations
The Company's Fee under Service Agreements. Pursuant to the Services
Agreement between PQC and the Springfield Affiliated Group, all amounts
allocated to the Springfield Affiliated Group under the employment agreements
with those physicians in any fiscal year are remitted to the Company. Under the
employment agreements with the twenty-nine Springfield Stockholder Physicians,
revenues from patient care remaining after payment of operating expenses,
including expenses of the Springfield Affiliated Group, ("Gross Margin") are
allocated first between the Springfield Affiliated Group's Compensation Pool
(the "Springfield Compensation Pool") and the Springfield Affiliated Group in a
95%/5% proportion until 95% of the base compensation of the Springfield
Stockholder Physicians is achieved, then to payment of certain other expenses
incurred with respect to the Springfield practices, and then 80% to the
Springfield Affiliated Group and 20% to the Springfield Compensation Pool until
the Springfield Affiliated Group has been allocated $1.5 million, with any
remaining Gross Margin being divided evenly between the Springfield Affiliated
Group and the Springfield Compensation Pool. Under the employment agreements
with the Springfield Stockholder Physicians who subsequently affiliated with the
Springfield Affiliate Group any Gross Margin attributable to these physicians
are allocated between the Springfield Compensation Pool and the Springfield
Affiliated Group in a 80%/20% proportion until the physicians receive 80% of
their base compensation, and then to payment of certain other expenses incurred
with respect to the Springfield practices, with any remaining Gross Margin being
divided evenly between the Springfield Compensation Pool and the Springfield
Affiliated Group. The base compensation of the Springfield Stockholder
Physicians is $6.7 million.
Pursuant to the Services Agreement between PQC and the Flagship
Affiliated Group and the employment agreements with the Flagship Stockholder
Physicians, revenues from patient services remaining after payment of
third-party operating expenses ("Net Margin") is allocated between the Flagship
Stockholder Physicians' Compensation Pool (the "Flagship Compensation Pool") and
reimbursement of the Company's direct expenses relating to the Flagship
Affiliated Group, based on a ratio of such budgeted compensation to such
budgeted expenses. Once both the Company's direct expenses and the aggregate
base physician compensation have been fully satisfied, any remaining Net Margin
will be divided evenly between the Company and the Flagship Compensation Pool.
The base compensation of the Flagship physicians is $8.15 million.
29
<PAGE>
For further information regarding the contractual arrangements between
PQC and its Affiliated Groups, see "Business - Affiliation Structure."
Under the foregoing contractual arrangements, the Company can improve
its management fee revenues by increasing the patient care revenue of its
Affiliated Groups, whether through improved billing and operating efficiency,
additional patient encounters or increased capitated revenues, and controlling
the expenses of Affiliated Groups. To the extent that patient revenue increases
at a greater rate than practice expenses, PQC's management fee will increase.
Conversely, if PQC is not able to control practice expenses or assist the
Affiliated Groups in increasing patient care revenue, PQC will earn no or only a
limited management fee. Under the proposed arrangements with Clinical
Associates, PQC will earn a fee based, in part, upon increases in billings, net
of bad debts and discounts, above historical levels, and a reduction in the
percentage of revenue needed to pay practice expenses. While this structure
causes PQC's management fee not to be as dependent upon controlling practice
expenses, PQC believes that both increased revenues and controlling costs will
continue to be important factors to its management fee growth as increased
billings depend upon affiliated physicians being motivated by competitive levels
of compensation.
The Company's and its Affiliated Groups' revenues are derived from
governmental programs, managed care payors and traditional fee-for-service
arrangements. The following table sets forth the approximate percentage of the
revenues received by the practices that were affiliated with the Company at
December 31, 1996 during the twelve-month period December 31, 1996:
<TABLE>
---------------------------------------------------------------
<S> <C>
Medicare 31.4%
---------------------------------------------------------------
Medicaid 4.2%
---------------------------------------------------------------
Capitated Managed Care Contracts 5.5%
---------------------------------------------------------------
Fee for Service Contracts 54.4%
---------------------------------------------------------------
Other 4.5%
---------------------------------------------------------------
</TABLE>
The Company
Six Months Ended June 30, 1997 and Six Months Ended June 30, 1996.
The completion of the Springfield and Baltimore affiliation
transactions resulted in the Company having net revenues of $21.2 million for
six months ended June 30, 1997 compared to no revenues in the first
six months of fiscal 1996. The increases in revenues were more than offset by
increases in expenses. The affiliation transactions resulted in the addition of
physicians compensation, non-physician salaries and benefits, other practice
expenses, provision for bad debt, and depreciation and amortization. In
addition, the $4.58 million increase in general corporate expenses reflects the
inclusion of non-salary clinic expenses. Amortization of intangibles acquired in
the transactions will increase in future periods as future transactions are
completed. The profitability of the Company in future periods will be dependent
upon increases in the revenues of the affiliation physicians and the Company's
ability to manage general corporate and other expenses.
30
<PAGE>
Although the completion of the Springfield and Baltimore affiliation
transactions resulted in the Company having management fee revenue of $3.8
million for the year ended December 31, 1996 as compared to no revenue in the
period from March 20, 1995 to December 31, 1995, increases in expense,
particularly corporate expense, exceeded the growth of revenues. The $3.9
million increase in general corporate expense in fiscal 1996 as compared to the
period from inception to December 31, 1995 reflects the increase in corporate
and regional office level personnel necessary to support operations, finance and
affiliations. Due to the completion of the affiliation transactions,
depreciation, amortization and the provision for bad debts are significantly
higher. Amortization of goodwill acquired in the transactions will increase in
future periods as it is reflected for a full year and as future transactions are
completed. The profitability of the Company in future periods will be dependent
upon an increase in the revenues of the affiliated physicians and the Company's
ability to control general corporate and other expenses.
31
<PAGE>
Liquidity and Capital Resources
The Company's principal requirements for capital are payments to
physicians in connection with affiliation transactions with the Company and its
Affiliated Groups, transaction costs associated with such affiliation
transactions, working capital requirements for its Affiliated Groups and the
funding of operating losses. The Company anticipates that its liquidity and
capital resource requirements will be similar on a long-term and short-term
basis. Due to its start-up status, the Company has incurred significant
operating losses to date and does not have operating cash flow to fund growth or
further losses. The Company cannot continue as a going concern without external
capital sources. The Company's principal sources of capital to date have been
the issuance of Class B and Class C Common Stock under the Equity Facility,
issuances of Class A Common Stock to Physician Stockholders, other issuances of
Class A Common Stock to private investors and borrowing under a Credit Agreement
with Bankers Trust Company.
During 1996, the Company paid aggregate consideration of approximately
$29.5 million in connection with affiliation transactions. Of such amount,
approximately $5.9 million was paid in cash and approximately $23.6 million was
paid in Class A Common Stock. Of these amounts, $3.2 million in cash and $6.5
million in Class A Common Stock was paid to physicians in the Springfield
Affiliated Group and $2.7 million in cash and $17.1 million in Class A Common
Stock was paid to the physicians in the Flagship Affiliated Group. The majority
of such payments were accounted for as an addition to intangible assets, which
represented $33 million of the Company's total assets of $35 million at December
31, 1996. The Company is amortizing the intangible assets over 25 years. The
Company has entered into or completed during 1997 Affiliation transactions with
a value of $19.7 million, $3.8 of which was or will be paid in cash.
Of the Company Common Stock outstanding 13,313,082 shares of Class A
Common Stock are subject to a put option which provides for the put of the
shares back to the Company at fair value upon the death or disability of the
holder. In addition, 1,072,285 of such shares are also subject to a fair value
put option back to the Company at the later of the shareholder's retirement from
the Company or 18 months after the date (December 11, 1996) of the shareholders'
agreement. Consequently, these 13,331,082 shares of Class A Common Stock have
been recorded at fair value outside of permanent equity in the accompanying
balance sheet. Under the Company's stockholder agreements, the holders of an
aggregate of 10,626,163 shares of Class A Common Stock, the Company may
repurchase such shares for fair value if the shareholder's termination of
employment with the Company is without cause or is by resignation, and for the
lower of cost or fair value if termination is with cause. The terms of such
repurchase provision may not permit the Company to fully recover its affiliation
payments to the physician or reflect the cost of affiliation transactions at the
time of termination. To date, no Stockholder Physician has terminated an
employment agreement or repurchased any practice assets. All of the above put
and call provisions expire on the closing of a public offering of the Company's
common stock which results in net proceeds to the Company of at least $50.0
million and which meets certain other criteria. Because the Company's shares are
subject to a number of restrictions in the stockholders' agreements and will not
trade until the occurrence of such an offering, the Company believes it is a
nonpublic entity for compensation accounting purposes and, accordingly, has not
recorded any compensation expense for
32
<PAGE>
these puts and calls. On December 31, 1996 and February 12, 1997, the Company
issued an aggregate of 614,000 additional shares of Class A Common Stock at
$2.50 per share for a total consideration of $1.535 million.
Working capital existing at the date of affiliation has generally been
retained in the practices. Therefore, additional working capital investment is
generally only required to the extent billing processing is slowed during payor
administrative changes after an affiliation and also to fund growth of revenues.
At December 31, 1996, the Company and its affiliated entities had total net
accounts receivable of $5.4 million. At June 30, 1997, the Company and its
affiliated entities had total net accounts receivable of $7,446,079.
The Company currently anticipates that its and the Affiliated Group's
capital expenditures during 1997 will be approximately $1,500,000.
The Company has executed a contract with HBO and Company that obligates
the Company to purchase $1.1 million worth of equipment and licenses pertaining
to practice management systems. The term of the contract is five years.
At March 31, 1997, Bain Capital had $20 million of unused commitment to
purchase the Company's Class B Common Stock. Such commitment was terminated on
June 20, 1997 in connection with the amendment of the Equity Facility at which
time $25 million was issued in consideration for the issuance of 7,682,309
shares of Class C Common Stock. An additional $20 million in shares of Class C
Common Stock may be issued in the future. The purchase of such additional shares
of Class C Common Stock is at the option of the Institutional Investors and
there can be no assurance that such equity capital will be available when
needed. Pursuant to the Equity Facility, the Company has also agreed that it
will not use other sources of equity or debt financing, other than bank
financing, without the consent of the Institutional Investors. See "Business --
The Equity Financing."
On January 16, 1997, the Company entered into the Credit Agreement with
Bankers Trust, as Agent, and the lenders from time to time a party thereto,
pursuant to which the lenders have agreed, subject to the terms and conditions
set forth in the Credit Agreement, to provide a revolving credit facility (the
"Facility") to the Company in an aggregate amount of up to $3.5 million (subject
to downward adjustment in the event that the Company and the Affiliated Groups
do not maintain an adequate amount of accounts receivable). On June 30, 1997,
there were no outstanding borrowings under the Facility and the remaining
available commitment on such date was $3.5 million. The Company will need to
repay or refinance the outstanding balance under the Credit Agreement when the
facility terminates in January 1998. While the Company currently expects to
enter into a replacement credit facility there can be no assurance that the
Company will be able to do so or to do so on terms favorable to the Company. See
"Business -- The Credit Agreement."
In addition to the Equity Facility, borrowing under the Credit
Agreement and cash generated by the operations of the Affiliated Groups, the
Company has also obtained capital to fund operating losses and affiliation
payments through the private placement of Class A Common Stock. In August 1996,
the Company issued $1.0 million of convertible notes, all of which were
converted into Class A Common Stock at a conversion price of $2.50 per share on
August 30, 1996. The proceeds from the convertible notes were used to fund the
Company's operations prior to the initial closing of the Equity Facility. On
December 31, 1996 and February 12, 1997, the Company issued an aggregate of
614,000 additional shares of Class A Common Stock at $2.50 per share for a total
consideration of $1.535 million.
33
<PAGE>
BUSINESS
The Company
Physicians Quality Care, Inc., which was incorporated in March 1995,
provides practice management services for multi-specialty medical practice
groups. The Company's objective is to establish networks of primary and
specialty care physicians and related diagnostic and therapeutic support
services which can provide comprehensive healthcare services in targeted
geographic areas.
PQC's strategy has four central elements: developing economies of scale
in support services for physician practices (i.e., administrative, billing and
clerical staff) and managed care contracts and geographic penetration by
affiliating with large numbers of qualified physicians in targeted geographic
areas, assisting the affiliated practices in providing cost-effective healthcare
to special populations, building comprehensive local healthcare networks by
developing contractual or strategic relationships with providers of, ancillary
services such as home healthcare and weight and health management and improving
the financial performance of affiliated physician's practices by seeking to
maximize the value of each physician encounter. To date, the Company has focused
upon developing its presence in western Massachusetts, northern Connecticut and
Maryland. The Company believes that once the Company has developed a large base
of affiliated physicians its strategy will enable the Company to generate
increased demand for the services and capabilities of its affiliated physicians,
treat patients in lower cost settings and negotiate favorable managed care
contracts. The Company intends to achieve growth through the recruitment of
additional physicians, the expansion of managed care relationships and the
development of contractual or strategic relationships with providers of
ancillary services.
The core of PQC's proposed integrated healthcare delivery system is its
affiliation with groups of physicians who enter into long-term management
agreements with the Company. The Company assumes responsibility for non-medical
aspects of an affiliated physician's practice and focuses its efforts on seeking
to increase revenues and improve operating margins, implementing management
information systems and negotiating managed care contracts. The physicians
remain responsible for, among other things, the medical, professional and
ethical aspects of their practices. By affiliating with the Company, physicians
have increased opportunity to access capital, continue to participate in the
profitability of their individual practices and, through stock ownership, share
a financial interest in the overall performance of the Company.
Industry Overview
Traditionally, health insurance plans reimbursed providers on a
fee-for-service basis, a system that offered very little incentive for
efficiency. In recent years, the healthcare industry has undergone significant
changes as both the private and public sectors seek to slow spending growth.
Since the early 1980s, much of the healthcare coverage in the U.S. has shifted
to managed care systems which offer cost savings in exchange for limiting the
utilization of services. Moreover, there has been a shift to prepaid insurance
plans that offer comprehensive healthcare services to enrollees and pay
providers a fixed, prepaid monthly premium. The most prevalent of these prepaid
health insurance alternatives is the health maintenance organization ("HMO"). To
remain competitive, HMOs and other similar payors seek to align themselves with
the most cost- and service-effective providers, generally channeling patient
volume to such providers.
In the managed care environment, doctors must contract or affiliate
with leading insurers or healthcare networks in their practice area. The
third-party payors rely on primary care physicians to play a "gatekeeping" role
and to make important medical decisions for the patient. Many payors look to
share the risk of providing services through capitation arrangements which
provide for fixed payments for patient care over a specified period of time. In
general, capitated contracts pay a flat dollar amount per enrollee in exchange
for the physician's obligation to provide or arrange for the provision of a
broad range of healthcare services (including inpatient care) to the enrollee. A
significant difference between a capitated contract and traditional managed care
contracts is that the physician is sometimes responsible for both professional
physician services and many other healthcare services, e.g., hospital,
laboratory, nursing home and home health. The physician is not only the
"gatekeeper" for enrollees, but is also financially at risk for over-utilization
and for the actuarial risk that certain patients may consume significantly more
healthcare resources than average for patients of similar age and sex (such
patients being referred to as "high risk patients"). Although physicians often
purchase reinsurance to cover some of the actuarial risk associated with
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high risk patients, such insurance typically does not apply with respect to the
risk of over-utilization until a relatively high level of aggregate claims has
been experienced. If over-utilization occurs with respect to a given physician's
enrollees (or if the physician's panel of enrollees includes a disproportionate
share of high risk patients not covered by reinsurance), the physician typically
is penalized by failing to receive some or all of the physician's compensation
under the contract that is contingent upon the attainment of negotiated
financial targets, or the physician may be required to reimburse the payor for
excess costs. In addition, a physician may be liable for over-utilization by
other physicians in the same "risk pool" and for utilization of ancillary,
inpatient hospital and other services when the physician has agreed
contractually to manage the use of those services. Under this payment system,
primary care physicians have important economic incentives to reduce costs by
ensuring the efficient utilization of other providers of care, shifting care to
outpatient settings where feasible, monitoring the progress of patients
throughout the course of treatment and encouraging preventive healthcare.
In this environment, physicians are facing reimbursement pressures,
greater administrative burdens, increasing financial responsibility for the risk
of patient care, and a shift in demand from specialty to primary care. In
addition, legislative changes have substantially limited a physician's ability
to maintain an ownership interest in entities that provide ancillary services
such as outpatient laboratories, infusion centers and diagnostic and
rehabilitation facilities. These factors have all contributed to a moderation,
if not reduction, in the growth of many physicians' incomes. With greater
oversight by third-party payors, physicians are also facing a decrease in
control over medical decisions and the administration of their practices.
In response to these changes in the marketplace, many physicians are
joining together to maintain clinical autonomy, create greater negotiating
leverage vis-a-vis HMOs and other third party payors and reduce escalating
administrative costs. Physicians also are increasingly abandoning traditional
private practice which typically has higher operating costs and little
purchasing power with suppliers and must spread overhead over a relatively small
revenue base in favor of affiliations with larger organizations. Three basic
groups have emerged as managers of physician practices each of which encompasses
several variations in format: hospitals, which may employ physicians directly or
provide support through a management services organization ("MSO"); insurance
companies, which may employ physicians directly through HMOs or may provide
management services through an affiliated MSO; and independent, investor-owned
physician practice management companies.
Company Strategy
The Company believes that physician practice management companies
("PPMs"), such as PQC, offer physicians significant advantages over other
alternatives in the industry consolidation. PPMs provide physicians with
improved practice management and an opportunity to participate in the growth of
the PPM through stock ownership while maintaining control over medical
decisions. The physician market is currently highly fragmented, and PPMs and
other organizations providing physicians with management alternatives have thus
far captured only a small portion of this potential market. Thus, the Company
believes there is a significant opportunity to expand the number of its
affiliated physicians.
In addition, the Company believes that because physicians can serve as
gatekeepers for patient care, they can exercise direct control over healthcare
spending and should be in a position to share in the savings generated by the
cost containment practices they adopt. For a fee or a percentage of the group's
earnings, a PPM provides physician groups with administrative and practice
management services that are needed for a physician group to realize these cost
savings and to seek to optimize contractual relationships with managed care
organizations, thus retaining some or most of the cost savings so generated.
The central elements of the Company's strategy are to develop long-term
affiliations with physicians, focus on cost effective healthcare delivery to
special populations, and build comprehensive local healthcare networks. To date,
the Company has focused upon developing a network of affiliated physicians. The
Company believes that its strategy will enable the Company to generate increased
demand for the services and capabilities of its affiliated physicians, treat
patients in lower cost settings and negotiate favorable managed care contracts.
Develop long-term affiliations with physicians. PQC seeks to affiliate
with physicians in solo or group practices by entering into contractual
arrangements pursuant to which PQC, or a professional corporation or
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professional association affiliated with PQC, assumes management of non-medical
aspects of the practices. Upon affiliation, PQC seeks to provide the physicians
with, among other things, increased opportunity to access capital, management
experience, improved information systems and increased opportunity to
participate in favorable managed care contracts. The Company intends to assist
affiliated physicians in improving clinical outcomes and seeks to keep medical
costs down by merging physicians into Affiliated Groups. The Company's structure
allows physicians to continue to practice in their existing locations with no
disruption to patient flow patterns while providing access to coordinated
ancillary services. By affiliating with PQC, physicians, through the revenue
sharing provisions of their employment agreements and the Services Agreements
between the Affiliated Group and PQC, continue to participate in the
profitability of their individual practices and, through stock ownership, share
a financial interest in the overall performance of the Company. Physicians
constitute a majority of the Board of the Directors of PQC and all local
advisory boards, which control such decisions as clinical protocols and
utilization review, payor relations and the addition of ancillary services.
Balance of Primary Care Physicians and Specialists. PQC believes that a
successful system should be balanced between primary care physicians and
specialists to provide efficient coordination and utilization of the appropriate
levels of care, and PQC intends to seek to develop this balance in the physician
groups with which it affiliates. Of the 98 physicians affiliated with the
Company at June 30, 1997, 65 are engaged in primary care practices and 33 are
engaged in specialist practices. The Company believes the industry trend toward
integrated delivery systems will result in an increasing demand for primary care
physicians because a higher degree of coordination of care and risk-sharing will
be required than that which can be achieved in a system controlled by
specialists. The Company's strategy is to have the primary care physician serve
as the central manager in the patient system and to develop effective
coordination between specialists and the primary care physicians within its
network.
Focus on special populations. PQC believes that the management of
healthcare costs for certain populations provides significant opportunities that
are not being addressed in the marketplace. The Company believes that special
populations, including the elderly, the disabled and those with debilitating
chronic or high-cost, complex diseases represent a minority of the population
but account for a disproportionately high percentage of the healthcare costs in
the United States due to the significantly greater need of such patients for
medical care compared to the population as a whole. The Company believes that a
significant portion of these costs can be avoided with effective case
management, use of information systems, and coordinated use of the full
continuum of healthcare. At present, a relatively small percentage of these
patients are enrolled under capitated contracts. However, the Company believes
that the cost pressures that fostered the development of managed care for other
segments of the population should have an even more significant impact on the
rapid development of managed care for such patients. Through affiliation with
physicians and academic experts who specialize in geriatrics and medical
conditions that disproportionately affect these population segments, effective
use of case management techniques designed specifically for such populations,
and management information systems, the Company believes that its affiliated
physicians should be able to manage cost effectively the risks of providing care
to these populations on a capitated basis.
Improved Medical Quality and Performance. Over time, the Company
intends that its affiliated physicians will devise medical protocols and the
Company will perform outcome analyses, such that the most effective medical
practices in each network can be shared across physician groups. The Company is
in the process of establishing a quality assurance program that will incorporate
peer review, self-critiquing mechanisms, patient satisfaction surveys,
continuing medical staff development and regular continuing medical education
seminars. Once a large base of affiliated physicians at Affiliated Groups is
established, medical directors of each local care network will participate in
the Company's National Medical Advisory Board that will meet regularly to
establish and review medical standards, policies and procedures for all
physicians affiliated with the Company.
Affiliation Structure
General Affiliation Model. Although the details of each affiliation
transaction may differ, the Company has developed the General Affiliation Model,
designed to capture the benefits of integration while preserving significant
physician autonomy. In the General Affiliation Model, physicians initially
affiliating with the Company in each geographic area who will become
stockholders of the Company transfer their practices by mergers or asset sales
to an Affiliated Group, a newly-formed professional corporation or professional
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association permitted to practice medicine under applicable law. These
physicians, along with other physicians in that geographic area who subsequently
become part of an Affiliated Group and become stockholders of the Company (the
"Stockholder Physicians"), execute an Employment Agreement with the Affiliated
Group at the time that they transfer their practice assets. The Affiliated
Group, in turn, enters into a 40-year Services Agreement with the Company
pursuant to which the Company agrees to provide the physicians in the Affiliated
Group with comprehensive management services in exchange for a fee. As
consideration for transferring their practices to and becoming employed by the
Affiliated Group, Stockholder Physicians receive shares of the Company's Common
Stock and in some cases cash, the amount of which is negotiated on an individual
basis between each Stockholder Physician and the Company. Physicians who are not
stockholders of the Company may also be employed by the Affiliated Group.
The factors that the Company considers in selecting physician or
physician groups for Affiliation include the location of the practice, whether
the practice can be successfully integrated into an Affiliated Group, the
ability of the Company to assist the physician to increase billings and control
costs, the size of the practices, the compensation sought by the physician or
physician group, the nature of the physician's practice and the reputation of
the physician in the medical community.
All of the outstanding capital stock of each Affiliated Group is held
by a Stockholder Physician designated by the Company (the "Affiliated Group
Stockholder"). At the time of the affiliation, the Affiliated Group Stockholder
enters into an agreement (the "Designation Agreement") with the Company and the
Affiliated Group pursuant to which he or she agrees to consult with the Company
in voting the stock of the Affiliated Group, agrees to transfer the stock of the
Affiliated Group without consideration to another licensed physician at the
direction of the Company and agrees to pay over to the Company any dividend or
distribution on the stock received from the Affiliated Group. The Designation
Agreement also provides that the stock of the Affiliated Group is automatically
transferred at the direction of the Company in the event that the Affiliated
Group Stockholder attempts to transfer it to a third party. The Designation
Agreement provides, however, that the Affiliated Group Stockholder is not
required to consult with the Company as to matters requiring the exercise of
professional medical judgment.
The Employment Agreements contain certain restrictive covenants,
including covenants relating to noncompetition, confidentiality and
nonsolicitation of employees. Pursuant to these restrictive covenants, the
Stockholder Physicians agree, during the term of the employment agreement and
for a one year period thereafter, not to establish, operate or provide medical
services in a specified geographic region (generally 15 miles within the
physician's practice site), subject to certain limited exceptions. In addition,
the Stockholder Physicians agree during the employment agreement and for a two
year period thereafter not to provide certain other services related to the
practice of medicine in the geographic region and not to solicit any employee or
patients of the Affiliated Group. Under current state laws and judicial
decisions that restrict the enforcement of non-competition agreements against
physicians on public policy grounds, the Company has no or limited ability to
enforce the covenants not to compete. Each Employment Agreement generally is
terminable by the Affiliated Group with respect to any individual Stockholder
Physician upon the death or disability of such Stockholder Physician or upon the
occurrence of certain events that either interfere with the ability of such
Stockholder Physician to practice medicine or significantly diminish the value
of such Stockholder Physician's affiliation to the Affiliated Group. Each
Stockholder Physician may terminate his or her Employment Agreement under
certain circumstances, including without cause upon six months notice to the
Affiliated Group. With respect to the Flagship Stockholder Physicians (as
defined below), such notice may only be given after the first anniversary of the
Employment Agreement. The Employment Agreements also contain terms permitting or
requiring a Stockholder Physician upon termination after certain material
breaches of the Affiliated Group's or the Company's obligations under the
employment agreement or the Services Agreement between PQC and the Affiliated
Group, to repurchase from the Affiliated Group the restrictive covenants and his
or her practice assets (i.e., office and examination equipment, in certain cases
the lease for premises at which the physician practices, patient lists and
records, and third party payor contracts) upon termination of employment. The
terms of such repurchase provision may not permit the Company to fully recover
its affiliation payments to the physician or reflect the cost of affiliation
transactions at the time of termination. To date, no Stockholder Physician has
terminated an employment agreement or repurchased any practice assets.
Pursuant to the Services Agreement, the Company provides (or arranges
for the provision of) a comprehensive package of services to the Affiliated
Group and its physicians, including offices and facilities,
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equipment, nursing and other non-physician professional support, administrative
personnel, information systems, comprehensive professional liability insurance
and general management and financial advisory services. The Company, on behalf
of the physicians in the Affiliated Group, supervises the billing of all
patients, insurance companies and third-party payors and negotiates all
contracts and relationships with payors. The physicians remain responsible for,
among other things, the medical, professional and ethical aspects of their
practices.
Generally, under a Services Agreement, net revenues from patient care
are first applied to the payment of the operating expenses of the practices. Any
remaining net revenues are allocated between a pool from which physician
compensation is paid ("Compensation Pool") and the Company. The majority of the
net revenues are initially allocated to the Compensation Pool until the
physicians receive as compensation a minimum level of income based upon a
significant percentage of their historical compensation. The Company receives a
portion of the net revenues as the net revenues exceed such base levels. For
additional information regarding the terms of the revenue sharing arrangements
see "The Springfield Affiliated Group", - "The Flagship Affiliated Group" and
"The Clinical Associates Transaction." Unlike the current arrangements, the
revenue sharing arrangements with respect to the physician in Clinical
Associates provide in part for PQC to receive a percentage of billings, net of
bad debts and discounts, above certain threshold levels with practice expenses
and physician compensation being paid from the billings after PQC's management
fee. The Company may use either a compensation formula based upon a sharing of
profits or billings in the future. Profits from integrated health services that
may be established by the Company or an Affiliated Group are allocated
separately and will be determined based upon the nature of the integrated health
service, or in the absence of such an agreement, 50% of the profit from such
services will be allocated to the Company. Because compensation of Stockholder
Physicians is a function of many factors including the financial performance of
such physicians, neither the Company nor an Affiliated Group can guarantee that
a Stockholder Physician will receive any minimum level of compensation, and the
Stockholder Physicians are not entitled to any compensation other than their
allocated share of the Compensation Pool. The Compensation Pool is initially
allocated to the Stockholder Physicians until each physician has received a pre-
agreed draw. Any amount remaining in the Compensation Pool is allocated among
the Stockholder Physicians as determined by a Compensation Committee appointed
by the Physicians.
The Company believes that its General Affiliation Model offers a number
of advantages. For example, physicians remain in their pre-affiliation
locations, offering their patients the continuity and convenience of
decentralized offices. At the same time, laboratory and administrative services
generally are provided on a centralized basis, allowing the Affiliated Groups to
achieve economies of scale in purchasing and other administrative efficiencies.
Moreover, the Company believes that as it completes its initial affiliation
transactions in particular geographic markets, Affiliated Groups will provide it
with both a visible business presence and a corporate framework for securing
additional affiliations with physicians in those markets.
Currently, most of the contractual arrangements with managed care
payors and other third party payors involve contracts between the Stockholder
Physicians and the payors. Such contracting structure does not decrease the
Company's revenues since the physicians are contractually obligated to pay over
any amounts received to the Affiliated Group. However, PQC expects that it will
in the future negotiate payor contracts directly between payors and Affiliated
Groups or payors and PQC in order to take full advantage of the economies of
scale resulting form a having a large number of affiliated physicians.
The Company also believes that the decision making structure that it
establishes in connection with each Affiliated Group facilitates information
sharing and cooperation between the affiliated physicians and the Company. Each
Affiliated Group maintains its own policy making structure, including a Joint
Policy Board and a Medical Advisory Board. The Joint Policy Board is charged
with, among other things, developing certain management and administrative
policies for the Affiliated Group, approving operating and capital expenditure
budgets, establishing fee schedules for services provided by the Affiliated
Group, approving the establishment of managed care contracts and determining of
the number and type of physicians required for the operation of the Affiliated
Group. Certain decisions that may have a material impact upon the business,
results of operation or financial condition of the Affiliated Group must also be
approved by the Affiliated Group Stockholder. The current Joint Policy Boards
have nine members: the President of the Affiliated Group (selected by the
Affiliated Group Stockholder from physicians nominated by the Stockholder
Physicians), four persons designated by the Company and four persons designated
by the Stockholder Physicians. The Medical Advisory Board, which is responsible
for providing medical input on managed care contracting by the
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Affiliated Group and leading the development and dissemination of medical
protocols among the physicians, is chaired by the Medical Director of the
Affiliated Group (selected by the Affiliated Group Stockholder from physicians
nominated by the Stockholder Physicians) and consists of six other physicians
elected by the Stockholder Physicians.
Physicians who affiliated with the Company after August 30, 1996, are
required to become parties to a Stockholders Agreement that grants certain
rights to the Company, the Institutional Investors and the Stockholders,
including certain put and call rights on the Common Stock and "drag-along" and
"tag-along" rights. For further information regarding these provisions. See
"Description of Capital Stock - Stockholders Agreement" and the Notes to the
Financial Statements.
Although the Springfield and Flagship Affiliations generally track the
General Affiliation Model, the Company may depart to some extent or
significantly from it or pursue an altogether different approach in completing
future physician affiliations.
The Springfield Affiliated Group
The Company has entered into affiliation transactions with nine medical
practices located in western Massachusetts, consisting of a total of 39
physicians, 34 of whom are stockholders in the Company (the "Springfield
Stockholder Physicians") and 5 of whom are employed by the Springfield
Affiliated Group as employees (the "Springfield Affiliation"). These physicians
treat patients from 28 towns in western Massachusetts and northern Connecticut,
which area had a total population in 1990 of approximately 650,000. Twenty-four
of the physicians are engaged in primary care practices, including two
physicians with pediatric practices. Fifteen of the physicians are engaged in
specialist practices, including pulmonology, cardiology, oncology/hematology,
infectious disease, rheumatology and gastroenterology. The Springfield
Affiliated Group leases offices in 11 locations, of which 9 are located in
Springfield, Massachusetts. Certain of the offices are leased from Springfield
Stockholder Physicians. The Springfield Affiliated Group had total patient
revenue of approximately $16.5 million for the year ended December 31, 1996. At
December 31, 1996, the Springfield Affiliates Group had a patient base of
approximately 50,000.
The Springfield Affiliated Group has a capitated Medicare Risk contract
with Tufts Health Plan's Secure Horizons product. As of March 31, 1997, there
were 1,975 covered lives. Profitability of the Secure Horizons contract is
dependent upon many factors including regular utilization review of inpatient,
skilled nursing facility, home care and outpatient services, subcapitations,
close collaboration with the partner hospital, primary care and specialist
physician communication, data analysis and review and physician leadership.
The Springfield Affiliated Group also participates in managed care
plans of Aetna, Blue Cross and Blue Shield of Massachusetts, Cigna, Fallon
Health Plan, Health New England, Pioneer (PPO), and Tufts Health Plan.
Consistent with the General Affiliation Model, the Springfield
Stockholder Physicians, or the professional corporations and other entities with
whom they were affiliated, merged or sold their practice assets to the
Springfield Affiliated Group in exchange for an aggregate of approximately
3,164,738 shares of Common Stock of the Company and approximately $4.1 million
in cash. The 29 initial Stockholder Physicians entered into a three-year
employment agreement with the Springfield Affiliated Group, pursuant to which
each physician received options to purchase 2,500 shares of Common Stock of PQC
at an exercise price of $2.50 per share. The options expire on the earlier of
termination of employment or three years from commencement of employment. The
Physicians who subsequently affiliated with the Springfield Affiliated Group
entered into ten-year employment agreements with the Springfield Affiliated
Group. Four of these Springfield Physician Stockholders each received options to
purchase 37,500 shares of Class A Common Stock at an exercise price of $1.00 per
share which options are subject to certain vesting conditions. In addition, up
to $2.15 million, payable in Class A Common Stock at $2.50 per share, may be
paid in the future to certain Springfield Stockholder Physicians provided that
certain revenue goals are met. The Springfield Affiliated Group in turn entered
into a 40-year services agreement with the Company pursuant to which the Company
(on behalf of the Springfield Affiliated Group) agreed to provide management
services to the Springfield Affiliated Group physicians.
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Under the Employment Agreements with the twenty-nine initial
Springfield Stockholder Physicians, revenues from patient care remaining after
payment of operating expenses, including expenses of the Springfield Affiliated
Group ("Gross Margin") are allocated first between the Springfield Affiliated
Group's Compensation Pool (the "Springfield Compensation Pool") and the
Springfield Affiliated Group in a 95%/5% proportion until 95% of the base
compensation of the Springfield Stockholder Physicians is achieved, then to
payment of certain non-operating expenses, and then 80% to the Springfield
Affiliated Group and 20% to the Springfield Compensation Pool until the
Springfield Affiliated Group has been allocated $1.5 million, with any remaining
Gross Margin being divided evenly between the Springfield Affiliated Group and
the Springfield Compensation Pool. Under the Employment Agreements with the
Springfield Stockholder Physicians who subsequently affiliated with the
Springfield Affiliate Group any Gross Margin attributable to these physicians
are allocated between the Springfield Compensation Pool and the Springfield
Affiliated Group in a 80%/20% proportion until the physicians receive 80% of
their base compensation, and then to payment of certain non-operating expenses
attributable to the Springfield Affiliated Group, with any remaining Gross
Margin being divided evenly between the Springfield Compensation Pool and the
Springfield Affiliated Group. The base compensation of the Springfield
Stockholder Physicians is $6.7 million. The allocation of Gross Margin to the
Springfield Compensation Pool is calculated separately for each fiscal period.
If the Gross Margin for any such period is negative, such negative amount
constitutes an operating expense in the next fiscal period. Pursuant to the
Springfield Services Agreement, all amounts allocated to the Springfield
Affiliated Group in any fiscal period are remitted to the Company.
Six months prior to the third anniversary of the closing of the initial
Springfield Affiliation, the Springfield Affiliated Group (on behalf of the
Company) or a majority of the Springfield Shareholder Physicians may amend the
financial arrangements, effective as of the third anniversary of such closing,
such that the economic terms of the Springfield Stockholder Physicians'
employment agreements, taken as a whole (and giving effect to any payments or
other compensation received by the Springfield Stockholder Physicians in
connection with their affiliation), are adjusted to reflect the terms being
entered into by independent third parties for similar affiliation and employment
relationships at that time.
The Flagship Affiliation. On December 11, 1996, pursuant to affiliation
transactions with the Company, 15 existing professional practices located in the
greater Baltimore-Annapolis, Maryland area, consisting of a total of 59
physicians, transferred their practice assets to and became employed by the
Flagship Affiliated Group. In exchange for such affiliation, the physicians
received a combination of approximately $2.3 million in cash and 6,842,675
shares of Class A Common Stock (the "Flagship Affiliation"). Forty-one of the
physicians are engaged in primary care practices, including 20 physicians with
pediatric practices. Eighteen of the physicians are engaged in specialist
practices, including pulmonology, cardiology, oncology/hematology, infectious
disease, rheumatology, gastroenterology and neurology. Fifty-five physicians are
stockholders in the Company (the "Flagship Stockholder Physicians") and 4
physicians are employed by the Flagship Affiliated Group as employees. The
Flagship Affiliated Group leases 15 practice locations in Maryland, some of
which are leased from the Flagship Stockholder Physicians. The practices
included in the Flagship Affiliated Group had total patient revenue of
approximately $25 million for the year ended December 31, 1996. During the year
ended December 31, 1996, the Flagship Affiliated Group had a patient base of
approximately 100,000. The majority of patient revenues are fee-for-service
rather than capitated.
In order to effectuate the Flagship Affiliation, the Flagship
Stockholder Physicians, or the professional associations, business corporations
and limited liability partnerships with whom they were affiliated, transferred
their practice assets to the Flagship Affiliated Group by merger or by sale of
assets. The Company entered into a 40-year management services agreement with
the Flagship Affiliated Group (the "Flagship Services Agreement"), which entered
into a five-year Employment Agreement with each Flagship Stockholder Physician.
In addition, the Company entered into an agreement with the Flagship Affiliated
Group pursuant to which the Company agreed to grant options to purchase, subject
to certain conditions, up to 400,000 shares of Class A Common Stock to the
Flagship Stockholder Physicians.
Pursuant to the Flagship Services Agreement and the Employment
Agreements with the Flagship Stockholder Physicians, revenues from patient
services remaining after payment of third-party operating expenses ("Net
Margin") will be allocated between the Flagship Stockholder Physicians'
Compensation Pool (the "Flagship Compensation Pool") and reimbursement of the
Company's direct expenses relating to the Flagship Affiliated Group, based on a
ratio of such budgeted compensation to such budgeted expenses. Once both the
Company's direct expenses and the aggregate base physician compensation have
been fully satisfied,
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any remaining Net Margin will be divided evenly between the Company and the
Flagship Compensation Pool. The base compensation of the Flagship physicians is
$8.15 million.
Future Affiliation Transactions. The Company's current primary focus is
on expanding the Springfield Affiliated Group and the Flagship Affiliated Group,
and developing additional Affiliated Groups in the eastern United States. The
Company expects to close its Affiliation transaction with Clinical Associates,
which will add 71 physicians to the Flagship Affiliated Group on JulY 31, 1997
or as soon thereafter as practicable.
The Company has acquired a 50% interest in two related physician
network management companies in Atlanta, Georgia. The two entities, TLC
Management Company, Inc. and Total Quality Practice Management, Inc., manage
payor contracting for a 350-physician network in Georgia. The network currently
serves approximately 4,500 covered lives. PQC's investment, which totals $5
million in cash, will be used to repurchase the stock of certain existing
shareholders, repay indebtedness, and provide working capital for the growth and
development of the network. The Company believes that the Atlanta market is
attractive for the Company as it is a relatively unconsolidated physician
practice market and global capitation arrangements are expected to become a more
significant market factor.
The Company will determine which geographic markets to enter in the
future based upon consideration of the following factors (among others): (i)
population and economic profile, (ii) level of managed care penetration and
effectiveness of providers in coping with the managed care environment, (iii)
physician practice density, specialty composition, and average group size, (iv)
receptivity of the medical community to the Company's management philosophy, (v)
local competition in the physician practice management business and (vi)
commercial and Medicare reimbursement rates. The Company also regularly
considers the addition of physicians on an employee, rather than a Stockholder
Physician, basis.
The Clinical Associates Transaction
The Company and the Flagship Affiliated Group have entered into an
agreement with Clinical Associates, a Maryland professional association,
pursuant to which Clinical Associates will become affiliated with the Company
and subject to an amended and restated Services Agreement between PQC and the
Flagship Affiliated Group. Although the closing of the transaction with Clinical
Associates is subject to certain conditions in favor of the Company and Clinical
Associates, the Company expects the Clinical Associates transaction to close
during July 1997 or as soon thereafter as practicable. Pursuant to the
agreements with Clinical Associates, the stockholders and optionholders of
Clinical Associates will receive in the aggregate 4,800,000 shares of Common
Stock and $3 million. The Clinical Associates physicians will also enter into
five year employment agreements with the Flagship Affiliated Group or another
Maryland professional association under common control with the Flagship
Affiliated Group and a party to the Services Agreement.
Clinical Associates is located in the Baltimore, Maryland metropolitan
area, and includes 71 physicians, 55 of whom will become stockholders in the
Company and 16 of whom are employed by the medical practice. The physicians
treat patients from the metropolitan Baltimore area. Twenty-nine of the
physicians are engaged in primary care practices, including 12 physicians with
pediatric practices. Forty-two of the physicians are engaged in speciality
practices, including cardiology, dermatology, endocrinology, gastroenterology,
immunology, neurology, psychiatry, pulmonology, obstetrics/gynecology,
ophthalmology, orthopedics, otolaryngology, plastic surgery, urology, general
surgery, and vascular surgery. The group leases offices in 13 locations, all of
which are in Baltimore county. The group had total patient revenue of
approximately $36.8 million for the year ended June 30, 1996 and $26.9 million
for the nine months ended March 31, 1997. Clinical Associates has a patient base
of approximately 150,000 lives. Approximately 50 percent of Clinical Associates'
patient revenues from the most recently completed fiscal year are from capitated
contracts and 50 percent are from fee-for-service arrangements. The physicians
in Clinical Associates participate in full professional capitation contracts
with CareFirst, Freestate (Maryland Blue Cross/Blue Shield) and Prudential.
The method for determining PQC's management fee and the compensation of
the Clinical Associates physicians differs from the model used in the
Springfield Affiliated Group and with the original Flagship physicians. Instead
of a sharing of gross margin after practice expenses, PQC is entitled to a
percentage of billings, net of uncollectible amounts and discounts ("Net
Adjusted Billings"). The revenue splitting arrangements for the Clinical
Associates physicians differ based upon whether the revenue is derived from an
existing specialist practice, a primary care practice, future specialist
practices and the practices of physicians without established practices. Except
as provided below, Net Adjusted Billings in excess of baseline Net Adjusted
Billings reflecting the historical level billings for such physician subject to
reductions for changes in practice patterns ("Specialist Net Adjusted Billings")
from specialist (a specialist being a physician at least 80% of whose billings
are derived from a specialist practice) practices with respect to any fiscal
year will be allocated 35% to PQC and 65% to an account established with respect
to the Clinical Associates physicians and any future physicians included in the
same compensation arrangements (the "Account") until $3 million has been
allocated between the Account and PQC; and any remaining Specialist Billings
will be allocated 20% to PQC and 80% to the Account.
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Net Adjusted Billings by primary care, OB/GYN physicians and physicians (whether
primary care or specialist) added to the compensation arrangements in the future
in excess of the agreed upon baseline Net Adjusted Billings will be allocated
20% to PQC and 80% to the Account. With respect to any physician recruited to
join Flagship after the closing who does not have a practice that is merged into
Flagship (and to certain physicians currently affiliated with Clinical
Associates ), 20% of the Incremented Amount shall be allocated to PQC.
"Incremented Amount" means the excess, if any, of Net Adjusted Billings
attributable to such physician over an amount equal to twice the average
compensation of physicians with a similar practice in the Baltimore metropolitan
area as reported by a standardized reporting source. Any Net Adjusted Billings
attributable to such physician less (A) the amounts allocated to PQC and (B) the
compensation payable to the physician under the physician's employment agreement
shall be allocated to the Account. Any revenue not included in Net Adjusted
Billings will be allocated to the Compensation Pool to offset practice expenses,
provided that if the ratio of practice expenses to practice revenue declines
below historical levels, revenues not included in Net Adjusted Billings will be
allocated equally to PQC and the Account. Net Margin from centralized laboratory
services (which for this purpose shall mean revenue from laboratory ancillary
services less (i) direct expenses of such laboratory ancillary services and (ii)
an allocation of Flagship overhead) attributable to the Clinical Associate
physicians will be allocated 80% to PQC and 20% to the Account. Net Margin from
incremental non-laboratory ancillary services will be allocated 50% to PQC and
50% to the Account together with the current Flagship Compensation Pool.
The amount allocated to the Account is first used to pay the practice
expenses of the physicians whose compensation is paid through the Account. Any
remaining amount in the Account with respect to any fiscal year will be
distributed to the Clinical Associates physicians as their sole source of
compensation. The allocation of such compensation among the physicians will be
determined by a committee elected by, or pursuant to a formula approved by, the
Clinical Associates physicians.
PQC expects to consider restructuring the compensation arrangements
with respect to the current Flagship Affiliated Group to determine whether to
merge the two compensation arrangements. In the event that PQC elects to modify
the compensation arrangements of the Flagship physicians in this manner, PQC
will guarantee for a two year period (commencing on the date of such merger)
that the compensation of the Clinical Associates physicians under the combined
compensation distribution system is not less than the baseline compensation that
such physicians would have received if the compensation distribution systems are
not merged.
Within six months after the closing of the affiliation transaction, the
Clinical Associate physicians have the right to elect to receive up to an
additional 2,000,000 shares of Common Stock as consideration for the
Affiliation. If the Clinical Associate physicians elect in their sole discretion
to receive such additional Common Stock, the compensation arrangements set forth
above will be amended, as an effective adjustment to the merger consideration,
so that an aggregate of $760,000 of Net Adjusted Billings (or such
proportionately reduced amount if less than 2,000,000 shares of Common Stock
shares are elected) that would otherwise be allocated to the Account with
respect to each fiscal year shall instead be allocated to PQC.
The Services Agreement would include a provision that penalizes PQC if
certain revenue targets described below are not met. Until there is no Shortfall
(as defined below) or PQC completes a public offering of the Company Common
Stock at a price to the public of $9.00 or more per share, the amount that would
have been allocated to PQC pursuant to the Services Agreement will be reduced by
the Adjustment Amount and the amount that is allocated to the Account will be
increased by the Adjustment Amount. "Shortfall" means the difference between
$3.0 million and the aggregate increase in Net Adjusted Billings over baseline
Net Adjusted Billing by the specialist physicians in Clinical Associates or who
are subsequently added to the practice. The "Adjustment Amount" is 45% of any
Shortfall. Consequently, unless Net Adjusted Billing increases by $3.0 million
over historical levels, and Adjustment Amount will be due.
PQC has agreed with the stockholders of Clinical Associates that
neither PQC nor Flagship will merge with or into, become a subsidiary of, or
sell Flagship or all or substantially all of PQC's assets to, or grants
governance participation to, a Baltimore Health Care Entity without the approval
of a majority of the members of the Management Committee. A Baltimore Health
Care Entity means any hospital, medical group or other organization that
principally conducts its business in and derives its revenues from the delivery
of healthcare services in Maryland.
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In the event that PQC or any of its affiliates propose the
establishment of an independent provider association ("IPA") network in the
Maryland Area, PQC is required to obtain the approval of the Joint Policy Board
with respect to the structure, governance and financial arrangements of the IPA
network, including whether the Physicians in the Flagship Affiliated Group will
participate in such IPA network. PQC will be entitled to a fee of up to 10% of
the aggregate revenue of the IPA network, which fee PQC shall not be required to
share with the physicians employed by the Flagship Affiliated Group. Any
residual profits of the IPA network (in excess of the 10% fee) that are retained
by PQC shall be allocated 50% to PQC and 50% to the physicians in the Flagship
Affiliated Group.
In the event that on the fourth anniversary of the closing of the
affiliation transaction, PQC has not completed an underwritten initial public
offering, the Clinical Associates physicians shall have the right, within 45
days thereafter, to require PQC to repurchase the Common Stock issued in the
Affiliation at a purchase price of $3.00 per share. PQC shall have the right to
pay the purchase price by a five (5) year non-interest bearing note. The
principal payable with respect to such note shall be reduced by the amount, if
any, that the Clinical Associates physicians' compensation between the issue
date of the note and its maturity exceeds the base compensation with respect to
the Clinical Associates physicians during that period.
Ancillary Services
In general, the Company anticipates that it will obtain access to
ancillary services, such as laboratories, skilled nursing facility services, and
home healthcare, for its Affiliated Groups through contractual relationships or
strategic alliances with other healthcare providers. The Company anticipates
that these services will be closely coordinated with services provided by its
physicians. Over time, the Company, to the extent permitted by federal and state
regulations, may seek to own some of these ancillary services, if cost and
effectiveness considerations indicate that it would be beneficial to do so and
if favorable strategic alliances cannot be entered into. As of the date of this
prospectus, the Company and its affiliated entities do not own any ancillary
services other than the Springfield and Flagship laboratories and do not have
any contractual relationships with respect to any other ancillary services. See
"-- Company Strategy."
Relationship With Other Provider Organizations
The Company may, in the future, contract with other provider
organizations such as IPAs and physician hospital organizations ("PHOs") on a
selective basis. Such contracts may provide management services, including
claims processing, member services and administrative support, for a management
fee. In other areas, PQC's role may include providing policy guidelines, medical
management, credentialing and provider contracting.
The Equity Financing
In order to finance the cash payments made to the Springfield and
Flagship Stockholder Physicians, to fund the Company's operating expenses and to
finance subsequent affiliation and working capital requirements, PQC entered
into a financing transaction with Bain Capital Fund V, L.P., Bain Capital Fund
V-B, L.P., BCIP Associates and BCIP Trust Associates, L.P., on August 30, 1996.
Pursuant to the Class B Stock and Warrant Purchase Agreement entered into as of
that date (the "Bain Purchase Agreement"), the Institutional Investors
affiliated with Bain Capital agreed to purchase and the Company agreed to sell,
in each case subject to certain conditions, up to 12,000,000 shares of the
Company's Class B Common Stock at a price of $2.50 per share, together with
warrants to purchase 13,000,000 shares of Class B Common Stock (the "Class B
Warrants"), of which 4,600,000 shares of Class B Common Stock and Class B
Warrants to purchase 6,415,000 shares of Class B Common Stock have been
purchased as of June 20, 1997. The Class B Warrants entitle the holder to
purchase shares of Class B Common Stock at $2.50 per share (the "Class B
Exercise Price"). The Class B Exercise Price is subject to adjustment (i) to
reflect any stock dividends, stock splits, reverse stock splits, reorganizations
and recapitalizations of the Company's capital stock and (ii) to prevent
dilution, on a weighted-average basis, in the event that the Company issues
additional securities at a purchase price less than the applicable Exercise
Price (with the exception of securities issued or reserved for issuance to
employees pursuant to stock option plans approved by the Company's Board of
Directors).
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On June 20, 1997, the Company entered into an Amended and Restated
Class B and Class C Common Stock Purchase Agreement with the Institutional
Investors. On June 23, 1997, the Company issued 7,692,309 shares of Class C
Common Stock pursuant to the Equity Facility for an aggregate consideration of
$25 million and warrants to purchase 7,692,309 shares of Class C Common Stock.
The Class C Warrants entitle the holder to purchase the shares of Class C Common
Stock at $3.25 per share (the "Class C Exercise Price"). The Class C Exercise
Price is subject to adjustment (i) to reflect any stock dividends, stock splits,
reverse stock splits, reorganization and recapitalization of the Company's
Common Stock and (ii) to prevent dilution, on a weighted-average basis, in the
event that the Company issues additional securities at a purchase price less
than the applicable Class C Exercise Price (with certain exceptions).
Pursuant to the Equity Facility, the Institutional Investors are
entitled at any time prior to an underwritten public offering of the Company's
Common Stock to purchase up to an additional 6,153,846 shares of Class C Common
Stock at a purchase price of $3.25 per share and in connection with that
purchase, to receive warrants to purchase up to 6,153,846 shares of Class C
Common Stock.
The Company has agreed that it will not take certain actions unless the
Company receives the prior approval of the Institutional Investors. Such actions
involving the Company, its subsidiaries or any Affiliated Groups include
mergers, sales of assets, affiliation transactions, declarations of dividends or
other distributions, material changes in business, amendments to the Restated
Certificate or By-laws, the hiring, firing and compensation of the Company's
chief executive and chief financial officers, adoption of annual operating
budget, transactions with affiliates and the commencement or settlement of any
litigation.
The Company's Class A Common Stock, Class B Common Stock and Class C
Common Stock are identical except for certain special voting rights of the
directors appointed by the holders of each class and the Class C Common Stock
being entitled to certain antidilution protection and to a liquidation
preference of $3.25 per share. See "Description of Capital Stock."
In connection with the Equity Facility, the Company entered into a
Management Agreement dated as of August 30, 1996 with Bain Capital Partners, V,
L.P. ("BCP V"). See "Certain Transactions."
The Credit Agreement
On January 16, 1997, the Company entered into the Credit Agreement with
Bankers Trust, as Agent, and the lenders from time to time a party thereto,
pursuant to which the lenders agreed, subject to the terms and conditions set
forth in the Credit Agreement, to provide an aggregate amount of up to $3.5
million to the Company under the Facility. On June 30, 1997, there were no
outstanding borrowings under the Facility and the remaining available
commitment at such date was $3.5 million.
Loans under the Facility (the "Loans") bear interest at (i) the higher
of (A) 0.5% over the "Adjusted Certificate of Deposit Rate" or (B) the prime
rate announced by Bankers Trust Company from time to time, plus 1.5% or (ii) the
"Eurodollar Rate," plus 2.5%, and are payable upon the earlier of a "Change of
Control Event" or January 16, 1998. The Company may use the Facility to provide
financing for general corporate and working capital purposes including, subject
to the terms and conditions set forth in the Credit Agreement, establishment by
the Company of Affiliated Groups and acquisitions by the Affiliated Groups of
physician practice groups.
The Loans are secured by all of the assets of the Company and its
subsidiaries, including subsequently created subsidiaries, and the receivables
of the Affiliated Groups, including the Flagship Affiliated Group and
subsequently created Affiliated Groups. The Loans are guaranteed by the Flagship
Affiliated Group and the Springfield Affiliated Group and must be guaranteed by
any subsequently created Affiliated Group.
The Credit Agreement contains various representations and covenants of
the Company, including a covenant to maintain a minimum amount of accounts
receivable of the Affiliated Groups. Certain other covenants, among other
things, limit the ability of the Company or the Affiliated Groups to (i) amend
or terminate the Stockholders Agreement, the Services Agreements and certain
other agreements set forth in the Credit Agreement, (ii) make capital
expenditures, (iii) sell assets, (iv) incur additional debt, (v) make
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investments or loans, (vi) pay dividends or distributions and (vii) issue
capital stock. In addition, the Company is required to maintain a minimum
earning before interest, taxes, depreciation and amortization ("EBITDA") equal
or exceeding a loss of $830,000 for the fiscal quarter ended March 31, 1997, a
loss of $1.4 million for the six months ended June 30, 1997, a loss of $1.5
million for the nine-months ended September 30, 1997 and a loss of $1.1 million
for the year ended December 31, 1997. The Company had a EBITDA of a loss of
$1.43 million for the fiscal quarter ended June 30, 1997. Failure to comply with
such covenants, as well as other events, including a payment default, a default
under certain agreements, a change in control, adverse judgments in excess of
$25,000 and a default under any security documents constitute events of default
under the loans. The Company has not fully complied with certain reporting
obligations under the Credit Agreement; however, the bank has not advised the
Company that a default exists.
In connection with the Credit Agreement, Bankers Trust received a
commitment fee of $157,500, which fee was converted into 63,000 shares of Class
A Common Stock on February 15, 1997.
Governmental Regulation
As a participant in the healthcare industry, the Company's operations
and relationships, and the business and activities of its affiliated physicians,
will be subject to extensive and increasing regulation by a number of
governmental entities at the federal, state and local levels and by fiscal
intermediates appointed by various payors and other private brokers. The Company
will also be subject to laws and regulations relating to business corporations
in general. Because of the uniqueness of the structure of the relationship
with the physician groups, many aspects of the Company's business operations
have not been the subject of state or federal regulatory interpretation, and
there can be no assurance that a review of the business of the Company or its
affiliated physicians by courts or regulatory authorities will not result in a
determination that could adversely affect the operations of the Company or the
affiliated physicians. In addition, there can be no assurance that the
healthcare regulatory environment will not change so as to restrict the
Company's or the affiliated physicians' existing operations or their expansion.
Prohibition on Corporate Practice of Medicine. The laws of most states,
including Massachusetts and Maryland, prohibit business corporations such as the
Company from practicing medicine or employing physicians to do so. The
contractual relationships the Company has entered into with the Affiliated
Groups attempt to comply with these laws. Because there is very limited judicial
or regulatory interpretation of the scope of the corporate practice of medicine
prohibition in most states, however, there can be no assurance that the
Company's contractual arrangements will be found to comply with such laws. Any
determination that the contractual relationships violate such laws could have a
material adverse effect on the Company, and there can be no assurance that the
Company would be able to restructure its arrangements on favorable terms or at
all.
The BRM has proposed regulations that, if promulgated as proposed,
might prohibit physicians licensed within the Commonwealth of Massachusetts from
entering into management contracts with proprietary business entities unless a
majority of the governing board of those business entities are licensed
physicians and certain other conditions are met. The BRM also indicated that it
may seek to limit significantly the extent to which proprietary business
entities may have control or consultation rights with respect to medical
decisions or business decisions that may affect patient care, such as the amount
of time each physician spends with a patient. Extensive commentary has been
filed in opposition to the proposed regulations, and it is not known when or in
what form final regulations will be promulgated. The final regulations may have
a material adverse effect on the Company's relationship with the Springfield
Affiliated Group and its ability to operate in Massachusetts as currently
contemplated. Comparable regulations have not been proposed in Maryland, but
there can be no assurance that such regulations will not be proposed or adopted.
Restrictions on Referrals and Fee-Splitting. In addition to prohibiting
the practice of medicine, numerous states prohibit entities such as the Company
from engaging in certain healthcare-related activities such as fee-splitting
with physicians or from making referrals to entities in which the referring
physician has an ownership interest. For example, Maryland has enacted
legislation that significantly restricts patient referrals for certain services,
and requires disclosure of ownership in businesses to which patients are
referred and places other regulations on healthcare providers. The Company has
structured its arrangements with the practices in the Flagship Affiliation to
fit within the group practice exemption contained in the Maryland act; however,
investments or contractual relationships with businesses not specifically
operated by the Flagship
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Affiliated Group would, in some cases, be prohibited. The Company believes it is
likely that other states will adopt similar legislation. Accordingly, expansion
of the operations of the Company to certain jurisdictions may require it to
comply with such jurisdictions' regulations which could lead to structural and
organizational modifications of the Company's anticipated form of relationships
with physician groups. Such changes, if any, could have an adverse effect on the
Company.
Certain provisions of the Social Security Act, commonly referred to as
the "Anti-kickback Statute," prohibit the offer or receipt of any form of
remuneration in return for the referral of Medicare or state health program
(such as Medicaid) patients, or in return for the recommendation, arrangement,
purchase, lease, or order of items or services that are covered by Medicare or
state health programs. The Anti-kickback Statute is broad in scope and has been
broadly interpreted by courts in many jurisdictions. Read literally, the statute
places at risk many customary business arrangements, potentially subjecting such
arrangements to lengthy, expensive investigations and prosecutions initiated by
federal and state governmental officials. Many states have adopted similar
prohibitions against payments intended to induce referrals of state health
program and other third-party payor patients. While the Company has attempted to
structure its contractual relationships so as to comply with the Anti-kickback
Statute, there can be no assurance that such relationships do in fact comply
with the Anti-kickback Statute given the broad wording of the statute. While the
federal government has promulgated or proposed various "safe harbor" exceptions
to the Anti-kickback Statute, the Company does not expect its operations to fit
within any of the safe harbors. Violation of the Anti-kickback Statute is a
felony, punishable by fines up to $25,000 per violation and imprisonment for up
to five years. In addition, the Department of Health and Human Services may
impose civil penalties excluding violators from participation in Medicare or
state health programs.
Significant prohibitions against physician referrals were enacted by
Congress in the Omnibus Budget Reconciliation Act of 1993. 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, subject to certain exemptions, a physician or a member of his or her
immediate family from referring Medicare or state health program patients for
"designated health services" to an entity in which the physician has an
ownership or investment interest or with which the physician has entered into a
compensation arrangement including the physician's own group practice. The
designated health services include radiology and other diagnostic services,
radiation therapy services, physical and occupational therapy services, durable
medical equipment, parenteral and enteral nutrients, equipment, and supplies,
prosthetics, orthotics, outpatient prescription drugs, home health services, and
inpatient and outpatient hospital services. The penalties for violating Stark II
include a prohibition on payment by these government programs for services
rendered pursuant to such references and civil penalties of as much as $15,000
for each violative referral and $100,000 for participation in a "circumvention
scheme." In addition, the provider may be disqualified from participating in the
Medicare and state health care programs based on the submission of a false claim
or participation in a circumventive scheme. The Company has attempted to
structure its activities in compliance with Stark I and Stark II. However, the
Stark legislation is broad and the Stark I regulations are complex and do not
provide clear guidance on how Stark II will be interpreted. A finding that the
Company or its Affiliated Groups has violated Stark could have a material
adverse effect on the Company. In addition, future regulations or clarification
of the existing regulations could require the Company to modify the form of its
relationships with physician groups and may limit the Company's ability to
implement fully its plan for integrated care.
Prohibition on False Claims. There are also state and federal civil and
criminal statutes imposing substantial penalties, including civil and criminal
fines and imprisonment, on healthcare providers who fraudulently or wrongfully
bill governmental or other third-party payors for healthcare services. The
federal law prohibiting false billings allows a private person to bring a civil
action in the name of the United States government for violations of its
provisions. There can be no assurance that the Company's activities will not be
challenged or scrutinized by governmental authorities. Moreover, technical
Medicare and other reimbursement rules affect the structure of physician billing
arrangements. Regulatory authorities might challenge the billing arrangements
with the Affiliated Groups and, in such event, the Company may have to modify
its relationship with physician groups. Noncompliance with such regulations may
adversely affect the operation of the Company and subject the Company and
Affiliated Groups to lost reimbursement, penalties and additional costs.
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Direct Provision of Healthcare Services. The Company plans to develop a
network of integrated healthcare services (other than acute care) in the future,
depending on market conditions. If the Company determines that it is
advantageous to provide such services through a wholly-owned subsidiary or other
controlled relationship, it is possible that one or more subsidiaries or
affiliates of the Company could become licensed providers of healthcare
services. Any such provider would have to comply with applicable regulatory
requirements. In addition, the direct provision of healthcare services by a
subsidiary or affiliate might increase the risk to the Company of regulatory or
other investigation or litigation.
Healthcare Reform. A portion of the revenues of the Company's
Affiliated Groups is derived from payments made by governmental sponsored
healthcare programs (principally, Medicare and Medicaid). Government revenue
sources are subject to statutory and regulatory changes, administrative rulings,
interpretations of policy, determinations by fiscal intermediaries, and
government funding restrictions, all of which may materially decrease the rates
of payment and cash flow to physicians and other healthcare providers. The
federal Medicare program adopted a system of reimbursement of physician
services, known as the resource based relative value scale schedule ("RBRVS"),
which took effect in 1992 and is expected to be fully implemented by December
31, 1996. The Company expects that the RBRVS fee schedule and other future
changes in Medicare reimbursement will, in some cases, result in a reduction
from historical levels in the per patient Medicare revenue received by certain
of the Affiliated Groups with which the Company may contract, which in turn may
result in a decrease in revenues to the Company.
In addition to current regulation, the United States Congress has
considered various types of healthcare reform, including comprehensive revisions
to the current healthcare system. It is uncertain what legislative proposals
will be adopted in the future, if any, or what actions federal or state
legislatures or third party payors may take in anticipation of or in response to
any healthcare reform proposals or legislation. Healthcare reform legislation
adopted by Congress could result in lower payment levels for the services of
physicians managed by the Company and lower profitability of the Affiliated
Groups, which could have a material adverse effect on the operations of the
Company.
Insurance Laws. Laws in all states regulate the business of insurance
and the operation of HMOs. Many states also regulate the establishment and
operation of networks of healthcare providers. While these laws do not generally
apply to the hiring and contracting of physicians by other healthcare providers,
there can be no assurance that regulatory authorities of the states in which the
Company operates would not apply these laws to require licensure of the
Company's operations as an insurer, as an HMO or as a provider network.
Antitrust Laws. Because the affiliated practice groups are not
subsidiaries of the Company and thus remain separate legal entities for
antitrust purposes, they may be deemed competitors subject to a range of
antitrust laws which prohibit anti-competitive conduct, including price fixing,
concerted refusals to deal and division of market. The Company intends to comply
with such state and federal laws as they may affect its development of
integrated healthcare delivery networks, but there is no assurance that the
review of the Company's business by courts or regulatory authorities will not
result in a determination that could adversely affect the operation of the
Company and its affiliated physician groups.
Competition
The Company faces competition for both the recruitment and retention of
affiliated physicians. The market for affiliation with physicians is highly
competitive, and the Company expects this competition to increase. The Company
competes for physician affiliations with many other entities, some of whom have
substantially greater resources, greater name recognition and a longer operating
history than the Company and some of whom offer alternative affiliation
strategies which the Company may not be able to offer.
The provision of physician practice management services is a highly
competitive business in which the Company will compete for contracts with
several national and many regional and local providers of such services. Certain
of the Company's competitors will have access to substantially greater resources
than the Company. Although the nature of the competition may vary, competition
is generally based on cost and quality of care.
Legal Proceedings
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On June 12, 1997, Jay N. Greenberg, a founder and former executive vice
president of the Company, filed a complaint against the Company in Massachusetts
state court seeking damages of $1.4 million and a declaratory judgment that
843,750 of the shares registered in Mr. Greenberg's name (out of 1,012,500
shares of Class A Common Stock originally granted to Mr. Greenburg) have
"vested" under this Employment Agreement. The complaint involves a dispute over
whether an amendment in December 1996 to Mr. Greenberg's Employment Agreement is
valid and whether Mr. Greenberg resigned or was terminated in January 1997. The
Company maintains that the amendment was fraudulently induced based upon a
commitment by Mr. Greenberg for long-term employment with the Company and that
Mr. Greenberg resigned in January 1997. Under such facts Mr. Greenberg is
entitled to have no more than 450,000 shares of Class A Common Stock vest (and,
depending upon counterclaims that may be brought by the Company, possible fewer)
and is entitled to no severance payment. Mr. Greenberg claims that 843,750
shares of Class A Common Stock have vested and that his employment was
terminated in January 1997 by the Company entitling him to severance payments of
$440,000. The Company is not able to predict the outcome of this litigation. No
other claims are pending against the Company.
Facilities
The Company leases a 6,358 square foot facility in Waltham,
Massachusetts for its headquarters and also leases office space in Springfield,
Massachusetts and Baltimore, Maryland. The Springfield Affiliated Group also
leases a total of 45,910 square feet at 13 practice locations and the Flagship
Affiliated Group leases a total of 78,191 square feet at 21 practice locations.
The facilities leased by the Company and its Affiliated Groups are sufficient
for its current operations.
Employees
As of September 30, 1997, the Company had 39 employees and the
Affiliated Groups had 609 employees, including 107 physicians.
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MANAGEMENT
Executive Officers and Directors
The executive officers and directors of the Company and their ages as
of June 30, 1997 are as follows:
<TABLE>
<CAPTION>
Name Age Position
- ---- --- --------
<S> <C> <C>
Jerilyn P. Asher.......................54 Chief Executive Officer and Chairman of the Board
Alphonse Calvanese, M.D................45 Director
Leslie Fang, M.D.(1)...................52 Director
Ira Fine, M.D. .....................48 Director
Dana Frank, M.D........................46 President and Director
Arlan F. Fuller, Jr., M.D..............51 Executive Vice President, Medical Affairs and Director
Stephen G. Pagliuca....................42 Director
Marc Wolpow .....................38 Director
Timothy T. Weglicki....................45 Director
Samantha J. Trotman ...................29 Chief Financial Officer
</TABLE>
- -------------------
(1) Member of the Compensation Committee.
There are currently three vacancies on the Board.
Directors, Executive Officers and Other Key Employees
Jerilyn P. Asher is a founder of the Company and has served as Chief
Executive Officer and as Chairman of the Board since its inception. She has over
eighteen years of experience as a healthcare executive in both the public and
private sectors, with broad-based responsibilities for all aspects of
constituency building with physicians and payors, business development, finance,
operations, sales, marketing and federal and state healthcare regulation. From
1994 to 1995, Ms. Asher served as President and a member of the Board of
Directors of Abbey Healthcare Group Incorporated ("Abbey"), a home healthcare
provider. Ms. Asher was a founder and served as President, Chief Executive
Officer and Chairman of the Board of Directors from 1988 to 1995 and Executive
Vice President from 1985 to 1988 of Protocare, Inc., a leading regional provider
of home healthcare products and services. From 1978 to 1984, Ms. Asher served as
Executive Director of United Cerebral Palsy of Western Massachusetts, Inc., a
multi-service agency providing direct care services to persons of all ages with
multiple disabilities.
Alphonse Calvanese, M.D. has been a member of the Board of Directors of
the Company since November 1996 and President of the Springfield Affiliated
Group since August 1996. He has been in the private practice of medicine since
1981. He received his B.S. from the University of Massachusetts and his M.D.
from Tufts Medical School. He completed his internship and residency at Baystate
Medical Center.
Leslie Fang, M.D. has served as a member of the Board of Directors of
the Company and a member of the Board's compensation committee since its
inception. Dr. Fang has been Associate Director of the Hemodialysis Unit,
Massachusetts General Hospital since 1980 and an Assistant Professor of Medicine
at Harvard University Medical School since 1983. He is also Director of the
Charles River Plaza Dialysis Unit and a nationally recognized expert in the
field of nephrology. Dr. Fang received his B.S., M.S. and Ph.D. in physiology
and biophysics from the University of Illinois and his M.D. from Harvard
University Medical School. He completed his internship and residency at
Massachusetts General Hospital.
Ira Fine, M.D. has been a member of the Board of Directors of the
Company since November 1996. He has been in the private practice of medicine for
16 years and has been the Chief, Division of Rheumatology at Sinai Hospital
since 1988 and St. Joseph Medical Center in Baltimore since 1992. He is the
Chairman of the Board of The Physician Group. He is also an Assistant Professor
of Medicine at the University of Maryland School of Medicine and an Assistant
Professor of Medicine at the Johns Hopkins University School of Medicine. He
received his B.S. from the Virginia Polytechnic Institute and his M.D. from
University of Maryland School of Medicine. He completed his internship at
University of Maryland Hospital/Baltimore
49
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Veterans Administration Hospital, his residency at University of Maryland
Hospital and a fellowship in rheumatology at the Johns Hopkins University School
of Medicine.
Dana Frank, M.D. has been President of the Company since March 1997 and
the Flagship Affiliated Group since December 1996 and has served as a member of
the Board of Directors of the Company since November 1996. He has been in the
private practice of medicine since 1981 and is President of Park Medical
Associates, P.A. He is an Assistant Professor at the Johns Hopkins University
School of Medicine and has been a Consulting Internist and Headache Specialist
at the Johns Hopkins University School of Medicine since 1981. He has also
served on the Johns Hopkins Hospital Medical Board. He received his A.B. from
Brown University and his M.D. from George Washington University. He completed
his internship and residency at Johns Hopkins Hospital.
Arlan F. Fuller, Jr., M.D. has served as Executive Vice President of
Medical Affairs and a member of the Board of Directors of the Company since its
inception. He also co-chairs the Company's National Medical Advisory Board, and
is responsible for organizing and directing the company's clinical systems. Dr.
Fuller has been an Associate Professor of Obstetrics and Gynecology at Harvard
University Medical School since 1987 and has been the Director of the
Gynecologic Oncology Service of Massachusetts General Hospital since 1985. Dr.
Fuller maintains a practice in gynecologic surgery and gynecologic oncology at
the Massachusetts General Hospital and is affiliated with the North Shore Cancer
and Medical Centers in Peabody and Salem, Massachusetts. In 1988, Dr. Fuller was
a founder and served as President of Massachusetts General Physicians
Corporation, the first organized physician group at the Massachusetts General
Hospital and a forerunner to the Massachusetts General Physicians Organization,
which manages group practices at the Massachusetts General Hospital. Previously,
Dr. Fuller was a member of the Board of Trustees of Partners Community
Healthcare, Inc., the primary care network and integrated health system which
includes the Massachusetts General Hospital and Brigham and Women's Hospital.
Dr. Fuller received his undergraduate degree from Bowdoin College and his M.D.
from Harvard University Medical School. He completed his internship at
Massachusetts General Hospital, his residencies at the former Boston Hospital
for Women (now the Brigham and Women's Hospital) and a fellowship in
gynecological oncology at Sloan-Kettering Memorial Cancer Center.
Stephen G. Pagliuca has been a member of the Board of Directors of the
Company since August 1996. He has been with Bain Capital, Inc., where he is a
Managing Director, since 1989, and has actively invested in the medical and
information industries. Prior to joining Bain Capital, Inc., he was a partner at
Bain & Company, where he managed client relationships in the healthcare and
information services industries, including assisting clients in developing
acquisition strategies. He is chairman of the board of PhysioControl Corporation
and Dade International, Inc. and a director of Vivra, Inc., Coram Healthcare,
Gartner Group, Executone, Medical Specialities Group and Wesley-Jessen.
Marc Wolpow has been a member of the Board of Directors of the Company
since August 1996. He joined Bain Capital, Inc. in 1990 and has been a Managing
Director since 1993. Previously he was a member of the corporate finance
department of Drexel Burnham Lampert, Inc. He is a director of American Pad &
Paper Corp., Miltex Instruments, Inc., Professional Services Industries, Inc.,
Paper Acquisition Corp. and Waters Corp.
Timothy T. Weglicki has been a member of the Board of Directors of the
Company since June 1997. Mr. Weglicki has been a principal with ABS Partners II,
L.L.C., the general partner of ABS Capital Partners II, L.P., a private equity
fund, and related entities since December 1993. Prior to joining ABS Partners,
he was a Managing Director of Alex Brown & Sons, Inc., where he established and
headed its Capital Markets Group and prior thereto headed the Firm's Equity
Division, Corporate Finance Department, and Health Care Investment Banking
Group. Mr. Weglicki holds an M.B.A. from the Wharton Graduate School of Business
and a B.A. from the John Hopkins University. He is a director of VitalCom, Inc.
and several privately held companies.
Samantha J. Trotman has served as Chief Financial Officer since
December 1996. She is responsible for all financial functions and physician
affiliation activities. She is also a member of the senior management team. Ms.
Trotman joined PQC from Bain Capital, where she was a senior associate. While at
Bain Capital, she managed and completed over a dozen transactions with combined
value of approximately $500 million, including the $30 million capital
commitment to the company. Prior to joining Bain Capital, Ms. Trotman was an
analyst with Wasserstein Perella, a leading mergers and
50
<PAGE>
acquisitions advisory firm. Ms. Trotman holds a BA in Engineering from Cambridge
University, England, an MA and MEng also from Cambridge and an MBA from Harvard
Business School.
Ann M. Keehn has served as Vice President of Finance since February
1997. Prior to joining PQC, Ms. Keehn was Director, Health Services Management
Consulting for John Snow, Inc. ("JSI"), an international health care consulting
firm. During her eight years with JSI, Ms. Keehn provided management consulting
services to a wide array of health care provider organizations including
integrated delivery systems, physician practices, community health centers, and
hospitals. Consulting engagement areas included strategic planning, affiliation
strategies, financial management under capitation arrangements, and operational
effectiveness. From 1988 to 1995, Ms. Keehn served as the chief financial
officer and interim chief executive officer for Acton Medical Associates, a
primary group practice affiliated with Harvard Pilgrim (formerly Harvard
Community Health Plan). Ms. Keehn has also held financial positions with
Children's Hospital and Brigham and Women's Hospital in Boston. Ms. Keehn worked
for Price Waterhouse from 1978 to 1981. She is a certified public accountant and
a member of the Massachusetts Society of CPAs. Ms. Keehn received her BA in
Accounting from Kansas State University and her Masters in Business
Administration from the University of Texas.
Director Compensation
Historically, members of the Board of Directors of the Company have not
received any cash compensation for their services as members of the Board,
although they are reimbursed for reasonable travel expenses while attending
Board and Committee meetings.
Executive Compensation
The following table sets forth compensation earned by (i) the Company's
Chief Executive Officer and (ii) the other executive officer of the Company
whose compensation during 1996 was greater than $100,000 (collectively, the
"Named Executive Officers"):
<TABLE>
<CAPTION>
Long-Term
1996 Annual Compensation Compensation All Other
Name and Principal Position Salary($) Bonus ($) Awards (1) Compensation($)
- --------------------------- --------------- ------------- ---------- ---------------
<S> <C> <C> <C> <C>
Jerilyn P. Asher........................... 250,000 --- --- 9,647(2)
Chief Executive Officer
Arlan F. Fuller, Jr., M.D.(3).............. 170,192 --- --- ---
Executive Vice President, Medical
Affairs
Jay Greenberg (5).......................... 220,000 --- --- 6,935(2)
Former Executive Vice President
Samantha J. Trotman........................ 4,808(4) --- --- ---
Chief Financial Officer
Nancy J. Kelley (6)........................ 18,333 55,000 --- 216,907(7)
Former Executive Vice President
</TABLE>
- --------------------
<TABLE>
<S> <C>
(1) The Company granted Jerilyn P. Asher, Arlan F. Fuller and Jay Greenberg
shares of restricted stock as described below in "--Employment
Agreements." The Company did not grant any stock appreciation rights
during the year ended December 31, 1996. The Company did not grant any
stock options to the Named Executive Officers nor did they exercise any
options during the year ended December 31, 1996. The Company does not
have any long-term incentive plans.
(2) Represents amounts paid in connection with an automobile allowance and
compensatory group life insurance premiums.
</TABLE>
51
<PAGE>
(3) Dr. Fuller has advised the Company that he will reduce his base annual
salary to $50,000 beginning in December 1996 reflecting a reduction on
the amount of time he anticipates attending to Company matters compared
to his other professional obligations.
(4) Amount based on annual salary of $125,000 from December 16, 1996.
(5) Mr. Greenberg resigned as an officer and director of the Company in
January 1997.
(6) Ms. Kelley ceased to be an officer of the Company in January 1996. The
bonus was paid in 1996 but is based upon services to the Company during
1995.
(7) Represents severance compensation due to Ms. Kelly in connection with
the termination of her employment agreement.
Employment Agreements
The Company has entered into the following employment agreements with
Jerilyn P. Asher and Arlan F. Fuller.
The Company is a party to an employment agreement with Ms. Asher
pursuant to which Ms. Asher serves as Chief Executive Officer of the Company for
the three-year period ending June 21, 1998. The term of the agreement will be
automatically extended for successive one-year terms, unless the Company
notifies Ms. Asher to the contrary at least 90 days prior to the expiration of
the then current term. For her services, Ms. Asher is entitled to an initial
base salary of $250,000 per year (subject to periodic increases as determined by
the Board) and is eligible to receive bonuses under the Company's management
incentive program, if such a program is adopted, in an amount up to 100% of her
base pay based upon individual and Company performance. Pursuant to an amendment
to the employment agreement dated August 30, 1996, Ms. Asher waived the right to
receive any unpaid amounts of base salary and bonus to which she was entitled
and had not received as of August 1, 1996. Ms. Asher is also entitled to receive
other benefits available to the Company's senior management generally. Pursuant
to a stock restriction agreement executed as of the date of the employment
agreement, the Company issued 4,162,500 shares of Series A Common Stock to Ms.
Asher at a purchase price of $.01 per share, 346,875 of which remain subject to
vesting if Ms. Asher maintains her employment with the Company until June 1998,
which vesting will be accelerated in the event of a Change in Control. A Change
in Control is defined to include a person or group becoming the beneficial owner
of 50% or more of the outstanding voting securities of the Company, certain
changes to the composition of the Board of Directors, certain mergers and a
liquidation of the Company. A percentage of the vested shares (50% in the case
of termination for cause and 35% in the case of voluntary termination) are
subject to the Company's repurchase rights in certain circumstances, including
termination of Ms. Asher for "cause" or Ms. Asher's voluntary resignation, at
the fair market value at the time of repurchase.
The Company may terminate Ms. Asher's employment at any time without
cause and upon 10 days' written notice with cause. Ms. Asher may terminate her
employment for any reason upon 90 days' written notice. If Ms. Asher's
employment is terminated by the Company without cause, or if Ms. Asher
terminates her employment for good reason, the Company must pay Ms. Asher an
amount equal to two times her annual salary. Cause, for purposes of the
termination provisions, means willful and continued failure to perform her
duties, willful engagement in misconduct materially injurious to the Company or
her conviction for a felony, fraud or embezzlement of the Company's property. In
addition, the Company must also make such payment if Ms. Asher's employment is
terminated at any time within 24 months after a "Change in Control" for any
reason other than (i) death or disability, (ii) by the Company for Cause or
(iii) by Ms. Asher other than for Good Reason.
During the term of the agreement, the Company must nominate Ms. Asher
to and Ms. Asher will be eligible to serve on the Board of Directors. Ms. Asher
also agreed to standard non-competition and non-disclosure terms with the
Company.
The Company is also party to an employment agreement with Dr. Fuller,
pursuant to which Dr. Fuller serves as Executive Vice President, Medical
Information Systems and Academic Development of the
52
<PAGE>
Company for the three-year period ending June 20, 1998. The term of the
agreement will be automatically extended for successive one-year terms, unless
the Company notifies Dr. Fuller to the contrary at least 90 days prior to the
expiration of the then current term. Dr. Fuller was required to devote 40% of
his time to the Company and, for such services, was entitled to an initial base
salary of $175,000 per year (subject to periodic increases as determined by the
Board). Dr. Fuller reduced his base annual salary to $50,000 beginning in
December 1996. Pursuant to a stock restriction agreement executed as of the date
of the employment agreement, the Company issued 618,750 shares of Common Stock
to Dr. Fuller at a purchase price of $.01 per share. These shares are subject to
vesting based on individual performance and duration of employment, which
vesting will be accelerated in the event of a "Change in Control." The Company
may terminate Dr. Fuller's employment at any time with cause and upon 60 days'
notice without cause. Dr. Fuller may terminate his employment for any reason
upon 60 days' written notice.
During the term of the agreement, the Company must nominate Dr. Fuller
to and Dr. Fuller will be eligible to serve on the Board of Directors. Dr.
Fuller also agreed to standard non-competition and non-disclosure terms with the
Company.
Compensation Committee Interlocks and Insider Participation
The Compensation Committee of the Board of Directors generally consists
of two non-employee directors. Dr. Fang is currently the only member. The
Compensation Committee makes recommendations to the Board of Directors
concerning salaries and incentive compensation for employees of and consultants
to the Company. No interlocking relationships exists between any member of the
Compensation Committee and any member of any other company's board of directors
or compensation committee.
1995 Equity Incentive Plan
The Company's 1995 Equity Incentive Plan (the "1995 Plan") was adopted
by the Board of Directors and approved by the stockholders of the Company in
June 1995. The 1995 Plan provides for the grant of stock options and the
issuance of shares of restricted stock to employees, officers and directors of,
and consultants or advisers to, the Company and its subsidiaries. Under the 1995
Plan, the Company may grant options that are intended to qualify as incentive
stock options within the meaning of Section 422 of the Internal Revenue Code of
1986, as amended (the "Code") ("incentive stock options"), or options not
intended to qualify as incentive stock options ("non-statutory options").
Incentive stock options may only be granted to employees of the Company.
A total of 1,875,000 shares of Class A Common Stock (adjustable up or
down in response to a change in the number of outstanding shares of Class A
Common Stock due to any merger, consolidation, reorganization, recapitalization,
reclassification, stock dividend, stock split or other similar transaction) may
be issued under the 1995 Plan. In the event that additional securities of the
Company are to be issued in connection with future affiliation transactions, the
Company may initially use such authorized but unissued shares. The maximum
number of shares with respect to which options or awards may be granted to any
employee under the 1995 Plan in any calendar year shall not exceed 500,000
shares of Class A Common Stock. Additionally, for so long as the Code shall so
provide, incentive stock options granted to an employee under the 1995 Plan will
not, in any calendar year, have an aggregate fair market value of more than
$100,000. If not previously terminated, the 1995 Plan will terminate on June 20,
2005 and options still outstanding at that time will continue to have force and
effect in accordance with the provisions of the instruments evidencing such
options.
The 1995 Plan is administered by the Board of Directors whose duties
are delegable to a committee. Subject to the provisions of the 1995 Plan, the
Board of Directors has the authority to select the employees to whom options are
granted and awards of restricted stock are made and determine the terms of each
option or award, including (i) the number of shares subject to the option or
award, (ii) the vesting schedule of the option or award, (iii) the option
exercise price, which, in the case of incentive stock options, must be at least
100% (110% in the case of incentive stock options granted to a shareholder
owning in excess of 10% of the Company's Class A Common Stock) of the fair
market value of the Class A Common Stock as of the date of grant, and (iv) the
duration of the option (which, in the case of incentive stock options, may not
exceed five years if granted to a shareholder owning in excess of 10% of the
Company's Class A Common Stock or ten years for all other recipients). As a
condition to the grant of an option under the 1995 Plan, each recipient of an
option must
53
<PAGE>
execute an option agreement, which may differ among recipients. The 1995 Plan
may be modified, amended or terminated at any time by the Board of Directors but
such a modification, amendment or termination will not, without the consent of
the optionee or recipient affect his or her rights under any option or award
previously granted to him or her. In addition, the Board of Directors may, in
its sole discretion (i) include additional provisions in any option or award
granted or made under the 1995 Plan (including restrictions on transfer,
repurchase rights, commitments to pay cash bonuses, to make or guarantee loans
or to transfer other property to optionees upon exercise of options, or such
other provisions as may be determined by the Board of Directors) so long as such
provisions are not inconsistent with the 1995 Plan or applicable law and (ii)
accelerate or extend dates on which options granted under the 1995 Plan may be
exercised.
Payment of the option exercise price may be made in cash and/or Common
Stock or by any other method (including delivery of a promissory note payable on
terms approved by the Board of Directors and consistent with Section 422 of the
Code, Rule 16b-3 under the Securities Exchange Act of 1934, as amended, and
Regulation T promulgated by the Federal Reserve Board). Options are not
assignable or transferable except by will or the laws of descent and
distribution and, in the case of non-statutory options, pursuant to a qualified
domestic relations order (as defined in the Code).
As of June 20, 1997, the Company had 34 employees, all of whom were
eligible to participate in the 1995 Plan. As of June 30, 1997, options to
purchase an aggregate of 1,747,086 shares of Class A Common Stock were
outstanding pursuant to the 1995 Plan.
CERTAIN TRANSACTIONS
Through June 20, 1997, pursuant to the Equity Facility, the
institutional investors affiliated with Bain Capital purchased an aggregate of
4,600,000 shares of Class B Common Stock and warrants exercisable for 6,415,000
shares of Class B Common Stock for an aggregate purchase price of $11,500,000.
On June 23, 1997, the Company issued 7,692,309 shares of Class C Common Stock
and Warrants to purchase 7,692,309 shares of Class C Common Stock to the
Institutional Investors for an aggregate consideration of $25 million. See
"Business -- The Equity Financing." In connection with the Bain Financing, the
Company entered into a Management Agreement dated as of August 30, 1996 with BCP
V, pursuant to which the Company will pay BCP V (or an affiliate designated by
BCP V) a management fee of $750,000 per year, plus 1% of any financings from
parties other than affiliates of Bain Capital, for services including advice in
connection with financings and financial, managerial and operational advice in
connection with day-to-day operations (the "Management Agreement"). The Company
is also obligated to pay certain expenses, not to exceed $250,000 per year
without the Company's consent, of BCP V, Bain Capital and the Institutional
Investors in connection with the Management Agreement. Each of Stephen G.
Pagliuca and Marc Wolpow is a Director of the Company, a limited partner of BCP
V, which is the general partner of Bain Capital Fund V, L.P. and Bain Capital
Fund V-B, L.P., and a general partner of BCIP Associates, L.P. and BCIP Trust
Associates, L.P., and a Managing Director of Bain Capital, which manages each of
the Institutional Investors.
Alphonse Calvanese, M.D., is a director of the Company and transferred
his practice to the Springfield Affiliated Group for which he received his
allocable portion of the $11.8 million total consideration paid to the
physicians who transferred their practices to the Springfield Affiliated Group.
Ira Fine, M.D. and Dana Frank, M.D., each a Director of the Company,
are members of medical practice groups which transferred their practice assets
to the Flagship Affiliated Group in the Flagship Affiliation. Upon consummation
of the Flagship Affiliation, Dr. Fine received his allocable share of the total
consideration of $566,580 payable to his existing practice group, and Dr. Frank
received his allocable share of the total consideration of $3,647,064 payable to
his existing practice group.
PLAN OF DISTRIBUTION
Shares of Common Stock will be offered in connection with PQC's (or an
Affiliated Group's) acquisition of businesses, properties or equity and/or debt
securities in business combination transactions from
54
<PAGE>
time to time. A maximum of 8,000,000 shares of Common Stock may be issued and
sold pursuant to this Prospectus of this amount, 4,800,000 are being issued in
connection with the Clinical Associates transaction and 3,200,000 may be issued
in connection with future Affiliations. These shares will ordinarily represent
all or part of the consideration paid upon affiliation of a physician practice
with the Company or its Affiliated Groups through business combination
transactions. The shares may also include shares to be delivered upon the
exercise or satisfaction of conversion or purchase rights which are created in
connection with acquisitions or which were previously created or assumed by the
companies whose businesses or properties are acquired by PQC (or its Affiliated
Group). The number of shares of Common Stock to be issued in any Affiliation, as
well as the valuation of such shares, are determined on a case by case basis as
a result of arms-length negotiation between PQC and the physicians in the
practice group affiliating with the Company. In determining the value of a
practice to the Company, PQC considers factors such as the historical revenues
of the practice, underutilization of patient care capacity, location, patient
base, participation in managed care contracts, the mix between primary care and
physicians with a specialist practice and the potential for successful
integration into the Affiliated Group.
55
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth the number of shares of capital stock of
the Company beneficially owned as of June 30, 1997 by (i) each owner who is
known by the Company to beneficially own 5% or more of any class of voting
stock, (ii) each of the Company's directors, (iii) each of the Company's Named
Executive Officers and (iv) all directors and executive officers as a group.
Except as otherwise indicated, the named owner has sole voting and investment
power with respect to all shares beneficially owned.
<TABLE>
<CAPTION>
Class A Common Stock (2) Class B Common Stock(2) Class C Common Common Stock(1)(2)
------------------------ ---------------------- Stock(2) -----------------
---------------
Number
------
Number Percent of Number Percent of Number Percentage of
Name and Address of Class of Class of of Common
of Beneficial Owner Shares Outstanding Shares Outstanding Shares Class Stock
------------------- ------ ----------- ------ ----------- ------ ----- -----
<S> <C> <C> <C> <C> <C> <C> <C>
Bain Funds(3)(4)................... --- --- 11,015,000 100.0% 3,076,924 33.3% 14,091,924
c/o Bain Capital, Inc.
Two Copley Place
Boston, Massachusetts 02116
Goldman Sachs Funds(3)(4).......... --- --- --- --- 3,076,924 33.3% 3,076,924
c/o Goldman Sachs & Co.
85 Broad Street
New York, NY 10004
ABS Capital Partners II, L.P.(3)(5) --- --- --- --- 9,160,004 74.6% 9,160,004
One South Street
Baltimore, MD 21201
Offshore Health Industries, Inc.(6) 1,582,500 7.5% --- --- --- --- 1,582,500
Two Park Plaza
Boston, MA 02116
Jerilyn P. Asher (7)............... 4,318,748 20.7% --- --- --- --- 4,318,748
Arlan F. Fuller, Jr., M.D.......... 618,750 3.0% --- --- --- --- 618,750
Samantha J. Trotman (8)............ --- --- 1,729,016 15.6% --- --- 1,729,016
Alphonse Calvanese, M.D (11)....... 512,382 2.4% --- --- --- --- 512,382
Leslie Fang, M.D................... --- --- --- --- --- --- ---
Ira Fine, M.D...................... 113,316 * --- --- --- --- 113,316
Dana Frank, M.D (11)............... 472,904 2.2% --- --- --- --- 472,904
Stephen G. Pagliuca(3)(9).......... --- --- 11,015,000 100.0% 3,074,924 33.3% 14,091,924
Marc Wolpow(3)(9).................. --- --- 11,015,000 100.0% 3,074,924 33.3% 14,091,924
Timothy T. Weglicki(10)............ --- --- --- --- 9,160,004 74.6% 9,160,004
All directors and executive officers
as a group (9 persons)(5) (14,985,600
(1)(3)(6) shares or 54.8% assuming
conversion of Class B Common Stock
into Class A Common Stock)......... 6,036,100 28.1% --- ---
<CAPTION>
Percentage
----------
of
--
Common
Name and Address ------
of Beneficial Owner Stock
------------------- -----
<S> <C>
Bain Funds(3)(4)................... 40.6%
c/o Bain Capital, Inc.
Two Copley Place
Boston, Massachusetts 02116
Goldman Sachs Funds(3)(4).......... 8.8%
c/o Goldman Sachs & Co.
85 Broad Street
New York, NY 10004
ABS Capital Partners II, L.P.(3)(5) 24.3%
One South Street
Baltimore, MD 21201
Offshore Health Industries, Inc.(6) 4.7%
Two Park Plaza
Boston, MA 02116
Jerilyn P. Asher (7)............... 13.0%
Arlan F. Fuller, Jr., M.D.......... 1.9%
Samantha J. Trotman (8)............ 5.1%
Alphonse Calvanese, M.D (11)....... 1.5%
Leslie Fang, M.D................... *
Ira Fine, M.D...................... *
Dana Frank, M.D (11)............... 1.4%
Stephen G. Pagliuca(3)(9).......... 40.7%
Marc Wolpow(3)(9).................. 40.7%
Timothy T. Weglicki(10)............ 24.3%
All directors and executive officers
group (9 persons)(5) (14,985,600
(1)(3)(6) shares or 54.8% assuming
conversion of Class B Common Stock
into Class A Common Stock)...........
</TABLE>
- --------------------------------
*Less than 1%.
(1) Reflects the percentage of shares of Class A, Class B and Class C
Common Stock. The Class B and Class C Common Stock of the Company are
convertible at the option of the holder into Class A Common Stock.
(2) Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission. In computing the number of shares
beneficially owned by a person and the percentage ownership of that
person,
56
<PAGE>
shares of the Company's capital stock subject to options or warrants held by
that person that are exercisable on or before August 30, 1997 are deemed
outstanding. Such shares, however, are not deemed outstanding for purposes of
computing the ownership of each other person.
(3) Does not include 6,153,846 shares of Class C Common Stock or warrants to
purchase 6,153,846 shares of Class C Common Stock which the Institutional
Investors are entitled to purchase pursuant to the Equity Facility.
(4) Includes warrants to purchase 1,538,462 shares of Class C Common Stock.
(5) Includes warrants to purchase 4,580,002 shares of Class C Common Stock.
(6) Includes warrants to purchase 332,500 shares of Class A Common Stock.
(7) Includes warrants to purchase 52,082 shares of Class A Common Stock.
(8) Includes an aggregate of 722,059 shares of Class B Common Stock and
1,006,957 shares of Class B Common Stock issuable upon outstanding
warrants held by BCIP Associates and BCIP Trust Associates. Ms. Trotman
is a general partner of BCIP Associates and BCIP Trust Associates. As
such, Ms. Trotman may be deemed to own beneficially shares owned by BCIP
Associates and BCIP Trust Associates, although Ms. Trotman disclaims
beneficial ownership of any such shares.
(9) Includes an aggregate of 4,600,000 shares of Class B Common Stock
beneficially owned by the institutional investors affiliated with Bain
Capital (11,015,000 shares on a fully diluted basis) and 1,538,426 shares
of Class C Common Stock (3,076,924 on a fully diluted basis). Each of Mr.
Pagliuca and Mr. Wolpow is a Managing Director of Bain Capital, which
manages each of the institutional investors. Bain Capital is a limited
partner in the partnership which is the general partner of Bain Capital
Fund V, L.P. and Bain Capital Fund V-B, L.P., and a general partner of
BCIP Associates and BCIP Trust Associates. As such, Messrs. Pagliuca and
Wolpow may be deemed to own beneficially shares owned by such
institutional investors, although each of Mr. Pagliuca and Mr. Wolpow
disclaims beneficial ownership of any such shares.
(10) Includes 4,615,385 shares of Class C Common Stock (9,230,770 shares of
Class C Common Stock on a fully diluted basis) beneficially owned by ABS
Capital Partners II, L.P. Mr. Weglicki is a managing member of ABS
Partners II, L.L.C., which manages ABS Capital Partners II, L.P. As such
Mr. Weglicki may be deemed to own beneficially shares owned by ABS
Capital Partners II, L.P., although Mr. Weglicki disclaims beneficial
ownership of such shares.
(11) Includes options to purchase 300,000 shares of Class A Common Stock.
57
<PAGE>
DESCRIPTION OF CAPITAL STOCK
The authorized capital stock of the Company consists of 10,000,000 shares
of Preferred Stock, $.01 par value per share, and 140,000,000 shares of common
stock, $.01 par value per share, of which (i) 101,292,691 shares are designated
as Class A Common Stock, (ii) 6,727,043 shares are designated as Class B-1
Common Stock, and (iii) 4,287,957 shares are designated as Class B-2 Common
Stock and 27,692,309 are designated as Class C Common Stock. As of June 30,
1997, there were issued and outstanding (i) 20,819,665 shares of Class A Common
Stock held by approximately 166 stockholders, (ii) 2,809,296 shares of Class B-1
Common Stock and 1,790,704 shares of Class B-2 Common Stock held by 4
stockholders and (iii) 7,692,309 shares of Class C Common Stock held by 21
stockholders. There were no outstanding Shares of Preferred Stock.
Class A Common Stock, Class B Common Stock and Class C Common Stock
Except as otherwise provided below, all shares of Class A Common Stock,
Class B Common Stock and Class C Common Stock are identical in all respects and
entitle the holders thereof to the same rights, privileges and preferences and
are subject to the same qualifications, limitations and restrictions. Holders of
the Class A Common Stock, the Class B Common Stock or Class C Common Stock are
entitled to one vote per share with respect to all matters to be voted on by the
stockholders of the Company and do not have cumulative voting rights. There are
no sinking fund provisions with respect to any of the Company's Class A Common
Stock, Class B Common Stock or Class C Common Stock. No distribution (whether in
cash, securities or otherwise) may be made in respect of any class of Common
Stock or the Class B Common Stock unless an equivalent distribution is made with
respect to each outstanding share of the other classes.
Subject to the special voting rights of the Class B and Class C Directors
and the approval rights of the Institutional Investors described below, the
Board of Directors of the Company may, at any time, without any vote of the
holders of the Company's capital stock, issue all or any part of the unissued
capital stock of the Company from time to time authorized under the Restated
Certificate and may determine, subject to any requirements of law, the
consideration for which such stock is to be issued and the manner of allocating
such consideration between capital and surplus.
Class B Common Stock. Shares of Class B Common Stock are convertible into
shares of Class A Common Stock at the option of the holder, and automatically
convert into shares of Class A Common Stock upon the earlier of a "Qualified
Public Offering" or a reduction in the number of shares of Class B Common Stock
below certain thresholds. A "Qualified Public Offering" is a public offering (i)
in which the net proceeds of the sale of such shares by the Company and any
stockholder of the Company equal or exceed $50.0 million, provided that the net
proceeds of the sale thereof to the Institutional Investors equal or exceed the
greater of (x) fifty percent of the purchase price paid by the Institutional
Investors in any closing under the Equity Facility or (y) $45.0 million; and
(ii) involving a firm commitment underwriting by a nationally recognized
underwriter acceptable to the Class B and Class C Directors (as defined below).
In any such conversion, each outstanding share of Class B Common Stock converts
into the number of shares of Class A Common Stock determined by application of
the conversion ratio in effect, which was one as of June 23, 1997, subject to
adjustment in order to reflect any stock dividends, stock splits, reverse stock
splits, reorganizations or recapitalizations of the Company's capital stock.
Class C Common Stock. Shares of Class C Common Stock are convertible into
Class A Common Stock at the option of the holder and automatically convert into
Class A Common Stock upon the earlier of a Qualified Public Offering or a
reduction in the number of shares of Class C Common Stock below certain
thresholds. In any such conversion, each outstanding share of Class C Common
Stock converts into the number of shares of Class A Common Stock determined by
application of the conversion ratio in effect, which was one as of June 23,
1997, subject to adjustments (i) in order to reflect any stock dividends, stock
splits, reverse stock splits, reorganization or recapitalization of the
Company's Capital Stock, (ii) to prevent dilution for the issuance or sale of
rights or options below the then applicable conversion price or (iii) upon the
sale of any class of Common Stock at a price less than the then applicable
conversion price. The Class
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C Common Stock is entitled to a distribution upon liquidation (including a
deemed liquidation upon certain mergers) in preference to any other class of
Company Common Stock equal to the greater of $3.25 per share or the amount to be
distributed with respect to each share of Class A or Class B Common Stock.
Election of Directors. The holders of the Class A Common Stock, voting
separately as a single class, are entitled to elect two of the thirteen
directors of the Company (each, a "Class A Director"), there currently being
three vacancies. Any vacancy in the seats held by the Class A Directors shall be
filled only by vote of a majority of the outstanding shares of Class A Common
Stock, and no Class A Director may be removed without the consent of a majority
of the holders of the Class A Common Stock. The Company may not in any manner
subdivide or increase (by stock split, stock dividend or other similar manner)
reclassify or combine in any manner the outstanding shares of Class A Common
Stock unless a proportional adjustment is made to the Class B Conversion Factor.
The holders of the Class B-1 Common Stock, voting separately as a single
class, are entitled to elect one of the eleven directors of the Company, the
Class B-1 Director and the holders of the Class B-2 Common Stock, voting
separately as a single class, are entitled to elect one director of the Company,
the Class B-2 Director. Any vacancy in the seats held by the Class B Directors
shall be filled only by vote of a majority of the outstanding shares of Class
B-1 Common Stock or Class B-2 Common Stock, as applicable, and no Class B
Director may be removed without the consent of a majority of the holders of the
Class B-1 Common Stock or Class B-2 Common Stock, as applicable. The Company may
not in any manner subdivide or increase (whether by stock split, stock dividend
or other similar manner), reclassify or combine in any manner the outstanding
shares of the Class B Common Stock unless a proportional adjustment is made to
the Common Stock.
The holders of Class C Common Stock are entitled to elect two directors
(with one position to remain vacant until the remaining amount to be purchased
by affiliates of Goldman, Sachs & Co. under the Equity Facility is drawn down).
Any vacancy in the seats held by the Class C Directors shall only be filled by
holders of a majority of the shares of Class C Common Stock. The Company may not
in any manner subdivide or increase (whether by stock split, stock dividend or
other similar manner), reclassify or combine in any manner the outstanding
shares of the Class C Common Stock unless a proportional adjustment is made to
the Common Stock.
The holders of the Class A Common Stock, the Class B Common Stock and
Class C Common Stock, voting together as a single class, are entitled to elect
seven of the thirteen directors of the Company (each, a "Common Stock
Director"). Any vacancy in the seats held by the Common Stock Directors shall be
filled only by vote of a majority of the outstanding shares of Company Common
Stock, and no Common Stock Director may be removed without the consent
of a majority of the holders of Company Common Stock. Except as provided below,
each director of the Company is entitled to one vote on all matters to be voted
on by the directors, and the directors vote together as a single class on all
matters.
Pursuant to the Stockholders Agreement, the Institutional Investors and
the Class A Common Stockholders who are parties to such agreement are required
to elect as Class A Directors two individuals who are employees of the Company
and are selected by the Chief Executive Officer and seven other Directors who
are physicians and are selected by the Chief Executive Officer and approved by
the Institutional Investors. See " -- Stockholders' Agreement."
Special Rights of Class B and Class C Directors. The Class B Directors
are entitled to one vote on any matter before the Board of Directors, except
that each Class B and Class C Director is entitled to five votes (providing the
Class B and Class C Directors with a majority of the voting power of the Board)
(i) with respect to any Class B and Class C Director Action and (ii) with
respect to all matters in the event that any Class B and Class C Director
Control Event remains uncured.
"Class B and Class C Director Actions" include (i) the issuance,
redemption or similar disposition of capital stock or securities convertible
into capital stock of the Company or any of its subsidiaries or affiliates
(including its Affiliated Groups), (ii) the declaration of dividends or other
distributions in respect of the capital stock of the Company or any of its
subsidiaries or affiliates (including its Affiliated Groups), (iii) the
incurrence of indebtedness by the Company or any of its subsidiaries or the
incurrence of material indebtedness by any
59
<PAGE>
of its affiliates (including its Affiliated Groups), (iv) a merger, sale,
liquidation or similar transfers involving the Company or any of its
subsidiaries or affiliates (including its Affiliated Groups), (v) public
offerings, (vi) material amendments to any management or similar agreement by
the Company or any of its subsidiaries with its affiliates (including its
Affiliated Groups) or with the shareholder of any of its Affiliated Groups and
(vii) the employment, termination and compensation of the Chief Executive
Officer.
"Class B and Class C Director Control Event" means any of the following:
(i) the Company fails to achieve 75% of a financial plan, if any, provided by
the Board (including the Class B and Class C Directors) for two consecutive
fiscal quarters or 50% of such a plan for one fiscal quarter; (ii) Jerilyn Asher
is no longer employed on a full time basis as Chief Executive Officer for any
reason other than her employment having been terminated without Cause (as
defined in the Restated Certificate) or (iii) the Company shall have taken a
"Restricted Action" (as described below) without the prior approval of the
Institutional Investors. No financial plan has been currently approved by the
Board.
Certain "Restricted Actions," in addition to being approved by the Board
of Directors, must be approved by the Institutional Investors. Restricted
Actions include (without limitation) (i) a merger, sale, liquidation or similar
transaction involving disposition of all, substantially all, or a material part
of, the property, business or assets of the Company or any of its subsidiaries
or affiliates (including its Affiliated Groups), (ii) any agreement by the
Company or any of its subsidiaries or affiliates (including its Affiliated
Groups) for an acquisition or affiliation transaction (other than acquisitions
or affiliations not in excess of $1 million in any 12-month period), (iii)
dividends and other distributions by the Company or any of its subsidiaries,
(iv) any material change in the business of the Company or any of its
subsidiaries or affiliates (including its Affiliated Groups), (v) any amendment
to the charter or by-laws of the Company or its subsidiaries, (vi) retention or
dismissal of the Chief Operating Officer or Chief Financial Officer of the
Company, (vii) transactions by the Company or any of its subsidiaries with
affiliates (including its Affiliated Groups) and (viii) commencement and
management of any material litigation.
The Restated Certificate provides that upon conversion of all outstanding
shares of Class B Common Stock and Class C Common Stock into Class A Common
Stock, the holders of the Class A Common Stock will be entitled to elect all the
directors, each director will have one vote on all matters to be voted on by the
directors, and the provisions therein granting the Class B and Class C Directors
special voting rights will be eliminated.
Other Obligations. Under the Equity Facility, the Company has certain
other obligations relating to its capital stock that are not reflected in the
Restated Certificate. Subject to certain conditions, the Equity Facility
requires that the Company provide the Institutional Investors with an
opportunity to participate in future financings by the Company involving debt or
equity securities in lieu of and on the same conditions as other potential
investors. The Equity Facility, independently from the Restated Certificate,
also requires that the Company not engage in any Restricted Action without the
prior approval of the Institutional Investors. Both of these obligations
terminate only upon a Qualified Public Offering.
Certain Corporate Provisions. The Restated Certificate authorizes
10,000,000 shares of Preferred Stock and grants the Board of Directors the
authority to issue series of Preferred Stock with such voting rights and other
powers as the Board of Directors may determine (subject to the special voting
rights of the Class B and Class C Directors and the approval rights of the
Institutional Investors). Those provisions, as well as the voting rights of the
Class B and Class C Directors and the approval rights of the Institutional
Investors, may be deemed to have an "anti-takeover" effect in that they may
delay, defer or prevent a change of control of the Company.
Preferred Stock
The Board of Directors is authorized, subject to any limitations
prescribed by law, without further stockholder approval, to issue from time to
time up to an aggregate of 10,000,000 shares of preferred stock, in one or more
series. Each such series of preferred stock shall have such number of shares,
designations, preferences, voting powers, qualifications and special relative
rights or privileges as shall be determined by
60
<PAGE>
the Board of Directors, which may include among others, dividend rights, voting
rights, redemption and sinking fund provisions, liquidation preferences,
conversion rights and preemptive rights.
The stockholders of the Company have granted the Board of Directors
authority to issue the preferred stock and to determine its rights and
preferences in order to eliminate delays associated with a stockholder vote on
specific issuances. The rights of the holders of Common Stock will be subject to
the rights of holders of any preferred Stock issued in the future. The issuance
of preferred stock, while providing desirable flexibility in connection with
possible acquisitions and other corporate purposes, could have the effect of
making it more difficult for a third party to acquire, or of discouraging a
third party from attempting to acquire, a majority of the outstanding voting
stock of the Company. The Company has no present plans to issue any shares of
preferred stock.
Warrants
At June 23, 1997, the Company had issued Class B Warrants to acquire up
to 6,415,000 shares of Class B Common Stock to the Institutional Investors
affiliated with Bain Capital at an exercise price of $2.50 per share of Class B
Common Stock and Class C Warrants to purchase up to 7,692,309 shares of Class C
Common Stock at $3.25 per share of Class C Common Stock. Pursuant to the Equity
Facility, the Company may be obligated to issue Class C Warrants to purchase an
additional 6,153,846 shares of Class C Common Stock. The Warrants expire on the
seventh anniversary of their issuance. The number of shares of Class B Common
Stock and Class C Common Stock issuable upon exercise and the exercise price are
subject to adjustment to prevent dilution, including adjustment in the event
that any Class A Common Stock is issued at a price less than Exercise Price. The
Warrants become warrants to purchase Class A Common Stock at such time as the
Class B Common Stock or Class C Common Stock is converted to Class A Common
Stock. The Company has also issued warrants to purchase 853,076 shares of Class
A Common Stock at $2.40 per share, of which 436,538 expire in 2000 and 416,538
expire in 2001, warrants to purchase 50,000 shares of Class A Common Stock at
$3.00 per share, all of which expire in 2003, and 201,150 warrants to purchase
Class A Common Stock at $5.00 per share which expire in 2003.
Stockholders Agreement
The Company, the Institutional Investors, management holders of the
Company's equity securities, the Flagship Stockholder Physicians, certain
Springfield physicians and all other holders of the Company's equity securities
(other than the Springfield Stockholder Physicians) are parties to the
Stockholders Agreement dated as of August 30, 1996, as amended. The 28
Springfield Stockholder Physicians are parties to a separate stockholders
agreement and registration rights agreement described below. In addition,
approximately 7 Flagship Shareholder Physicians nearing retirement age entered
into an additional agreement containing provisions with respect to the treatment
of Securities (as defined below) held by them at retirement.
The Stockholders Agreement requires each Stockholder (as defined in the
Agreement) to vote his or her shares of the Company to elect as directors of the
Company: (i) two employees designated by the Chief Executive Officer, and (ii)
seven physicians designated by the Chief Executive Officer and approved by the
Institutional Investors. Pursuant to the Company's Restated Certificate, the
Institutional Investors have the right to designate the two other directors of
the Company. See "Description of Capital Stock."
The Stockholders Agreement prohibits the transfer of shares of the
Company held by officers and employees (except shares issuable pursuant to
certain incentive stock options granted to employees) ("Management Shares") and
options, warrants and shares issued in affiliation transactions ("Physician
Shares") (collectively, "Restricted Shares") except under certain limited
circumstances, such as transfer of such Restricted Shares to members of the
holder's immediate family or to the holder's estate and heirs provided that they
agree to become bound by the Stockholders Agreement.
Except with respect to Management Shares held by Ms. Asher, upon
termination of a holder's employment with the Company or an Affiliated Group,
the Company has the right to acquire Restricted Shares held by such holder,
together with any exercisable warrants or options held by such holder (such
warrants,
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options and Restricted Shares, collectively, "Securities") at fair market value
(or, in the event of termination for cause, at the lower of cost or fair market
value). Upon the death of any officer, employee or affiliated physician, the
estate of such holder has the right, subject to certain limitations, to sell all
or any part of the holder's Securities to the Company at fair market value.
Because the obligation to purchase Common Stock under the Stockholders Agreement
is limited to circumstances in which a physician stockholder dies or is
disabled, the Company does not anticipate this put right to cause significant
liquidity issues for the Company. To the extent that the Company needs to
repurchase common stock pursuant to this provision, the Company anticipates
using its working capital, the Equity Facility or other available sources of
capital. The Stockholders Agreement also provides for certain take along
obligations pursuant to which, at the request of the Institutional Investors,
holders are required to sell a proportionate amount of their shares to persons
who are acquiring shares from the Institutional Investors on the same terms and
conditions. In addition, subject to certain conditions, all holders have the
right to join pro rata in any sale of shares by another holder.
All holders have so-called "piggyback registration rights" which permit
them to cause the Company to use its best efforts to add their shares (subject
to certain limitations) to registration statements filed by the Company under
the Securities Act for any public offering, other than registration statements
pertaining to employee benefit plans or acquisitions. The Institutional
Investors have so-called "demand registration rights" which permit them, subject
to certain conditions, to cause the Company to use its best efforts to effect a
registration under the Securities Act of all or a part of their shares. These
demand registration rights may only be exercised with respect to three such
registrations. Each holder agrees that upon the request of the underwriters
managing any underwritten public offering of the Company's securities, it will
not transfer any shares for a period beginning not more than seven days
immediately preceding and ending not more than 180 days following the public
offering without the prior written consent of the underwriters.
The Stockholders Agreement further provides that the Company shall not,
without the prior written consent of the Institutional Investors, enter into any
agreement with any holder or prospective holder of any securities of the Company
relating to registration rights unless such agreement (to the extent the
agreement would allow such holder or prospective holder to include such
securities in any registration filed under the provisions of the Stockholders
Agreement) includes a provision that such holder or prospective holder may
include such securities in any such registration only to the extent that the
inclusion of its securities will not (i) reduce the amount of the securities
held by the Institutional Investors which would otherwise be included in such
registration and (ii) otherwise diminish the rights provided in the Stockholders
Agreement.
Subject to certain limited exceptions, each holder agrees that it will
not transfer any shares to any person unless such person has delivered to the
Company a written acknowledgment and agreement that the shares to be received
are subject to all of the provisions of the Stockholders Agreement and that such
person agrees to be bound by and party to the Agreement to the same extent as if
it were the original holder and an original signatory thereto.
The Springfield Stockholder Physicians who entered into affiliation
transaction on August 30, 1996, are subject to a separate stockholders agreement
with the Company dated as of August 9, 1996 (the "Springfield Stockholders
Agreement"). The Springfield Stockholders Agreement provides that no Springfield
Stockholder Physician may transfer, assign or pledge his or her rights in shares
of the Company until August 9, 1998, unless the Company concludes that such
transfer will not prevent the merger pursuant to which such physician became
affiliated with the Company from qualifying as a tax free transaction. In
addition to that limitation, the Company has a right of first refusal for 60
days upon a Springfield Stockholder Physician's decision to transfer his or her
shares pursuant to which the Company must purchase all or none of such shares.
The Company's right of first refusal does not extend to transfers (i) pursuant
to a registration statement, (ii) as part of a sale of substantially all shares
of the Company, and (iii) to a family member, heir or entity controlled by the
physician. As a condition to each such exempt transfer, the transferee must
agree to be bound by the terms of the Springfield Stockholders Agreement. The
Company's right of first refusal terminates upon an initial public offering or
merger, sale of the Company, or similar transaction. The Company also has the
right to redeem the shares held by a physician at fair market value upon
termination of his or her employment for any reason prior to August 9, 1999. The
shares subject to the Springfield Stockholders Agreement are held in an escrow
account controlled jointly by the Company and each physician.
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The Springfield Stockholder Physicians who entered into affiliation
transactions on August 30, 1996, are also subject to a separate registration
rights agreement with the Company dated as of August 9, 1996 (the "Springfield
Registration Rights Agreement"). The Springfield Registration Rights Agreement
grants the Springfield Stockholder Physicians unlimited piggy-back registration
rights with respect to any registration statement (other than a registration
statement on Form S-8 or Form S-4) filed by the Company for a public offering,
except the registration statement relating to the initial public offering of the
Company's stock. The shares to be registered may be limited by the underwriters,
provided that the physicians who have elected to participate in the offering
will participate pro rata with all other holders registering shares. The
Springfield Registration Rights Agreement terminates on August 9, 1998.
Pursuant to the Stockholders Agreement and the Springfield Registration
Rights Agreement, at September 30, 1997, 4,600,000 shares of Class B Common
Stock and 7,692,309 shares of Class C Common Stock are entitled to demand
registration rights and all outstanding shares of Company Common Stock are
entitled to piggy-back registration rights.
SHARES ELIGIBLE FOR FUTURE SALE
Shares offered hereby may generally be resold by the persons acquiring
them without further registration under the Securities Act, unless such persons
are "affiliates" or "underwriters" within the meaning of the Securities Act.
However, it is expected that each future stockholder, including physicians
entering into affiliation transactions with the Company, will enter into a
Stockholders Agreement which impose certain restrictions upon the resale of
shares of the Company's Class A Common Stock.
At September 30, 1997, the Company had outstanding 32,854,574 shares of
Class A Common Stock, Class B Common Stock and Class C Common Stock (before
giving effect to any future exercise of outstanding warrants and options).
1,666,151 shares of Class A Common Stock are freely tradeable without
restriction under Rule 144(k) of the Securities Act. None of the outstanding
shares of Class A Common Stock and Class B Common Stock (collectively, the
"Restricted Shares"), including Restricted Shares to be issued in connection
with the exercise of outstanding warrants and options, have been registered
under the Securities Act, and they may be resold publicly only upon registration
under the Securities Act or in compliance with an exemption from the
registration requirements of the Securities Act.
At present, Rule 144 provides generally that if one year has elapsed
since the later of the date of the acquisition of Restricted Shares from the
Company or any affiliate of the Company, the acquiror or subsequent holder
thereof may sell, within any three-month period, a number of shares that does
not exceed the greater of 1% of the then outstanding shares of Common Stock or
the average weekly trading volume of the Common Stock during the four calendar
weeks preceding the date on which notice of the sale if filed with the
Commission. Sales under Rule 144 are also subject to certain manner of sale
provisions, notice requirements and the availability of current public
information about the Company. If two years have elapsed since the later of the
date of acquisition of Restricted Shares from the Company or from any affiliate
of the Company, and the acquiror or subsequent holder thereof is deemed not to
have been an affiliate of the Company at any time during the 90 days preceding a
sale, such person would be entitled to sell such shares without regard to the
limitations described above. As of September 30, 1997, holders of 14,313,295,
6,984,676, 440,000, 667,493 and 7,706,250 Restricted Shares will be eligible to
sell such shares pursuant to Rule 144 under the Securities Act, subject to the
manner of sale, volume, notice and information requirements of Rule 144,
beginning in September 1997, December 1997, January 1998, February 1998, and
June, 1998 respectively.
LEGAL MATTERS
The validity of the Common Stock offered hereby has been passed upon for
the Company by Hale and Dorr LLP, Boston, Massachusetts. As of the date of this
Prospectus, H&D Investments II, a general partnership in which certain members
of Hale and Dorr LLP are partners, beneficially owns 20,833 shares of the
Company's Class A Common Stock.
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INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
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<S> <C>
PHYSICIANS QUALITY CARE, INC.
Report of Independent Auditors ..........................................
*Balance Sheets as of December 31, 1995 and 1996
and June 30, 1997 (unaudited).........................................
Statements of Operations for the period from March 20, 1995
(inception) to December 31, 1995 and the year ended December 31, 1996
and the six months ended June 30, 1996 (Unaudited) and June 30,
1997 (Unaudited).......................................................
*Statements of Changes in Stockholders' Equity (Deficit) and Common Stock
Subject to Put for the period from March 20, 1995 (inception) to
December 31, 1995 and the year ended December 31, 1996 and the six
months ended June 30, 1996 (Unaudited) and June 30, 1997 (Unaudited).
*Statements of Cash Flows for the period from March 20, 1995
(inception) to December 31, 1995 and the year ended December 31, 1996
and the six months ended June 30, 1996 (Unaudited) and June 30,
1997 (Unaudited).......................................................
Notes to Financial Statements ...........................................
SPRINGFIELD MEDICAL ASSOCIATES, INC.
Report of Independent Auditors ..........................................
Consolidated Balance Sheets as of December 31, 1994 and 1995 and
August 31, 1996 .......................................................
*Consolidated Statements of Operations for the year ended December 31,
1993, 1994 and 1995, the period January 1, 1996 through August 30,
1996 and three months ended March 31, 1996 (unaudited) ................
Consolidated Statements of Stockholders' Equity for the year ended
December 31, 1993, 1994 and 1995, the period January 1, 1996 through
August 30, 1996 and nine months ended September 30, 1995 (unaudited)...
Consolidated Statements of Cash Flows for the year ended December 31,
1993, 1994 and 1995, the period January 1, 1996 through August 30,
1996 and nine months ended September 30, 1995 (unaudited) .............
Notes to Consolidated Financial Statements ..............................
ALPHONSE F. CALVANESE, M.D., P.C.
Report of Independent Auditors ..........................................
Balance Sheets as of September 30, 1995 and August 30, 1996 (unaudited)..
Statements of Operations for the year ended September 30, 1995 and the
period October 1, 1995 through August 30, 1996 (unaudited) ............
Statements of Stockholder's Equity for the year ended September 30, 1995
and the period October 1, 1995 through August 30, 1996 (unaudited) ....
Statements of Cash Flows for the year ended September 30, 1995 and the
period October 1, 1995 through August 30, 1996 (unaudited) ............
Notes to Financial Statements ...........................................
CARDIOLOGY AND INTERNAL MEDICINE ASSOCIATES, INC.
Report of Independent Auditors ..........................................
Balance Sheets as of December 31, 1995 and August 30, 1996 (unaudited)...
Statements of Operations for the years ended December 31, 1994 and 1995
and period January 1, 1996 through August 30, 1996 (unaudited) and
nine months ended September 30, 1995 (unaudited) ......................
Statements of Stockholder's Equity for the years ended December 31,
1994 and 1995 and period January 1, 1996 through August 30, 1996
(unaudited) and nine months ended September 30, 1995 (unaudited) ......
Statements of Cash Flows for the years ended December 31, 1994 and 1995
and period January 1, 1996 through August 30, 1996 (unaudited) and
nine months ended September 30, 1995 (unaudited) ......................
Notes to Financial Statements ...........................................
</TABLE>
<PAGE>
<TABLE>
<S> <C>
JAMES F. HAINES AND WILLIAM J. BELCASTRO, PARTNERSHIP
Report of Independent Auditors .........................................
Balance Sheets as of December 31, 1995 and August 31, 1996 (unaudited)..
Statements of Operations for the year ended December 31, 1995 and
period January 1, 1996 through August 30, 1996 (unaudited) and nine
months ended September 30, 1995 (unaudited) ..........................
Statements of Partners' Capital for the year ended December 31, 1995
and period January 1, 1996 through August 30, 1996 (unaudited) and
nine months ended September 30, 1995 (unaudited) .....................
Statements of Cash Flows for the year ended December 31, 1995 and
period January 1, 1996 through August 30, 1996 (unaudited) and nine
months ended September 30, 1995 (unaudited) ..........................
Notes to Financial Statements ..........................................
JAY M. UNGAR, M.D.
Report of Independent Auditors .........................................
Balance Sheets as of December 31, 1995 and August 30, 1996 (unaudited)..
Statements of Operations for the year ended December 31, 1995 and
period January 1 through August 30, 1996 (unaudited) and nine months
ended September 30, 1995 (unaudited) .................................
Statements of Cash Flows for the year ended December 31, 1995 and
period January 1 through August 30, 1996 (unaudited) and nine months
ended September 30, 1995 (unaudited) .................................
Notes to Financial Statements ..........................................
WESTERN MASSACHUSETTS MEDICAL GROUP, INC.
Report of Independent Auditors .........................................
Balance Sheets as of November 30, 1995 and August 30, 1996 (unaudited)..
Statements of Operations for the year ended November 30, 1995 and the
period December 1, 1995 through August 30, 1996 (unaudited) and nine
months ended August 31, 1995 (unaudited) .............................
Statements of Stockholder's Equity for the year ended November 30, 1995
and the period December 1, 1995 through August 30, 1996 (unaudited)
and nine months ended August 31, 1995 (unaudited) ....................
Statements of Cash Flows for the year ended November 30, 1995 and the
period December 1, 1995 through August 30, 1996 (unaudited) and nine
months ended August 31, 1995 (unaudited) .............................
Notes to Financial Statements ..........................................
ANNAPOLIS MEDICAL SPECIALISTS, LLP
Report of Independent Auditors .........................................
Balance Sheets as of December 31, 1994 and 1995 and September 30, 1996
(unaudited) ..........................................................
Statements of Operations for the years ended December 31, 1993, 1994
and 1995, and nine months ended September 30, 1995 (unaudited) and
nine months ended September 30, 1996 (unaudited) .....................
Statements of Stockholder's Equity for the years ended December 31,
1993, 1994 and 1995, and nine months ended September 30, 1995
(unaudited) and nine months ended September 30, 1996 (unaudited) .....
Statements of Cash Flows for the years ended December 31, 1993, 1994
and 1995, and nine months ended September 30, 1995 (unaudited) and
nine months ended September 30, 1996 (unaudited) .....................
Notes to Financial Statements ..........................................
</TABLE>
<PAGE>
<TABLE>
<S> <C>
DRS. FORTIER, LIBBER, CLEMMENS & WEIMER, P.A.
Report of Independent Auditors .........................................
Balance Sheets as of December 31, 1995 and September 30, 1996
(unaudited) ..........................................................
Statements of Operations for the year ended December 31, 1995 and nine
months ended September 30, 1995 (unaudited) and September 30, 1996
(unaudited) ..........................................................
Statements of Shareholders' Equity for the year ended December 31, 1995
and nine months ended September 30, 1995 (unaudited) and
September 30, 1996 (unaudited) .......................................
Statements of Cash Flows for the year ended December 31, 1995 and nine
months ended September 30, 1995 (unaudited) and September 30, 1996
(unaudited) ..........................................................
Notes to Financial Statements ..........................................
DRS. GOLDGEIER, LEVINE & FRIEDMAN, P.A.
Report of Independent Auditors .........................................
Balance Sheets as of December 31, 1995 and September 30, 1996
(unaudited) ..........................................................
Statements of Operations for the year ended December 31, 1995 and nine
months ended September 30, 1995 (unaudited) and September 30, 1996
(unaudited) ..........................................................
Statements of Shareholders' Equity (Deficit) for the year ended
December 31, 1995 and nine months ended September 30, 1995 (unaudited)
and September 30, 1996 (unaudited) ...................................
Statements of Cash Flows for the year ended December 31, 1995 and nine
months ended September 30, 1995 (unaudited) and September 30, 1996
(unaudited) ..........................................................
Notes to Financial Statements ..........................................
KOEPPEL, ROSEN, RUDIKOFF, M.D., P.C.
Report of Independent Auditors .........................................
Balance Sheets as of December 31, 1995 and September 30, 1996
(unaudited) ..........................................................
Statements of Operations for the year ended December 31, 1995 and nine
months ended September 30, 1995 (unaudited) and September 30, 1996
(unaudited) ..........................................................
Statements of Stockholders' Equity for the year ended December 31,
1995 and nine months ended September 30, 1995 (unaudited) and
September 30, 1996 (unaudited) .......................................
Statements of Cash Flows for the year ended December 31, 1995 and nine
months ended September 30, 1995 (unaudited) and September 30, 1996
(unaudited) ..........................................................
Notes to Financial Statements ..........................................
DRS. PAKULA, DAVICK & BOGUE, P.A.
Report of Independent Auditors .........................................
Balance Sheets as of December 31, 1995 and September 30, 1996
(Unaudited) ..........................................................
Statements of Operations for the year ended December 31, 1995 and nine
months ended September 30, 1996 (unaudited) and September 30, 1995
(unaudited) ..........................................................
Statements of Stockholders' Equity for the year ended December 31,
1995 and nine months ended September 30, 1996 (unaudited) and
September 30, 1995 (unaudited) .......................................
Statements of Cash Flows for the year ended December 31, 1995 and nine
months ended September 30, 1996 (unaudited) and September 30, 1995
(unaudited) ..........................................................
Notes to Financial Statements ..........................................
</TABLE>
<PAGE>
<TABLE>
<S> <C>
PARK MEDICAL ASSOCIATES, P.A. AND PARK MEDICAL LABS, INC.
Report of Independent Auditors .........................................
Consolidated Balance Sheets as of December 31, 1994 and 1995 and
September 30, 1996 (unaudited) .......................................
Consolidated Statements of Operations for the years ended December 31,
1993, 1994 and 1995 and nine months ended September 30, 1995
(unaudited) and nine months ended September 30, 1996 (unaudited) .....
Consolidated Statements of Owners' Equity for the years ended
December 31, 1993, 1994 and 1995 and nine months ended
September 30, 1995 (unaudited) and nine months ended
September 30, 1996 (unaudited) .......................................
Consolidated Statements of Cash Flows for the years ended December 31,
1993, 1994 and 1995 and nine months ended September 30, 1995
(unaudited) and nine months ended September 30, 1996 (unaudited) .....
Notes to Consolidated Financial Statements .............................
DRS. SIGLER, ROSKES, HOLDEN & SCHUBERTH, P.A.
Report of Independent Auditors .........................................
Balance Sheets as of December 31, 1995 and September 30, 1996
(unaudited) ..........................................................
Statements of Operations for the years ended December 31, 1994 and
1995, and nine months ended September 30, 1995 (unaudited) and
September 30, 1996 (unaudited) .......................................
Statements of Shareholders' Equity for the years ended December 31,
1994 and 1995, and nine months ended September 30, 1995 (unaudited)
and September 30, 1996 (unaudited) ...................................
Statements of Cash Flows for the years ended December 31, 1994 and
1995, and nine months ended September 30, 1995 (unaudited) and
September 30, 1996 (unaudited) .......................................
Notes to Financial Statements ..........................................
CLINICAL ASSOCIATES, P.A.
Report of Independent Auditors .........................................
Balance Sheet as of June 30, 1995 ......................................
Statement of Income for the year ended June 30, 1995 ...................
Statement of Changes in Stockholder's Equity for the year ended June 30,
1995 .................................................................
Statement of Cash Flows for the year ended June 30, 1995 ...............
Notes to Financial Statements ..........................................
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
CLINICAL ASSOCIATES, P.A.
Report of Independent Auditors .........................................
Balance Sheet as of June 30, 1996 ......................................
Statement of Income for the year ended June 30, 1996 ...................
Statement of Changes in Stockholders' Equity for the year ended June 30,
1996 .................................................................
Statement of Cash Flows for the year ended June 30, 1996 ...............
Notes to Financial Statements ..........................................
CLINICAL ASSOCIATES, P.A.
Report of Independent Auditors..........................................
Balance Sheet as of June 30, 1997.......................................
Statement of Income for the year ended June 30, 1997....................
Statement of Changes in Stockholders' Equity for the year ended June 30,
1997..................................................................
Statement of Cash Flows for the year ended June 30, 1997................
Notes to Financial Statements...........................................
</TABLE>
UNAUDITED PROFORMA FINANCIAL STATEMENTS
BALANCE SHEET
As discussed in Note 14 to the financial statements, the Company entered into a
financing arrangement on June 20, 1997 and has reflected the transaction in its
June 30, 1997 balance sheet. Accordingly, a proforma balance sheet is not
required.
STATEMENT OF OPERATIONS
The Company has limited operating experience and operating history as a
physician practice management company. In addition, the Company's operations as
a physician practice management company differ from those of the physician
practices. Based on these factors, proforma statements of operations are not
required to be presented because the historical costs of the physician practices
are not necessarily representative of the amounts and composition of costs which
will be incurred by the Company.
<PAGE>
Physicians Quality Care, Inc.
Audited Financial Statements
The period from March 20, 1995 (inception) to
December 31, 1995 and the year ended December
31, 1996 and six months ended June 30, 1996
(Unaudited) and six months ended June 30, 1997
(Unaudited)
Contents
<TABLE>
<CAPTION>
<S> <C>
Report of Independent Auditors......................................... 1
Audited Financial Statements
Balance Sheets......................................................... 2
Statements of Operations............................................... 3
Statements of Changes in Stockholders' Equity (Deficit) and Common
Stock Subject to Put................................................... 4
Statements of Cash Flows............................................... 5
Notes to Financial Statements.......................................... 6
</TABLE>
<PAGE>
Report of Independent Auditors
The Board of Directors
Physicians Quality Care, Inc.
We have audited the accompanying balance sheets of Physicians Quality Care, Inc.
(the Company) as of December 31, 1995 and 1996, and the related statements of
operations, changes in stockholders' equity (deficit) and common stock subject
to put, and cash flows for the period from March 20, 1995 (inception) to
December 31, 1995 and the year ended December 31, 1996. 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 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 provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Physicians Quality Care, Inc.
as of December 31, 1995 and 1996 and the results of its operations and its cash
flows for the period from March 20, 1995 (inception) to December 31, 1995 and
the year ended December 31, 1996, in conformity with generally accepted
accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 2 to the
financial statements, the Company's ability to continue as a going concern will
be dependent upon obtaining adequate financing and consummating future
affiliations with physician practices. In addition, the recoverability of
assets and payment of liabilities will be dependent upon the Company's ability
to continue as a going concern. These uncertainties raise substantial doubt
about the Company's ability to continue as a going concern. The financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.
/s/ Ernst & Young LLP
March 28, 1997
Boston, Massachusetts
1
<PAGE>
Physicians Quality Care, Inc.
Balance Sheets
<TABLE>
<CAPTION>
(Unaudited)
December 31, June 30,
1995 1996 1997
--------------------------------------
<S> <C> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 3,479,781 $ 136,926 $ 19,745,309
Prepaid expenses 12,644 58,776 85,429
Due from related parties (Note 9) 1,694,687 5,662,981
Other current assets 8,138 25,380 35,816
---------------------------------------
Total current assets 3,500,563 1,915,769 25,529,535
Long-term affiliation agreements, less accumulated
amortization of $198,634 and $728,031 in 1996 and
1997 (unaudited), respectively 32,401,305 34,356,966
Deferred affiliation and equity offering costs 772,209 137,831 693,970
Property and equipment, net 90,646 214,008 1,052,954
Other assets 120,660 339,916
Deferred tax asset 608,171 608,171
---------------------------------------
---------------------------------------
Total assets $ 4,363,418 $35,397,744 $ 62,581,512
=======================================
</TABLE>
2
<PAGE>
<TABLE>
<CAPTION>
(Unaudited)
December 31 June 30,
1995 1996 1997
-----------------------------------------------
<S> <C> <C> <C>
Liabilities and stockholders' equity (deficit)
Current liabilities:
Accounts payable $ 604,765 $ 1,217,630 $ 1,528,550
Accrued compensation 109,664 218,893 250,231
Accrued expenses 103,456 1,053,892 345,407
Income taxes payable 32,000 69,708 (22,292)
Current portion of note payable - 200,000 -
Current portion of capital lease obligations - 15,685 16,243
--------------------------------------------
Total current liabilities 849,885 2,775,808 2,118,139
Convertible promissory note 1,410,000 -
Capital lease obligations, less current maturities 55,867 47,604
Deferred taxes 1,073,048 1,083,048
Commitments and contingencies
Common stock, subject to put, 12,740,589 and 13,313,082
shares authorized, issued and outstanding at December 31, 1996
and June 30, 1997, (unaudited), respectively 31,851,473 39,939,247
Stockholders' equity (deficit):
Common stock, $.01 par value, 15,308,333 shares
authorized, 7,706,250 shares issued and outstanding
at December 31, 1995 77,063
Class A common stock, $.01 par value, 75,000,000 shares
authorized, 7,236,033 and 7,771,033 shares issued and
6,223,533 and 8,261,683 outstanding at December 31, 1996
and June 30, 1997, (unaudited), respectively 72,359 82,616
Class B-1 common stock, $.01 par value, 15,267,915
shares authorized, 2,442,866 and 3,042,866 shares
issued and outstanding at December 31, 1996 and
June 30, 1997, (unaudited), respectively 24,429 30,429
Class B-2 common stock, $.01 par value, 9,732,085 shares
authorized, 1,557,134 shares issued and outstanding
at December 31, 1996 15,571 15,571
Class C common stock, $.01 par value, 13,846,155 shares
authorized, 7,692,309 shares issued and outstanding
at June 30, 1997, (unaudited) 76,923
Series A Convertible Preferred Stock, $.01 par value,
$3,998,762 liquidation value, 1,666,667 shares
authorized 1,666,151 shares issued and outstanding
at December 31, 1995 3,750,609
Preferred stock, $.01 par value, 10,000,000 shares authorized
Additional paid-in capital 420,000 21,117,623 49,888,806
Accumulated deficit (2,082,264) (21,578,309) (30,690,746)
Due from stockholders (61,875)
Less treasury stock, at cost, 1,012,500 shares at
December 31, 1996 (10,125) (10,125)
--------------------------------------------
Total stockholders' equity (deficit) 2,103,533 (358,452) 19,393,474
--------------------------------------------
Total liabilities and stockholders' equity $ 4,363,418 $ 35,397,744 $62,581,512
============================================
</TABLE>
See accompanying notes.
<PAGE>
Physicians Quality Care, Inc.
Statements of Operations
<TABLE>
<CAPTION>
Period from (Unaudited)
March 20, 1995 Year ended June 30,
(inception) to December 31, -------------------------------
December 31, 1995 1996 1996 1997
----------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net patient service revenue - $ 6,026,452 - $21,221,655
Less: amounts retained by physician groups - 2,194,571 - 7,467,466
----------------------------------------------------------------------------------
Management fee revenue - 3,831,881 - 13,754,209
Operating expenses:
Nonphysician salaries and benefits - 1,816,309 - 6,381,192
Other practice expenses - 535,479 - 1,419,818
General corporate expenses $ 2,061,737 5,953,117 $ 2,242,866 6,826,119
Depreciation and amortization 6,704 280,490 16,309 958,363
Provision for bad debts - 214,404 - 555,580
----------------------------------------------------------------------------------
Total expenses 2,068,441 8,799,799 2,259,175 16,141,072
----------------------------------------------------------------------------------
Operating loss (2,068,441) (4,967,918) (2,259,175) (2,386,863)
Other income (expense):
Interest income 108,177 91,104 48,384 36,793
Interest expense (90,000) (104,255) (93,159) (105,826)
----------------------------------------------------------------------------------
18,177 (13,151) (44,775) (69,033)
----------------------------------------------------------------------------------
Loss before income taxes (2,050,264) (4,981,069) (2,303,950) (2,455,896)
Income tax provision 32,000 78,128 9,400 -
----------------------------------------------------------------------------------
Net loss $ (2,082,264) $ (5,059,197) (2,313,350) (2,455,896)
==================================================================================
Net loss available to common stock $ (2,082,264) $ (19,496,045) $(2,313,350) $(9,112,437)
==================================================================================
Net loss per common share $ (0.27) $ (1.81) $ (0.22) $ (0.35)
==================================================================================
Weighted average common shares
outstanding 7,706,250 10,785,605 10,399,702 25,746,314
==================================================================================
</TABLE>
See accompanying notes.
3
<PAGE>
Physicians Quality Care, Inc.
Statements of Changes in Stockholders' Equity (Deficit)
and Common Stock Subject to Put
Period from March 20, 1995 (inception) to December 31, 1995
and Year ended December 31, 1996 and June 30, 1997 (unaudited)
<TABLE>
<CAPTION>
Common Stock Class A Common Stock Class B-1 Common Stock
----------------------------------------------------------------------------
Shares Amount Shares Amount Shares Amount
----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Issuance of common stock 7,706,250 $ 77,063
Issuance of convertible preferred stock,
net of issuance costs of $98,153
Issuance of warrant
Issuance of warrants in lieu of interest on
convertible promissory note
Issuance of warrants in connection with
convertible preferred stock
Loan to stockholders
Net loss
----------------------------------------------------------------------------
Balance at December 31, 1995 7,706,250 77,063
Purchase of treasury shares
Recapitalization in connection with
restatement of Charter (7,706,250) (77,063) 7,706,250 $ 77,063
Reclassification of common stock in
connection with recapitalization (5,897,914) (58,980)
Accretion of common stock subject to
put to fair value
Issuance of Class A common stock upon
conversion of bridge loan 402,301 4,023
Issuance of Class A common stock upon
conversion of Series A convertible
preferred stock 1,666,151 16,662
Issuance of Class A common stock upon
conversion of subordinated note 625,000 6,250
Issuance of Class A common stock in
connection with the Springfield affiliation 2,592,245 25,921
Issuance of Class A common stock in
connection with the Baltimore affiliation 6,842,675 68,426
Reclassification of common stock
subject to put (6,842,675) (68,426)
Issuance of Class B-1 and B-2 common
stock for cash, net of issuance costs
of $1,410,881 1,587,863 $15,879
Issuance of Class B-1 and B-2 common
stock for cash, net of issuance costs
of $640,214 855,003 8,550
Payment received from Stockholder
Issuance of Class A common stock to
Shareholders for cash 142,000 1,420
Net loss
----------------------------------------------------------------------------
Balance at December 31, 1996 - $ - 7,236,033 $ 72,359 2,442,866 $24,429
Issuance of Class A Common Stock In
acquisition of business (Chestnut) (unaudited) 440,000 4,400
Reclassification of common stock
subject to put to fair value (unaudited) (440,000) (4,400)
Issuance of Class A Common Stock
for Cash (Shareholders), (unaudited) 130,000 1,300
Issuance of Class A Common Stock
for Cash (Shareholders), (unaudited) 342,000 3,420
Issuance of Class A Common Stock
to Banker's Trust (unaudited) 63,000 630
Issuance of Class A Common Stock in
acquisition of business (Izenstein) (unaudited) 132,493 1,325
Reclassification of common stock
subject to put to fair value (unaudited) (132,493) (1,325)
Issuance of Common Stock B-1, (unaudited) 600,000 6,000
Issuance of Class A Common Stock for cash in
connection with exercised options, (unaudited) 80,250 803
Accretion of common stock
subject to put to fair value, (unaudited)
Issuance of Class A Common Stock
for Cash (Shareholders), (unaudited) 410,400 4,104
Issuance of Class C common stock (unaudited)
Net Loss
----------------------------------------------------------------------------
Balance at June 30, 1997 (unaudited) - $ - 8,261,683 $82,616 3,042,866 $30,429
============================================================================
<CAPTION>
Series A Additional
Class B-2 Convertible Class C Paid-in
Common Stock Preferred Stock Common Stock Treasury Stock
----------------------------------------------------------------------
Shares Amount Shares Amount Shares Amount Shares Amount Capital
-------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Issuance of common stock
Issuance of convertible preferred stock,
net of issuance costs of $98,153 1,666,151 $ 3,750,609
Issuance of warrant $ 90,000
Issuance of warrants in lieu of interest on
convertible promissory note 180,000
Issuance of warrants in connection with
convertible preferred stock 150,000
Loan to stockholders
Net loss
-------------------------------------------------------------------------------------
Balance at December 31, 1995 1,666,151 3,750,609 420,000
Purchase of treasury shares 1,012,500 $(10,125)
Recapitalization in connection with
restatement of Charter
Reclassification of common stock in
connection with recapitalization (248,958)
Accretion of common stock subject to
put to fair value
Issuance of Class A common stock upon
conversion of bridge loan 1,001,727
Issuance of Class A common stock upon
conversion of Series A convertible
preferred stock (1,666,151) (3,750,609) 3,733,947
Issuance of Class A common stock upon
conversion of subordinated note 1,493,750
Issuance of Class A common stock in
connection with the Springfield affiliation 6,454,672
Issuance of Class A common stock in
connection with the Baltimore affiliation 17,038,261
Reclassification of common stock
subject to put (17,038,261)
Issuance of Class B-1 and B-2 common
stock for cash, net of issuance costs
of $1,410,881 1,012,137 $10,121 5,063,119
Issuance of Class B-1 and B-2 common
stock for cash, net of issuance costs
of $640,214 544,997 5,450 2,845,786
Payment received from Stockholder
Issuance of Class A common stock to
Shareholders for cash 353,580
Net loss
-------------------------------------------------------------------------------------
Balance at December 31, 1996 1,557,134 $15,571 - $ - (1,012,500) $(10,125) $21,117,623
Issuance of Class A Common Stock In
acquisition of business (Chestnut) 1,095,600
Reclassification of common stock
subject to put to fair value (1,095,600)
Issuance of Class A Common Stock
for Cash (Shareholders), 323,700
Issuance of Class A Common Stock
for Cash (Shareholders), 851,580
Issuance of Class A Common Stock
to Banker's Trust 156,870
Issuance of Class A Common Stock in
acquisition of business (Izenstein) 329,908
Reclassification of common stock
subject to put to fair value (329,908)
Issuance of Common Stock B-1, (unaudited) 1,494,000
Issuance of Class A Common Stock, (unaudited) 60
Accretion of common stock
subject to put to fair value, (unaudited)
Issuance of Class A Common Stock
for Cash (Shareholders), (unaudited) 1,021,896
Issuance of Class C common stock (unaudited) 7,692,309 76,923 24,923,077
Net Loss
-------------------------------------------------------------------------------------
Balance at June 30, 1997 (unaudited) 1,557,134 $15,571 7,692,309 76,923 (1,012,500) $(10,125) $49,888,806
=====================================================================================
<CAPTION>
Common
Total Stock
Accumulated Due from Stockholders' Subject
Deficit Stockholders Equity to Put
------------------------------------------------------------
<S> <C> <C> <C> <C>
Issuance of common stock $ 77,063
Issuance of convertible preferred stock,
net of issuance costs of $98,153 3,750,609
Issuance of warrant 90,000
Issuance of warrants in lieu of interest on
convertible promissory note 180,000
Issuance of warrants in connection with
convertible preferred stock 150,000
Loan to stockholders $(61,875) (61,875)
Net loss $ (2,082,264) (2,082,264)
-------------------------------------------------------------
Balance at December 31, 1995 (2,082,264) (61,875) 2,103,533
Purchase of treasury shares 10,125
Recapitalization in connection with
restatement of Charter
Reclassification of common stock in
connection with recapitalization (307,938) $ 307,938
Accretion of common stock subject to
put to fair value (14,436,848) (14,436,848) 14,436,848
Issuance of Class A common stock upon
conversion of bridge loan 1,005,750
Issuance of Class A common stock upon
conversion of Series A convertible
preferred stock
Issuance of Class A common stock upon
conversion of subordinated note 1,500,000
Issuance of Class A common stock in
connection with the Springfield affiliation 6,480,593
Issuance of Class A common stock in
connection with the Baltimore affiliation 17,106,687
Reclassification of common stock
subject to put (17,106,687) 17,106,687
Issuance of Class B-1 and B-2 common
stock for cash, net of issuance costs
of $1,410,881 5,089,119
Issuance of Class B-1 and B-2 common
stock for cash, net of issuance costs
of $640,214 2,859,786
Payment received from Stockholder 51,750 51,750
Issuance of Class A common stock to
Shareholders for cash 355,000
Net loss (5,059,197) (5,059,197)
-------------------------------------------------------------
Balance at December 31, 1996 $(21,578,309) $ - $ (358,452) 31,851,473
Issuance of Class A Common Stock In
acquisition of business (Chestnut) 1,100,000
Reclassification of common stock
subject to put to fair value (1,100,000) 1,100,000
Issuance of Class A Common Stock
for Cash (Shareholders), 325,000
Issuance of Class A Common Stock
for Cash (Shareholders), 855,000
Issuance of Class A Common Stock
to Banker's Trust 157,500
Issuance of Class A Common Stock in
acquisition of business (Izenstein) 331,233
Reclassification of common stock
subject to put to fair value (331,233) 331,233
Issuance of Common Stock B-1, (unaudited) 1,500,000
Issuance of Class A Common Stock, (unaudited) 863
Accretion of common stock
subject to put to fair value, (unaudited) (6,656,541) (6,656,541) 6,656,541
Issuance of Class A Common Stock
for Cash (Shareholders), (unaudited) 1,026,000
Issuance of Class C common stock (unaudited) 25,000,000
Net Loss (2,455,896) (2,455,896)
--------------------------------------------------------------
Balance at June 30, 1997 (Unaudited) $(30,690,746) $ - $ 19,393,474 $ 39,939,247
==============================================================
</TABLE>
See accompanying notes.
4
<PAGE>
Physicians Quality Care, Inc.
Statements of Cash Flows
<TABLE>
<CAPTION>
(Unaudited)
Six
Period from Months Ended
March 20, 1995 Year ended June 30
(inception) to December 31 ---------------------------------
December 31, 1995 1996 1996 1997
------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Operating activities
Net loss $(2,082,264) $(5,059,197) $(2,313,350) $(2,455,896)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 6,704 280,490 16,309 958,363
Interest accretion on convertible promissory note 90,000 90,000 90,000 -
Changes in operating assets and liabilities, net of
effects of business acquisitions:
Increase in due from related parties - (2,522,221) (2,468) (3,605,340)
Increase/Decrease in prepaid expenses and other assets (20,782) (184,034) (57,276) (330,062)
Increase/Decrease in accounts payable, accrued 817,885 1,672,530
compensation and accrued expenses 241,139 (366,228)
Increase/Decrease in income taxes payable 32,000 37,708 (22,400) (92,000)
------------------------------------------------------------------------
Net cash used in operating activities (1,156,457) (5,684,724) (2,048,046) (5,891,163)
------------------------------------------------------------------------
Investing activities
Purchase of property and equipment (97,350) (120,218) (141,482) (949,199)
(Increase) decrease in deferred acquisition costs (315,071) 195,436 (572,366) (657,632)
Cash paid for affiliation costs - (1,839,274) - (406,097)
Cash paid for affiliation - (5,880,974) (831,231)
------------------------------------------------------------------------
Net cash used in investing activities (412,421) (7,645,030) (713,848) (2,844,159)
------------------------------------------------------------------------
Financing activities
Proceeds from issuance of common stock, net of
issuance costs 15,188 8,309,655 - 28,864,362
Net proceeds from issuance of convertible preferred stock 3,750,609 - -
Proceeds from issuance of warrants 420,000 - -
Proceeds from bridge financing - 1,000,000 -
Proceeds from note payable - 200,000 85,000 3,500,000
Proceeds from convertible promissory note 1,320,000 - -
Proceeds from repayment of shareholder loan - 51,750 -
(Increase) decrease in deferred financing costs (457,138) 438,942 (73,524) 18,196
Payments on note payable - (3,500,000)
Payments on capital lease obligations - (13,448) (6,005) (207,705)
Cash Paid for Debt issuance cost - (331,148)
------------------------------------------------------------------------
Net cash provided by financing activities 5,048,659 9,986,899 5,471 28,343,705
------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 3,479,781 (3,342,855) (2,756,423) 19,608,383
Cash and cash equivalents at beginning of period - 3,479,781 3,479,781 136,926
------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 3,479,781 $ 136,926 $ 723,358 $ 19,745,309
------------------------------------------------------------------------
</TABLE>
Supplemental disclosure of cash flow information:
During the year ended December 31, 1996, the Company entered into capital lease
obligations aggregating $85,000.
On August 30, 1996, the Company converted a bridge loan in the principal amount
of $1,000,000 to 402,301 shares of common stock (see Note 10).
Cash paid for interest was $0 and $14,225 for the year ended December 31, 1995
and 1996, respectively.
Cash paid for income taxes was $0 and $31,800 for the year ended December 31,
1995 and 1996, respectively.
See accompanying notes.
5
<PAGE>
Physicians Quality Care, Inc.
Notes to Financial Statements
December 31, 1996
1. Business and Organization
Formed in March 1995, Physicians Quality Care, Inc. (PQC or the Company)
provides complete practice management for multi-specialty medical practice
groups. The Company's objective is to establish and manage networks of
specialty and primary care physicians and related diagnostic and therapeutic
support services which can provide comprehensive health care services in
targeted geographic areas.
On August 30, 1996, the Company consummated affiliations with seven physician
practices (32 physicians and a physician-owned laboratory) in Springfield,
Massachusetts, and on December 11, 1996, the Company consummated affiliations
with fifteen physician practices (59 physicians and a physician-owned
laboratory) in the Baltimore/Annapolis, Maryland area. As of the date of the
affiliations the Company began providing management services to the physicians
under long-term management agreements and recognizing revenues from these
physician practices (the Physician Practices). Prior to August 30, 1996, the
Company's operations consisted primarily of seeking affiliations with physician
practices and negotiating the terms of the affiliations and management
agreements with such physician practices.
2. Operations and Basis of Presentation
The accompanying financial statements have been prepared assuming the Company
will continue as a going concern. Since its inception, the activities of the
Company have been primarily devoted to seeking affiliations with physician
practices, negotiating the terms of the affiliations with and management
agreements with, physician practices. The Company consummated affiliations with
91 physicians during 1996, the terms of which are more fully disclosed in Note
4. Due to the absence of significant revenues prior to the affiliations, the
Company has predictably incurred significant operating losses and currently does
not have working capital available to fund its growth strategy or operating
losses expected during the next year. These conditions raise substantial doubt
about the Company's ability to continue as a going concern.
Management expects to finance its future affiliations with sales of equity
pursuant to existing financing agreements with its Institutional Investors (see
Note 10). In addition, management expects to fund operations in the short term
with proceeds of an equity offering to private investors and a working capital
line of credit (see Note 13) and with management fee income and positive cash
flow from existing physician practices. However, no assurances can be provided
that the Company will successfully complete these financings. Should any of the
planned financing not be completed, management
6
<PAGE>
Physicians Quality Care, Inc.
Notes to Financial Statements (continued)
2. Operations and Basis of Presentation (continued)
will seek financing through other sources; however, there can be no assurance
that other sources of capital will be available on terms and conditions
acceptable to the Company or at all. The financial statements do not include any
adjustments to reflect the possible future effects on the recoverability and
classification of assets or the amounts and classification of liabilities that
may result from the outcome of this uncertainty.
3. Summary of Significant Accounting Policies
Basis of Presentation
The financial statements have been prepared on the accrual basis of accounting.
The Company enters into long-term affiliation arrangements with physician
practices, and through mergers and asset purchases, the assets and liabilities
of the physician practices are transferred to a professional corporation
affiliated with the Company. Each affiliated group has a nine member Joint
Policy Board that is responsible for final decisions related to management and
administrative policies for the overall operations of the affiliated group
including decisions regarding; scope of services, patient acceptance policies
and procedures, pricing of services, negotiation and execution of contracts and
approval of operating and capital budgets. Four members of the Joint Policy
Board are appointed by the Company and four members are appointed by the
affiliated group. The President, who is the ninth member of the Joint Policy
Board, is appointed by the Company; however, the Company may only select the
President from three physicians nominated by physicians employed by the
affiliated group. Therefore, the Company cannot exercise exclusive authority
over the decision making process of the Joint Policy Board. Accordingly, for
financial reporting purposes, the Company does not consolidate the operating
results and accounts of the physician practices. For display purposes, the
Company has presented the physician practice revenues and amounts retained by
the physician practices in the accompanying statements of operations to arrive
at the Company's gross management fee revenue. See further discussion below.
Net Patient Service Revenue
Net patient service revenue represents the revenue of the physician practices
reported at the estimated realizable amounts from patients, third-party payors
and others for services rendered, net of contractual and other adjustments.
During 1996, the Company estimates that approximately 40% of net patient service
revenue was received under government-sponsored healthcare programs
(principally, the Medicare and Medicaid programs).
The Company has agreements with various Health Maintenance Organizations (HMOs)
to provide medical services to subscribing participants. Under these agreements,
the Company receives monthly capitation payments based on the number of each
HMO's participants.
7
<PAGE>
Physicians Quality Care, Inc.
Notes to Financial Statements (continued)
3. Summary of Significant Accounting Policies (continued)
Management Fee Revenue
Management fee revenue represents net patient service revenue less amounts
retained by physician practices and consists of the following for the year ended
December 31, 1996:
<TABLE>
<S> <C>
Net patient service revenue $ 6,026,452
Less: Physician baseline compensation (2,090,385)
Allocation of physician practice net profits to the physicians (104,186)
---------------
$ 3,831,881
===============
</TABLE>
The amounts retained by physician practices represents amounts paid to the
physicians pursuant to the service agreements between the Company and the
physician practices. Physician baseline compensation is determined based on an
agreed-upon percentage (80% to 95%) of the physicians' historic compensation
levels but is subject to reduction if physician practice net revenues are
insufficient to cover baseline compensation. The amounts allocated to the
Company and to the physician groups are determined based on a percentage of
physician group revenue in excess of physician baseline compensation and
reimbursement of practice expenses (hereafter referred to as net profits). The
net profits for one of the Company's Affiliated Groups are first allocated to
the Company up to 5% of the net profits. Net profits remaining after the first
allocation are then allocated 80% to the Company and 20% to the physician groups
up to 15% of the net profits. Net profits remaining after the second allocation
are then allocated equally between the Company and the physician groups. The net
profits for the other Affiliated Group are allocated equally between the Company
and the physician groups. The following is the methodology by which the amounts
retained by physician groups and the management fee revenue is determined for
the year ended December 31, 1996.
<TABLE>
<CAPTION>
Amounts Retained by Physician Groups:
<S> <C>
Excess net profits subject to allocation $ 241,143
Amounts allocated to the Company 136,957
----------
Amounts allocated to physician groups 104,186
Physician baseline compensation 2,090,385
----------
Amounts retained by physician groups $2,194,571
==========
Management Fee Revenue:
Amounts allocated to the Company 136,957
Reimbursement of practice expenses 3,694,924
----------
Management Fee Revenue $3,831,881
==========
</TABLE>
Under the service agreements, the Company provides each physician practice with
a comprehensive package of services, including office and facilities, equipment,
nursing and other non-physician professional support, administrative support,
information systems, comprehensive professional liability insurance, and general
management and financial advisory services. The Company also bills all patients,
insurance companies and third-party payors and negotiates all contracts and
relationships with payors.
Cash and Cash Equivalents
The Company considers all highly liquid investments with a maturity of three
months or less at the time of purchase to be cash equivalents. The carrying
amount reported in the balance sheet for cash and cash equivalents approximates
its fair value.
Property and Equipment
Property and equipment is carried at cost. Depreciation is calculated using the
straight-line method over the useful lives of the assets.
Professional Liability Insurance
The Company has obtained professional liability coverage for the Physician
Practices through commercial insurance carriers on either a claims-made or
occurrence basis. The Company has purchased additional insurance to cover the
tail portion of the claims made policies. Management believes that there are no
claims that may result in a loss in excess of amounts covered by its existing
insurance.
8
<PAGE>
Physicians Quality Care, Inc.
Notes to Financial Statements (continued)
3. Summary of Significant Accounting Policies (continued)
Long-term Affiliation Agreements
The cost of the long-term affiliation agreements over the fair value of
identifiable assets of the affiliate has been reflected as "Intangibles" and is
being amortized over 25 years.
Impairment of Long-Lived Assets
On January 1, 1996, the Company adopted 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." Under SFAS 121, the carrying
value of long-lived assets are reviewed if the facts and circumstances suggest
they may be impaired. If this review indicates that the affected assets may not
be recoverable, as determined based upon a projection of undiscounted operating
cash flows, the carrying value of the affected assets would be reduced to fair
value.
Capital Leases
Assets and liabilities relating to capital leases are recorded at the present
value of the future minimum rental payments using interest rates appropriate at
the inception of the lease. Capital lease amortization is provided on a
straight-line basis over the initial term of the lease and is included with
depreciation expense.
Deferred Affiliation and Equity Offering Costs
Deferred affiliation costs consist of amounts paid in connection with proposed
affiliations with physician practices and related negotiations to provide
management services to such practices. Costs are capitalized in connection with
affiliations that are considered probable and included in the consideration for
the practices upon consummation of affiliation and management agreements.
Affiliation costs deferred at December 31, 1995 and 1996 amounted to
approximately $315,000 and $113,000, respectively. If a proposed affiliation is
no longer considered to be probable, the related deferred affiliation costs are
written off.
Costs incurred in connection with the Company's equity offerings are deferred
until the offering is consummated, at which time they are netted against the
proceeds of the equity
9
<PAGE>
Physicians Quality Care, Inc.
Notes to Financial Statements (continued)
3. Summary of Significant Accounting Policies (continued)
offering to which they pertain. Equity offering costs deferred at December 31,
1995 and December 31, 1996 amounted to approximately $457,000 and $25,000,
respectively.
Stock Compensation Arrangements
The Company accounts for its stock compensation arrangements under the
provisions of APB Opinion No. 25, "Accounting for Stock Issued to Employees",
and intends to continue to do so.
The Company has adopted disclosure-only provisions of Statement of Financial
Accounting Standards (SFAS) No. 123, "Accounting for Stock-Based Compensation".
These provisions require the Company to disclose pro forma net income and
earnings per share amounts as if compensation expense related to grants of stock
options were recognized based on new fair value accounting rules.
Fair Value of Financial Instruments
The Company's financial instruments consist of accounts receivable, accounts
payable, accrued expenses and other liabilities. The Company believes that the
carrying value of its financial instruments approximate fair value.
Net Loss Per Common Share
Net loss per share of common stock is computed by dividing the net loss
available to common stock by the weighted-average number of shares of common and
common equivalent shares outstanding during each period presented. The net loss
available to common stock reflects the accretion of common stock subject to put
to fair value at December 31, 1996 (see Note 10). The effect of options and
warrants is not considered as it would be antidilutive. Fully diluted loss per
share is not presented because the effect would be antidilutive.
Risks and Uncertainties
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates.
Unaudited Financial Statements
The unaudited financial statements have been prepared by management in
accordance with generally accepted accounting principles. In the opinion of
management, all adjustments (consisting of normal recurring accruals) considered
necessary for a fair presentation have been included. Operating results of the
interim periods are not necessarily indicative of the results that may be
expected for a full year.
10
<PAGE>
Physicians Quality Care, Inc.
Notes to Financial Statements (continued)
4. Affiliations
Springfield
Effective August 30, 1996, the Company entered into affiliation arrangements
with 7 physician practices (32 physicians) located in Western Massachusetts (the
Springfield Affiliation). In connection with this transaction, through mergers
and asset purchases, the assets and liabilities of the physician practices were
transferred to a newly formed professional corporation affiliated with the
Company, Medical Care Partners, P.C. (MCP) and the physicians became employees
of MCP. The aggregate total consideration paid to the physicians for the
mergers and asset purchases was approximately $9.7 million, of which $3.2
million was paid in cash and $6.5 million was paid by the issuance of 2,592,245
shares of common stock. Up to an additional $2.15 million, payable in common
stock, may be paid in the future to certain of the physicians if revenue goals
are met. Such consideration, if and when paid, would be reflected as an expense
in the statement of operations. In addition, 29 physicians received 2,500
options to purchase common stock at an exercise price of $2.50 per share.
Baltimore
Effective December 11, 1996, the Company entered into affiliation arrangements
with 15 physician practices (59 physicians) located in the Baltimore/Annapolis,
Maryland area (the Flagship Affiliation). In connection with this transaction,
through mergers and sales, the assets and liabilities of the physician practices
were transferred to a newly formed professional corporation affiliated with the
Company, Flagship Health, P.A. (Flagship) and the physicians became employees of
Flagship. The aggregate consideration paid to the physicians at the
consummation of the mergers and asset purchases was approximately $19.8 million,
of which $2.7 million was paid in cash and $17.1 million was paid by the
issuance of 6,842,675 shares of common stock. Final total consideration is
subject to working capital adjustments within 120 days after closing.
11
<PAGE>
Physicians Quality Care, Inc.
Notes to Financial Statements (continued)
4. Affiliations (continued)
The following table depicts the calculation of the Company's affiliation cost,
excess of affiliation cost over the fair value of the affiliates' assets and the
preliminary allocation to the acquired assets of the affiliates. The
determination of the fair market value of the acquired assets and the allocation
of the affiliation cost to both tangible and intangible assets are currently
being performed and may vary from values presented below.
<TABLE>
<CAPTION>
Allocation of affiliation cost:
Springfield Flagship
------------------------------
<S> <C> <C>
Cash $ 336,000 $ 443,000
Fixed assets 317,000 955,000
Other current assets 1,346,000 4,260,000
Intangibles 9,037,000 16,371,000
Accounts payable (190,000) (677,000)
Other liabilities (1,138,000) (1,592,000)
------------------------------
9,708,000 19,760,000
Other affiliation costs 1,238,000 1,711,000
------------------------------
$10,946,000 $21,471,000
==============================
</TABLE>
12
<PAGE>
Physicians Quality Care, Inc.
Notes to Financial Statements (continued)
5. Property and Equipment
Property and equipment consist of the following:
<TABLE>
<CAPTION>
December 31
1995 1996
-------------------------
<S> <C> <C>
Equipment $74,230 $132,163
Furniture and fixtures 7,755 34,110
Office equipment 15,365 20,509
Leasehold improvements 85,000
-------------------------
97,350 271,782
Less accumulated depreciation 6,704 57,774
-------------------------
$90,646 $214,008
=========================
</TABLE>
Depreciation expense was $6,704 and $81,853 for the period from March 20, 1995
(inception) to December 31, 1995 and for the year ended December 31, 1996,
respectively.
6. Convertible Promissory Note and Warrant
In June 1995, the Company issued a $1,500,000 convertible promissory note to an
investor. In lieu of interest, the Company issued a warrant to purchase 20,000
shares of the Company's common stock at $2.40 per share. The warrant's value of
$180,000 has been reflected in the statements of operations as interest expense.
Effective August 1996, the note was converted into 625,000 shares of the
Company's Class A Common Stock.
7. Leases
The Company maintains operating leases for property and certain office equipment
at its corporate headquarters and a subsidiary site. The property leases
contain renewal options and escalation clauses and require the Company to pay
certain utilities and taxes over established base amounts.
Operating lease expense amounted to $14,679 and $277,046 for the period from
inception to December 31, 1995 and for the year ended December 31, 1996,
respectively.
13
<PAGE>
Physicians Quality Care, Inc.
Notes to Financial Statements (continued)
7. Leases (continued)
At December 31, 1996, property, plant and equipment amounts included capitalized
lease assets totaling $85,000, net of accumulated depreciation of $15,583.
Future minimum lease payments under noncancelable capital and operating leases
are as follows:
<TABLE>
<CAPTION>
Capital Leases Operating Leases
-------------------------------------
<S> <C> <C>
1997 $ 21,979 $ 216,144
1998 20,845 201,838
1999 19,629 35,537
2000 18,331 33,750
-------------------------------------
82,477 487,269
-------------------------------------
Amounts representing interest (10,920)
-------------------------------------
$ 71,552 $ 487,269
=====================================
</TABLE>
8. Letter of Credit
At December 31, 1996, the Company had a letter of credit outstanding in the
amount of $85,000 securing the Company's payment for office improvements at a
subsidiary site.
9. Transactions with Related Parties
The amounts due under the services agreements with the affiliated practices
represent management fee revenue due the Company net of nonphysician salaries
and benefits and other practice related expenses paid by the Company on behalf
of the affiliated practices.
The amounts due as a result of working capital and other adjustments at date of
affiliation, represent post closing adjustments provided for as part of the
affiliation agreements. The corresponding credits were reflected as a reduction
in the cost of the long-term affiliation agreements.
The following summarizes the amounts due from related parties:
<TABLE>
<CAPTION>
December 31, (Unaudited)
1996 June 30, 1997
-----------------------------------
<S> <C> <C>
Due under Services agreements:
Flagship $ 69,774 $1,682,053
MCP 520,596 2,876,611
Working capital and other adjustments
at date of affiliation:
Flagship 506,702 506,702
MCP 597,615 597,615
---------- ----------
$1,694,687 $5,662,981
========== ==========
</TABLE>
Because of the nature of the Company's arrangements with the affiliated
physician groups, substantially all transactions included in net patient
services revenues and amounts retained by physician groups in the accompanying
financial statements are viewed as related party transactions.
14
<PAGE>
Physicians Quality Care, Inc.
Notes to Financial Statements (continued)
9. Transactions with Related Parties (continued)
During the year ended December 31, 1996, the Company entered into affiliation
transactions with three of its directors who are physicians. The physicians
received 498,602 shares of Class A common stock, 2,500 options to acquire Class
A common stock, with an exercise price of $2.50 per share and cash in the amount
of $315,000 as consideration for the affiliations. These transactions were
entered into on commercially reasonable terms, substantially similar to the
terms of its affiliation transactions with other affiliated physicians (see Note
4), and the consideration paid in connection with such affiliations was based on
the fair market value of the medical practice assets or services acquired.
At December 31, 1996, the Company had a promissory note with a face value of
$200,000 with a director of the Company. The note bears interest at prime plus
2%. This note, along with accrued interest, was paid by the Company on
February 4, 1997.
On August 30, 1996, the Company entered into a Management Agreement with Bain
Capital Partners V, L.P. (Bain), an affiliate of the Company's Institutional
Investors (see Note 10). Pursuant to the Management Agreement, the Company will
pay Bain a management fee of $500,000, plus 1% of any financings from parties
other than affiliates of Bain, for services including advice in connection with
financings and financial, managerial and operational advice in connection with
day-to-day operations. The Company is also obligated to pay certain expenses,
not to exceed $100,000 per year without the Company's consent, of Bain and its
affiliates in connection with the Management Agreement.
10. Stockholders' Equity
Common Stock
- ------------
During the period from March 20, 1995 (inception) to December 31, 1995, the
Company issued 7,706,250 shares of $.01 par value common stock to its founders
in exchange for cash of $15,188 and notes of $61,875. During the year ended
December 31, 1996, 1,012,500 shares of common stock were reacquired by the
Company at a cost of $10,125 in the form of cancellation of a like amount of a
note due from the shareholder. These shares are subject to certain restrictions
which lapse in August 1998.
Effective August 30, 1996, the Company recapitalized. All shares of then-
existing common stock were canceled (Old Common Stock) and three new classes of
common stock (Class A, Class B-1 and Class B-2) were authorized. Holders of
Class A, Class B-1 and Class B-2 common shares are entitled to elect two, one
and one members of the Company's Board of Directors, respectively. The
remaining seven directors are elected collectively by the holders of Class A,
Class B-1 and Class B-2 common shares, with each share having a single vote.
15
<PAGE>
Physicians Quality Care, Inc.
Notes to Financial Statements (continued)
10. Stockholders' Equity (continued)
Class A common shares were distributed to holders of Old Common Stock on a one-
for-one basis.
On August 30, 1996, 402,301 of Class A common shares were issued in connection
with the conversion of a bridge loan. The bridge loan, in the amount of $1.0
million, (1) was outstanding during July and August 1996; (2) bore interest at
10.25% and (3) was convertible into Class A common shares at a conversion rate
of $2.50 per share. Warrants to purchase 201,150 shares of common stock at
$5.00 per share were issued in connection with the bridge loan.
During June 1995, the Company issued 1,666,151 shares of Series A Convertible
Preferred Stock (Preferred Stock), par value $.01, which effective August 30,
1996, was converted to Class A common stock on a one-for-one basis. Warrants to
purchase 416,538 shares of Common Stock at $2.40 per share were issued upon the
closing of the sale of the Preferred Stock. Warrants to purchase an additional
416,538 shares of common stock were required to be issued to the holders of the
Preferred Stock in the event that the Company did not complete an initial public
offering on or before June 30, 1996. Accordingly, on August 30, 1996, the
Company issued an additional 416,538 warrants at $2.40 per share. A total value
of $300,000 was assigned to these warrants using the minimum value method.
As discussed in Note 6, 625,000 shares of Class A common stock were issued in
connection with the conversion of a promissory note.
As discussed in Note 4, 2,592,245 Class A common shares were issued in
connection with the Springfield Affiliation, and 6,842,675 Class A common shares
were issued in connection with the Baltimore Affiliation.
In connection with the Springfield Affiliation described in Note 4, on
August 30, 1996, the Company issued 1,587,863 Class B-1 common shares, 1,012,137
Class B-2 common shares and warrants to purchase 3,750,500 shares of Class B
common stock at $2.50 per share to the Institutional Investors in exchange for
cash proceeds of $6.5 million, which after issuance costs of approximately $1.4
million, netted to approximately $5.1 million. In connection with the Baltimore
Affiliation described in Note 4, on December 11, 1996, the Company issued
855,003 Class B-1 common shares, 544,997 Class B-2 common shares and warrants to
purchase 1,799,000 shares of Class B common stock at $2.50 per share to the
Institutional Investors in exchange for cash proceeds of $3.5 million, which
after issuance costs of approximately $640,000, netted to approximately $2.9
million. A total value of $270,000 was assigned to these warrants using the
minimum value method.
16
<PAGE>
Physicians Quality Care, Inc.
Notes to Financial Statements (continued)
10. Stockholders' Equity (continued)
Subject to certain conditions, the Institutional Investors are required to
purchase up to 8,000,000 additional shares of Class B common stock, together
with warrants to purchase up to 7,450,500 shares of Class B common stock, for
aggregate consideration of $20,000,000. These shares may be sold no later than
December 31, 1999. The number of shares of common stock issuable upon exercise
of the warrants is subject to adjustment based on the Company's future financial
performance.
During December 1996, the Company issued 142,000 shares of Class A common stock
at $2.50 per share to shareholders for cash.
Puts and Calls
- --------------
Of the Company's outstanding common stock, 12,740,589 shares are subject to a
put option which provides for the put of the shares back to the Company at fair
value upon the death of the holder. In addition, 1,072,285 of such shares are
also subject to a fair value put option back to the Company at the later of the
shareholder's retirement from the Company or 18 months after the date
(December 11, 1996) of the shareholders' agreement. Consequently, these
12,740,589 shares have been recorded at fair value outside of permanent equity
in the accompanying balance sheet.
The Company's shareholder agreements also provide that in connection with
10,053,670 shares of common stock, the Company has the right to purchase such
shares for fair value if the shareholder's termination from the Company is
without cause or is by resignation, and for the lower of cost or fair value if
termination is with cause.
All of the above put and call provisions expire on the date of a Qualified
Public Offering (QPO), defined as a public offering of the Company's common
stock with proceeds to the Company of at least $50 million.
Because the Company's shares are subject to a number of restrictions in the
shareholders' agreements and will not trade until the occurrence of a QPO, the
Company believes it is a nonpublic entity as it relates to the treatment of its
puts and calls for accounting purposes. Accordingly, to date, the Company has
not recognized any compensation expense for these puts and calls. As noted
above, at the date of the QPO, the put and call provisions of the shareholder
agreements will expire.
Warrants
- --------
In May 1995, the Company issued a stock purchase warrant for consideration of
$90,000, which provided the holder the right to purchase 100,000 shares of
common stock at $20.00 per share. The warrant expired unexercised on
December 31, 1995.
In September 1996, the Company issued a stock purchase warrant for consideration
of $115,000, which provided the holder the right to purchase 50,000 shares of
Class A common stock at $3.00 per share.
At December 31, 1996, warrants to purchase 6,653,726 shares of Class A and Class
B common stock were outstanding as follows:
<TABLE>
<CAPTION>
Number Price Expiration Date
----------------------------------------------------
<S> <C> <C>
20,000 $2.40 2000
201,150 5.00 2003
416,538 2.40 2000
416,538 2.40 2001
3,750,500 2.50 2003
1,799,000 2.50 2003
50,000 3.00 2003
</TABLE>
17
<PAGE>
Physicians Quality Care, Inc.
Notes to Financial Statements (continued)
10. Stockholders' Equity (continued)
Shares Reserved for Future Issuance
- -----------------------------------
At December 31, 1996, the Company has reserved 8,528,726 shares of Common Stock
for future issuance for the following purposes:
<TABLE>
<S> <C>
Equity incentive plan 1,875,000
Warrants 6,653,726
-----------
8,528,726
===========
</TABLE>
Net Loss per Common Share
- -------------------------
Net loss per common share disclosed in the statement of operations is calculated
using the methodology discussed in Note 3. In February 1997, the Financial
Accounting Standards Board (FASB) issued Statement of Financial Accounting
Standards (SFAS) No. 128 "Earnings Per Share," which is required to change the
method currently used to compute earnings per share and to restate all prior
periods. Under the new requirements for calculating primary earnings per share,
the dilutive effect of stock options will be excluded. The impact of SFAS 128
on the calculation of net loss per common share for the first quarter ended
March 31, 1997 and March 31, 1996 is not expected to be material.
Supplemental net loss per common share is presented to reflect the effects of
various conversions that occurred during 1996 as though they occurred on January
1, 1996. These conversions included, 1,666,151 shares of the convertible
preferred stock to common stock on a one for one basis, the conversion of the
convertible promissory note payable (see Note 6) into 625,000 shares of common
stock and the conversion of the convertible bridge loan into 402,301 shares of
common stock. None of the convertible securities are reflected in the historical
earnings per share calculations as their effects were anti-dilutive.The
supplemental net loss per common share for the year ended December 31, 1996 is
as follows:
<TABLE>
<CAPTION>
Year ended
December 31,
1996
---------------
<S> <C>
Supplemental net loss per common share $(1.54)
===============
Weighted average common shares
outstanding 12,581,239
===============
</TABLE>
11. Employee Compensation Plans
Equity Incentive Plan
- ---------------------
The Company's 1995 Equity Incentive Plan provides the opportunity for employees,
consultants, officers and directors to be granted options to purchase, receive
awards or make direct purchases of up to 1,875,000 shares of the Company's
common stock. Options granted under the Plan may be "Incentive Stock Options"
or "Nonqualified Options" under the applicable provisions of the Internal
Revenue Code.
18
<PAGE>
Physicians Quality Care, Inc.
Notes to Financial Statements (continued)
11. Employee Compensation Plans (continued)
Incentive Stock Options are granted at the fair market value of the Company's
common stock at the date of the grant as determined by the Board of Directors.
Incentive Stock Options granted to employees who own more than 10% of the voting
power of all classes of stock will be granted at 110% of the fair market value
of the Company's common stock at the date of the grant. Nonqualified options
may be granted at amounts up to the fair market value of the Company's common
stock on the date of the grant, as determined by the Board of Directors.
Although FAS 123 requires the presentation of pro forma information to reflect
the fair value method of accounting for employee stock option grants, such
information has not been presented because the pro forma effects are not
material. The fair value for these options was estimated at the date of grant
using the "minimum value method" prescribed by FAS 123. The following weighted-
average assumptions were used to determine the fair value for 1995 and 1996,
respectively: a risk-free interest rate of 6.0% and 6.2%, an expected dividend
yield of 0% each year, and a weighted-average expected life of the options of
six years.
A summary of the Company's stock option activity and related information is as
follows:
<TABLE>
<CAPTION>
Period from March 20
1995 (inception) to Year ended
December 31, 1995 December 31, 1996
------------------------------------------------------
Weighted- Weighted-
Average Average
Exercise Exercise
Shares Price Shares Price
------------------------------------------------------
<S> <C> <C> <C> <C>
Outstanding at beginning of 476,086 $0.10
period
Granted 476,086 $0.10 340,500 2.12
Exercised
Forfeited (11,750) (0.08)
------------------------------------------------------
Outstanding at end of period 476,086 $0.10 804,836 $0.95
============ ===========
Exercisable at period end 0 140,487
Weighted-average fair value
of options granted during
period $0.02 $0.69
</TABLE>
19
<PAGE>
Physicians Quality Care, Inc.
Notes to Financial Statements (continued)
11. Employee Compensation Plans (continued)
The following table summarizes information about stock options outstanding at
December 31, 1996:
<TABLE>
<CAPTION>
Weighted-Average
Options Remaining Life
Exercise Price Options Outstanding Exercisable (Years)
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
$0.01 360,586 111,862 8.48
0.25 102,250 25,750 8.70
0.85 94,000 2,875 9.07
2.50 248,000 0 9.83
</TABLE>
No options were exercised during the period from March 20, 1995 (inception) to
December 31, 1996. All options granted vest equally over a range of three to
four years.
Profit Sharing Plan
- -------------------
The Board of Directors of the Company approved the adoption of a qualified
401(k) profit sharing plan (the Plan) for all employees meeting certain
eligibility requirements. Under the Plan, the participants may make
contributions to the Plan of up to 15% of their compensation, up to the Internal
Revenue Service limitation. Effective December 1, 1996, the Company may make
discretionary contributions to the Plan as determined by the Board of
Directors. Contributions for the year ended December 31, 1996 were
approximately $86,000.
Money Purchase Pension Plan
- ---------------------------
The Board of Directors of the Company approved the adoption of a qualified money
purchase pension plan for the employees of MCP. Effective on August 30, 1996
the Company may provide a contribution on wages up to the Social Security
limitation and up to 9.27% on wages in excess of the Social Security limitation.
The Company contributed approximately $187,000 to the money purchase pension
plan in 1996.
12. Income Taxes
The Company files consolidated tax returns with its affiliated physician
practices. The Company provides for income taxes under the liability method.
Deferred income taxes arise principally from temporary differences related to
capitalized start-up costs, depreciation, net operating losses, certain
accruals, and a change from the cash to accrual method of accounting for tax
purposes. The components of the Company's deferred income taxes are as follows:
20
<PAGE>
Physicians Quality Care, Inc.
Notes to Financial Statements (continued)
12. Income Taxes (continued)
<TABLE>
<CAPTION>
December 31
1995 1996
---------------------------
<S> <C> <C>
Deferred Tax Liabilities:
Adjustment of cash Basis Practices to Accrual Basis $ 0 $(1,073,048)
Prepaid expenses, other 0 0
--------------------------
Total deferred tax liabilities 0 (1,073,048)
--------------------------
Deferred Tax Assets:
Other Accrued Liabilities 98,529
Fixed Asset Basis Differences 0 85,360
Capitalized Startup Costs 707,000 664,547
Net operating loss carryover 0 1,783,956
Other 0 85,763
--------------------------
707,000 2,718,155
Less valuation allowance (707,000) (2,109,984)
--------------------------
Net deferred tax assets 0 608,171
--------------------------
Net deferred tax assets (liabilities) $ 0 $ (464,877)
==========================
</TABLE>
For financial reporting purposes, a valuation allowance of $707,000 and
$2,109,984 at December 31, 1995 and 1996, respectively, has been recognized to
offset deferred tax assets since uncertainty exists with respect to future
realization of deferred tax assets.
Significant components of the provision for income taxes are as follows:
<TABLE>
<CAPTION>
Period from
inception to Year ended
December 31 December 31
1995 1996
----------------------------------
<S> <C> <C>
Current:
Federal $25,500 $22,057
State 6,500 56,071
----------------------------------
$32,000 $78,128
==================================
</TABLE>
The difference between the provision for income taxes and the amount computed by
applying the statutory federal income tax rate is as follows:
<TABLE>
<CAPTION>
Period from
inception to Year ended
December 31 December 31
1995 1996
-------------------------------------------------
<S> <C> <C> <C> <C>
Federal taxes at statutory rates $(717,592) 35% $(1,721,439) 35%
Add (deduct):
State income taxes, net of federal benefit 6,500 (0.3%) (209,474) 4.3%
Change in valuation allowance
attributable to operations 707,000 (34.5%) 1,999,182 (40.6%)
Other 36,092 (1.8%) 9,859 (0.2%)
-------------------------------------------------
$ 32,000 (1.6%) $ 78,128 (1.5%)
=================================================
</TABLE>
21
<PAGE>
Physicians Quality Care, Inc.
Notes to Financial Statements (continued)
12. Income Taxes (continued)
At December 31, 1996, the Company had net operating loss carryforwards for
federal income tax purposes of approximately $4,460,000 which expire through the
year 2011. The utilization of net operating losses may be subject to limitation
under the change in stock ownership rules of the Internal Revenue Code. For
financial reporting purposes, a valuation allowance of approximately $2,109,984
has been recognized to offset the deferred tax assets, including these
carryforwards, since uncertainty exist with respect to future realization of
such carryforwards.
13. Commitments
In September, 1996, the Company executed a contract with HBO and Company that
obligates the Company to purchase $1.1 million of equipment and licenses
pertaining to practice management systems. The term of the contract is five
years.
14. Subsequent Events
In January and February 1997, the Company entered into affiliation arrangements
with 6 physicians located in the Springfield, Massachusetts area (the
Springfield II Affiliation). Through mergers and asset purchases, the
Springfield II practices were transferred to MCP and the physicians became
employees of MCP. The aggregate total consideration paid to the physicians or
their practices in connection with the Springfield II Affiliation was
approximately $2.3 million, payable in a combination of cash and common stock.
In January 1997, the Company entered into a $3.5 million line of credit
agreement with a bank. The line carries an interest rate of prime plus 1.5%. The
Company has been delinquent in providing the bank with certain financial
information under the credit agreement and had a shortfall of $60,000 in
earnings before interest, taxes, depreciation and amortization from the amount
required under the credit agreement for the period ended June 30, 1997. Because
of these breaches of the credit agreement, the credit agreement may not be
available as a source of capital if needed before its termination in January
1998.
In February 1997 and June 1997, the Company issued 472,000 shares of Class A
common stock for $1,180,000 and 410,400 shares of Class A common stock for
$1,026,000, respectively, to shareholders and friends of the Company.
In April 1997, the Company issued 600,000 shares of Class B common stock to its
institutional investors for total consideration of $1,500,000.
In April 1997, the Company issued 80,250 shares of class A common stock in
connection with exercised employee stock options.
On June 20, 1997 the Company issued 7,692,309 shares and warrants to purchase
7,692,309 shares of Class C common stock for total consideration of $25,000,000
to its institutional and other investors.
The Company is currently negotiating a long-term affiliation agreement with
Clinical Associates, P.A. (Clinical) Under this agreement, Clinical would
transfer its physician practices and its employees would become employees of
Flagship. The aggregate consideration to the Company for this affiliation is
expected to be in a combination of cash and the Company's common stock.
22
<PAGE>
Springfield Medical Associates, Inc.
Audited Consolidated Financial Statements
Years ended December 31, 1993, 1994 and 1995,
the period January 1, 1996 through August 30, 1996
and three months ended March 31, 1996 (Unaudited)
<TABLE>
<CAPTION>
Contents
<S> <C>
Report of Independent Auditors............................................ 1
Audited Consolidated Financial Statements
Consolidated Balance Sheets............................................... 2
Consolidated Statements of Operations..................................... 3
Consolidated Statements of Stockholders' Equity........................... 4
Consolidated Statements of Cash Flows..................................... 5
Notes to Consolidated Financial Statements................................ 6
</TABLE>
<PAGE>
[LETTERHEAD OF ERNST & YOUNG LLP APPEARS HERE]
Report of Independent Auditors
The Board of Directors
Physicians Quality Care, Inc.
We have audited the accompanying consolidated balance sheets of Springfield
Medical Associates, Inc. (the Company) as of December 31, 1994 and 1995, and
August 30, 1996 and the related consolidated statements of operations,
stockholders' equity, and cash flows for each of the three years ended December
31, 1995 and the period January 1, 1996 through August 30, 1996. 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 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 provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Springfield Medical Associates, Inc. at December 31, 1994, 1995, and August 30,
1996 and the consolidated results of its operations and its cash flows for each
of the three years ended December 31, 1995 and the period January 1, 1996
through August 30, 1996, in conformity with generally accepted accounting
principles.
/s/ Ernst & Young LLP
November 21, 1996
Boston, Massachusetts 1
<PAGE>
Springfield Medical Associates, Inc.
Consolidated Balance Sheets
<TABLE>
<CAPTION>
December 31 August 30
1994 1995 1996
------------------------------------
<S> <C> <C> <C>
Assets
Current assets:
Cash $ 40,888 $ 178,604 $ 112,116
Accounts receivable, less allowance
for doubtful accounts of $754,767 in
1994, $885,013 in 1995 and $1,202,653
in 1996, respectively 920,971 931,212 1,305,046
Prepaid expenses 73,859 74,067 93,195
Deferred income taxes 126,329 294,124 134,902
Income tax receivable 11,127 - -
Other current assets 27,202 24,154 44,164
------------------------------------
Total current assets 1,200,376 1,502,161 1,689,423
Deferred income tax 43,346 48,877 70,746
Property and equipment, net 300,947 340,636 358,856
------------------------------------
Total assets $1,544,669 $1,891,674 $2,119,025
====================================
Liabilities and stockholders' equity
Current liabilities:
Accounts payable $ 185,337 $ 40,599 $ 267,340
Accrued physician bonuses 231,475
Accrued employee benefits 95,254 331,560 340
Accrued expenses, other 35,231 131,676 101,530
Deferred income taxes 397,932 375,458 559,297
Income tax payable 57,991 51,174
Current portion of notes payable 227,840 88,370 78,759
------------------------------------
Total current liabilities 941,594 1,257,129 1,058,440
Notes payable 252,922 198,232 186,451
Stockholders' equity:
Common stock, no par value, 15,000
shares authorized, 1,600 shares issued
and outstanding
Additional paid-in capital 136,030 136,030 136,030
Retained earnings 214,123 300,283 738,104
------------------------------------
Total stockholders' equity 350,153 436,313 874,134
------------------------------------
Total liabilities and stockholders'
equity $1,544,669 $1,891,674 $2,119,025
====================================
</TABLE>
See accompanying notes.
2
<PAGE>
Springfield Medical Associates, Inc.
Consolidated Statements of Operations
<TABLE>
<CAPTION>
(Unaudited)
Three months January 1,
ended 1996 through
Year ended December 31, March 31, August 30,
1993 1994 1995 1996 1996
-------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Revenue:
Net patient service revenue $6,187,800 $6,663,990 $7,021,521 $1,854,704 $5,986,482
Other income 2,573 149,969 37,673 94,940
Interest income 4,036 3,381 892 220 422
-------------------------------------------------------------------------------------
6,191,836 6,669,944 7,172,382 1,892,597 6,081,844
Operating expenses:
Salaries and wages--physicians 1,975,119 2,017,823 1,951,363 521,381 995,680
Salaries and wages--staff 1,376,401 1,512,357 1,673,917 401,585 1,023,991
Employee benefits--physicians 407,403 452,581 363,598 89,707 84,554
Employee benefits--staff 239,268 301,720 256,425 56,696 190,659
Supplies and other 1,281,638 1,510,779 1,781,480 485,684 1,671,820
Insurance 92,730 102,009 139,870 37,310 61,325
Interest 19,490 20,475 36,406 7,813 17,795
Depreciation 97,601 96,691 127,824 30,000 97,378
Provision for bad debts 668,754 754,767 885,013 287,764 1,202,653
-------------------------------------------------------------------------------------
Net operating expenses 6,158,404 6,769,202 7,215,896 1,917,940 5,345,855
-------------------------------------------------------------------------------------
Net income (loss) before income taxes 33,432 (99,258) (43,514) (25,343) 735,989
Income tax benefit (expense) 1,689 37,709 129,674 96,658 (298,168)
-------------------------------------------------------------------------------------
Net income (loss) $ 35,121 $ (61,549) $ 86,160 $ 71,315 $ 437,821
=====================================================================================
</TABLE>
See accompanying notes.
3
<PAGE>
Springfield Medical Associates, Inc.
Consolidated Statements of Stockholders' Equity
<TABLE>
<S> <C>
Balance at December 31, 1992 $356,581
Capital contributions by owners 10,000
Net income 35,121
----------
Balance at December 31, 1993 401,702
Capital contributions by owners 10,000
Net loss (61,549)
----------
Balance at December 31, 1994 350,153
Net loss 86,160
----------
Balance at December 31, 1995 436,313
Net income 437,821
----------
Balance at August 30, 1996 $874,134
==========
</TABLE>
See accompanying notes.
4
<PAGE>
Springfield Medical Associates, Inc.
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
(Unaudited)
three months January 1
ended 1996 through
Year ended December 31, March 31, August 30,
1993 1994 1995 1996 1996
-----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Operating activities
Net income (loss) $ 35,121 $ (61,549) $ 86,160 $ 71,315 $ 437,821
Adjustments to reconcile net
income (loss) to net cash
provided by operating
activities:
Depreciation 97,601 96,691 127,824 30,000 97,378
Deferred income taxes (2,145) (26,126) (195,800) (120,994) 843,210
Gain on sale of fixed
assets (400) (2,573) (5,439) (30,600)
Changes in operating assets
and liabilities:
Accounts receivable, net (42,715) (68,802) (10,241) (50,654) (373,834)
Prepaid expenses and
other current assets 37,048 (22,247) (208) 10,734 (39,138)
Accounts payable, accrued
expenses and other current
liabilities 19,880 89,722 491,654 291,154 (894,936)
----------------------------------------------------------------------------------------------------
Net cash provided by
operating activities 144,390 5,116 493,950 231,555 39,901
Investing activities
Proceeds from sale of
property and equipment 2,017 9,436 16,000 30,600
Purchase of property and
equipment (105,163) (149,827) (178,074) (35,191) (115,597)
----------------------------------------------------------------------------------------------------
Net cash used in investing
activities (103,146) (140,391) (162,074) (35,191) (84,997)
Financing activities
Contribution of capital 10,000 10,000
Proceeds from notes payable 36,241 187,575 37,520
Payments on notes payable (104,483) (45,090) (194,160) (23,722) (58,912)
----------------------------------------------------------------------------------------------------
Net cash provided (used) by
financing activities (58,242) 152,485 (194,160) (23,722) (21,392)
----------------------------------------------------------------------------------------------------
Increase (decrease) in cash (16,998) 17,210 137,716 172,642 (66,488)
Cash at beginning of period 40,676 23,678 40,888 156,006 178,604
----------------------------------------------------------------------------------------------------
Cash at end of period $ 23,678 $ 40,888 $ 178,604 $ 328,648 $ 112,116
====================================================================================================
Supplemental disclosure of
cash flow information:
Cash paid during the period
for interest $ 19,490 $ 20,475 $ 36,406 $ 8,079 $ 17,795
====================================================================================================
Cash paid during the
period for income taxes $ 476 $ 456 $ 912 $ 470 $ 470
====================================================================================================
</TABLE>
See accompanying notes.
5
<PAGE>
Springfield Medical Associates, Inc.
Notes to Consolidated Financial Statements
December 31, 1995
1. Summary of Significant Accounting Policies
Description of Business
Springfield Medical Associates, Inc. (the Company) is a taxable entity organized
under the laws of Massachusetts. The Company offers a variety of medical
services including cardiology, cancer treatment and primary care in Western
Massachusetts.
Principles of Consolidation
The consolidated financial statements of the Company include the accounts of
Springfield Medical Associates and its wholly-owned subsidiaries. All
intercompany transactions have been eliminated in consolidation.
Property and Equipment
Property and equipment are stated at cost. Depreciation of property and
equipment is calculated using the 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.
Income Taxes
Deferred income taxes are provided for temporary differences between the
carrying amounts of assets and liabilities for financial reporting purposes and
the amounts used for income tax purposes.
Professional Liability Insurance
The Company has obtained professional liability coverage through commercial
insurance carriers on the occurrence basis. Management believes that there are
no claims that may result in a loss in excess of amounts covered by its existing
insurance.
6
<PAGE>
Springfield Medical Associates, Inc.
Notes to Consolidated Financial Statements (continued)
1. Summary of Significant Accounting Policies (continued)
Net Patient Service Revenue
Net patient service revenue is reported at the estimated realizable amounts from
patients, third-party payors and others for services rendered. The Medicare and
Medicaid programs pay physician services based on fee schedules which are
determined by the related government agency. The Company has negotiated
numerous agreements with managed care organizations to provide physician
services based on fee schedules. No individual managed care contract is
material to the Company.
Risks and Uncertainties
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Unaudited Consolidated Financial Statements
The unaudited consolidated financial statements have been prepared by management
in accordance with generally accepted accounting principles. In the opinion of
management, all adjustments (consisting of normal recurring accruals) considered
necessary for a fair presentation have been included. Operating results of the
interim periods are not necessarily indicative of the results that may be
expected for a full year.
7
<PAGE>
Springfield Medical Associates, Inc.
Notes to Consolidated Financial Statements (continued)
2. Property and Equipment
Property and equipment consists of the following:
<TABLE>
<CAPTION>
December 31 August 30
1994 1995 1996
------------------------------------
<S> <C> <C> <C>
Furniture, fixtures and equipment $ 817,499 $ 876,375 $ 934,476
Leasehold improvements 228,028 308,437 293,758
------------------------------------
1,045,527 1,184,812 1,228,234
Less accumulated depreciation 744,580 844,176 869,378
------------------------------------
$ 300,947 $ 340,636 $ 358,856
====================================
</TABLE>
3. Notes Payable
The Company has various notes payable with a combined original principal amount
of $575,675, payable in monthly installments of principal and interest at
interest rates ranging from 7.65% to 10.5% and secured by all of the Company's
assets. The principal balance outstanding under these note agreements
aggregated $480,762 and $286,602 at December 31, 1994 and 1995, respectively,
and $265,210 at August 30, 1996.
The following is a schedule of principal maturities on the notes as of
December 31, 1995:
<TABLE>
<CAPTION>
<S> <C>
1996 $ 88,370
1997 89,834
1998 71,263
1999 36,293
2000 842
----------
$286,602
==========
</TABLE>
In April 1996, the Company entered into loan agreements for two vehicles for
$37,520. In September 1996, the vehicles were sold to two of the Company's
physicians.
8
<PAGE>
Springfield Medical Associates, Inc.
Notes to Consolidated Financial Statements (continued)
4. Operating Leases
The Company leases office space and certain equipment from related parties under
operating leases. Total rental expense was $244,095, $280,479 and $295,975 in
1993, 1994 and 1995, respectively, and $196,358, during the period January 1,
1996 through August 30, 1996, and is included in supplies and other in the
accompanying consolidated statements of operations. The following is a schedule
by year of future minimum lease payments under operating leases as of December
31, 1995:
<TABLE>
<CAPTION>
<S> <C>
1996 $228,565
1997 275,122
1998 162,524
1999 41,590
2000 1,558
----------
$709,359
==========
</TABLE>
5. Employee Benefit Plans
The Company has a qualified profit sharing plan covering substantially all
employees. Contributions were determined based upon a percentage of each
eligible employee's compensation, as defined and/or at the discretion of
management. Total contributions were $362,994, $422,293 and $302,174 for the
years ended December 31, 1993, 1994 and 1995, respectively, and $160,000 during
the period January 1, 1996 through August 30, 1996, and are included in employee
benefits in the accompanying consolidated statements of operations.
9
<PAGE>
Springfield Medical Associates, Inc.
Notes to Consolidated Financial Statements (continued)
6. Income Taxes
Deferred income taxes reflect the net effects of temporary differences between
the carrying amounts of assets and liabilities for financial reporting purposes
and the amounts used for income tax purposes. The Company is a cash basis tax
payer. Significant components of the Company's deferred tax liabilities and
assets were as follows:
<TABLE>
<CAPTION>
December 31 August 30
1994 1995 1996
-----------------------------------
<S> <C> <C> <C>
Deferred tax liabilities:
Accounts receivable, net $(368,388) $(345,831) $(522,019)
Prepaid expenses, other (29,544) (29,627) (37,278)
-----------------------------------
Total deferred tax liabilities (397,932) (375,458) (559,297)
Deferred tax assets:
Accrued expenses, other 169,675 343,001 205,648
Net operating loss carryover 114,237 548,997
-----------------------------------
283,912 343,001 754,645
Less: valuation allowance 114,237 548,997
-----------------------------------
Net deferred tax assets 169,675 343,001 205,648
-----------------------------------
Net deferred tax liabilities $(228,257) $ (32,457) $(353,649)
===================================
</TABLE>
For financial reporting purposes a valuation allowance of $114,237, $0 and
$548,997 has been recognized at December 31, 1994 and 1995 and August 30, 1996,
respectively, to offset certain deferred tax assets since uncertainty exists
with respect to future realization of these tax assets.
10
<PAGE>
Springfield Medical Associates, Inc.
Notes to Consolidated Financial Statements (continued)
6. Income Taxes (continued)
Significant components of the provision (benefit) for income taxes attributable
to continuing operations are as follows:
<TABLE>
<CAPTION>
The period
January 1
1996
through
Year ended December 31 August 30
----------------------------------- -----------
1993 1994 1995 1996
----------------------------------- -----------
<S> <C> <C> <C> <C>
Current:
Federal $ - $(12,039) $ 50,759 $(545,498)
State 456 456 15,367 456
----------------------------------- -----------
Total current 456 (11,583) 66,126 (545,042)
Deferred:
Federal (1,652) (20,117) (150,766) 649,272
State (493) (6,009) (45,034) 193,938
----------------------------------- -----------
Total deferred (2,145) (26,126) (195,800) 843,210
----------------------------------- -----------
Net provision (benefit) $(1,689) $(37,709) $(129,674) $ 298,168
=================================== ===========
</TABLE>
11
<PAGE>
Springfield Medical Associates, Inc.
Notes to Consolidated Financial Statements (continued)
6. Income Taxes (continued)
The difference between the provision for income taxes and the amount computed by
applying the statutory federal income tax rate to income before taxes is as
follows:
<TABLE>
<CAPTION>
The period
January 1, 1996
through
Year ended December 31 August 30
1993 1994 1995 1996
------------------------------------------------------- -----------------
Amount Rate Amount Rate Amount Rate Amount Rate
------------------------------------------------------- -----------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Federal taxes at $11,670 35% $(34,740) 35% $(15,230) 35% $257,596 35%
statutory rates
Add (deduct):
State income tax,
net of federal
tax benefit
(37) 0 (3,609) 4 (19,284) 44 126,356 17
Effect of
valuation
allowance (13,322) (40) (95,160) 219
Other 640 (1) (20,658) (3)
------------------------------------------------------- -----------------
$(1,689) (5)% $(37,709) 38% $(129,674) 298% $363,294 (49)%
======================================================= =================
</TABLE>
At December 31, 1995, the Company had net operating loss carryforwards for tax
purposes of approximately $285,000 which expire beginning in 2005.
12
<PAGE>
Springfield Medical Associates, Inc.
Notes to Consolidated Financial Statements (continued)
7. Affiliation
On August 30, 1996, the Company consummated a long-term affiliation arrangement
with Physicians Quality, Inc. (PQC). Under this arrangement, the physicians
transferred their practices to, and became employees of, a newly formed
professional corporation that is affiliated with PQC. The aggregate
consideration paid to the physicians for the asset purchases and affiliations
was in a combination of cash and PQC common stock.
The results of operations for the period January 1, 1996 through August 30, 1996
do not reflect an annual physicians bonus accrual which the Company's physicians
elected not to receive prior to the affiliation arrangement with PQC.
13
<PAGE>
Alphonse F. Calvanese, M.D., P.C.
Audited Financial Statements
Year ended September 30, 1995 and the period
October 1, 1995 through August 30, 1996 (Unaudited)
Contents
<TABLE>
<CAPTION>
<S> <C>
Report of Independent Auditors...............................................1
Audited Financial Statements
Balance Sheets...............................................................2
Statements of Operations.....................................................3
Statements of Stockholder's Equity...........................................4
Statements of Cash Flows.....................................................5
Notes to Financial Statements................................................6
</TABLE>
<PAGE>
[LETTERHEAD OF ERNST & YOUNG LLP APPEARS HERE]
Report of Independent Auditors
The Board of Directors
Physicians Quality Care, Inc.
We have audited the accompanying balance sheet of Alphonse F. Calvanese, M.D.,
P.C. (the Practice) as of September 30, 1995, and the related statements of
operations, stockholder's equity, and cash flows for the year then ended. These
financial statements are the responsibility of 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, in
all material respects, the financial position of Alphonse F. Calvanese, M.D.,
P.C. at September 30, 1995, and the results of operations and cash flows for the
year then ended in conformity with generally accepted accounting principles.
/s/ Ernst & Young LLP
November 21, 1996
Boston, Massachusetts
1
<PAGE>
Alphonse F. Calvanese, M.D., P.C.
Balance Sheets
<TABLE>
<CAPTION>
September 30 (Unaudited)
1995 August 30, 1996
-------------------------------
<S> <C> <C>
Assets
Current assets:
Cash $ 95,529 $127,191
Accounts receivable, less allowance for
doubtful accounts of $4,123 in 1995 and
$4,078 in 1996 (unaudited) 35,899 32,564
Prepaid expenses 10,654
Deferred income taxes 3,857 2,684
-------------------------------
Total current assets 135,285 173,093
Property and equipment, net 2,048
-------------------------------
Total assets $137,333 $173,093
===============================
Liabilities and stockholder's equity
Current liabilities:
Accounts payable $ 4,424 $ 6,710
Deferred income taxes, current 14,380 17,287
Taxes payable 16,210
Accrued expenses, other 5,168
-------------------------------
Total liabilities 23,972 40,207
Common stock, no par value, 1,000 shares
authorized, issued and outstanding 4,000 4,000
Retained earnings 109,361 128,886
Stockholder's equity 113,361 132,886
-------------------------------
Total liabilities and stockholder's equity $137,333 $173,093
===============================
</TABLE>
See accompanying notes.
2
<PAGE>
Alphonse. F. Calvanese, M.D., P.C.
Statements of Operations
<TABLE>
<CAPTION>
(Unaudited)
October 1, 1995
Year ended through
September 30 August 30
1995 1996
-------------------------------------
<S> <C> <C>
Revenue:
Net patient service revenue $586,191 $538,671
Other income 972
Interest income 3,496 3,302
-------------------------------------
589,687 542,945
Operating expenses:
Salaries and wages--physicians 356,800 328,986
Salaries and wages--staff 58,493 53,556
Employee benefits--physicians 31,576 31,397
Employee benefits--staff 13,277 19,684
Supplies and other 80,684 67,071
Insurance 8,970 3,168
Depreciation 18,781 2,048
Provision for bad debts 4,123 4,078
-------------------------------------
Net operating expenses 572,704 509,988
-------------------------------------
Net income before income taxes 16,983 32,957
Income tax benefit expense 372 (13,432)
-------------------------------------
Net income $ 17,355 $ 19,525
=====================================
</TABLE>
See accompanying notes.
3
<PAGE>
Alphonse F. Calvanese, M.D., P.C.
Statements of Stockholder's Equity
<TABLE>
<S> <C>
Balance at September 30, 1994 $ 96,006
Net income 17,355
---------------
Balance at September 30, 1995 113,361
Net income (unaudited) 19,525
---------------
Balance at August 30, 1996 (unaudited) $132,886
===============
</TABLE>
See accompanying notes.
4
<PAGE>
Alphonse F. Calvanese, M.D., P.C.
Statements of Cash Flows
<TABLE>
<CAPTION>
(Unaudited)
October 1, 1995
Year ended through
September 30 August 30
1995 1996
----------------------------------
<S> <C> <C>
Operating activities
Net income $ 17,355 $ 19,525
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation 18,781 2,048
Deferred income taxes (828) 4,080
Changes in operating assets and
liabilities:
Accounts receivable, net (3,097) 3,335
Advance to officer 1,334
Prepaid expenses (10,654)
Accounts payable, accrued expenses
and other current liabilities 5,168 13,328
----------------------------------
Net cash provided by operating activities 38,713 31,662
Investing activity
Purchase of property and equipment (14,648)
----------------------------------
Net cash used in investing activity (14,648)
----------------------------------
Increase in cash 24,065 31,662
Cash at beginning of period 71,464 95,529
----------------------------------
Cash at end of period $ 95,529 $127,191
==================================
</TABLE>
See accompanying notes.
5
<PAGE>
Alphonse F. Calvanese, M.D., P.C.
Notes to the Financial Statements
September 30, 1995
1. Summary of Significant Accounting Policies
Description of Business
The medical practice of Alphonse F. Calvanese, M.D. (the Practice) is organized
under the laws of Massachusetts. The practice offers a variety of primary care
medical services in western Massachusetts.
Property and Equipment
Property and equipment are stated at cost. Depreciation of property and
equipment is calculated using the 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.
Income Taxes
Deferred income taxes are provided for temporary differences between the
carrying amounts of assets and liabilities for financial reporting purposes and
the amounts used for income tax purposes.
Professional Liability Insurance
The practice has obtained professional liability coverage through commercial
insurance carriers on the claims-made basis. Management believes that there are
no claims that may result in a loss in excess of amounts covered by its existing
insurance.
Net Patient Service Revenue
Net patient service revenue is reported at the estimated realizable amounts from
patients, third-party payors and others for services rendered. The Medicare and
Medicaid programs pay physician services based on fee schedules which are
determined by the related government agency. The Practice has negotiated
numerous agreements with managed care organizations to provide physician
services based on fee schedules. No individual managed care contract is
material to the Practice.
6
<PAGE>
Alphonse F. Calvanese, M.D., P.C.
Notes to the Financial Statements (continued)
1. Summary of Significant Accounting Policies (continued)
Risks and Uncertainties
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Unaudited Financial Statements
The unaudited financial statements have been prepared by management in
accordance with generally accepted accounting principles. In the opinion of
management, all adjustments (consisting of normal recurring accruals) considered
necessary for a fair presentation have been included. Operating results of the
interim periods are not necessarily indicative of the results that may be
expected for a full year.
2. Property and Equipment
Property and equipment consisted of the following:
<TABLE>
<CAPTION>
September 30
1995
------------
<S> <C>
Furniture, fixtures and equipment $133,350
Less accumulated depreciation 131,302
------------
$ 2,048
============
</TABLE>
3. Operating Leases
The Practice leases office space from a related party under an operating lease.
Total rental expense was $33,456 at September 30, 1995 and is included in
supplies and other on the statement of operations.
7
<PAGE>
Alphonse F. Calvanese, M.D., P.C.
Notes to the Financial Statements (continued)
4. Income Taxes
Deferred income taxes reflect the net effects of temporary differences between
the carrying amounts of assets and liabilities for financial reporting purposes
and the amounts used for income tax purposes. The Company is a cash-basis
taxpayer. Significant components of the Company's deferred tax liabilities and
assets were as follows:
<TABLE>
<CAPTION>
September 30
1995
------------
<S> <C>
Deferred tax liabilities:
Accounts receivable, net $(14,380)
Prepaid expenses, other
------------
Total deferred tax liabilities (14,380)
Deferred tax assets:
Accrued expenses, other 3,857
Net operating loss carryover
------------
Less valuation allowance
Net deferred tax assets 3,857
------------
Net deferred tax assets (liabilities) $(10,523)
============
</TABLE>
8
<PAGE>
Alphonse F. Calvanese, M.D., P.C.
Notes to the Financial Statements (continued)
4. Income Taxes (continued)
Significant components of the provision (benefit) for income taxes attributable
to continuing operations are as follows:
<TABLE>
<CAPTION>
Year ended September 30
1995
-----------------------
<S> <C>
Current:
Federal
State $ 456
-----------------------
Total current 456
Deferred:
Federal (638)
State (190)
-----------------------
Total deferred $(828)
=======================
Net provision (benefit) $(372)
=======================
</TABLE>
The difference between the provision for income taxes and the amount computed by
applying the statutory federal income tax rate to income before taxes is as
follows:
<TABLE>
<CAPTION>
September 30
1995
----------------
Amount Rate
----------------
<S> <C> <C>
Federal taxes at statutory rates $ 5,944 35 %
Add (deduct):
Federal taxes on income (124) (1)
Taxed at shareholder level
Effect of valuation allowance (6,018) (35)
Other (174) (1)
----------------
$ (372) (2)%
================
</TABLE>
9
<PAGE>
Alphonse F. Calvanese, M.D., P.C.
Notes to the Financial Statements (continued)
5. Affiliation
On August 31, 1996, the Practice consummated a long-term affiliation arrangement
with Physicians Quality Care, Inc. (PQC). Under this arrangement, the
physicians transferred their practices to, and became employees of, a newly
formed professional corporation that is affiliated with PQC. The aggregate
consideration paid to the physicians for the assets purchased and affiliations
was in a combination of cash and PQC common stock.
10
<PAGE>
Cardiology and Internal Medicine Associates, Inc.
Audited Financial Statements
Years ended December 31, 1994 and 1995 and
period January 1, 1996 through August 30, 1996 (Unaudited)
and nine months ended September 30, 1995 (Unaudited)
Contents
<TABLE>
<CAPTION>
<S> <C>
Report of Independent Auditors................................................1
Audited Financial Statements
Balance Sheets................................................................2
Statements of Operations......................................................3
Statements of Stockholder's Equity............................................4
Statements of Cash Flows......................................................5
Notes to Financial Statements.................................................6
</TABLE>
<PAGE>
[LETTERHEAD OF ERNST & YOUNG LLP APPEARS HERE]
Report of Independent Auditors
The Board of Directors
Cardiology and Internal Medicine Associates, Inc.
We have audited the accompanying balance sheets of Cardiology and Internal
Medicine Associates, Inc. (the Group) as of December 31, 1995 and 1994, and the
related statements of operations, stockholder's equity, and cash flows for the
years then ended. These financial statements are the responsibility of the
Group's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
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 provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Cardiology and Internal
Medicine Associates, Inc. at December 31, 1995 and 1994, and the results of its
operations and its cash flows for each of the years then ended, in conformity
with generally accepted accounting principles.
/s/ Ernst & Young LLP
November 21, 1996
Boston, Massachusetts
1
<PAGE>
Cardiology and Internal Medicine Associates, Inc.
Balance Sheets
<TABLE>
<CAPTION>
(Unaudited)
December 31 August 30
1994 1995 1996
--------------------------------
<S> <C> <C> <C>
Assets
Current assets:
Cash $ 43,264 $ 42,974 $ 85,681
Accounts receivable, less
allowance for doubtful
accounts of $17,928 in
1994, $28,680 in 1995 and
$26,191 in 1996 (unaudited) 132,713 157,341 139,085
Prepaid expenses 11,448 10,332 18,203
Due from related parties 1,500
Deferred income taxes 23,955 31,881 8,715
--------------------------------
Total current assets 211,380 244,028 251,684
Property and equipment, net 59,558 46,648 41,910
--------------------------------
Total assets $270,938 $290,676 $293,594
================================
Liabilities and owners' equity
Current liabilities:
Accounts payable $ 9,477 $ 22,339 $ 7,999
Accrued employee benefits 48,699 42,555
Accrued expenses, other 1,711 14,808 13,158
Deferred income taxes 57,664 67,070 62,916
Income tax payable 456 912 21,865
Current portion of notes
payable and line of credit 13,000 6,960
--------------------------------
Total current liabilities 131,007 154,644 105,938
Deferred income taxes,
noncurrent 5,448 2,426
Stockholder's equity:
Common stock, no par value,
12,500 shares authorized,
400 shares issued
and outstanding
Additional paid-in capital 1,000 1,000 1,000
Retained earnings 133,483 132,606 186,656
--------------------------------
134,483 133,606 187,656
--------------------------------
Total liabilities and owners'
equity $270,938 $290,676 $293,594
================================
</TABLE>
See accompanying notes.
2
<PAGE>
Cardiology and Internal Medicine Associates, Inc.
Statements of Operations
<TABLE>
<CAPTION>
(Unaudited)
Nine months January 1
ended 1996 through
Year ended December 31 September 30 August 30
1994 1995 1995 1996
------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenue:
Net patient service revenue $1,823,131 $1,909,307 $1,369,391 $1,211,521
Other income 26,654 24,078 18,339 17,235
Interest income 822 941 763 498
------------------------------------------------------------------
1,850,607 1,934,326 1,388,493 1,229,254
Operating expenses:
Salaries and wages--physicians 988,839 999,650 680,540 556,110
Salaries and wages--staff 303,453 328,573 245,321 220,902
Employee benefits--physicians 127,360 130,104 89,501 71,278
Employee benefits--staff 42,210 45,712 34,124 25,043
Supplies and other 325,514 343,163 236,402 217,411
Insurance 26,948 44,229 24,815 16,175
Interest 1,672 1,042 885 344
Depreciation 15,140 15,136 11,308 18,487
Provision for bad debts 17,928 28,680 25,000 26,191
------------------------------------------------------------------
Net operating expenses 1,849,064 1,936,289 1,347,896 1,151,941
------------------------------------------------------------------
Net income (loss) before income taxes 1,543 (1,963) 40,597 77,313
Income tax benefit (expense) 5,985 1,086 (9,859) (23,263)
------------------------------------------------------------------
Net income (loss) $ 7,528 $ (877) $ 30,738 $ 54,050
==================================================================
</TABLE>
See accompanying notes.
3
<PAGE>
Cardiology and Internal Medicine Associates, Inc.
Statements of Stockholder's Equity
<TABLE>
<CAPTION>
<S> <C>
Balance at December 31, 1993 $126,955
Net income 7,528
--------
Balance at December 31, 1994 134,483
Net income (loss) (877)
--------
Balance at December 31, 1995 133,606
Net income (unaudited) 54,050
--------
Balance at August 30, 1996 (unaudited) $187,656
========
</TABLE>
See accompanying notes.
4
<PAGE>
Cardiology and Internal Medicine Associates, Inc.
Statements of Cash Flows
<TABLE>
<CAPTION>
(Unaudited)
Nine months January 1
ended 1996 through
Year ended December 31 September 30 August 30
1994 1995 1995 1996
--------------------------------------------------------------
<S> <C> <C> <C> <C>
Operating activities
Net income (loss) $ 7,528 $ (877) $ 30,738 $ 54,050
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Depreciation 15,140 15,136 11,308 18,487
Deferred income taxes (6,441) (1,542) 7,942 16,586
Changes in operating assets and liabilities:
Accounts receivable, net 19,217 (24,628) 9,541 18,256
Prepaid expenses, due from related parties
and other current assets (40) (384) (3,726) 9,905
Accounts payable, accrued expenses and
other current liabilities 5,030 20,271 (29,397) (53,868)
--------------------------------------------------------------
Net cash provided by operating activities 40,434 7,976 26,406 63,416
Investing activities
Purchase of property and equipment (6,943) (2,226) (997) (13,749)
--------------------------------------------------------------
Net cash used in investing activities (6,943) (2,226) (997) (13,749)
Financing activities
Contribution of capital 250
Payments on notes payable and line of credit (9,819) (6,040) (4,500) (6,960)
--------------------------------------------------------------
Net cash used in financing activities (9,569) (6,040) (4,500) (6,960)
--------------------------------------------------------------
Increase (decrease) in cash 23,922 (290) 20,909 42,707
Cash at beginning of period 19,342 43,264 42,974 42,974
--------------------------------------------------------------
Cash at end of period $43,264 $ 42,974 $ 63,883 $ 85,681
==============================================================
Supplemental disclosure of cash flow information:
Cash paid during the period for interest $ 1,672 $ 1,042 $ 885 $ 344
==============================================================
</TABLE>
See accompanying notes.
5
<PAGE>
Cardiology and Internal Medicine Associates, Inc.
Notes to Financial Statements
December 31, 1995
1. Summary of Significant Accounting Policies
Description of Business
Cardiology and Internal Medicine Associates, Inc. (CIMA) is a taxable entity
organized under the laws of Massachusetts. CIMA offers a variety of medical
services, including cardiology and primary care in Western Massachusetts.
Property and Equipment
Property and equipment are stated at cost. Depreciation of property and
equipment is calculated using the 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.
Income Taxes
CIMA is taxable under the provisions of the Internal Revenue Code. Deferred
income taxes are provided for temporary differences between the carrying amounts
of assets and liabilities for financial reporting purposes and the amounts used
for income tax purposes.
Professional Liability Insurance
CIMA has obtained professional liability coverage through commercial insurance
carriers on an occurrence basis. Management believes that there are no claims
that may result in a loss in excess of amounts covered by its existing
insurance.
Net Patient Service Revenue
Net patient service revenue is reported at the estimated realizable amounts from
patients, third-party payors and others for services rendered. The Medicare and
Medicaid programs pay physician services based on fee schedules which are
determined by the related government agency. CIMA has negotiated several
agreements with managed care organizations to provide physician services based
on fee schedules. No individual managed care contract is material to CIMA.
6
<PAGE>
Cardiology and Internal Medicine Associates, Inc.
Notes to Financial Statements (continued)
1. Summary of Significant Accounting Policies (continued)
Risks and Uncertainties
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Unaudited Financial Statements
The unaudited financial statements as of September 30, 1996 and for the nine
months ended September 30, 1995 and 1996 have been prepared by management in
accordance with generally accepted accounting principles. In the opinion of
management, all adjustments (consisting of normal recurring accruals) considered
necessary for a fair presentation have been included. Operating results of the
interim periods are not necessarily indicative of the results that may be
expected for a full year.
2. Property and Equipment
Property and equipment consisted of the following:
<TABLE>
<CAPTION>
December 31
1994 1995
-----------------------
<S> <C> <C>
Furniture, fixtures and equipment $ 185,702 $ 187,928
Leasehold improvements 46,832 46,832
-----------------------
232,534 234,760
Less accumulated depreciation (172,976) (188,112)
-----------------------
$ 59,558 $ 46,648
=======================
</TABLE>
3. Line of Credit
CIMA has negotiated a line of credit with a local bank at an interest rate of
9.72%. This line of credit is secured by all of the practice's assets. At
December 31, 1994 and 1995 the outstanding balance on the line of credit was
$13,000 and $6,960, respectively. The available credit under this line was
$5,000 and $11,040 at December 31, 1994 and 1995.
7
<PAGE>
Cardiology and Internal Medicine Associates, Inc.
Notes to Financial Statements (continued)
4. Operating Leases
CIMA leases office space and certain equipment from a related party under
operating leases. Total rental expense was $97,622 in 1994 and 1995, and is
included in supplies and other in the accompanying combined statements of
operations. The following is a schedule by year of future minimum lease
payments under operating leases as of December 31, 1995:
<TABLE>
<S> <C>
1996 $97,622
1997 97,622
1998 97,622
1999 97,622
2000 89,487
</TABLE>
5. Income Taxes
Deferred income taxes reflect the net effects of temporary differences between
the carrying amounts of assets and liabilities for financial reporting purposes
and the amounts used for income tax purposes. Each member of CIMA is a cash-
basis taxpayer. Significant components of CIMA's deferred tax liabilities and
assets were as follows:
<TABLE>
<CAPTION>
December 31
1994 1995
---------------------
Deferred tax liabilities:
<S> <C> <C>
Accounts receivable, net $(53,085) $(62,937)
Prepaid expenses, other (4,579) (4,133)
---------------------
Total deferred tax liabilities (57,664) (67,070)
Deferred tax assets:
Accrued expenses, other 23,955 31,881
Accumulated depreciation (5,448) (2,426)
Net operating loss carryover 6,443 5,868
---------------------
24,950 35,323
Less valuation allowance (6,443) (5,868)
---------------------
Net deferred tax assets 18,507 29,455
---------------------
Net deferred tax liabilities $(39,157) $(37,615)
=====================
</TABLE>
8
<PAGE>
Cardiology and Internal Medicine Associates, Inc.
Notes to Financial Statements (continued)
5. Income Taxes (continued)
For financial reporting purposes, a valuation allowance of $16,107 and $14,669
at December 31, 1994 and 1995, respectively, has been recognized to offset
certain deferred tax assets since uncertainty exists with respect to future
realization of these tax assets.
Significant components of the provision (benefit) for income taxes attributable
to continuing operations are as follows:
<TABLE>
<CAPTION>
Year ended December 31
1994 1995
---------------------------
<S> <C> <C>
Current:
Federal - -
State $ 456 $ 456
---------------------------
Total current 456 456
Deferred:
Federal (4,960) (1,187)
State (1,481) (355)
---------------------------
Total deferred (6,441) (1,542)
---------------------------
Net provision (benefit) $(5,985) $(1,086)
===========================
</TABLE>
6. Affiliation
On August 30, 1996, CIMA consummated a long-term affiliation arrangement with
Physicians Quality, Inc. (PQC). Under this arrangement, the physicians
transferred their practices to, and became employees of, a newly formed
professional corporation that is affiliated with PQC. The aggregate
consideration paid to the physicians for the asset purchases and affiliations
was in a combination of cash and PQC common stock.
9
<PAGE>
James F. Haines and William J. Belcastro, Partnership
Audited Financial Statements
Year ended December 31, 1995 and period
January 1, 1996 through August 30, 1996 (Unaudited)
and nine months ended September 30, 1995 (Unaudited)
<TABLE>
<CAPTION>
Contents
<S> <C>
Report of Independent Auditors............................................ 1
Audited Financial Statements
Balance Sheets............................................................ 2
Statements of Operations.................................................. 3
Statements of Partners' Capital........................................... 4
Statements of Cash Flows.................................................. 5
Notes to Financial Statements............................................. 6
</TABLE>
<PAGE>
[LETTERHEAD OF ERNST & YOUNG LLP APPEARS HERE]
Report of Independent Auditors
The Board of Directors
Physicians Quality Care, Inc.
We have audited the accompanying balance sheet of James F. Haines and William J.
Belcastro, Partnership as of December 31, 1995, and the related statements of
operations, partners' capital, and cash flows for the year then ended. These
financial statements are the responsibility of 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, in
all material respects, the financial position of James F. Haines and William J.
Belcastro, Partnership at December 31, 1995, and the results of its operations
and its cash flows for the year then ended, in conformity with generally
accepted accounting principles.
/s/ Ernst & Young LLP
November 21, 1996
Boston, Massachusetts
1
<PAGE>
James F. Haines and William J. Belcastro, Partnership
Balance Sheets
<TABLE>
<CAPTION>
(Unaudited)
December 31 August 30
1995 1996
-----------------------------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 51,370 $ 68,410
Accounts receivable, less allowance
for doubtful accounts of $19,014
in 1995 and $13,372 in 1996
(unaudited) 60,592 51,144
Prepaid expenses 13,215 30,244
-----------------------------
Total current assets 125,177 149,798
Furniture and equipment, net 222,579 196,426
-----------------------------
Total assets $347,756 $346,224
=============================
Liabilities and owners' equity
Current liabilities:
Accounts payable $ 13,714 $ 9,271
Accrued expenses, other 6,857
Current portion of notes
payable and line of credit 50,032 50,032
-----------------------------
Total current liabilities 63,746 66,160
Notes payable 254,245 212,152
Partner's capital 29,765 67,912
-----------------------------
Total liabilities and partner's capital $347,756 $346,224
=============================
</TABLE>
See accompanying notes.
2
<PAGE>
James F. Haines and William J. Belcastro, Partnership
Statements of Operations
<TABLE>
<CAPTION>
(Unaudited) (Unaudited)
Nine months January 1,
Year ended ended 1996 through
December 31 September 30 August 30
1995 1995 1996
------------------------------------------------
<S> <C> <C> <C>
Revenue:
Net patient service revenue $1,009,315 $771,080 $688,081
Other income 793 454
------------------------------------------------
1,010,108 771,080 688,535
Operating expenses:
Salaries and wages--physicians 459,386 310,266 307,549
Salaries and wages--staff 162,197 124,761 109,043
Employee benefits--physicians 62,678 47,158 52,646
Employee benefits--staff 12,000 9,003 501
Supplies and other 148,429 98,341 112,641
Insurance 30,262 20,557 15,783
Interest 25,230 23,125 12,600
Depreciation 63,909 48,308 26,153
Provision for bad debts 19,014 18,432 13,472
------------------------------------------------
Net operating expenses 983,105 699,951 650,388
------------------------------------------------
Net income $ 27,003 $ 71,129 $ 38,147
================================================
</TABLE>
See accompanying notes.
3
<PAGE>
James F. Haines and William J. Belcastro, Partnership
Statements of Partners' Capital
<TABLE>
<S> <C>
Balance at December 31, 1994 $ 2,762
Net income 27,003
---------
Balance at December 31, 1995 29,765
Net income (unaudited) 38,147
---------
Balance at August 30, 1996 (unaudited) $67,912
=========
</TABLE>
See accompanying notes.
4
<PAGE>
James F. Haines and William J. Belcastro, Partnership
Statements of Cash Flows
<TABLE>
<CAPTION>
(Unaudited) (Unaudited)
Nine months January 1, 1996
Year ended ended through
December 31 September 30 August 30
1995 1995 1996
--------------------------------------------
<S> <C> <C> <C>
Operating activities
Net income (loss) $ 27,003 $ 71,129 $ 38,147
Adjustments to reconcile net
income (loss) to net cash
provided by operating
activities:
Depreciation 63,909 48,308 26,153
Changes in operating
assets and liabilities:
Accounts receivable, net (10,101) (19,957) 9,448
Prepaid expenses, due from
related parties and
other current assets 5,614 15,335 (17,029)
Accounts payable, accrued
expenses and other
current liabilities 2,604 10,552 2,414
--------------------------------------------
Net cash provided by operating
activities 89,029 125,367 59,133
Investing activity
Purchase of property and equipment (63,462) (61,463) -
--------------------------------------------
Net cash used in investing activity (63,462) (61,463) -
Financing activities
Issuance of debt 58,500 58,500
Payments on notes payable and line
of credit (64,490) (48,876) (42,093)
--------------------------------------------
Net cash provided (used)
by financing activities (5,990) 9,624 (42,093)
--------------------------------------------
Increase in cash 19,577 73,528 17,040
Cash at beginning of period 31,793 31,793 51,370
--------------------------------------------
Cash at end of period $ 51,370 $105,321 $ 68,410
============================================
Supplemental disclosure of
cash flow information:
Cash paid during the
period for interest $ 25,230 $ 23,125 $ 12,600
============================================
</TABLE>
See accompanying notes.
5
<PAGE>
James F. Haines and William J. Belcastro, Partnership
Notes to Financial Statements
December 31, 1995
1. Summary of Significant Accounting Policies
Description of Business
The medical practice of James F. Haines and William J. Belcastro, Partnership
(the Partnership) is a general partnership organized under the laws of
Massachusetts. The practice offers primary care medical services in Western
Massachusetts.
Property and Equipment
Property and equipment are stated at cost. Depreciation of property and
equipment is calculated using the 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.
Income Taxes
The Partnership is a nontaxable entity under the provisions of the Internal
Revenue Code. The taxable income or loss of the Partnership is allocated to the
partners and then is reported on the partners' individual tax returns.
Therefore, no provision for income taxes is included in these financial
statements.
Professional Liability Insurance
The Partnership has obtained professional liability coverage through commercial
insurance carriers on the claims-made basis. Management believes that there are
no claims that may result in a loss in excess of amounts covered by its existing
insurance.
Net Patient Service Revenue
Net patient service revenue is reported at the estimated realizable amounts from
patients, third-party payors and others for services rendered. The Medicare and
Medicaid programs pay physician services based on fee schedules which are
determined by the related government agency. The Partnership has negotiated
agreements with managed care organizations to provide physician services based
on fee schedules. No individual managed care contract is material to the
Partnership.
6
<PAGE>
James F. Haines and William J. Belcastro, Partnership
Notes to Financial Statements (continued)
1. Summary of Significant Accounting Policies (continued)
Risks and Uncertainties
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Unaudited Financial Statements
The unaudited financial statements have been prepared by management in
accordance with generally accepted accounting principles. In the opinion of
management, all adjustments (consisting of normal recurring accruals) considered
necessary for a fair presentation have been included. Operating results of the
interim periods are not necessarily indicative of the results that may be
expected for a full year.
2. Property and Equipment
Property and equipment consisted of the following:
<TABLE>
<CAPTION>
December 31
1995
-------------
<S> <C>
Furniture and equipment $584,858
Less accumulated depreciation 362,279
-------------
$222,579
=============
</TABLE>
7
<PAGE>
James F. Haines and William J. Belcastro, Partnership
Notes to Financial Statements
3. Notes Payable
The Partnership has various notes payable with a combined original principal
amount of $304,277 at December 31, 1995 payable in monthly installments of
principal and interest at interest rates ranging from 8.75% to 10.5% and secured
by all the Partnership's assets.
The following is a schedule of principal maturities on the notes as of December
31, 1995:
<TABLE>
<CAPTION>
<S> <C>
1996 $ 50,032
1997 30,535
1998 30,989
1999 28,324
2000 14,183
Thereafter 150,214
----------
$304,277
==========
</TABLE>
4. Employee Benefit Plans
The Partnership has a qualified defined contribution plans covering
substantially all employees. Contributions were determined based upon a
percentage of each eligible employee's compensation, as defined, and/or at the
discretion of management. Total contributions were $12,000 at December 31,
1995, and are included in employee benefits in the accompanying statement of
operations.
5. Affiliation
On August 30, 1996, the Partnership consummated a long-term affiliation
arrangement with Physicians Quality Care, Inc. (PQC). Under this arrangement,
the physicians transferred their practices to, and became employees of, a newly
formed professional corporation that is affiliated with PQC. The aggregate
consideration paid to the physicians for the assets purchased and affiliations
was in a combination of cash and PQC common stock.
8
<PAGE>
Jay M. Ungar, M.D.
Audited Financial Statements
Year ended December 31, 1995 and period
January 1 through August 30, 1996 (Unaudited) and
nine months ended September 30, 1995 (Unaudited)
<TABLE>
<CAPTION>
Contents
<S> <C>
Report of Independent Auditors............................................. 1
Audited Financial Statements
Balance Sheets............................................................. 2
Statements of Operations................................................... 3
Statements of Cash Flows................................................... 4
Notes to Financial Statements.............................................. 5
</TABLE>
<PAGE>
[LETTERHEAD OF ERNST & YOUNG LLP APPEARS HERE]
Report of Independent Auditors
The Board of Directors
Physicians Quality Care, Inc.
We have audited the accompanying balance sheet of Jay M. Ungar, M.D. as of
December 31, 1995, and the related statements of operations, and cash flows for
the year then ended. These financial statements are the responsibility of
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, in
all material respects, the financial position of Jay M. Ungar, M.D. at December
31, 1995, and the results of operations and cash flows for the year then ended,
in conformity with generally accepted accounting principles.
/s/ Ernst & Young LLP
November 21, 1996
Boston, Massachusetts
1
<PAGE>
Jay M. Ungar, M.D.
Balance Sheets
<TABLE>
<CAPTION>
December 31 (Unaudited)
1995 August 30, 1996
----------------------------------
<S> <C> <C>
Assets
Current assets:
Cash $ 8,655 $24,645
Accounts receivable, less allowance
for doubtful accounts of $18,982 in
1995 and $16,733 in 1996
(Unaudited) 39,531 24,917
Prepaid expenses 4,500 4,939
Other current assets 18,000 18,000
----------------------------------
Total current assets 70,686 72,501
Property and equipment, net 328
----------------------------------
Total assets $71,014 $72,501
==================================
Liabilities and owners' equity
Current liabilities:
Accounts payable $ 7,700 $10,801
Accrued employee benefits 34,000 34,000
----------------------------------
Total current liabilities 41,700 44,801
Owners' equity 29,314 27,700
----------------------------------
Total liabilities and owners' equity $71,014 $72,501
==================================
</TABLE>
See accompanying notes.
2
<PAGE>
Jay M. Ungar, M.D.
Statements of Operations
<TABLE>
<CAPTION>
(Unaudited)
Nine months (Unaudited)
Year ended ended January 1, 1996
December 31 September 30 through August 30
1995 1995 1996
-------------------------------------------------
<S> <C> <C> <C>
Revenue:
Net patient service revenue $575,448 $422,964 $337,054
Other income 727 26,451
Interest income 639 485 267
-------------------------------------------------
576,087 424,176 363,772
Operating expenses:
Salaries and wages--physicians 305,632 229,668 162,140
Salaries and wages--staff 108,172 81,128 94,957
Employee benefits--physicians 36,675 29,543 22,099
Employee benefits--staff 21,634 17,350 11,900
Supplies and other 66,895 49,012 43,460
Insurance 24,021 3,902 13,769
Depreciation 328
Provision for bad debts 18,982 14,236 16,733
-----------------------------------------------
Net operating expenses 582,011 424,839 365,386
-----------------------------------------------
Net loss $ (5,924) $ (663) $ (1,614)
===============================================
</TABLE>
See accompanying notes.
3
<PAGE>
Jay M. Ungar, M.D.
Statements of Cash Flows
<TABLE>
<CAPTION>
(Unaudited) (Unaudited)
Nine months January 1
Year ended ended 1996 through
December 31 September 30 August 30
1995 1995 1996
---------------------------------------------------
<S> <C> <C> <C>
Operating activities
Net loss $(5,924) $ (663) $(1,614)
Adjustments to reconcile
net loss to net cash
provided by operating
activities:
Depreciation 328
Changes in operating
assets and liabilities:
Accounts receivable, (258) 18,649 14,614
net
Other current assets 4,500 (439)
Accounts payable 3,101
---------------------------------------------------
Net cash provided (used) by (6,182) 22,486 15,990
operating activities
Cash at beginning of period 14,837 14,837 8,655
---------------------------------------------------
Cash at end of period $ 8,655 $37,323 $24,645
===================================================
</TABLE>
See accompanying notes.
4
<PAGE>
Jay M. Ungar, M.D.
Notes to Financial Statements
December 31, 1995
1. Summary of Significant Accounting Policies
Description of Business
The medical practice of Dr. Jay M. Ungar, M.D. (the Practice) is a sole
proprietorship which offers primary care medical services.
Property and Equipment
Property and equipment are stated at cost. Depreciation of property and
equipment is calculated using the 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.
Professional Liability Insurance
The Practice has obtained professional liability coverage through commercial
insurance carriers on a claims-made basis. Management believes that there are
no claims that may result in a loss in excess of amounts covered by its existing
insurance.
Net Patient Service Revenue
Net patient service revenue is reported at the estimated realizable amounts from
patients, third-party payors and others for services rendered. The Medicare and
Medicaid programs pay physician services based on fee schedules which are
determined by the related government agency. The practice has negotiated
numerous agreements with managed care organizations to provide physician
services based on fee schedules.
Risks and Uncertainties
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
5
<PAGE>
Jay M. Ungar, M.D.
Notes to Financial Statements (continued)
1. Summary of Significant Accounting Policies (continued)
Unaudited Combined Financial Statements
The unaudited financial statements at August 30, 1996 and for the nine months
ended September 30, 1995 and the period January 1, 1996 through August 30, 1996
have been prepared by management in accordance with generally accepted
accounting principles. In the opinion of management, all adjustments
(consisting of normal recurring accruals) considered necessary for a fair
presentation have been included. Operating results of the interim periods are
not necessarily indicative of the results that may be expected for a full year.
2. Property and Equipment
Property and equipment consisted of the following:
December 31
1995
-------------
Furniture, fixtures and equipment $24,072
Less accumulated depreciation 23,744
-------------
$ 328
=============
3. Affiliation
On August 31, 1996, Jay M. Ungar, M.D. consummated a long-term affiliation
arrangement with Physicians Quality Care, Inc. (PQC). Under this arrangement,
the physician transferred his practices to, and became an employee of, a newly
formed professional corporation that is affiliated with PQC. The aggregate
consideration paid to the physician for the asset purchases and affiliations was
in a combination of cash and PQC common stock.
6
<PAGE>
Western Massachusetts Medical Group, Inc.
Audited Financial Statements
Year ended November 30, 1995 and the period
December 1, 1995 through August 30, 1996 (Unaudited) and
nine months ended August 31, 1995 (Unaudited)
<TABLE>
<CAPTION>
Contents
<S> <C>
Report of Independent Auditors.............................................1
Audited Financial Statements
Balance Sheets.............................................................2
Statements of Operations...................................................3
Statements of Stockholder's Equity.........................................4
Statements of Cash Flows...................................................5
Notes to Financial Statements..............................................6
</TABLE>
<PAGE>
[LETTERHEAD OF ERNST & YOUNG LLP APPEARS HERE]
Report of Independent Auditors
The Board of Directors
Physicians Quality Care, Inc.
We have audited the accompanying balance sheets Western Massachusetts Medical
Group, Inc. as of November 30, 1995, and the related statements of operations,
stockholder's equity, and cash flows for the year then ended. These financial
statements are the responsibility of the Group'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, in
all material respects, the financial position of Western Massachusetts Medical
Group, Inc. at November 30, 1995, and the results of its operations and its cash
flows for the year then ended in conformity with generally accepted accounting
principles.
/s/ Ernst & Young LLP
November 21, 1996
Boston, Massachusetts
1
<PAGE>
Western Massachusetts Medical Group, Inc.
Balance Sheets
<TABLE>
<CAPTION>
(Unaudited)
November 30 August 30
1995 1996
--------------------------
<S> <C> <C>
Assets
Current assets:
Cash $ 83,930 $ 32,358
Accounts receivable, less allowance for doubtful
accounts of $17,328 in 1995 and $19,079 in
1996 (unaudited) 84,601 93,174
Prepaid expenses 14,685 27,437
Due from related parties 1,342
Other current assets 23,839 25,288
Deferred income taxes 13,984 11,266
Income tax receivable 8,371
-------------------------
Total current assets 222,381 197,894
Property and equipment, net 83,426 72,229
-------------------------
Total assets $305,807 $270,123
=========================
Liabilities and stockholder's equity
Liabilities:
Accounts payable $ 34,734 $ 28,165
Deferred income taxes 39,715 48,244
Taxes payable 11,602
Current portion of notes payable and line of credit 8,251 8,730
-------------------------
Total current liabilities 94,302 85,139
Deferred income taxes 13,674 13,840
Notes payable 6,663 761
Stockholder's equity:
Common stock, no par value, 15,000 shares
authorized, 8,000 shares issued and
outstanding
Additional paid-in capital 400 400
Retained earnings 190,768 169,983
-------------------------
Total stockholder's equity 191,168 170,383
-------------------------
Total liabilities and stockholder's equity $305,807 $270,123
=========================
</TABLE>
See accompanying notes.
2
<PAGE>
Western Massachusetts Medical Group, Inc.
Statements of Operations
<TABLE>
<CAPTION>
Nine months December 1,
Year ended ended 1995 through
November 30 August 31 August 30
1995 1995 1996
---------------------------------------------------
<S> <C> <C> <C>
Revenue:
Net patient service
revenue $1,295,882 $ 966,099 $895,292
Interest income 1,909 1,647 919
---------------------------------------------------
1,297,791 967,746 896,211
Operating expenses:
Salaries and
wages--physicians 500,410 445,411 319,106
Salaries and wages--staff 293,891 261,590 189,341
Employee benefits--physicians 95,414 80,329 48,000
Employee benefits--staff 63,610 47,178 32,000
Supplies and other 288,002 205,495 270,770
Insurance 27,718 20,718 22,887
Interest 379 34 1,593
Depreciation 22,259 16,142 22,779
Provision for bad debts 17,328 14,191 19,079
---------------------------------------------------
Net operating expenses 1,309,011 1,091,088 925,555
---------------------------------------------------
Net loss before income taxes (11,220) (123,342) (29,344)
Income tax benefit 6,944 54,801 8,559
---------------------------------------------------
Net loss $ (4,276) $ (68,541) $(20,785)
===================================================
</TABLE>
See accompanying notes.
3
<PAGE>
Western Massachusetts Medical Group, Inc.
Statements of Stockholder's Equity
<TABLE>
<CAPTION>
<S> <C>
Balance at November 30, 1994 $195,444
Net loss (4,276)
----------
Balance at November 30, 1995 191,168
Net loss (unaudited) (20,785)
----------
Balance at August 30, 1996 (unaudited) $170,383
==========
</TABLE>
See accompanying notes.
4
<PAGE>
Western Massachusetts Medical Group, Inc.
Statements of Cash Flows
<TABLE>
<CAPTION>
(Unaudited)
December 1, 1995
Year ended Nine months ended through
November 30 August 31 August 30
1995 1995 1996
----------------------------------------------------
<S> <C> <C> <C>
Operating activities
Net loss $ (4,276) $(68,541) $(20,785)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation 22,259 16,142 22,779
Deferred income taxes (18,546) (55,257) (19,882)
Changes in operating assets and liabilities:
Accounts receivable, net 16,929 21,806 (8,573)
Prepaid expenses due from related parties
and other current assets (6,026) 2,025 (12,859)
Accounts payable, accrued expenses and
other current liabilities 22,787 64,049 4,753
----------------------------------------------------
Net cash provided (used) by operating activities 33,127 (19,776) (34,567)
Investing activity
Purchase of property and equipment (29,608) (23,991) (11,582)
----------------------------------------------------
Net cash provided (used) by investing activity (29,608) (23,991) (11,582)
Financing activities
Principal payments on long-term debt (4,456) (2,500) (5,423)
Issuance of debt 16,870 16,870
----------------------------------------------------
Net cash provided (used) by financing activities 12,414 14,370 (5,423)
----------------------------------------------------
Increase (decrease) in cash 15,933 (29,397) (51,572)
Cash at beginning of period 67,997 67,997 83,930
----------------------------------------------------
Cash at end of period $ 83,930 $ 38,600 $ 32,358
====================================================
Supplemental disclosure of cash flow information:
Cash paid during the period for interest $ 379 $ 34 $ 1,593
====================================================
</TABLE>
See accompanying notes.
5
<PAGE>
Western Massachusetts Medical Group, Inc.
Notes to Financial Statements
November 30, 1995
1. Summary of Significant Accounting Policies
Description of Business
Western Massachusetts Medical Group, Inc. (the Group) is a taxable entity
organized under the laws of Massachusetts. The Group offers primary medical
services in Western Massachusetts.
Property and Equipment
Property and equipment are stated at cost. Depreciation of property and
equipment is calculated using the 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.
Income Taxes
The Group is taxable under the provisions of the Internal Revenue Code. Deferred
income taxes are provided for temporary differences between the carrying amounts
of assets and liabilities for financial reporting purposes and the amounts used
for income tax purposes.
Professional Liability Insurance
The Group has obtained professional liability coverage through commercial
insurance carriers on the occurrence basis. Management believes that there are
no claims that may result in a loss in excess of amounts covered by its existing
insurance.
Net Patient Service Revenue
Net patient service revenue is reported at the estimated realizable amounts from
patients, third-party payors and others for services rendered. The Medicare and
Medicaid programs pay physician services based on fee schedules which are
determined by the related government agency. The Group has negotiated numerous
agreements with managed care organizations to provide physician services based
on fee schedules. No individual managed care contract is material to the Group.
6
<PAGE>
Western Massachusetts Medical Group, Inc.
Notes to Financial Statements (continued)
1. Summary of Significant Accounting Policies (continued)
Risks and Uncertainties
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Unaudited Financial Statements
The unaudited financial statements have been prepared by management in
accordance with generally accepted accounting principles. In the opinion of
management, all adjustments (consisting of normal recurring accruals) considered
necessary for a fair presentation have been included. Operating results of the
interim periods are not necessarily indicative of the results that may be
expected for a full year.
2. Property and Equipment
Property and equipment consisted of the following:
<TABLE>
<CAPTION>
November 30
1995
-------------
<S> <C>
Furniture, fixtures and equipment $340,898
Less accumulated depreciation 257,472
-------------
Total $ 83,426
=============
</TABLE>
7
<PAGE>
Western Massachusetts Medical Group, Inc.
Notes to Financial Statements (continued)
3. Notes Payable
The Group has a note payable with an original principal amount of $16,870,
payable in monthly installments of principal and interest at 8.5% secured by the
Groups' respective assets. The principal balance outstanding under the notes
payable agreement is $14,914 at November 30, 1995.
The following is a schedule of principal maturities on the notes and line of
credit as of November 30, 1995:
<TABLE>
<S> <C>
1996 $ 8,251
1997 6,663
---------
Total $14,914
=========
</TABLE>
4. Operating Leases
The Group leases office space and certain equipment under operating leases.
Total rental expense was $66,572 in 1995, and is included in supplies and other
in the accompanying combined statements of operations.
5. Employee Benefit Plans
The Group has a qualified defined contribution plan or profit sharing plans
covering substantially all employees. Contributions were determined based upon
a percentage of each eligible employee's compensation, as defined and/or at the
discretion of management. Total contributions were $153,912 for the year ended
November 30, 1995, and are included in employee benefits in the accompanying
statements of operations.
8
<PAGE>
Western Massachusetts Medical Group, Inc.
Notes to Financial Statements (continued)
6. Income Taxes
Deferred income taxes reflect the net effects of temporary differences between
the carrying amounts of assets and liabilities for financial reporting purposes
and the amounts used for income tax purposes. Each member of the Group is a
cash-basis taxpayer. Significant components of the Group's deferred tax
liabilities and assets were as follows:
<TABLE>
<CAPTION>
November 30
1995
-------------
<S> <C>
Deferred tax liabilities:
Accounts receivable, net $(33,841)
Prepaid expenses, other (5,874)
-------------
Total deferred tax liabilities (39,715)
Deferred tax assets:
Accrued expenses, other 220
Net operating loss carryover 9,075
-------------
9,295
Less: valuation allowance 9,075
-------------
Net deferred tax assets 220
-------------
Net deferred tax liabilities $(39,495)
=============
</TABLE>
For financial reporting purposes a valuation allowance of $9,075 at November 30,
1995, has been recognized to offset certain deferred tax assets since
uncertainty exists with respect to future realization of these tax assets.
9
<PAGE>
Western Massachusetts Medical Group, Inc.
Notes to Financial Statements (continued)
6. Income Taxes (continued)
Significant components of the provision (benefit) for income taxes attributable
to continuing operations are as follows:
<TABLE>
<CAPTION>
November 30
1995
--------------
<S> <C>
Current:
Federal $ 11,146
State 456
--------------
Total current 11,602
Deferred:
Federal (14,286)
State (4,260)
--------------
Total deferred (18,546)
--------------
Net provision (benefit) $ (6,944)
==============
</TABLE>
The difference between the provision for income taxes and the amount computed by
applying the statutory federal income tax rate to income before taxes is as
follows:
<TABLE>
<CAPTION>
Year ended
November 30, 1995
--------------------------
Amount Rate
--------------------------
<S> <C> <C>
Federal taxes at statutory rates $(3,927) 35%
Add (deduct):
State tax, net of federal benefit (2,451) 22
Other (566) 5
--------------------------
$(6,944) 62%
==========================
</TABLE>
10
<PAGE>
Western Massachusetts Medical Group, Inc.
Notes to Financial Statements (continued)
7. Affiliation
On August 30, 1996, the Western Massachusetts Medical Group, Inc. consummated a
long-term affiliation arrangement with Physicians Quality Care, Inc. (PQC).
Under this arrangement, the physicians transferred their practices to, and
became employees of, a newly formed professional corporation that is affiliated
with PQC. The aggregate consideration paid to the physicians for the asset
purchases and affiliations was in a combination of cash and PQC common stock.
11
<PAGE>
Annapolis Medical Specialists, LLP
Audited Financial Statements
Years ended December 31, 1993, 1994 and 1995, and
nine months ended September 30, 1995 (Unaudited) and
nine months ended September 30, 1996 (Unaudited)
Contents
<TABLE>
<CAPTION>
<S> <C>
Report of Independent Auditors............................................ 1
Audited Financial Statements
Balance Sheet............................................................. 2
Statements of Operations.................................................. 3
Statements of Stockholder's Equity........................................ 4
Statements of Cash Flows.................................................. 5
Notes to Financial Statements............................................. 7
</TABLE>
<PAGE>
[LETTERHEAD OF ERNST & YOUNG LLP APPEARS HERE]
Report of Independent Auditors
The Board of Directors
Physicians Quality Care, Inc.
We have audited the accompanying balance sheets of Annapolis Medical
Specialists, LLP (the Partnership) as of December 31, 1994 and 1995 and the
related statements of operations, partners capital, and cash flows each of the
three years in the period ended December 31, 1995. These financial statements
are the responsibility of management. Our responsibility is to express an
opinion on these financial statements based on our audits.
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 provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Annapolis Medical Specialists,
LLP, at December 31, 1994 and 1995 and the results of its operations and its
cash flows for each of the three years in the period ended December 31, 1995, in
conformity with generally accepted accounting principles.
/S/ ERNST & YOUNG LLP
September 20, 1996
Boston, Massachusetts
<PAGE>
Annapolis Medical Specialists, LLP
Balance Sheets
<TABLE>
<CAPTION>
(Unaudited)
December 31 September 30
1994 1995 1996
-------------------------------------
<S> <C> <C> <C>
Assets
Current assets:
Cash $ 46,706 $ 64,280 $203,974
Accounts receivable, less allowance
for doubtful accounts of $130,611
in 1994, $85,081 in 1995 and $98,887
in 1996 (unaudited) 399,774 357,906 362,742
Prepaids and other assets 35,726 40,773 57,267
-------------------------------------
Total current assets 482,206 462,959 623,983
Property and equipment, net 162,526 122,248 94,455
-------------------------------------
Total assets $644,732 $ 585,207 $718,438
=====================================
Liabilities and partners' capital
Current liabilities:
Accounts payable $150,693 $ 168,293 $292,830
Accrued employee benefits 54,821 84,117 73,498
Accrued expenses, other 36,518 46,594 52,264
Current portion of obligation
under capital lease 18,168 20,169 14,288
Current portion of notes payable 70,777 44,869
-------------------------------------
Total current liabilities 330,977 364,042 432,880
Notes payable 45,100
Obligation under capital lease 29,215 9,046
Partners' capital 248,582 334,368 378,393
Due from partners (9,142) (122,249) (92,835)
-------------------------------------
Total liabilities and partners' capital $644,732 $ 585,207 $718,438
=====================================
</TABLE>
See accompanying notes.
2
<PAGE>
Annapolis Medical Specialists, LLP
Statements of Operations
<TABLE>
<CAPTION>
(Unaudited)
Nine months ended
Year ended December 31 September 30
1993 1994 1995 1995 1996
---------------------------------------------------------------
Revenue:
<S> <C> <C> <C> <C> <C>
Net patient service revenue $3,565,656 $4,480,340 $5,190,789 $3,782,202 $4,233,015
Rental income 97,528 139,406 77,872 77,872
Other income 6,205 17,333 33,087 28,029 12,722
---------------------------------------------------------------
3,669,389 4,637,079 5,301,748 3,888,103 4,245,737
Operating expenses:
Salaries and wages--physicians 1,679,221 1,939,649 2,304,117 1,692,307 1,633,578
Salaries and wages--staff 898,693 1,075,985 1,268,605 971,359 1,048,364
Employee benefits--staff 39,616 57,612 73,434 54,053 32,889
Supplies and other 607,503 964,837 1,218,922 938,013 1,147,835
Insurance 57,765 65,505 74,107 56,602 61,427
Interest 22,747 21,825 12,988 10,861 4,657
Rent 222,761 227,663 238,897 171,607 214,321
Depreciation and amortization 63,306 60,686 63,883 47,912 44,835
Provision for bad debts 109,539 130,611 85,081 (27,654) 13,806
---------------------------------------------------------------
Net operating expenses 3,701,151 4,544,373 5,340,034 3,915,060 4,201,712
---------------------------------------------------------------
Net income (loss) $ (31,762) $ 92,706 $ (38,286) $ (26,957) $ 44,025
===============================================================
</TABLE>
See accompanying notes.
3
<PAGE>
Annapolis Medical Specialists, LLP
Statements of Partners' Capital
<TABLE>
<CAPTION>
Total Partners'
Capital
-----------------
<S> <C>
Balance at December 31, 1992 $243,458
Capital contributions by newly admitted partner 25,144
Capital withdrawals by departing partner (24,907)
Net loss (31,762)
-----------------
Balance at December 31, 1993 211,933
Capital withdrawals by partners (56,057)
Net income 92,706
-----------------
Balance at December 31, 1994 248,582
Capital contributions by newly admitted partners 148,655
Capital withdrawals by partners (24,583)
Net loss (38,286)
-----------------
Balance at December 31, 1995 334,368
Net income (unaudited) 44,025
-----------------
Balance at September 30, 1996 (unaudited) $378,393
=================
</TABLE>
See accompanying notes.
4
<PAGE>
Annapolis Medical Specialists, LLP
Statements of Cash Flows
<TABLE>
<CAPTION>
(Unaudited)
Nine months ended
Year ended December 31 September 30
1993 1994 1995 1995 1996
--------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Operating activities
Net income (loss) $(31,762) $ 92,706 $(38,286) $(26,957) $ 44,025
Adjustments to reconcile net income
(loss) to net cash provided by operating
activities:
Depreciation and amortization 63,306 60,686 63,883 47,912 44,835
Changes in operating assets and
liabilities:
Accounts receivable 26,782 (123,398) 41,868 (1,134) (4,836)
Other current assets (248) (4,141) (5,047) (4,707) (16,494)
Accounts payable, accrued
expenses and other current
liabilities 69,321 125,249 56,972 45,145 119,588
--------------------------------------------------------
Net cash provided by operating activities 127,399 151,102 119,390 60,259 187,118
Investing activity
Purchase of property and equipment, net (29,460) (24,124) (23,605) (9,110) (17,042)
--------------------------------------------------------
Net cash used in investing activity (29,460) (24,124) (23,605) (9,110) (17,042)
Financing activities
Contribution of capital 16,760 16,002 35,548 18,554 29,414
Withdrawals of capital (56,057) (24,583)
Payments on obligation under capital
lease (14,739) (16,364) (18,168) (13,446) (14,927)
Payments on notes payable (73,333) (77,365) (71,008) (54,108) (44,869)
--------------------------------------------------------
Net cash used in financing activities (71,312) (133,784) (78,211) (49,000) (30,382)
--------------------------------------------------------
Net increase (decrease) in cash 26,627 (6,806) 17,574 2,149 139,694
Cash at beginning of year 26,885 53,512 46,706 46,706 64,280
--------------------------------------------------------
Cash at end of year $ 53,512 $ 46,706 $ 64,280 $ 48,855 $203,974
========================================================
</TABLE>
5
<PAGE>
Annapolis Medical Specialists, LLP
Statements of Cash Flows (continued)
<TABLE>
<CAPTION>
(Unaudited)
Nine months ended
Year ended December 31 September 30
1993 1994 1995 1995 1996
--------------------------------------------------
<S> <C> <C> <C> <C> <C>
Supplemental disclosure of cash
flow information:
Interest paid $23,766 $21,671 $ 12,498 $ 15,494 $4,282
==================================================
Noncash transactions:
Issuance of note payable for
partner withdrawal $24,907 - - - -
==================================================
Issuance of notes receivable
for partner admission $25,144 - $122,249 $148,655 -
==================================================
</TABLE>
See accompanying notes.
6
<PAGE>
Annapolis Medical Specialists, LLP
Notes to Financial Statements
September 30, 1996
1. Summary of Significant Accounting Policies
Description of Business
Annapolis Medical Specialists, LLP (the Partnership) is a limited liability
partnership organized under the laws of Maryland. The Partnership offers a
variety of medical services, including cardiology, hematology/oncology,
infectious disease, pulmonary/critical care and internal medicine, in the
greater Annapolis, Maryland area.
Property and Equipment
Property and equipment are stated at cost. Depreciation of property and
equipment is calculated using the straight-line method over the estimated useful
lives of the assets. Routine maintenance and repairs are charged to expense as
incurred. Amortization of assets recorded under capital lease transactions is
included in depreciation expense.
Income Taxes
For tax purposes, Annapolis Medical Specialists, LLP is treated as a partnership
and a pass-through entity. The taxable income or loss of the practice is
allocated to the partners and reported on the partners' tax returns. Therefore,
no provision for income taxes is included in these financial statements.
Professional Liability Insurance
The Partnership has obtained professional liability coverage through commercial
insurance carriers on a claims-made basis. Management believes that there are
no claims that may result in a loss in excess of amounts covered by its existing
insurance.
Net Patient Service Revenue
Net patient service revenue is reported at the estimated realizable amounts from
patients, third-party payors and others for services rendered. The Medicare and
Medicaid programs pay physician services based on fee schedules which are
determined by the related government agency. The Partnership has negotiated
numerous agreements with managed care organizations to provide physician
services based on fee schedules. No individual managed care contract is
material to the Partnership.
7
<PAGE>
Annapolis Medical Specialists, LLP
Notes to Financial Statements (continued)
1. Summary of Significant Accounting Policies (continued)
Risks and Uncertainties
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Unaudited Financial Statements
The unaudited financial statements as of September 30, 1996 and for the nine
months ended September 30, 1995 and 1996 have been prepared by management in
accordance with generally accepted accounting principles. In the opinion of
management, all adjustments (consisting of normal recurring accruals) considered
necessary for a fair presentation have been included. Operating results of the
interim periods are not necessarily indicative of the results that may be
expected for a full year.
2. Property and Equipment
Property and equipment consisted of the following:
<TABLE>
<CAPTION>
December 31
1994 1995
--------------------------
<S> <C> <C>
Furniture, fixtures and equipment $460,610 $479,773
Leasehold improvements 9,379 9,379
--------------------------
469,989 489,152
Less accumulated depreciation 307,463 366,904
--------------------------
$162,526 $122,248
==========================
</TABLE>
8
<PAGE>
Annapolis Medical Specialists, LLP
Notes to Financial Statements (continued)
3. Notes Payable
The Partnership has two notes payable with a combined original principal amount
of $324,907, payable in monthly installments of principal and interest at
interest rates ranging from 8.5% to prime plus 1.25%. The principal balance
outstanding of these notes payable was $115,877 and $44,869 at December 31, 1994
and 1995, respectively. The notes payable are scheduled to be paid in 1996.
The assets of the Partnership have been pledged as security interest to one of
the notes payable. The carrying amounts of the notes approximate their fair
value.
4. Capital Leases
The Partnership leases certain medical equipment under long-term leases and has
the option to purchase the equipment for a nominal cost at the termination of
the lease. Property, plant and equipment includes the following amounts for
leases that have been capitalized:
<TABLE>
<CAPTION>
1994 1995
----------------------
<S> <C> <C>
Furniture, fixtures and equipment $84,865 $84,865
Less accumulated depreciation 42,432 59,405
----------------------
Total $42,433 $25,460
======================
Future minimum lease payments for capital leases were as follows at
December 31, 1995:
1996 $22,284
1997 11,142
---------
Total minimum lease payments 33,426
Less amount representing interest 4,211
---------
Present value of net minimum lease payments 29,215
Less current maturities 20,169
---------
Long-term obligation $ 9,046
=========
</TABLE>
9
<PAGE>
Annapolis Medical Specialists, LLP
Notes to Financial Statements (continued)
5. Operating Leases
The Partnership leases office space and certain equipment under operating
leases. Total rental expense was $222,761, $227,663 and $238,897 in 1993, 1994
and 1995, respectively. The following is a schedule by year of future minimum
lease payments under operating leases as of December 31, 1995:
<TABLE>
<CAPTION>
<S> <C>
1996 $243,015
1997 85,954
1998 1,713
1999 1,428
----------
Total future minimum lease payments $332,110
==========
</TABLE>
6. Related Parties
Upon admission to the Partnership, a loan may be extended to new partners for
the value of their partnership interest. The loans have varying maturities with
interest rates set at prime plus 1%. The principal balance outstanding under
these notes receivable agreements were $9,142 and $122,249 at December 31, 1994
and 1995, respectively.
7. Employee Benefit Plans
The Partnership has a defined contribution plan and profit sharing plan covering
substantially all employees, excluding partners. Contributions are determined
based upon a percentage of each eligible employee's compensation, as defined
and/or at the discretion of management. Total contributions were $33,572,
$36,357 and $39,328 for the years ended December 31, 1993, 1994 and 1995,
respectively, and are included in employee benefits in the accompanying
statements of operations.
8. Pending Affiliation
The Partnership expects to enter into a long-term affiliation arrangement with
Physicians Quality Care, Inc. (PQC). Under this arrangement, the Partnership
will sell certain assets to, and the physicians will become employees of, a
newly formed professional corporation that is affiliated with PQC. In addition,
certain professional corporations that are partners of the Partnership may merge
into the newly formed professional corporation that is affiliated with PQC. The
aggregate consideration to be paid to the Partnership, the physicians and the
related professional corporations for the asset purchases and affiliations is
subject to working capital adjustments and is payable in cash and common stock
of PQC.
10
<PAGE>
Drs. Fortier, Libber, Clemmens & Weimer, P.A.
Audited Financial Statements
Year ended December 31, 1995 and nine
months ended September 30, 1995 (Unaudited)
and September 30, 1996 (Unaudited)
Contents
<TABLE>
<S> <C>
Report of Independent Auditors............................................. 1
Audited Financial Statements
Balance Sheets............................................................. 2
Statements of Operations................................................... 3
Statements of Shareholders' Equity......................................... 4
Statements of Cash Flows................................................... 5
Notes to Financial Statements.............................................. 6
</TABLE>
75
<PAGE>
[LETTERHEAD OF ERNST & YOUNG LLP APPEARS HERE]
Report of Independent Auditors
The Board of Directors
Physicians Quality Care, Inc.
We have audited the accompanying balance sheet of Drs. Fortier, Libber, Clemmens
& Weimer, P.A. as of December 31, 1995, and the related statements of
operations, shareholders' equity, and cash flows for the year then ended. These
financial statements are the responsibility of 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, in
all material respects, the financial position of Drs. Fortier, Libber, Clemmens
& Weimer, P.A. at December 31, 1995, and the results of its operations and its
cash flows for the year then ended in conformity with generally accepted
accounting principles.
/s/ Ernst & Young LLP
September 20, 1996
Boston, Massachusetts
1
<PAGE>
Drs. Fortier, Libber, Clemmens & Weimer, P.A.
Balance Sheets
<TABLE>
<CAPTION>
(Unaudited)
December 31 September 30
1995 1996
----------------------------
<S> <C> <C>
Assets
Current assets:
Cash $ 18,972 $ 22,021
Accounts receivable, less allowance
for doubtful accounts of $65,062 in
1995 and $63,640 in 1996 (unaudited) 149,264 145,989
Prepaid expenses 19,632 20,110
Deferred income taxes 28,134 35,528
----------------------------
Total current assets 216,002 223,648
Deferred income taxes, noncurrent 4,268 3,352
Property and equipment, net 88,521 69,891
----------------------------
Total assets $ 308,791 $ 296,891
============================
Liabilities and shareholders' equity
Current liabilities:
Accounts payable $ 47,309 $ 55,769
Accrued employee benefits 15,879 11,872
Accrued salaries and payroll taxes 32,486 21,479
Due to former shareholders, current
portion 27,241 27,955
Income taxes payable 4,393 8,093
Deferred income taxes 67,372 70,788
Line of credit 50,000 87,000
Current portion of obligation under
capital lease 3,005 3,005
Current portion of note payable to bank 17,955
----------------------------
Total current liabilities 265,640 285,961
Deferred income taxes, noncurrent 9,945 3,727
Due to former shareholders, noncurrent 46,120 25,061
Obligation under capital lease, less
current portion 7,664 5,376
Note payable, less current portion
Shareholders' equity:
Common stock, no stated par value,
300 shares outstanding 8,000 8,000
Additional paid-in capital 1,012 1,012
Retained earnings 108,539 105,883
----------------------------
117,551 114,895
Less treasury stock, at cost, 60 shares (138,129) (138,129)
----------------------------
Total shareholders' equity (20,578) (23,234)
----------------------------
Total liabilities and shareholders' equity $ 308,791 $ 296,891
============================
</TABLE>
See accompanying notes.
2
<PAGE>
Drs. Fortier, Libber, Clemmens & Weimer, P.A.
Statements of Operations
<TABLE>
<CAPTION>
(Unaudited)
Year ended Nine months ended
December 31 September 30
1995 1995 1996
---------------------------------------------
<S> <C> <C> <C>
Revenue:
Net patient service revenue $2,107,977 $1,629,704 $1,710,430
Other income 87 33,436 17,671
Interest income 39,594 65 38
---------------------------------------------
2,147,658 1,663,205 1,728,139
Operating expenses:
Salaries and wages--physicians 506,336 340,281 373,649
Salaries and wages--staff 772,305 575,975 674,980
Employee benefits 3,267 2,258 2,070
Supplies and other 383,493 286,385 342,704
Rent 211,644 159,833 170,755
Insurance 116,194 82,542 75,404
Interest 14,191 9,773 11,196
Depreciation 29,303 21,977 21,977
Provision for bad debts 64,062 60,828 63,640
---------------------------------------------
Net operating expenses 2,100,795 1,539,852 1,736,375
---------------------------------------------
Net income (loss) before
income taxes 46,863 123,353 (8,236)
Income tax (provision) benefit (13,987) (55,989) 5,580
---------------------------------------------
Net income (loss) $ 32,876 $ 67,364 $ (2,656)
=============================================
</TABLE>
See accompanying notes.
3
<PAGE>
Drs. Fortier, Libber, Clemmens & Weimer, P.A.
Statements of Shareholders' Equity
<TABLE>
<S> <C>
Balance at December 31, 1994 $ 14,805
Net income 32,876
Purchase of treasury stock (cash) (21,000)
Purchase of treasury stock (noncash) (47,259)
------------
Balance at December 31, 1995 (20,578)
Net loss (unaudited) (2,656)
------------
Balance at September 30, 1996 (unaudited) $(23,234)
============
</TABLE>
See accompanying notes.
4
<PAGE>
Drs. Fortier, Libber, Clemmens & Weimer, P.A.
Statements of Cash Flows
<TABLE>
<CAPTION>
(Unaudited)
Year ended Nine months ended
December 31 September 30
1995 1995 1996
---------------------------------------------
<S> <C> <C> <C>
Operating activities
Net income (loss) $ 32,876 $ 67,364 $ (2,656)
Adjustments to reconcile net
income (loss) to net cash
provided by operating
activities:
Depreciation 29,303 21,977 21,977
Deferred income taxes 9,786 (1,952) (9,280)
Loss on sale of fixed assets 744
Changes in operating assets
and liabilities:
Accounts receivable, net (11,459) (3,976) 3,275
Other current assets 2,364 1,000 (478)
Accounts payable and
accrued expense 14,703 41,809 (2,854)
---------------------------------------------
Net cash provided by
operating activities 77,573 126,966 9,984
Investing activity
Purchase of property and
equipment (5,050) (4,836) (3,347)
---------------------------------------------
Net cash used in investing
activity (5,050) (4,836) (3,347)
Financing activities
Payments on lease obligation (2,299) (2,288) (2,288)
Payments on note payable
and line of credit (16,608) (67,955)
Purchase of treasury stock (21,000)
Proceeds from line of credit 87,000
Payments to former shareholders (23,898) (33,251) (20,345)
---------------------------------------------
Net cash used in financing
activities (63,805) (35,539) (3,588)
---------------------------------------------
Increase (decrease) in cash 8,718 86,591 3,049
Cash at beginning of period 10,254 10,254 18,972
---------------------------------------------
Cash at end of period $ 18,972 $ 96,845 $ 22,021
=============================================
Supplemental disclosure of
cash flow information:
Interest paid $ 10,570 $ 5,178 $ 9,810
=============================================
Income taxes paid $ 786 $ 428 $ 4,303
=============================================
Noncash transactions:
Issuance of note payable
for purchase of treasury
stock $ 47,259 - -
==============================================
</TABLE>
See accompanying notes.
5
<PAGE>
Drs. Fortier, Libber, Clemmens & Weimer, P.A.
Notes to Financial Statements
December 31, 1995
1. Summary of Significant Accounting Policies
Description of Business
Drs. Fortier, Libber, Clemmens & Weimer, P.A. (Pediatrics) is a professional
association organized under the laws of Maryland. Pediatrics offers a variety
of medical services, including pediatrics and primary care, in the greater
Annapolis, Maryland area.
Property and Equipment
Property and equipment are stated at cost. Depreciation of property and
equipment is calculated using the straight-line method over the estimated useful
lives of the assets. Routine maintenance and repairs are charged to expense as
incurred. Amortization of assets recorded under capital lease transactions is
included in depreciation expense.
Income Taxes
Pediatrics is taxable under the provisions of the Internal Revenue Code.
Pediatrics files its federal and state income tax return on the cash basis
method of accounting. Deferred income taxes are provided for temporary
differences between the carrying amount of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes (see Note 8).
Professional Liability Insurance
Pediatrics has obtained professional liability coverage through commercial
insurance carriers on the claims-made basis. Management believes that there are
no claims that may result in a loss in excess of amounts covered by its existing
insurance.
Net Patient Service Revenue
Net patient service revenue is reported at the estimated realizable amounts from
patients, third-party payors and others for services rendered. The Medicare and
Medicaid programs pay physician services based on fee schedules which are
determined by the related government agency. Pediatrics has negotiated numerous
agreements with managed care organizations to provide physician services based
on fee schedules. No individual managed care contract is material to
Pediatrics.
6
<PAGE>
Drs. Fortier, Libber, Clemmens & Weimer, P.A.
Notes to Financial Statements (continued)
1. Summary of Significant Accounting Policies (continued)
Risks and Uncertainties
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Unaudited Financial Statements
The unaudited financial statements as of September 30, 1996 and for the nine
months ended September 30, 1995 and 1996 have been prepared by management in
accordance with generally accepted accounting principles. In the opinion of
management, all adjustments (consisting of normal recurring accruals) considered
necessary for a fair presentation have been included. Operating results of the
interim periods are not necessarily indicative of the results that may be
expected for a full year.
2. Property and Equipment
Property and equipment consisted of the following at December 31, 1995:
<TABLE>
<CAPTION>
<S> <C>
Furniture, fixtures and equipment $137,575
Leasehold improvements 59,072
----------
196,647
Less accumulated depreciation 108,126
----------
$ 88,521
==========
</TABLE>
3. Note Payable and Line of Credit
Pediatrics had a note payable with a bank, payable in monthly installments of
principal and interest of $1,590, which matured during 1996. The note carried
interest at a rate of 9%. The principal balance outstanding under the note was
$17,955 at December 31, 1995.
7
<PAGE>
Drs. Fortier, Libber, Clemmens & Weimer, P.A.
Notes to Financial Statements (continued)
3. Note Payable and Line of Credit (continued)
Pediatrics had a $50,000 line of credit with a bank which carried an interest
rate of prime plus 2% (9% at December 31, 1995). The balance outstanding under
the line of credit was $50,000 at December 31, 1995.
In April 1996, Pediatrics entered into a secured demand note with a bank
providing financing up to $100,000. The note carries interest at prime plus 1%
and is secured by Pediatrics' receivables and equipment. The proceeds of the
new note were used to pay off the line of credit and note payable.
4. Capital Leases
Property, plant and equipment includes the following amounts for leases that
have been capitalized at December 31, 1995:
<TABLE>
<CAPTION>
<S> <C>
Equipment $14,430
Less accumulated amortization (3,779)
---------
$10,651
=========
Future minimum lease payments for capital leases were as follows as of
December 31, 1995:
Year ending December 31:
1996 $ 5,920
1997 4,984
1998 4,899
1999 816
---------
Total minimum lease payments 16,619
Less amount representing interest (5,950)
---------
Present value of net minimum lease payments $10,669
=========
</TABLE>
8
<PAGE>
Drs. Fortier, Libber, Clemmens & Weimer, P.A.
Notes to Financial Statements (continued)
5. Operating Leases
Pediatrics leases office space and certain equipment under operating leases.
Total rental expense was $211,644 in 1995. The following is a schedule by year
of future minimum lease payments under operating leases as of December 31, 1995:
<TABLE>
<S> <C>
1996 $ 198,822
1997 190,322
1998 190,322
1999 190,322
2000 190,322
Thereafter 285,483
------------
$1,245,593
============
</TABLE>
6. Related Parties
Pediatrics rents office space from entities owned by stockholders of Pediatrics.
Total rental expense incurred under these rental agreements was $198,549 in
1995. Lease commitments with related parties over the next five years are
included in the minimum lease payment disclosure in Note 5.
7. Employee Benefit Plans
Pediatrics has a qualified profit sharing plan covering substantially all
employees. Contributions are determined based upon a percentage of each
eligible employee's compensation, as defined and/or at the discretion of
management. Total contributions were $3,267 for the year ended December 31,
1995, and are included in employee benefits in the accompanying statements of
operations.
8. Income Taxes
Pediatrics accounts for income taxes using the liability method required by
Financial Accounting Standards Board (FASB) Statement No. 109, "Accounting for
Income Taxes."
9
<PAGE>
Drs. Fortier, Libber, Clemmens & Weimer, P.A.
Notes to Financial Statements (continued)
8. Income Taxes (continued)
Deferred income taxes reflect the net effects of temporary differences between
the carrying amounts of assets and liabilities for financial reporting purposes
and the amounts used for income tax purposes. Significant components of
Pediatrics' deferred tax liabilities and assets were as follows at December 31,
1995:
<TABLE>
<S> <C>
Deferred tax liabilities:
Accounts receivable, net $59,706
Accrued expenses 7,666
Depreciation 9,945
---------
Total deferred tax liabilities 77,317
Deferred tax assets:
Accrued expenses 28,135
Capital lease 4,267
---------
Total deferred tax assets 32,402
---------
Net deferred tax liabilities $44,915
=========
</TABLE>
Significant components of the provision (benefit) for income taxes attributable
to continuing operations are as follows for the year ended December 31, 1995:
<TABLE>
<S> <C>
Current:
Federal $ 3,844
State 549
---------
Total current 4,393
Deferred:
Federal 8,371
State 1,223
---------
Total deferred 9,594
---------
$13,987
=========
</TABLE>
10
<PAGE>
Drs. Fortier, Libber, Clemmens & Weimer, P.A.
Notes to Financial Statements (continued)
8. Income Taxes (continued)
The difference between the provision for income taxes and the amount computed by
applying the statutory federal income tax rate to income before taxes is as
follows for the year ended December 31, 1995:
<TABLE>
<CAPTION>
Amount Rate
----------------
<S> <C> <C>
Federal taxes at statutory rates $16,403 35%
State income tax, net of federal tax benefit 958 2
Accounts receivable (3,374) (7)
----------------
$13,987 30%
================
</TABLE>
9. Pending Affiliation
Pediatrics expects to enter into a long-term affiliation arrangement with
Physicians Quality Care, Inc. (PQC). Under this arrangement, Pediatrics will
merge with and into, and the physicians will become employees of, a newly formed
professional corporation that is affiliated with PQC. The aggregate
consideration to be paid to Pediatrics is subject to working capital adjustments
and is payable in common stock of PQC.
11
<PAGE>
Drs. Goldgeier, Levine & Friedman, P.A.
Audited Financial Statements
Year ended December 31, 1995 and nine months
ended September 30, 1995 (Unaudited) and
September 30, 1996 (Unaudited)
<TABLE>
<CAPTION>
Contents
<S> <C>
Report of Independent Auditors............................................. 1
Audited Financial Statements
Balance Sheets............................................................. 2
Statements of Operations................................................... 3
Statements of Shareholders' Equity (Deficit)............................... 4
Statements of Cash Flows................................................... 5
Notes to Financial Statements.............................................. 6
</TABLE>
<PAGE>
[LETTERHEAD OF ERNST & YOUNG LLP APPEARS HERE]
Report of Independent Auditors
The Board of Directors
Physicians Quality Care, Inc.
We have audited the accompanying balance sheet of Drs. Goldgeier, Levine &
Friedman, P.A. as of December 31, 1995, and the related statements of
operations, shareholders' equity, and cash flows for the year then ended. These
financial statements are the responsibility of 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, in
all material respects, the financial position of Drs. Goldgeier, Levine &
Friedman, P.A. at December 31, 1995, and the results of its operations and its
cash flows for the year then ended in conformity with generally accepted
accounting principles.
/s/ Ernst & Young LLP
September 20, 1996
Boston, Massachusetts
1
<PAGE>
Drs. Goldgeier, Levine & Friedman, P.A.
Balance Sheets
<TABLE>
<CAPTION>
(Unaudited)
December 31 September 30
1995 1996
----------------------------------------
<S> <C> <C>
Assets
Current assets:
Cash $ 50,187 $ 50,765
Accounts receivable, less allowance for doubtful
accounts of $78,208 in 1995 and $77,219 in 1996 155,852 156,858
(unaudited)
Prepaid expenses 1,394 1,987
Deferred income taxes 87,274 80,284
----------------------------------------
Total current assets 294,707 289,894
Deferred income taxes 6,593 5,536
Property and equipment, net 35,247 26,309
----------------------------------------
Total assets $ 336,547 $ 321,739
========================================
Liabilities and owners' equity
Current liabilities:
Accounts payable $ 172,207 $ 160,042
Accrued salaries, payroll taxes and employee benefits 57,894 52,462
Deferred income taxes 69,309 69,743
Current portion of obligation under capital lease 3,554 3,773
Current portion of notes payable to former shareholders 6,840
----------------------------------------
Total current liabilities 309,804 286,020
Deferred income taxes 812 2,062
Obligation under capital lease, less current portion 12,926 10,068
Notes payable to former shareholders
Shareholders' equity:
Common stock, par value 50,300 shares authorized,
180 shares issued and outstanding 9,000 9,000
Additional paid-in capital 42,662 42,662
Retained earnings (21,157) (10,573)
----------------------------------------
30,505 41,089
Less treasury stock, at cost, 60 shares (17,500) (17,500)
----------------------------------------
Total shareholders' equity 13,005 23,589
----------------------------------------
Total liabilities and shareholders' equity $ 336,547 $ 321,739
========================================
</TABLE>
See accompanying notes.
2
<PAGE>
Drs. Goldgeier, Levine & Friedman, P.A.
Statements of Operations
<TABLE>
<CAPTION>
(Unaudited)
Year ended Nine months ended
December 31 September 30
1995 1995 1996
---------------------------------------------------
<S> <C> <C> <C>
Revenue:
Net patient service revenue $1,913,452 $1,463,639 $1,464,199
Other income 63,681 37,201 25,610
Interest income 197 158 108
---------------------------------------------------
1,977,330 1,500,998 1,489,917
Operating expenses:
Salaries and wages 1,038,637 772,305 765,316
Employee benefits
Supplies and other 638,466 510,447 496,989
Rent 125,798 73,692 90,997
Insurance 44,194 36,566 28,298
Interest 1,023 1,747 1,175
Depreciation 11,752 8,937 9,609
Provision for bad debts 78,208 77,293 77,219
---------------------------------------------------
Net operating expenses 1,938,078 1,480,987 1,469,603
---------------------------------------------------
Net income (loss) before
income taxes 39,252 20,011 20,314
Income tax benefit
(expense) (17,768) (24,524) (9,730)
---------------------------------------------------
Net income (loss) $ 21,484 $ (4,513) $ 10,584
===================================================
</TABLE>
See accompanying notes.
3
<PAGE>
Drs. Goldgeier, Levine & Friedman, P.A.
Statements of Shareholders' Equity (Deficit)
<TABLE>
<S> <C>
Balance at December 31, 1994 $(8,479)
Net income 21,484
----------
Balance at December 31, 1995 13,005
Net income (unaudited) 10,584
----------
Balance at September 30, 1996 (unaudited) $23,589
==========
</TABLE>
See accompanying notes.
4
<PAGE>
Drs. Goldgeier, Levine & Friedman, P.A.
Statements of Cash Flows
<TABLE>
<CAPTION>
(Unaudited)
Year ended Nine months ended
December 31 September 30
1995 1995 1996
---------------------------------------------
<S> <C> <C> <C>
Operating activities
Net income (loss) $ 21,484 $ (4,513) $ 10,584
Adjustments to reconcile net income (loss)
to net cash provided by operating
activities:
Depreciation 11,752 8,937 9,609
Deferred income taxes 17,768 24,524 9,730
Changes in operating assets and
liabilities:
Accounts receivable, net (49,599) (50,756) (1,006)
Other current assets 2,751 2,750 (593)
Accounts payable, accrued expenses
and other current liabilities 28,020 7,879 (17,596)
---------------------------------------------
Net cash provided by (used in) operating
activities 32,176 (11,179) 10,728
Investing activity
Purchase of property and equipment (12,454) (7,701) (671)
---------------------------------------------
Net cash used in investing activity (12,454) (7,701) (671)
Financing activities
Payments on lease obligation (3,149) (2,639)
Payments on long-term note payable (14,129) (11,963) (6,840)
---------------------------------------------
Net cash provided by (used in) financing
activities (17,278) (11,963) (9,479)
---------------------------------------------
Increase (decrease) in cash 2,444 (30,843) 578
Cash at beginning of period 47,743 47,743 50,187
---------------------------------------------
Cash at end of period $ 50,187 $ 16,900 $ 50,765
=============================================
Supplemental disclosure of cash flow
information:
Interest paid $ 1,023 - $ 7,813
=============================================
Noncash transactions:
Capital lease transactions $ 19,629 - -
=============================================
</TABLE>
See accompanying notes.
5
<PAGE>
Drs. Goldgeier, Levine & Friedman, P.A.
Notes to Financial Statements
December 31, 1995
1. Summary of Significant Accounting Policies
Description of Business
Drs. Goldgeier, Levine & Friedman, P.A. (the Company) is a professional
association organized under the laws of Maryland. The Company offers a variety
of medical services including pediatrics and primary care in the greater
Baltimore, Maryland area.
Property and Equipment
Property and equipment are stated at cost. Depreciation of property and
equipment is calculated using the straight-line method over the estimated useful
lives of the assets. Routine maintenance and repairs are charged to expense as
incurred. Amortization of assets recorded under capital lease transactions is
included in depreciation expense.
Income Taxes
The Company is taxable under the provisions of the Internal Revenue Code. The
Company files its federal and state income tax return on the cash basis method
of accounting. Deferred income taxes are provided for temporary differences
between financial and income tax reporting (see Note 8).
Professional Liability Insurance
The Company has obtained professional liability coverage through commercial
insurance carriers on the claims made basis. Management believes that there are
no claims that may result in a loss in excess of amounts covered by its existing
insurance.
Net Patient Service Revenue
Net patient service revenue is reported at the estimated realizable amounts from
patients, third-party payors and others for services rendered. The Medicare and
Medicaid programs pay physician services based on fee schedules which are
determined by the related government agency. The Company has negotiated numerous
agreements with managed care organizations to provide physician services based
on fee schedules. No individual managed care contract is material to the
Company.
6
<PAGE>
Drs. Goldgeier, Levine & Friedman, P.A.
Notes to Financial Statements (continued)
1. Summary of Significant Accounting Policies (continued)
Risks and Uncertainties
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Unaudited Financial Statements
The unaudited financial statements as of September 30, 1996 and for the nine
months ended September 30, 1995 and 1996 have been prepared by management in
accordance with generally accepted accounting principles. In the opinion of
management, all adjustments (consisting of normal recurring accruals) considered
necessary for a fair presentation have been included. Operating results of the
interim periods are not necessarily indicative of the results that may be
expected for a full year.
2. Property and Equipment
Property and equipment consisted of the following at December 31, 1995:
<TABLE>
<CAPTION>
<S> <C>
Furniture, fixtures and equipment $197,778
Leasehold improvements 87,551
-------------
285,329
Less accumulated depreciation (250,082)
-------------
$ 35,247
=============
</TABLE>
3. Notes Payable to Former Shareholders
The Company has notes payable to former shareholders, payable in monthly
installments of principal and interest of $5,207 at interest rates ranging from
6% to 7%. The principal balance outstanding under these notes payable
agreements aggregated $6,840 at December 31, 1995.
7
<PAGE>
Drs. Goldgeier, Levine & Friedman, P.A.
Notes to Financial Statements (continued)
4. Capital Leases
Property, plant and equipment includes the following amounts for leases that
have been capitalized:
<TABLE>
<CAPTION>
December 31
1995
-------------
<S> <C>
Equipment $19,629
Less accumulated amortization (3,599)
-------------
$16,030
=============
Future minimum lease payments for capital leases were as follows as of
December 31, 1995:
Year ending December 31:
1996 $ 4,744
1997 4,744
1998 4,744
1999 4,744
2000 395
-------------
Net minimum lease payments 19,371
Less amount representing interest (2,891)
-------------
Present value of net minimum lease payments $16,480
=============
</TABLE>
8
<PAGE>
Drs. Goldgeier, Levine & Friedman, P.A.
Notes to Financial Statements (continued)
5. Operating Leases
The Company leases office space and certain equipment under operating leases.
Total rental expense was $125,798 in 1995. The following is a schedule by year
of future minimum lease payments under operating leases as of December 31, 1995:
<TABLE>
<S> <C>
1996 $124,455
1997 120,182
1998 112,654
1999 32,703
2000 2,198
Thereafter 183
--------------
$392,375
==============
</TABLE>
6. Employee Benefit Plans
The Company had a qualified profit sharing plan covering substantially all
employees. Contributions were determined based upon a percentage of each
eligible employee's compensation, as defined and/or at the discretion of
management. This plan was terminated in 1994.
7. Income Taxes
The Company accounts for income taxes utilizing the liability method required by
Financial Accounting Standards Board (FASB) Statement No. 109, "Accounting for
Income Taxes."
9
<PAGE>
Drs. Goldgeier, Levine & Friedman, P.A.
Notes to Financial Statements (continued)
7. Income Taxes (continued)
Deferred income taxes reflect the net effects of temporary differences between
the carrying amounts of assets and liabilities for financial reporting purposes
and the amounts used for income tax purposes. Significant components of the
Company's deferred tax liabilities and assets were as follows at December 31,
1995:
<TABLE>
<S> <C>
Deferred tax liabilities:
Accounts receivable, net $ 62,309
Capital lease and other 7,000
Depreciation 812
----------------
Total deferred tax liabilities 70,121
Deferred tax assets:
Depreciation -
Accrued expenses 87,274
Capital lease and other 6,593
----------------
Total deferred tax assets 93,867
----------------
Net deferred tax liabilities $(23,746)
================
</TABLE>
Significant components of the provision (benefit) for income taxes attributable
to continuing operations are as follows for the year ended December 31, 1995:
<TABLE>
<S> <C>
Deferred:
Federal $15,547
State 2,221
----------------
Total deferred $17,768
================
</TABLE>
10
<PAGE>
Drs. Goldgeier, Levine & Friedman, P.A.
Notes to Financial Statements (continued)
7. Income Taxes (continued)
The difference between the provision for income taxes and the amount computed by
applying the statutory federal income tax rate to income before taxes is as
follows for the year ended December 31, 1995:
<TABLE>
<CAPTION>
Amount Rate
-----------------
<S> <C> <C>
Federal taxes at statutory rates $13,739 35%
Add (deduct):
State income tax, net of federal tax benefit 1,963 5
Other (404) (1)
Valuation allowance 2,470 6
-----------------
$17,768 45%
=================
</TABLE>
Net operating loss carryforwards available for tax purposes as of December 31,
1995 approximate $10,973, which expire beginning in 2005.
8. Pending Affiliation
The Company expects to enter into a long-term affiliation arrangement with
Physicians Quality Care, Inc. (PQC). Under this arrangement, the Company will
merge with and into, and the physicians will become employees of, a newly formed
professional corporation that is affiliated with PQC. The aggregate
consideration to be paid to the Company is subject to working capital
adjustments and is payable in cash and common stock of PQC.
11
<PAGE>
Koeppel, Rosen, Rudikoff, M.D., P.C.
Audited Financial Statements
Year ended December 31, 1995 and
nine months ended September 30, 1995 (Unaudited)
and September 30, 1996 (Unaudited)
<TABLE>
<CAPTION>
Contents
<S> <C>
Report of Independent Auditors.............................................1
Audited Financial Statements
Balance Sheets.............................................................2
Statements of Operations...................................................3
Statements of Stockholders' Equity.........................................4
Statements of Cash Flows...................................................5
Notes to Financial Statements..............................................6
</TABLE>
<PAGE>
[LETTERHEAD OF ERNST & YOUNG LLP APPEARS HERE]
Report of Independent Auditors
The Board of Directors
Physicians Quality Care, Inc.
We have audited the accompanying balance sheet of Koeppel, Rosen, Rudikoff,
M.D., P.C., as of December 31, 1995, and the related statement of operations,
stockholders' equity, and cash flows for the year then ended. These financial
statements are the responsibility of 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, in
all material respects, the financial position of Koeppel, Rosen, Rudikoff, M.D.,
P.C. at December 31, 1995, and the results of its operations and its cash flows
for the year then ended, in conformity with generally accepted accounting
principles.
/s/ Ernst & Young LLP
November 18, 1996
Boston, Massachusetts
1
<PAGE>
Koeppel, Rosen, Rudikoff, M.D., P.C.
Balance Sheets
<TABLE>
<CAPTION>
(Unaudited)
December 31 September 30
1995 1996
---------------------------
<S> <C> <C>
Assets
Current assets:
Cash $ 15,745 $ 79,457
Accounts receivable, less allowance
for doubtful accounts of $49,373 and
$33,444 in 1995 and 1996 (unaudited),
respectively 121,486 47,295
Prepaids and other assets 9,396 10,308
---------------------------
Total current assets 146,627 137,060
Property and equipment, net 52,178 43,813
---------------------------
Total assets $198,805 $180,873
===========================
Liabilities and stockholders' equity
Current liabilities:
Accounts payable $ 15,583 $ 4,457
Accrued salaries and payroll taxes 4,490 25,090
Accrued employee benefits 20,613 51,948
Accrued expenses, other 14,418 10,719
---------------------------
Total current liabilities 55,104 92,214
Stockholders' equity:
Common stock, $.10 par value, 1,000
shares authorized, 600 shares issued
and outstanding 60 60
Additional paid-in capital 540 540
Retained earnings 143,101 88,059
---------------------------
Total stockholders' equity 143,701 88,659
---------------------------
Total liabilities and stockholders'
equity $198,805 $180,873
===========================
</TABLE>
See accompanying notes.
2
<PAGE>
Koeppel, Rosen, Rudikoff, M.D., P.C.
Statements of Operations
<TABLE>
<CAPTION>
(Unaudited)
Year ended Nine months ended
December 31 September 30
1995 1995 1996
--------------------------------------
<S> <C> <C> <C>
Revenue:
Net patient service revenue $1,566,479 $1,130,194 $1,196,933
Other income 5,821 9,780 8,858
--------------------------------------
1,572,300 1,139,974 1,205,791
Operating expenses:
Salaries and wages--physicians 547,936 459,628 509,102
Salaries and wages--staff 270,611 236,898 220,864
Physician and staff benefits 71,548 9,477 53,410
Supplies and other 485,462 321,788 300,977
Insurance 44,611 26,103 29,903
Rent 23,947 13,890 12,203
Rent to related parties 53,300 45,287 39,975
Depreciation 10,378 5,713 8,455
Provision for bad debts 49,373 48,125 33,444
--------------------------------------
Net operating expenses 1,557,166 1,166,909 1,208,333
--------------------------------------
Net income (loss) $ 15,134 $ (26,935) $ (2,542)
======================================
</TABLE>
See accompanying notes.
3
<PAGE>
Koeppel, Rosen, Rudikoff, M.D., P.C.
Statements of Stockholders' Equity
<TABLE>
<CAPTION>
Total
Stockholders'
Equity
-------------
<S> <C>
Balance at December 31, 1994 $218,567
Net income 15,134
Dividends paid (90,000)
-------------
Balance at December 31, 1995 143,701
Net loss (unaudited) (2,542)
Dividends paid (unaudited) (52,500)
-------------
Balance at September 30, 1996 (unaudited) $ 88,659
=============
</TABLE>
See accompanying notes.
4
<PAGE>
Koeppel, Rosen, Rudikoff, M.D., P.C.
Statements of Cash Flows
<TABLE>
<CAPTION>
(Unaudited)
Year ended Nine months ended
December 31 September 30
1995 1995 1996
-----------------------------------
<S> <C> <C> <C>
Operating activities
Net income (loss) $ 15,134 $(26,935) $ (2,542)
Adjustments to reconcile net income
(loss) to net cash provided by
operating activities:
Depreciation 10,378 5,713 8,455
Changes in operating assets and
liabilities:
Accounts receivable, net 48,926 91,260 74,191
Other current assets (419) (958) (1,002)
Accounts payable, accrued expenses
and other current liabilities 12,616 34,967 37,110
-----------------------------------
Net cash provided by operating
activities 86,635 104,047 116,212
Investing activity
Purchase of property and equipment (30,194) (23,403) -
-----------------------------------
Net cash used in investing activity (30,194) (23,403) -
Financing activity
Dividends paid (90,000) (60,000) (52,500)
-----------------------------------
Net cash used in financing activity (90,000) (60,000) (52,500)
-----------------------------------
Increase (decrease) in cash (33,559) 20,644 63,712
Cash at beginning of period 49,304 49,304 15,745
-----------------------------------
Cash at end of period $ 15,745 $ 69,948 $ 79,457
===================================
</TABLE>
See accompanying notes.
5
<PAGE>
Koeppel, Rosen, Rudikoff, M.D., P.C.
Notes to Financial Statements
December 31, 1995
1. Summary of Significant Accounting Policies
Description of Business
The medical practice of Koeppel, Rosen, Rudikoff, M.D., P.C, (the Company), is a
professional corporation organized under the laws of Maryland. The Company
offers a variety of medical services including cardiology, pediatrics, cancer
treatment, gastrointestinal and primary care.
Property and Equipment
Property and equipment are stated at cost. Depreciation of property and
equipment is calculated using the straight-line method over the estimated useful
lives of the assets. Routine maintenance and repairs are charged to expense as
incurred.
Income Taxes
The Company has elected, by consent of its shareholders, to be taxed as an S
Corporation under the provisions of the Internal Revenue Code (the Code).
Pursuant to the Code, S Corporations are taxed as pass-through entities. The
taxable income or loss of the Company is allocated to the Company's shareholders
and reported on the shareholders' tax returns. Accordingly, there is no
provision for income taxes included in these financial statements.
Professional Liability Insurance
The Company has obtained professional liability coverage through commercial
insurance carriers on a modified claims made basis, which excludes tail
coverage. Management believes that there are no claims that may result in a
loss in excess of amounts covered by its existing insurance.
6
<PAGE>
Koeppel, Rosen, Rudikoff, M.D., P.C.
Notes to Financial Statements (continued)
1. Summary of Significant Accounting Policies (continued)
Net Patient Service Revenue
Net patient service revenue is reported at the estimated realizable amounts from
patients, third-party payors and others for services rendered. The Medicare and
Medicaid programs pay physician services based on fee schedules which are
determined by the related government agency. The Company has negotiated
numerous agreements with managed care organizations to provide physician
services based on fee schedules. No individual managed care contract is
material to the Company.
Risks and Uncertainties
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Unaudited Financial Statements
The unaudited statements of operations for nine months ended September 30, 1996
and for the nine months ended September 30, 1995 have been prepared by
management in accordance with generally accepted accounting principles. In the
opinion of management, all adjustments (consisting of normal recurring accruals)
considered necessary for a fair presentation have been included. Operating
results of the interim periods are not necessarily indicative of the results
that may be expected for a full year.
2. Property and Equipment
Property and equipment consisted of the following:
<TABLE>
<CAPTION>
December 31
1995
-------------
<S> <C>
Furniture, fixtures and equipment $55,550
Leasehold improvements 10,409
-------------
65,959
Less accumulated depreciation (13,781)
-------------
$52,178
=============
</TABLE>
7
<PAGE>
Koeppel, Rosen, Rudikoff, M.D., P.C.
Notes to Financial Statements (continued)
3. Lease Commitments
The Company leases office space and certain equipment under operating leases.
Total rental expense was $77,247 in 1995 which included $53,300 paid to related
parties (Note 5). The following is a schedule by year of future minimum lease
payments under operating leases as of December 31, 1995:
<TABLE>
<CAPTION>
<S> <C>
1996 $67,275
1997 3,575
---------
$70,850
=========
</TABLE>
4. Employee Benefit Plans
The Company has a qualified profit sharing plan covering substantially all
employees. Contributions are determined based upon a percentage of each
eligible employee's compensation, as defined and/or at the discretion of
management. Total contributions were $70,506 for the year ended December 31,
1995, and are included in physician and staff benefits in the accompanying
statement of operations.
5. Related Parties
The Company rents office space from related entities owned by shareholders of
the Company. Total rental expense paid under these rental agreements was
$53,300. Lease commitments over the next five years with related parties are
included in Note 3.
6. Pending Affiliation
The Company expects to enter into a long-term affiliation arrangement with
Physicians Quality Care, Inc. (PQC). Under this arrangement, the Company will
merge with and into, and the physicians will become employees of, a newly formed
professional corporation that is affiliated with PQC. The aggregate
consideration to be paid to the Company is subject to working capital
adjustments and is payable in common stock of PQC.
<PAGE>
Drs. Pakula, Davick & Bogue, P.A.
Audited Financial Statements
Year ended December 31, 1995 and nine months ended
September 30, 1996 (Unaudited) and September 30, 1995 (Unaudited)
Contents
<TABLE>
<S> <C>
Report of Independent Auditors......................................... 1
Audited Financial Statements
Balance Sheets......................................................... 2
Statements of Operations............................................... 3
Statements of Stockholders' Equity..................................... 4
Statements of Cash Flows............................................... 5
Notes to Financial Statements.......................................... 6
</TABLE>
<PAGE>
[LETTERHEAD OF ERNST & YOUNG LLP]
Report of Independent Auditors
The Board of Directors
Physicians Quality Care, Inc.
We have audited the accompanying balance sheet of Drs. Pakula, Davick & Bogue,
P.A. as of December 31, 1995, and the related statements of operations,
stockholders' equity, and cash flows for the year then ended. These financial
statements are the responsibility of 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, in
all material respects, the financial position of Drs. Pakula, Davick & Bogue,
P.A. at December 31, 1995, and the results of its operations and its cash flows
for the year then ended, in conformity with generally accepted accounting
principles.
/s/ Ernst & Young LLP
November 18, 1996
Boston, Massachusetts
1
<PAGE>
Drs. Pakula, Davick & Bogue, P.A.
Balance Sheets
<TABLE>
<CAPTION>
(Unaudited)
December 31 September 30
1995 1996
----------------------------
<S> <C> <C>
Assets
Current assets:
Cash $ 18,863 $ 15,820
Accounts receivable, less allowance for
doubtful accounts of $17,523 and $27,749
in 1995 and 1996 (unaudited), respectively 84,361 98,387
Deferred income taxes 32,927 41,878
Cash surrender value of life insurance policy 57,444 78,927
----------------------------
Total current assets 193,595 235,012
Property and equipment, net 26,438 21,346
----------------------------
Total assets $220,033 $256,358
============================
Liabilities and stockholders' equity
Current liabilities:
Accounts payable $ 48,370 $ 64,344
Accrued salaries and payroll taxes 12,910 13,677
Accrued employee benefits 3,699
Accrued expenses, other 9,992
Deferred income taxes 33,744 39,354
Due to related parties 7,421 11,101
----------------------------
Total current liabilities 106,144 138,468
Deferred income taxes, noncurrent 1,928 2,524
Due to related parties, noncurrent 50,949 42,870
Stockholders' equity:
Common stock, no par value, 5,000 shares
authorized, 300 shares issued and outstanding
Additional paid-in capital 24,217 24,217
Retained earnings 47,749 55,557
----------------------------
Total stockholders' equity 71,966 79,774
Due from shareholders (10,954) (7,278)
----------------------------
61,012 72,496
----------------------------
Total liabilities and stockholders' equity $220,033 $256,358
============================
</TABLE>
See accompanying notes.
2
<PAGE>
Drs. Pakula, Davick & Bogue, P.A.
Statements of Operations
<TABLE>
<CAPTION>
(Unaudited)
Year ended Nine months ended
December 31 September 30
1995 1995 1996
----------------------------------------
<S> <C> <C> <C>
Revenue:
Net patient service revenue $868,084 $652,194 $725,335
Other income 17,912 9,463 39,857
Interest income 832 615 502
----------------------------------------
886,828 662,272 765,694
Operating expenses:
Salaries and wages--physicians 315,606 209,053 221,472
Salaries and wages--staff 241,064 214,556 212,129
Supplies and other 182,105 149,728 157,205
Insurance 89,213 59,069 72,230
Rent 56,215 35,103 73,284
Interest 4,027 2,850 4,334
Depreciation 11,834 9,943 5,532
Provision for bad debts 17,523 18,876 27,749
----------------------------------------
Net operating expenses 917,587 699,178 773,935
----------------------------------------
Net loss before income taxes (30,759) (36,906) (8,241)
Income tax benefit 12,304 8,307 2,746
----------------------------------------
Net loss $(18,455) $(28,599) $ (5,495)
========================================
</TABLE>
See accompanying notes.
3
<PAGE>
Drs. Pakula, Davick & Bogue, P.A.
Statements of Stockholders' Equity
<TABLE>
<CAPTION>
<S> <C>
Balance at December 31, 1994 $ 70,421
Capital contributions 20,000
Net loss (18,455)
-------------
Balance at December 31, 1995 71,966
Capital contributions (unaudited) 13,303
Net income (unaudited) (5,495)
-------------
Balance at September 30, 1996 $ 79,774
=============
</TABLE>
See accompanying notes.
4
<PAGE>
Drs. Pakula, Davick & Bogue, P.A.
Statements of Cash Flows
<TABLE>
<CAPTION>
(Unaudited)
Year ended Nine months ended
December 31 September 30
1995 1995 1996
---------------------------------------
<S> <C> <C> <C>
Operating activities
Net income (loss) $(18,455) $(40,320) $ (5,495)
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Depreciation 11,834 9,943 5,532
Deferred income taxes (12,304) (8,307) (6,466)
Changes in operating assets and liabilities:
Accounts receivable, net (37,973) (33,383) (14,026)
Other current assets 287 13,105 (21,483)
Accounts payable, accrued expenses and other
current liabilities 35,125 39,062 26,755
---------------------------------------
Net cash used in operating activities (21,486) (19,900) (15,183)
Investing activity
Purchase of property and equipment (19,799) (18,822) (440)
---------------------------------------
Net cash used in investing activity (19,799) (18,822) (440)
Financing activities
Proceeds from issuance of long-term notes payable
from related parties 59,745 59,745
Payments on long-term notes payable to
related parties (1,375) (1,000) (4,399)
Proceeds from issuance of stock 5,000 5,000
Proceeds from notes receivable from shareholders 4,046 3,676
Capital contributions 13,303
---------------------------------------
Net cash provided by financing activities 67,416 63,745 12,580
---------------------------------------
Increase (decrease) in cash 26,131 25,023 (3,043)
Cash at beginning of period (7,268) (7,268) 18,863
---------------------------------------
Cash at end of period $ 18,863 $ 17,755 $ 15,820
=======================================
Noncash investing and financing activities:
Issuance of common stock for note receivable $ 15,000 $ 15,000 $ -
=======================================
Supplemental disclosure of cash flow information:
Interest paid $ 7,665 $ 2,850 $ 4,334
=======================================
</TABLE>
See accompanying notes.
5
<PAGE>
Drs. Pakula, Davick & Bogue, P.A.
Notes to Financial Statements
December 31, 1995
1. Summary of Significant Accounting Policies
Description of Business
The medical practice of Drs. Pakula, Davick & Bogue, P.A. (the Company) is a
professional association organized under the laws of Maryland. The Company
offers a variety of medical services, including cardiology, pediatrics, cancer
treatment, gastrointestinal and primary care.
Property and Equipment
Property and equipment are stated at cost. Depreciation of property and
equipment is calculated using the straight-line method over the estimated useful
lives of the assets. Routine maintenance and repairs are charged to expense as
incurred.
Income Taxes
The Company is taxable under the provisions of the Internal Revenue Code. The
Company files its federal and state income tax return on the cash basis of
accounting. Deferred income taxes are provided for temporary differences
between financial and income tax reporting (see Note 5).
Professional Liability Insurance
The Company has obtained professional liability coverage through commercial
insurance carriers on a claims-made basis. Management believes that there are
no claims that may result in a loss in excess of amounts covered by its existing
insurance.
Net Patient Service Revenue
Net patient service revenue is reported at the estimated realizable amounts from
patients, third-party payors and others for services rendered. The Medicare and
Medicaid programs pay physician services based on fee schedules which are
determined by the related government agency. The Company has negotiated numerous
agreements with managed care organizations to provide physician services based
on fee schedules. No individual managed care contract is material to the
Company.
6
<PAGE>
Drs. Paluka, Davick & Boque, P.A.
Notes to Financial Statements (continued)
1. Summary of Significant Accounting Policies (continued)
Risks and Uncertainties
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from these estimates.
Unaudited Financial Statements
Unaudited statements of operations for nine months ended September 30, 1996 and
for the nine months ended September 30, 1995 have been prepared by management in
accordance with generally accepted accounting principles. In the opinion of
management, all adjustments (consisting of normal recurring accruals) considered
necessary for a fair presentation have been included. Operating results of the
interim periods are not necessarily indicative of the results that may be
expected for a full year.
2. Property and Equipment
Property and equipment consisted of the following:
<TABLE>
<CAPTION>
December 31
1995
-----------
<S> <C>
Furniture, fixtures and equipment $93,468
Less accumulated depreciation (67,030)
-----------
$26,438
===========
</TABLE>
7
<PAGE>
Drs. Paluka, Davick & Bogue, P.A.
Notes to Financial Statements (continued)
3. Lease Commitments
The Company leases office space and certain equipment under operating leases.
Total rental expense was $56,215 in 1995. The following is a schedule by year of
future minimum lease payments under operating leases as of December 31, 1995:
<TABLE>
<CAPTION>
<S> <C>
1996 $ 93,307
1997 96,737
1998 100,267
1999 103,961
2000 107,782
Thereafter 569,675
--------------
$1,071,729
==============
</TABLE>
4. Employee Benefit Plans
The Company has a qualified profit sharing plan covering substantially all
employees. Contributions are determined based upon a percentage of each eligible
employee's compensation, as defined, and/or at the discretion of management.
8
<PAGE>
Drs. Paluka, Davick & Bogue, P.A.
Notes to Financial Statements (continued)
5. Income Taxes
The Company accounts for income taxes using the liability method required by
Financial Accounting Standards Board (FASB) Statement No. 109, "Accounting for
Income Taxes."
Deferred income taxes reflect the net effects of temporary differences between
the carrying amounts of assets and liabilities for financial reporting purposes
and the amounts used for income tax purposes. Significant components of the
Company's deferred tax liabilities and assets were as follows:
<TABLE>
<CAPTION>
December 31
1995
-----------
<S> <C>
Deferred tax liabilities:
Accounts receivable $33,744
Depreciation 1,928
-----------
Total deferred tax liabilities 35,672
Deferred tax assets:
Accrued expenses, other 25,992
Net operating loss carryover 6,935
-----------
Total deferred tax assets 32,927
-----------
Net deferred tax liabilities $ 2,745
===========
</TABLE>
Significant components of the provision for income taxes attributable to
continuing operations are as follows:
<TABLE>
<CAPTION>
Year ended
December 31
1995
-----------
<S> <C>
Deferred:
Federal $10,766
State 1,538
-----------
Total deferred $12,304
===========
Net provision
</TABLE>
<PAGE>
Drs. Pakula, Davick & Bogue, P.A.
Notes to Financial Statements (continued)
5. Income Taxes (continued)
The difference between the provision for income taxes and the amount computed by
applying the statutory federal income tax rate to income before taxes is as
follows:
<TABLE>
<CAPTION>
Year ended
December 31, 1995
------------------
Amount Rate
------------------
<S> <C> <C>
Federal taxes at statutory rates $(10,766) 35%
Add (deduct):
State income tax, net of federal
tax benefit (1,538) 5
Other--permanent differences 24,608 (23)
------------------
$ 12,304 17%
==================
</TABLE>
Net operating loss carryforwards available for tax purposes as of December 31,
1995 approximate $17,338, which expire beginning in 2005.
6. Related Parties
During 1995, an additional physician was admitted as an owner to the Company and
issued 100 shares of common stock in consideration of $20,000, paid by a note
in the amount of $15,000, with the remaining $5,000 contributed in cash by the
physician. The remaining balance on the $15,000 loan was $10,954 as of
December 31, 1995.
10
<PAGE>
Drs. Pakula, Davick & Bogue, P.A.
Notes to Financial Statements (continued)
6. Related Parties (continued)
The Company has four notes payable with a combined original principal amount of
$59,745, payable in monthly installments of principal and interest at interest
rates ranging from 6% to 7.2%. The principal balance outstanding of these notes
payable was $58,370 at December 31, 1995. The following is a schedule of
principal maturities on the notes as of December 31, 1995:
<TABLE>
<S> <C>
1996 $ 7,421
1997 10,911
1998 9,892
1999 10,393
2000 11,033
Thereafter 8,720
------------
$58,370
============
</TABLE>
7. Pending Affiliation
The Company expects to enter into a long-term affiliation arrangement with
Physicians Quality Care, Inc. (PQC). Under this arrangement, the Company will
merge with and into, and the physicians will become employees of, a newly formed
professional corporation that is affiliated with PQC. The aggregate
consideration to be paid to the Company is subject to working capital
adjustments and is payable in common stock of PQC.
11
<PAGE>
Park Medical Associates, P.A. and Park Medical Labs, Inc.
Audited Consolidated Financial Statements
Years ended December 31, 1993, 1994 and 1995 and
nine months ended September 30, 1995 (Unaudited) and
nine months ended September 30, 1996 (Unaudited)
<TABLE>
<CAPTION>
Contents
<S> <C>
Report of Independent Auditors.......................................1
Audited Consolidated Financial Statements
Consolidated Balance Sheets..........................................2
Consolidated Statements of Operations................................3
Consolidated Statements of Owners' Equity............................4
Consolidated Statements of Cash Flows................................5
Notes to Consolidated Financial Statements...........................6
</TABLE>
<PAGE>
[LETTERHEAD OF ERNST & YOUNG LLP APPEARS HERE]
Report of Independent Auditors
The Board of Directors
Physicians Quality Care, Inc.
We have audited the accompanying consolidated balance sheets of Park Medical
Associates, P.A. and Park Medical Labs, Inc. (the Companies) as of December 31,
1995 and 1994, and the related consolidated statements of operations, owners'
equity, and cash flows for each of the three years in the period ended December
31, 1995. These financial statements are the responsibility of the Companies'
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
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 provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Park Medical
Associates, P.A. and Park Medical Labs, Inc. at December 31, 1995 and 1994, and
the consolidated results of their operations and their cash flows for each of
the three years in the period ended December 31, 1995, in conformity with
generally accepted accounting principles.
/s/ Ernst & Young LLP
September 20, 1996
Boston, Massachusetts
1
<PAGE>
Park Medical Associates, P.A. and Park Medical Labs, Inc.
Consolidated Balance Sheets
<TABLE>
<CAPTION>
(Unaudited)
December 31 September 30
1994 1995 1996
-----------------------------------------
<S> <C> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 95,342 $ 48,537 $ 194,719
Accounts receivable, less allowance
for doubtful accounts of $83,256,
$86,507 and $92,685 in 1994, 1995
and 1996 (unaudited), respectively 659,453 724,890 776,784
Prepaid expenses 38,086 46,286 13,450
Deferred income taxes 50,962 87,859 138,997
-----------------------------------------
Total current assets 843,843 907,572 1,123,950
Property and equipment, net (Note 2) 415,821 558,234 483,411
-----------------------------------------
Total assets $1,259,664 $1,465,806 $1,607,361
=========================================
Liabilities and owners' equity
Current liabilities:
Accounts payable $ 58,373 $ 109,111 $ 163,471
Accrued employee benefits 108,020 107,054 215,367
Accrued expenses, other 112,093 163,850 164,868
Deferred income taxes 196,954 227,615 242,924
Current portion of obligation
under capital leases 28,814 28,814
-----------------------------------------
Total current liabilities 475,440 636,444 815,444
Deferred income taxes, noncurrent 14,120 22,806 22,806
Obligation under capital leases 100,768 79,666
Owners' equity:
Preferred stock: $100 par value; 1,225
shares authorized; 1,020 shares
issued; 918, 918 and 1,020 shares
outstanding in 1994, 1995 and 1996
(unaudited), respectively 92,004 92,004 92,106
Common stock: Associates, $10 par
value; 3,000 shares authorized; 1,000
shares issued; 900, 900 and 1,000
shares outstanding in 1994, 1995 and
1996 (unaudited), respectively 9,200 9,200 9,300
Common stock: Laboratories, $1 par
value; 100,000 shares authorized; 9,000
shares issued and outstanding 9,000 9,000 9,000
Paid-in capital 32,761 32,761 32,761
Retained earnings 651,112 594,873 578,328
-----------------------------------------
794,077 737,838 721,495
Less treasury stock, at cost;
Preferred--204 shares in 1994 and
306 shares in 1995 and 1996; Common
Associates--200 shares in 1994 and
300 shares in 1995 and 1996; Common
Laboratories--0 in 1994, 1,000 in
1995 and 1996 (23,973) (32,050) (32,050)
-----------------------------------------
770,104 705,788 689,445
-----------------------------------------
Total liabilities and owners' equity $1,259,664 $1,465,806 $1,607,361
=========================================
</TABLE>
See accompanying notes.
2
<PAGE>
Park Medical Associates, P.A. and Park Medical Labs, Inc.
Consolidated Statements of Operations
<TABLE>
<CAPTION>
(Unaudited)
Nine months ended
Year ended December 31 September 30
1993 1994 1995 1995 1996
-----------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Revenue:
Net patient service revenue $3,479,064 $3,908,278 $4,380,661 $3,269,125 $3,321,600
Interest income 3,818 3,569 4,246 3,599 2,599
Other income 70,000 50,000 7,000
-----------------------------------------------------------------
3,482,882 3,911,847 4,454,907 3,322,724 3,331,199
Operating expenses:
Salaries and wages--physicians 1,057,000 1,158,000 1,423,265 1,158,270 1,092,485
Salaries and wages--staff 693,913 784,153 878,386 662,667 684,414
Physician and staff benefits 440,099 498,258 521,899 384,582 382,546
Supplies and other 774,719 839,965 855,456 623,507 692,363
Insurance 38,932 49,421 42,400 36,641 32,517
Rent 99,324 178,557 295,016 206,675 193,269
Depreciation and amortization 61,822 68,309 114,079 80,872 89,207
Provision for bad debts 169,217 201,366 233,695 175,271 155,485
-----------------------------------------------------------------
Net operating expenses 3,335,026 3,778,029 4,364,196 3,328,485 3,322,286
-----------------------------------------------------------------
Net income before income taxes 147,856 133,818 90,711 (5,761) 8,913
Income tax expense (benefit) 9,614 (25,055) 2,450 (14,689) 3,058
-----------------------------------------------------------------
Net income $ 138,242 $ 158,873 $ 88,261 $ 8,928 $ 5,855
=================================================================
</TABLE>
See accompanying notes.
3
<PAGE>
Park Medical Associates, P.A. and Park Medical Labs, Inc.
Consolidated Statements of Owners' Equity
<TABLE>
<CAPTION>
Common Stock
-------------------------------- Total
Preferred Stock Associates Laboratories Paid-in Retained Treasury Owners'
Shares Amount Shares Amount Shares Amount Capital Earnings Stock Equity
--------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1993 714 $91,800 700 $9,000 7,000 $7,000 $32,761 $ 446,028 $(23,973) $ 562,616
Distributions (50,031) (50,031)
Net income 138,242 138,242
--------------------------------------------------------------------------------------------------
Balance at December 31, 1993 714 91,800 700 9,000 7,000 7,000 32,761 534,239 (23,973) 650,827
Issuance of preferred stock 204 204 204
Issuance of common stock 200 200 2,000 2,000 2,200
Distributions (42,000) (42,000)
Net income 158,873 158,873
--------------------------------------------------------------------------------------------------
Balance at December 31, 1994 918 92,004 900 9,200 9,000 9,000 32,761 651,112 (23,973) 770,104
Acquisition of treasury stock (8,077) (8,077)
Distributions (144,500) (144,500)
Net income 88,261 88,261
--------------------------------------------------------------------------------------------------
Balance at December 31, 1995 918 92,004 900 9,200 9,000 9,000 32,761 594,873 (32,050) 705,788
Issuance of preferred stock 102 102 102
(unaudited)
Issuance of common stock 100 100 100
(unaudited)
Distributions (unaudited) (22,400) (22,400)
Net income (unaudited) 5,855 5,855
--------------------------------------------------------------------------------------------------
Balance at September 30, 1996
(unaudited) 1,020 $92,106 1,000 $9,300 9,000 $9,000 $32,761 $ 578,328 $(32,050) $ 689,445
==================================================================================================
</TABLE>
See accompanying notes.
4
<PAGE>
Park Medical Associates, P.A. and Park Medical Labs, Inc.
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
(Unaudited)
Nine months ended
Year ended December 31 September 30
1993 1994 1995 1995 1996
--------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Operating activities
Net income $138,242 $ 158,873 $ 88,261 $ 8,928 $ 5,855
Adjustments to reconcile net
income to net cash provided
by operating activities:
Depreciation and amortization 61,822 68,309 114,079 80,872 89,207
Deferred income taxes 9,614 (25,055) 2,450 74,646 (35,829)
Loss on sale of investments 6,897 5,747
Loss on disposal of fixed assets 3,812
Changes in operating assets
and liabilities:
Accounts receivable, net 4,433 (25,185) (65,437) (12,935) (51,894)
Other current assets (12,445) 4,239 (8,200) 17,478 32,836
Accounts payable and accrued
expenses 22,107 105,103 101,529 128,786 163,691
--------------------------------------------------------
Net cash provided by operating 230,670 295,843 232,682 297,775 203,866
activities
Investing activities
Cash proceeds from sale of 13,007 111,857
investments
Purchase of investments (36,110) (81,342)
Purchase of property and
equipment (14,048) (389,184) (111,530) (88,159) (14,384)
---------------------------------------------------------
Net cash used in investing
activities (37,151) (358,669) (111,530) (88,159) (14,384)
Financing activities
Issuance of stock 2,404 202
Purchase of treasury stock (8,077)
Distributions paid (50,031) (42,000) (144,500) (91,000) (22,400)
Payments on lease obligations (3,080) (3,228) (15,380) (8,018) (21,102)
---------------------------------------------------------
Net cash used in financing
activities (53,111) (42,824) (167,957) (99,018) (43,300)
---------------------------------------------------------
Net increase (decrease) in cash 140,408 (105,650) (46,805) 110,598 146,182
Cash and cash equivalents at
beginning of year 60,584 200,992 95,342 95,342 48,537
---------------------------------------------------------
Cash and cash equivalents at end
of year $200,992 $ 95,342 $ 48,537 $205,940 $194,719
=========================================================
Supplemental disclosure of cash
flow information:
Interest paid $ 692 $ 227 $ 7,962 $ 3,800 $ 7,236
=========================================================
Noncash transactions:
Acquisition of capital
leased equipment - - $ 144,962 $144,962 -
=========================================================
</TABLE>
See accompanying notes.
5
<PAGE>
Park Medical Associates, P.A. and Park Medical Labs, Inc.
Notes to Consolidated Financial Statements
December 31, 1995
1. Summary of Significant Accounting Policies
Description of Business
Park Medical Associates, P.A. and Park Medical Labs, Inc. (the Companies) are
taxable entities organized under the laws of Maryland. The Companies offer a
variety of medical services, including internal medicine, neurology and
obstetrics/gynecology, in the greater Baltimore, Maryland area.
Principles of Consolidation
The accompanying consolidated financial statements reflect the accounts of the
Companies. These Companies are affiliated through, and managed by, common
ownership. All significant intercompany accounts and transactions are
eliminated upon consolidation.
Cash Equivalents
Cash equivalents consist of cash in banks and an interest-bearing money market
accounts.
Property and Equipment
Property and equipment are stated at cost. Depreciation of property and
equipment is calculated using the straight-line method over the estimated useful
lives of the assets. Routine maintenance and repairs are charged to expense as
incurred. Amortization of assets recorded under capital leases is included in
depreciation expense.
Income Taxes
Park Medical Associates, P.A. is taxable under the provisions of the Internal
Revenue Code and files a separate cash-basis federal and state income tax
return, reporting only its own taxable income (loss) for the year. No provision
for federal income tax is required for Park Medical Laboratories since this
entity, with consent of its shareholders, has elected to be taxed as an S
corporation under the provisions of the Internal Revenue Code. Deferred income
taxes are provided for temporary differences between the carrying amounts of
assets and liabilities for financial reporting purposes and the amounts used for
income tax purposes (see Note 7).
6
<PAGE>
Park Medical Associates, P.A. and Park Medical Labs, Inc.
Notes to Consolidated Financial Statements (continued)
1. Summary of Significant Accounting Policies (continued)
Professional Liability Insurance
The Companies have obtained professional liability coverage through commercial
insurance carriers on both the occurrence and claims-made basis. Management
believes that there are no claims that may result in a loss in excess of amounts
covered by its existing insurance.
Net Patient Service Revenue
Net patient service revenue is reported at the estimated realizable amounts from
patients, third-party payors and others for services rendered. The Medicare and
Medicaid programs pay physician services based on fee schedules which are
determined by the related government agency. The Companies have negotiated
numerous agreements with managed care organizations to provide physician
services based on fee schedules. No individual managed care contract is
material to the Companies.
Risks and Uncertainties
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Unaudited Financial Statements
The unaudited financial statements as of September 30, 1996 and for the nine
months ended September 30, 1995 and 1996 have been prepared by management in
accordance with generally accepted accounting principles. In the opinion of
management, all adjustments (consisting of normal recurring accruals) considered
necessary for a fair presentation have been included. Operating results of the
interim periods are not necessarily indicative of the results that may be
expected for a full year.
7
<PAGE>
Park Medical Associates, P.A. and Park Medical Labs, Inc.
Notes to Consolidated Financial Statements (continued)
2. Property and Equipment
Property and equipment consisted of the following:
<TABLE>
<CAPTION>
December 31
1994 1995
------------------------
<S> <C> <C>
Furniture, fixtures and equipment $ 945,132 $ 980,894
Capital leased equipment 144,962
Leasehold improvements 75,768
------------------------
945,132 1,201,624
Less accumulated depreciation and
amortization (529,311) (643,390)
------------------------
$ 415,821 $ 558,234
========================
</TABLE>
3. Capital Leases
The Companies lease certain medical equipment under long-term capital leases.
Future minimum lease payments for capital leases were as follows at December 31,
1995:
<TABLE>
<S> <C>
1996 $ 37,134
1997 37,134
1998 37,134
1999 37,134
2000 9,426
-----------
Total minimum lease payments 157,962
Less amount representing interest (28,380)
-----------
Present value of net minimum
lease payments 129,582
Less current maturities (28,814)
-----------
Long-term obligation $100,768
===========
</TABLE>
8
<PAGE>
Park Medical Associates, P.A. and Park Medical Labs, Inc.
Notes to Consolidated Financial Statements (continued)
4. Operating Leases
The Companies lease office space and certain equipment under operating leases.
The lease of office space includes an annual escalation clause of 3.75% and is
noncancelable for a period of ten years, with two additional five-year renewal
options. Total rental expense was $99,324, $178,557 and $295,016 in 1993, 1994
and 1995, respectively.
The following is a schedule by year of future minimum lease payments under
operating leases as of December 31, 1995:
<TABLE>
<S> <C>
1996 $ 249,373
1997 258,692
1998 268,406
1999 278,495
2000 288,934
Thereafter 1,125,676
------------
Total future minimum lease payments $2,469,576
============
</TABLE>
5. Employee Benefit Plans
The Companies sponsor a profit-sharing plan covering all employees at least 21
years of age and having completed a minimum of one year of service.
Contributions were determined based upon a percentage of each eligible
employee's compensation, as defined, and/or at the discretion of management.
Participants become fully vested in their sixth year of service with the
Companies. Total contributions were $32,969, $41,024 and $57,168 for the years
ended December 31, 1993, 1994 and 1995, respectively, and are included in
employee benefits in the accompanying statement of operations.
6. Distributions
Under the provisions of the Internal Revenue Code, all taxable income of Park
Medical Laboratories is subject to taxation at the shareholder level.
Accordingly, the Company distributes cash to its shareholders in amounts which
equal taxable income reported by the Company. Distributions made in 1994, 1995
and 1996 represent taxable income of prior years.
9
<PAGE>
Park Medical Associates, P.A. and Park Medical Labs, Inc.
Notes to Consolidated Financial Statements (continued)
7. Income Taxes
The Company accounts for income taxes using the liability method required by
Financial Accounting Standards Board (FASB) Statement No. 109, "Accounting for
Income Taxes."
Deferred income taxes reflect the net effects of temporary differences between
the carrying amounts of assets and liabilities for financial reporting purposes
and the amounts used for income tax purposes.
Significant components of the Company's deferred tax liabilities and assets were
as follows:
<TABLE>
<CAPTION>
December 31
1994 1995
---------------------
<S> <C> <C>
Deferred tax liabilities:
Accounts receivable, net $176,796 $195,777
Prepaid expenses, other 20,158 31,838
Accelerated depreciation 14,120 22,806
---------------------
Total deferred tax liabilities 211,074 250,421
Deferred tax assets:
Accrued expenses, other 50,962 87,859
Capital loss carryforward 5,058 5,058
Net operating loss carryover 1,701 1,436
---------------------
57,721 94,353
Less valuation allowance (6,759) (6,494)
---------------------
Net deferred tax assets 50,962 87,859
---------------------
Net deferred tax liabilities $160,112 $162,562
=====================
</TABLE>
10
<PAGE>
Park Medical Associates, P.A. and Park Medical Labs, Inc.
Notes to Consolidated Financial Statements (continued)
7. Income Taxes (continued)
Significant components of the provision (benefit) for income taxes attributable
to continuing operations are as follows:
<TABLE>
<CAPTION>
Year ended December 31
1993 1994 1995
---------------------------------------
<S> <C> <C> <C>
Deferred:
Federal $8,412 $(21,923) $2,144
State 1,202 (3,132) 306
---------------------------------------
Net provision (benefit) $9,614 $(25,055) $2,450
=======================================
</TABLE>
The difference between the provision for income taxes and the amount computed by
applying the statutory federal income tax rate to income before taxes is as
follows:
<TABLE>
<CAPTION>
Year ended December 31
1993 1994 1995
-------------------------------------------------------
Amount Rate Amount Rate Amount Rate
-------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Federal taxes at statutory
rates $ 51,750 35% $ 46,836 35% $ 31,749 35%
Add (deduct):
Federal taxes on income
taxed at shareholder
level (35,191) (24) (69,113) (52) (29,635) (32)
State income tax, net of
federal tax benefit 782 1 (2,036) (2) 199 0
Effect of valuation
allowance (9,550) (6) 134 0 (265) 0
Other 1,823 1 (876) 0 402 0
-------------------------------------------------------
$ 9,614 7% $(25,055) (19)% $ 2,450 3%
=======================================================
</TABLE>
Net operating loss carryforwards for tax purposes available as of December 31,
1995 were $3,590, which expire beginning in 2007.
11
<PAGE>
Park Medical Associates, P.A. and Park Medical Labs, Inc.
Notes to Consolidated Financial Statements (continued)
8. Preferred Stock
Each share of Park Medical Associates' nonvoting preferred stock entitles its
holder to receive an annual cash dividend of $8.00 per share. Dividends on the
preferred stock are noncumulative and must be paid before any distributions are
made to the holders of Park Medical Associates' common stock.
In the event of the dissolution and liquidation of the corporation, the holders
of the preferred stock are entitled to receive out of funds available for
distributions to stockholders $100 for each share of preferred stock issued
before any distributions are made to the holders of Park Medical Associates'
common stock.
The Board of Directors may at any time on thirty days' written notice redeem any
part or all of the preferred stock at the redemption price of $105 per share.
Park Medical Associates has not declared any dividends on its preferred or
common stock since inception of the Company.
9. Pending Affiliation
The Companies expect to enter into a long-term affiliation agreement with
Physicians Quality Care, Inc. (PQC). Under this arrangement, the Companies will
merge with and into, and the physicians will become employees of, a newly formed
professional corporation that is affiliated with PQC. The aggregate
consideration to be paid to the Companies for the merger is subject to working
capital adjustments and is payable in cash and common stock of PQC.
12
<PAGE>
Drs. Sigler, Roskes, Holden & Schuberth, P.A.
Audited Financial Statements
Years ended December 31, 1994 and 1995, and
nine months ended September 30, 1995 (Unaudited)
and September 30, 1996 (Unaudited)
Contents
<TABLE>
<CAPTION>
<S> <C>
Report of Independent Auditors.......................... 1
Audited Financial Statements
Balance Sheets.......................................... 2
Statements of Operations................................ 3
Statements of Shareholders' Equity...................... 4
Statements of Cash Flows................................ 5
Notes to Financial Statements........................... 6
</TABLE>
<PAGE>
[LETTERHEAD OF ERNST & YOUNG LLP APPEARS HERE]
Report of Independent Auditors
The Board of Directors
Physicians Quality Care, Inc.
We have audited the accompanying balance sheets of Drs. Sigler, Roskes, Holden &
Schuberth, P.A. as of December 31, 1994 and 1995, and the related statements of
operations, shareholders' equity, and cash flows for the years then ended.
These financial statements are the responsibility of management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
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 provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Drs. Sigler, Roskes, Holden &
Schuberth, P.A. at December 31, 1994 and 1995, and the results of its operations
and its cash flows for the years then ended in conformity with generally
accepted accounting principles.
/s/ Ernst & Young LLP
September 20, 1996
Boston, Massachusetts
1
<PAGE>
Drs. Sigler, Roskes, Holden & Schuberth, P.A.
Balance Sheets
<TABLE>
<CAPTION>
(Unaudited)
December 31 September 30
1994 1995 1996
--------------------------------------
<S> <C> <C> <C>
Assets
Current assets:
Cash $109,949 $ 53,982 $210,458
Accounts receivable, less allowance for
doubtful accounts of $16,470 in 1994,
$15,035 in 1995 and $10,976 in 1996
(unaudited) 237,005 273,132 227,914
Prepaid expenses 29,261 50,201 55,242
Deferred income taxes 53,871 67,354 115,984
--------------------------------------
Total current assets 430,086 444,669 609,598
Deferred income taxes, noncurrent 18,125 20,974 10,262
Property and equipment, net 75,072 51,979 44,120
--------------------------------------
Total assets $523,283 $517,622 $663,980
======================================
Liabilities and shareholders' equity
Current liabilities:
Accounts payable $ 58,077 $ 79,857 $151,920
Accrued employee benefits 62,005 23,742 50,512
Accrued salaries and payroll taxes 53,796 61,843 31,220
Accrued expenses, other 55,379 52,611 48,998
Deferred income taxes 106,506 129,332 113,263
Accrued physician bonuses 36,396
Escrow fees payable 56,784
Accrued income taxes 50,631
Current portion of obligation under capital lease 14,496 3,798
Current portion of note payable 12,000 12,000 10,000
--------------------------------------
Total current liabilities 362,259 363,183 549,724
Obligation under capital lease, less current portion 3,798 1
Note payable, less current portion 19,000 7,000
Deferred income taxes, noncurrent 210
Shareholders' equity:
Common stock 14,171 14,171 14,171
Additional paid-in capital 56,924 56,924 56,924
Retained earnings 80,826 90,248 57,066
--------------------------------------
151,921 161,343 128,161
Cost of treasury stock (13,905) (13,905) (13,905)
--------------------------------------
Total shareholders' equity 138,016 147,438 114,256
--------------------------------------
Total liabilities and shareholders' equity $523,283 $517,622 $663,980
======================================
</TABLE>
See accompanying notes.
2
<PAGE>
Drs. Sigler, Roskes, Holden & Schuberth, P.A.
Statements of Operations
<TABLE>
<CAPTION>
(Unaudited)
Year ended Nine months ended
December 31 September 30
1994 1995 1995 1996
-----------------------------------------------------
<S> <C> <C> <C> <C>
Revenue:
Net patient service revenue $2,735,139 $2,770,367 $2,093,288 $1,927,947
Other income 114,205 157,128 101,237 97,706
Interest income 29 4,385 2,758 1,646
-----------------------------------------------------
2,849,373 2,931,880 2,197,283 2,027,299
Operating expenses:
Salaries and wages--physicians 1,191,190 1,178,873 927,086 833,519
Salaries and wages--staff 457,581 502,896 456,094 457,331
Employee benefits--staff 208,460 212,182 158,639 150,512
Supplies and other 637,526 724,193 397,320 408,641
Rent 123,280 134,026 122,299 122,299
Insurance 121,314 115,707 59,423 67,906
Interest 4,569 3,312 2,619 1,016
Depreciation 37,049 29,949 22,462 11,638
Provision for bad debts 16,470 15,035 11,276 10,976
-----------------------------------------------------
Net operating expenses 2,797,439 2,916,173 2,157,218 2,063,838
-----------------------------------------------------
Net income (loss) before income taxes 51,934 15,707 40,065 (36,539)
Income tax provision (benefit) 21,264 6,283 11,128 (3,355)
-----------------------------------------------------
Net income (loss) $ 30,670 $ 9,424 $ 28,937 $ (33,184)
=====================================================
</TABLE>
See accompanying notes.
3
<PAGE>
Drs. Sigler, Roskes, Holden & Schuberth, P.A.
Statements of Shareholders' Equity
<TABLE>
<CAPTION>
<S> <C>
Balance at December 31, 1993 $107,346
Net income 30,670
----------
Balance at December 31, 1994 138,016
Net income 9,424
----------
Balance at December 31, 1995 147,440
Net loss (unaudited) (33,184)
----------
Balance at September 30, 1996 (unaudited) $114,256
==========
</TABLE>
See accompanying notes.
4
<PAGE>
Drs. Sigler, Roskes, Holden & Schuberth, P.A.
Statements of Cash Flows
<TABLE>
<CAPTION>
(Unaudited)
Year ended Nine months ended
December 31 September 30
1994 1995 1995 1996
---------------------------------------------------
<S> <C> <C> <C> <C>
Operating activities
Net income (loss) $ 30,670 $ 7,427 $ 28,937 $(31,912)
Adjustments to reconcile net income (loss)
to net cash provided by operating activities:
Depreciation 37,049 29,949 22,462 11,638
Deferred income taxes 21,190 6,283 11,128 (55,257)
Changes in operating assets and liabilities:
Accounts receivable, net (46,448) (36,127) (66,466) 45,218
Other current assets (1,701) (20,940) (36,073) (5,041)
Accounts payable and accrued expenses 27,770 (9,207) 234,049 208,408
---------------------------------------------------
Net cash provided (used) by operating
activities 68,530 (22,615) 194,037 173,054
Investing activity
Purchase of property and equipment (26,183) (6,856) (6,859) (3,779)
---------------------------------------------------
Net cash used in investing activity (26,183) (6,856) (6,859) (3,779)
Financing activities
Payments on capital lease obligation (13,452) (14,496) (9,000) (3,799)
Payments on note payable (12,000) (12,000) (12,245) (9,000)
---------------------------------------------------
Net cash used in financing activities (25,452) (26,496) (21,245) (12,799)
---------------------------------------------------
Increase (decrease) in cash 16,895 (55,967) 165,933 156,476
Cash at beginning of period 93,054 109,949 109,949 53,982
---------------------------------------------------
Cash at end of period $109,949 $ 53,982 $275,882 $210,458
===================================================
Supplemental disclosure of cash flow
information:
Interest paid $ 2,645 $ 2,423 $ 2,619 $ 1,016
===================================================
</TABLE>
See accompanying notes.
5
<PAGE>
Drs. Sigler, Roskes, Holden & Schuberth, P.A.
Notes to Financial Statements
December 31, 1995
1. Summary of Significant Accounting Policies
Description of Business
Drs. Sigler, Roskes, Holden & Schuberth, P.A. (the Company) is a taxable entity
organized under the laws of Maryland. The Company offers a variety of medical
services, including pediatrics and primary care, in the greater Baltimore,
Maryland area.
Property and Equipment
Property and equipment are stated at cost. Depreciation of property and
equipment is calculated using the straight-line method over the estimated useful
lives of the assets. Routine maintenance and repairs are charged to expense as
incurred. Amortization of assets recorded under capital lease transactions is
included in depreciation expense.
Income Taxes
The Company is taxable under the provisions of the Internal Revenue Code. The
Company files its federal and state income tax return on the cash-basis method
of accounting. Deferred income taxes are provided for temporary differences
between the carrying amount of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes (see Note 7).
Professional Liability Insurance
The Company has obtained professional liability coverage through commercial
insurance carriers on the claims-made basis. Management believes that there are
no claims that may result in a loss in excess of amounts covered by its existing
insurance.
Net Patient Service Revenue
Net patient service revenue is reported at the estimated realizable amounts from
patients, third-party payors and others for services rendered. The Medicare and
Medicaid programs pay physician services based on fee schedules which are
determined by the related government agency. The Company has negotiated
numerous agreements with managed care organizations to provide physician
services based on fee schedules. No individual managed care contract is
material to the Company.
6
<PAGE>
Drs. Sigler, Roskes, Holden & Schuberth, P.A.
Notes to Financial Statements (continued)
1. Summary of Significant Accounting Policies (continued)
Risks and Uncertainties
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Unaudited Financial Statements
The unaudited financial statements as of September 30, 1996 and for the nine
months ended September 30, 1995 and 1996 have been prepared by management in
accordance with generally accepted accounting principles. In the opinion of
management, all adjustments (consisting of normal recurring accruals) considered
necessary for a fair presentation have been included. Operating results of the
interim periods are not necessarily indicative of the results that may be
expected for a full year.
2. Property and Equipment
Property and equipment consisted of the following:
<TABLE>
<CAPTION>
December 31
1994 1995
--------------------
<S> <C> <C>
Furniture, fixtures and equipment $213,956 $217,093
Leasehold improvements 117,987 121,709
--------------------
331,943 338,802
Less accumulated depreciation (256,871) (286,823)
--------------------
$ 75,072 $ 51,979
====================
</TABLE>
3. Note Payable
The Company has a note payable with a bank payable in monthly installments of
$1,000, plus interest, with a final maturity date of July 10, 1997. The note
carries interest at the prime rate. The principal balance outstanding under the
note was $31,000 and $19,000 at December 31, 1994 and 1995, respectively.
7
<PAGE>
Drs. Sigler, Roskes, Holden & Schuberth, P.A.
Notes to Financial Statements (continued)
3. Note Payable (continued)
The following is a schedule of principal maturities on the notes and line of
credit as of December 31, 1995:
<TABLE>
<S> <C>
1996 $ 12,000
1997 7,000
----------
$ 19,000
==========
</TABLE>
4. Capital Leases
Property, plant and equipment includes the following amounts for leases that
have been capitalized at December 31:
<TABLE>
<CAPTION>
December 31
1994 1995
---------------------
<S> <C> <C>
Equipment $ 64,347 $ 64,347
Less accumulated amortization (48,240) (61,105)
---------------------
$ 16,107 $ 3,242
=====================
</TABLE>
5. Operating Leases
The Group leases office space and certain equipment under operating leases.
Total rental expense was $123,280 and $134,026 in 1994 and 1995, respectively.
The following is a schedule by year of future minimum lease payments under
operating leases as of December 31, 1995:
<TABLE>
<S> <C>
1996 $ 135,625
1997 138,822
1998 143,518
1999 148,540
2000 153,773
Thereafter 337,651
------------
Total future minimum
lease payments $1,057,929
============
</TABLE>
8
<PAGE>
Drs. Sigler, Roskes, Holden & Schuberth, P.A.
Notes to Financial Statements (continued)
6. Employee Benefit Plans
The Company has a qualified profit sharing plan covering substantially all
employees. Contributions are determined based upon a percentage of each
eligible employee's compensation, as defined and/or at the discretion of
management. Total contributions were $208,460 and $212,182 for the years ended
December 31, 1994 and 1995, respectively, and are included in employee benefits
in the accompanying statements of operations.
7. Income Taxes
The Company accounts for income taxes utilizing the liability method required by
Financial Accounting Standards Board (FASB) Statement No. 109, "Accounting for
Income Taxes."
Deferred income taxes reflect the net effects of temporary differences between
the carrying amounts of assets and liabilities for financial reporting purposes
and the amounts used for income tax purposes. Significant components of the
Company's deferred tax liabilities and assets were as follows:
<TABLE>
<CAPTION>
Year ended December 31
1994 1995
------------------------
<S> <C> <C>
Deferred tax liabilities:
Accounts receivable, net $ 94,802 $109,252
Accrued expenses 11,704 20,080
Depreciation 210
------------------------
Total deferred tax liabilities 106,716 129,332
Deferred tax assets:
Accrued expenses 53,871 67,354
Net operating loss carryover 10,807 12,803
Other 7,318 1,519
Depreciation 6,652
------------------------
Total deferred tax assets 71,996 88,328
------------------------
Net deferred tax liabilities $ 34,720 $ 41,004
========================
</TABLE>
9
<PAGE>
Drs. Sigler, Roskes, Holden & Schuberth, P.A.
Notes to Financial Statements (continued)
7. Income Taxes (continued)
Significant components of the provision for income taxes attributable to
continuing operations are as follows:
<TABLE>
<CAPTION>
Year ended December 31
1994 1995
------------------------
<S> <C> <C>
Current:
Federal
State $ 74
------------------------
Total current 74
Deferred:
Federal 18,451 $5,497
State 2,739 785
------------------------
Total deferred 21,190 6,282
------------------------
$21,264 $6,282
========================
</TABLE>
The difference between the provision for income taxes and the amount computed by
applying the statutory federal income tax rate to income before taxes is as
follows:
<TABLE>
<CAPTION>
Year ended December 31
1994 1995
------------------------------
Amount Rate Amount Rate
------------------------------
<S> <C> <C> <C> <C>
Federal taxes at statutory rates $18,177 35% $5,497 35%
Add (deduct):
State income tax, net of federal
tax benefit 2,597 5 786 5
Other 490 1
------------------------------
$21,264 41% $6,283 40%
==============================
</TABLE>
Net operating loss carryforwards for tax purposes as of December 31, 1995
approximate $32,008, which expire beginning in 2004.
Drs. Sigler, Roskes, Holden & Schuberth, P.A.
Notes to Financial Statements (continued)
8. Pending Affiliation
The Company expects to enter into a long-term affiliation arrangement with
Physicians Quality Care, Inc. (PQC). Under this arrangement, the Company will
merge with and into, and the physicians will become employees of, a newly formed
professional corporation that is affiliated with PQC. The aggregate
consideration to be paid to the Company is subject to working capital
adjustments and is payable in common stock of PQC.
10
<PAGE>
[LETTERHEAD OF SCHEINER, MISTER & GRANDIZIO, P.A. APPEARS HERE]
INDEPENDENT AUDITORS' REPORT
To the Board of Directors
Clinical Associates, P.A.
We have audited the accompanying balance sheet of Clinical Associates, P.A. as
of June 30, 1995, and the related statements of income, changes in stockholders'
equity, and cash flows for the year then ended. 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 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 out audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Clinical Associates, P.A. as
of June 30, 1995, and the results of its operations and its cash flows for the
year then ended in conformity with generally accepted accounting principles.
[SIGNATURE APPEARS HERE]
Scheiner, Mister & Grandizio, P.A.
November 17, 1995
Lutherville, Maryland
1
<PAGE>
CLINICAL ASSOCIATES, P.A.
BALANCE SHEET
- --------------------------------------------------------------------------------
JUNE 30, 1995
- --------------------------------------------------------------------------------
ASSETS
<TABLE>
<S> <C>
CURRENT ASSETS
Cash and Cash Equivalents $ 407,043
Accounts Receivable (Less reserve for
contractual allowances and doubtful
accounts of $3,845,561) (Note 1) 3,751,175
Notes Receivable - Stockholders 41,111
Other Receivables 75,938
Prepaid Expenses 341,917
Income Taxes Receivable 46,040
----------
TOTAL CURRENT ASSETS 4,663,224
PROPERTY AND EQUIPMENT
Leasehold Improvements 535,499
Furniture and Fixtures 461,291
Office Equipment 418,180
Medical Equipment 584,073
Vehicles 12,434
Equipment under Capital Leases (Note 5) 108,173
----------
Total 2,119,650
Less: Accumulated Depreciation 911,187
----------
TOTAL PROPERTY AND EQUIPMENT 1,208,463
----------
OTHER ASSETS
Notes Receivable - Stockholders 156,389
----------
TOTAL ASSETS $6,028,076
==========
</TABLE>
The independent auditors' report and the accompanying notes are an
integral part of these financial statements
2
<PAGE>
CLINICAL ASSOCIATES, P.A.
BALANCE SHEET
- --------------------------------------------------------------------------------
June 30, 1995
- --------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<S> <C>
CURRENT LIABILITIES
Notes Payable - Related Parties (Note 4) $ 47,683
Current Maturities of Capital Lease Obligations (Note 5) 11,035
Accounts Payable 509,249
Allowance for Claims Incurred but not Reported 1,190,000
Current Portion of Lease Incentive (Note 6) 11,600
Deferred Income Tax Liability (Note 7) 1,202,257
Accrued Expenses and Other Current Liabilities 795,879
----------
TOTAL CURRENT LIABILITIES 3,767,703
----------
LONG-TERM LIABILITIES
Notes Payable - Related Parties,
Net of Current Portion (Note 4) 6,250
Obligation Under Capital leases, Net of Current
portion (Note 5) 11,142
Lease Incentive, Net of Current portion (Note 6) 66,700
Deferred Income Taxes 41,709
----------
TOTAL LONG-TERM LIABILITIES 125,801
----------
TOTAL LIABILITIES 3,893,504
----------
STOCKHOLDERS' EQUITY
Common Stock - Par Value - $1.00; authorized
100,000 shares; issued and outstanding
10,408 shares 10,408
Capital in Excess of Par 1,085,460
Retained Earnings 1,038,704
----------
TOTAL STOCKHOLDERS' EQUITY 2,134,572
----------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $6,028,076
==========
</TABLE>
The independent auditors' report and the accompanying notes are an
integral part of these financial statements.
<PAGE>
CLINICAL ASSOCIATES, P.A.
STATEMENT OF INCOME
- --------------------------------------------------------------------------------
For the Year Ended June 30, 1995
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
NET PATIENT SERVICE REVENUE $36,526,122
-----------
EXPENSES
Professional Care and Supplies 9,270,120
Salaries and Wages 18,707,349
Employee Health and Welfare 1,750,600
General and Administrative Expenses 5,810,149
Provision for Bad Debt 860,862
-----------
TOTAL EXPENSES 36,399,080
-----------
NET OPERATING INCOME 127,042
Other Income Net 252,965
-----------
NET INCOME BEFORE INCOME TAXES 380,007
-----------
PROVISION FOR INCOME TAXES
Current 33,263
Deferred 120,899
-----------
TOTAL PROVISION FOR INCOME TAXES 154,162
-----------
NET INCOME $ 225,845
===========
</TABLE>
The independent auditors' report and the accompanying notes are an
integral part of these financial statements.
-3-
<PAGE>
CLINICAL ASSOCIATES, P.A.
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
- --------------------------------------------------------------------------------
For the Year Ended June 30, 1995
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Capital in
Common Excess Retained
Stock of Par Earnings Total
-------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
BALANCE - BEGINNING OF
YEAR $ 10,250 $ 748,618 $ 812,859 $1,571,727
Purchase and Retirement
of Common Stock (250) 250 -0- -0-
Issuance of Common Stock 408 336,592 -0- 337,000
Net Income -0- -0- 225,845 225,845
-------- ---------- ---------- ----------
BALANCE - END OF YEAR $ 10,408 $1,085,460 $1,038,704 $2,134,572
======== ========== ========== ==========
</TABLE>
The independent auditors' report and the accompanying notes are an
integral part of these financial statements.
-4-
<PAGE>
CLINICAL ASSOCIATES, P.A.
STATEMENT OF CASH FLOWS
- --------------------------------------------------------------------------------
For the Year Ended June 30, 1995
- --------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income $ 225,845
Adjustments to Reconcile Net Income to
Net Cash Provided by Operating Activities:
Depreciation 236,921
Amortization 802
Net (Gain) Loss on Sale and Disposal of
Property & Equipment 1,422
Deferred Income Taxes 120,899
(Increase) Decrease in Operating Assets:
Accounts Receivable 235,085
Other Receivables (55,583)
Prepaid Expenses (1,610)
Income Taxes Receivable (46,040)
Security Deposits 763
Increase (Decrease) in Operating Liabilities:
Accounts Payable and Allowance for Claims
Incurred but not Reported (410,101)
Lease Incentive Payable (11,600)
Accrued Expenses (49,008)
Income Taxes Payable (92,113)
----------
NET CASH PROVIDED BY OPERATING ACTIVITIES 155,682
----------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of Property and Equipment (452,626)
Repayment of Stockholder Loans 5,500
----------
NET CASH USED IN INVESTING ACTIVITIES (447,126)
----------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from Long-Term Debt 44,421
Principal Payments on Debt and Obligations Under
Capital Lease (52,785)
Issuance of Common Stock 137,000
----------
NET CASH USED IN FINANCING ACTIVITIES 128,636
----------
NET DECREASE IN CASH AND CASH EQUIVALENTS $ (162,808)
Cash and Cash Equivalents - Beginning of Year 569,851
----------
CASH AND CASH EQUIVALENTS - END OF YEAR $ 407,043
==========
The independent auditors' report and the accompanying notes are an
integral part of these financial statements.
-5-
<PAGE>
CLINICAL ASSOCIATES, P.A.
STATEMENT OF CASH FLOWS (CONTINUED)
- --------------------------------------------------------------------------------
For the Year Ended June 30, 1995
- --------------------------------------------------------------------------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
- ------------------------------------------------
<TABLE>
<CAPTION>
Cash paid During the Year for:
<S> <C>
Interest $ 48,507
==========
Income Taxes $ 188,691
==========
</TABLE>
During the year ended June 30, 1995, the Company issued stock in
exchange for Notes Receivable in the amount of $200,000.
The independents auditors' report and the accompanying notes
are an integral part of these financial statements.
<PAGE>
CLINICAL ASSOCIATES, P.A.
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
June 30, 1995
- --------------------------------------------------------------------------------
NOTE 1: NATURE OF OPERATIONS AND CREDIT CONCENTRATIONS
- ------------------------------------------------------
Clinical Associates, P.A. (the Company) is a medical practice providing health
care services through various facilities located in Baltimore City and Baltimore
County, Maryland. The Company grants credit to patients, substantially all of
whom are local residents. The Company generally does not require collateral or
other security in extending credit; however, it routinely obtains assignment of,
or is otherwise entitled to receive, patients' benefits receivable under their
health insurance programs, plans or policies (e.g. Medicare, Medicaid, Blue
Cross, health maintenance organizations [HMO(s)] and commercial insurance
policies).
At June 30, 1995, the Company's receivables were as follows:
<TABLE>
<S> <C>
Medicare $2,610,499
Medicaid 248,351
Blue Shield 1,153,161
HMO(s) 455,463
Commercial Insurance and Other 3,129,262
----------
Total 7,596,736
Less: Reserve for Contractual Allowances
and Doubtful Accounts 3,845,561
----------
Accounts Receivable, Net $3,751,175
==========
</TABLE>
Amounts due from patients as a result of deductibles and co-payments under their
insurance policies are included in the balances due from the insurer in the
above.
During the fiscal year ended June 30, 1995, the Company received approximately
50% of its patient service revenues under the contracts with HMO(s).
Approximately 43% of patient service revenues were generated under HMO
contracts expiring in December 31, 1995. Another HMO contract, which
automatically renews for one year periods each July unless otherwise terminated,
generated patient service revenues of approximately 7% of the total.
-6-
<PAGE>
CLINICAL ASSOCIATES, P.A.
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
June 30, 1995
- --------------------------------------------------------------------------------
NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
- --------------------------------------------------
Cash Equivalents
- ----------------
Cash and cash equivalents include investments with original maturities of three
months or less.
Accounts Receivable
- -------------------
The Company records a reserve for difference between fees billed and amounts
collectible from third party payors (contractual allowances) and for doubtful
accounts.
HMO Receivables
- ---------------
The Company's contracts with HMO(s) contain various provisions for risk sharing,
stop loss and coordination of benefits. These provisions result in settlements
after the end of each contract period. The Company has recorded an estimate of
the settlements due as of the end of the fiscal year. Differences between the
amounts estimated and the actual settlement are recorded in the year determined.
Medical Supplies
- ----------------
The Company expenses medical supplies as received.
Property and Equipment
- ----------------------
Property and Equipment are recorded at cost. Depreciation is recorded on a
straight-line basis over the estimated useful life of the equipment. Leasehold
improvements are depreciated over the remaining life of the lease. A summary of
depreciable lives used is as follows:
<TABLE>
<CAPTION>
Leasehold Improvements Life of Lease
<S> <C>
Furniture and Fixtures 7 - 10 Years
Office Equipment 5 - 7 Years
Medical Equipment 5 - 7 Years
</TABLE>
Accelerated depreciation methods are used for income tax purposes.
7
<PAGE>
CLINICAL ASSOCIATES, P.A.
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
June 30, 1995
- --------------------------------------------------------------------------------
NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
- --------------------------------------------------------------
Allowance for Claims Incurred But Not Reported
- ----------------------------------------------
In connection with its agreements with HMO(s), the Company is liable for the
cost of services rendered to HMO members by outside providers. The Company
estimates the cost of services rendered but not yet billed to the Company based
on prior experience.
Deferred Income Taxes
- ---------------------
Deferred tax is provided in accordance with Statement No. 109 of the Financial
Accounting Standards Board. Deferred taxes result primarily from differences in
the timing of recognizing revenue and expenses, which are recorded on a modified
cash basis for tax purposes, and differences in depreciation rates (see note 7).
Stock Transactions
- ------------------
The Company offers stock to physicians who meet certain criteria. A portion of
the stock value is paid in cash with the balance paid through future services.
The Company's policy is to record the stock in the amount of the cash payment
only. Had the value of the services been considered, capital contributions in
excess or par would have been higher and retained earnings would have been
lower.
NOTE 3: RELATED PARTY TRANSACTIONS
- ----------------------------------
Some of the Company's stockholders are partners in a partnership, which owns 50%
of Security MDC Associates Partnership, the landlord under a lease in which the
Company is the tenant. Annual rental under this lease is approximately $215,000.
This lease expires on July 31, 1995, and contains an additional five year
renewal option.
Notes receivable represent confessed judgment notes due from stockholders are
bearing interest at 7.5% per annum. Principal and interest payments are due
monthly through 1999.
The Company has notes payable to several stockholders and other related parties
bearing interest at 10% to 12% per annum, payable in monthly or quarterly
installments of principal and interest. (See note 4).
-8-
<PAGE>
CLINICAL ASSOCIATES, P.A.
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
June 30, 1995
- --------------------------------------------------------------------------------
NOTE 4: NOTES PAYABLE
- ---------------------
Notes payable to stockholders and other related parties:
Notes payable to stockholders and other related parties - interest at 10
to 12%; monthly or quarterly payments of principal and interest ranging
from $484 to $1,250 payable through November 1996.
<TABLE>
<S> <C>
$53,933
Less: Current Portion 47,683
-------
Non-Current Portion $ 6,250
=======
</TABLE>
Future maturities of the non-current portion of long term debt are as follows:
Year ending June 30, 1996 $ 6,250
=======
Total interest expense for the year ended June 30, 1995 amounted to $48,256.
NOTE 5: CAPITAL LEASES
- ----------------------
The Company is the lessee of equipment under a capital lease expiring in the
year ending June 30, 1997.
Future minimum lease payments under the capital lease are as follows:
<TABLE>
<S> <C>
Year Ending June 30, 1996 $12,778
1997 11,714
-------
Total Commitment Under Capital Leases 24,492
Less: Amount Representing Interest 2,315
-------
Present Value of Future Minimum
Lease Payments 22,177
Less: Current Portion 11,035
-------
TOTAL LONG-TERM PORTION $11,142
=======
</TABLE>
-9-
<PAGE>
CLINICAL ASSOCIATES, P.A.
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
June 30, 1995
- --------------------------------------------------------------------------------
NOTE 5: CAPITAL LEASES (Continued)
- ----------------------------------
Following is a summary of equipment under capital leases:
<TABLE>
<CAPTION>
<S> <C>
Telecommunications Equipment $ 49,971
Medical Equipment 58,202
---------
108,173
Less: Accumulated Amortization 89,987
---------
$ 18,186
=========
</TABLE>
NOTE 6: LEASE INCENTIVE
- -----------------------
In connection with one of its lease agreements, the landlord assumed the
Company's obligations under an old lease. In accordance with generally accepted
accounting principles, the value of this incentive has been recorded as a
liability and is being amortized on a straight-line basis over the life of the
new lease. The current portion reflects the amount that will be amortized during
the year ending June 30, 1996.
NOTE 7: DEFERRED INCOME TAXES
- -----------------------------
The net deferred tax liability in the accompanying balance sheet includes the
following components as of June 30, 1995:
<TABLE>
<CAPTION>
<S> <C>
Deferred Tax Liability $1,293,837
Deferred Tax Asset (49,871)
Deferred Tax Asset Valuation Allowance -0-
----------
Net Deferred Tax Liability $1,243,966
==========
</TABLE>
The deferred tax liability arises primarily from differences in the timing of
recognition of patient service revenues and accrued expenses for tax purposes
and financial reporting purposes, and the excess of depreciation for tax
reporting purposes over the amount for financial purposes.
Temporary differences giving rise to the deferred tax asset consist of a capital
loss carryover for tax purposes, and lease expense as outlined in Note 6.
-10-
<PAGE>
CLINICAL ASSOCIATES, P.A.
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
June 30, 1995
- --------------------------------------------------------------------------------
NOTE 8: 401(K) PLAN
- -------------------
Effective January 1, 1992, the Company implemented a 401(K) plan, amending and
restating in its entirety its former Target Benefit Plan and Trust, in order to
be in compliance with current pension regulations. All participants in the
former plan continued to participate in the 401(K) plan. Those not participating
in the former plan are eligible to participate in the 401(K) plan upon
completion of one year of service and attaining the age of 21. Employees may
elect to contribute up to 8% of their compensation annually, subject to dollar
limitations set by law. Under the plan the Company can elect to match a
percentage of the employees' contributions at its discretion. The Plan also
allows the Company to contribute a profit sharing amount, determined annually by
the Company. Participants are always 100% vested in their contributions to the
Plan. Vesting in the Company's contributions is 20% after two years of service,
increasing 20% annually with full vesting after six years of service. The Plan's
year end is December 31. Only those participants who are actively employed on
the last day of the year are eligible to participate in employer contributions.
Total profit sharing plan expense for the year ended June 30, 1995 amounted to
$1,244,967.
NOTE 9: COMMITMENTS AND CONTINGENCIES
- -------------------------------------
Leases
- ------
The Company leases several buildings under operating leases expiring in various
years through March 31, 2002.
Minimum future rental payments under non-cancelable operating leases follow:
<TABLE>
<S> <C>
Year Ended June 30, 1996 $1,348,515
1997 1,397,582
1998 1,477,132
1999 1,616,043
2000 1,643,658
Thereafter 4,823,220
-----------
TOTAL MINIMUM FUTURE RENTAL PAYMENTS $12,306,150
===========
</TABLE>
-11-
<PAGE>
CLINICAL ASSOCIATES, P.A.
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
June 30, 1995
- --------------------------------------------------------------------------------
NOTE 9: COMMITMENTS AND CONTINGENCIES (Continued)
- -------------------------------------------------
The Company is responsible for a proportionate share of operating expenses and
tax increases under several of its lease agreements. Several agreements also
call for rental increases based on changes in the Consumer Price Index or
specified amounts. Certain leases also provide for renewal options.
The Company also leases, on a month-to-month basis, other operating facilities.
Total lease expense for the above leases amounted to approximately $1,640,589.
Agreements to Repurchase Stock
- ------------------------------
The Company has agreements with each of its stockholders, whereby the Company
will repurchase the stock upon the death, disability, or termination of the
stockholder's employment. The purchase price varies depending on the event
triggering the repurchase.
Litigation
- ----------
Malpractice claims have been asserted against the Company by various claimants
arising in the ordinary course of business. In the opinion of management, the
Company has adequate legal defenses or insurance coverage with respect to each
of these actions and does not believe that they will materially affect the
Company's results of operations or financial position.
Assignment of Accounts Receivable
- ---------------------------------
In connection with its agreement with one HMO, the Company has assigned $500,000
of its accounts receivable to the HMO for the purpose of providing resources
sufficient to satisfy the Company's obligations to outside providers should the
Company fail to honor those obligations.
NOTE 10: CREDIT RISK
- --------------------
At June 30, 1995, the Company has deposits in a major financial institution
which exceed Federal Depository Insurance limits. This financial institution has
a strong credit rating and management believes that credit risk related to these
deposits is minimal.
The Company routinely invest its surplus operating funds in money market mutual
funds. These funds generally invest in highly liquid U.S. government and agency
obligations. Investments in money market funds are not insured or guaranteed by
the U.S. government; however, management believes that credit risk related to
these investments is minimal.
-12-
<PAGE>
CLINICAL ASSOCIATES, P.A.
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
June 30, 1995
- --------------------------------------------------------------------------------
NOTE 11: OTHER MATTERS
- ----------------------
The Company has available to finance future working capital needs a
line-of-credit facility in the amount of $500,000. Any borrowings against the
facility bear interest at the bank's prime rate plus 5/8 of one percent per
annum and are secured by the assets of the Company. No borrowings were made
against the line-of-credit as of June 30, 1995.
-13-
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors
Clinical Associates, P.A.
We have audited the accompanying balance sheet of Clinical Associates, P.A. as
of June 30, 1996, and the related statements of income, changes in stockholders'
equity, and cash flows for the year then ended. 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 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, in
all material respects, the financial position of Clinical Associates, P.A. as of
June 30, 1996, and the results of its operations and its cash flows for the year
then ended in conformity with generally accepted accounting principles.
Scheiner, Mister & Grandizio, P.A.
January 20, 1997
Lutherville, Maryland
1
<PAGE>
CLINICAL ASSOCIATES, P.A.
BALANCE SHEET
- --------------------------------------------------------------------------------
June 30, 1996
- --------------------------------------------------------------------------------
ASSETS
<TABLE>
<CAPTION>
CURRENT ASSETS
<S> <C>
Accounts Receivable (Less reserve for
contractual allowances and doubtful
accounts of $4,205,120) (Note 1) $ 4,340,420
Notes Receivable - Stockholders 63,333
Other Receivables 205,093
Prepaid Expenses 462,376
Income Taxes Receivable 43,999
-----------
TOTAL CURRENT ASSETS 5,115,221
-----------
PROPERTY AND EQUIPMENT
Leasehold Improvements 553,487
Furniture and Fixtures 424,934
Office Equipment 561,240
Medical Equipment 728,756
Vehicles 12,434
Equipment under Capital Leases (Note 5) 108,173
-----------
Total 2,389,024
Less: Accumulated Depreciation (1,175,810)
-----------
TOTAL PROPERTY AND EQUIPMENT 1,213,214
-----------
OTHER ASSETS
Notes Receivable - Stockholders 127,224
Cash - Restricted 139,574
-----------
TOTAL OTHER ASSETS 266,798
-----------
TOTAL ASSETS $ 6,595,233
===========
</TABLE>
The independent auditors' report and the accompanying notes are an
integral part of these financial statements
-2-
<PAGE>
CLINICAL ASSOCIATES, P.A.
BALANCE SHEET
- --------------------------------------------------------------------------------
June 30, 1996
- --------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
CURRENT LIABILITIES
<S> <C>
Current Maturities of Long-Term Debt $ 17,666
Current Maturities of Capital Lease Obligation (Note 5) 11,142
Accounts Payable 839,584
Allowance for Claims Incurred but not Reported 1,130,000
Current Portion of Lease Incentive (Note 6) 11,600
Deferred Income Tax Liability (Note 7) 1,259,546
Accrued Expenses and Other Current Liabilities 892,254
----------
TOTAL CURRENT LIABILITIES 4,161,792
----------
LONG-TERM LIABILITIES
Long-Term Debt, Less Current Maturities 17,667
Deferred Income Tax Liability 45,167
Lease Incentive, Net of Current Portion (Note 6) 55,100
----------
TOTAL LONG-TERM LIABILITIES 117,934
----------
TOTAL LIABILITIES 4,279,726
----------
STOCKHOLDERS' EQUITY
Common Stock - Par Value - $1.00; authorized
100,000 shares; issued and outstanding
10,598 shares 10,598
Capital in Excess of Par 1,130,930
Retained Earnings 1,173,979
----------
TOTAL STOCKHOLDERS' EQUITY 2,315,507
----------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $6,595,233
==========
</TABLE>
The independent auditors' report and the accompanying notes are an
integral part of these financial statements.
<PAGE>
CLINICAL ASSOCIATES, P.A.
STATEMENT OF INCOME
- --------------------------------------------------------------------------------
For the Year Ended June 30, 1996
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
NET PATIENT SERVICE REVENUE $36,767,258
-----------
EXPENSES
Professional Care and Supplies 7,946,706
Salaries and Wages 19,134,021
Employee Health and Welfare 1,808,054
General and Administrative Expenses 6,374,417
Provision for Bad Debt 1,440,090
-----------
TOTAL EXPENSES 36,703,288
-----------
NET OPERATING INCOME 63,970
Other Income Net 221,061
-----------
NET INCOME BEFORE INCOME TAXES 285,031
-----------
PROVISION FOR INCOME TAXES
Current 64,009
Deferred 60,747
-----------
TOTAL PROVISION FOR INCOME TAXES 124,756
-----------
NET INCOME $ 160,275
===========
</TABLE>
The independent auditors' report and the accompanying notes are an
integral part of these financial statements.
-3-
<PAGE>
CLINICAL ASSOCIATES, P.A.
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
- --------------------------------------------------------------------------------
For the Year Ended June 30, 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Capital in
Common Excess Retained
Stock of Par Earnings Total
--------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
BALANCE - BEGINNING OF
YEAR $10,408 $1,085,460 $1,038,704 $2,134,572
Purchase and Retirement
of Common Stock (60) (14,940) (25,000) (40,000)
Issuance of Common Stock 250 60,410 -0- 60,660
Net Income -0- -0- 160,275 160,275
------- ---------- ---------- ----------
BALANCE - END OF YEAR $10,598 $1,130,930 $1,173,979 $2,315,507
======= ========== ========== ==========
</TABLE>
The independent auditors' report and the accompanying notes are an
integral part of these financial statements.
-4-
<PAGE>
CLINICAL ASSOCIATES, P.A.
STATEMENT OF CASH FLOWS
- --------------------------------------------------------------------------------
For the Year Ended June 30, 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CASH FLOWS FROM OPERATING ACTIVITIES
<S> <C>
Net Income $ 160,275
Adjustments to Reconcile Net Income to
Net Cash Provided by Operating Activities:
Depreciation and Amortization 280,246
Net (Gain) Loss on Sale and Disposal of
Property and Equipment 17,717
Deferred Income Taxes 60,747
(Increase) Decrease in Operating Assets:
Accounts Receivable (589,245)
Other Receivables (129,155)
Prepaid Expenses (120,459)
Income Taxes Receivable 2,041
Increase (Decrease) in Operating Liabilities:
Accounts Payable and Allowance for Claims
Incurred but not Reported (8,813)
Lease Incentive Payable (11,600)
Accrued Expenses 96,374
---------
NET CASH USED IN OPERATING ACTIVITIES (241,872)
---------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of Property and Equipment (347,936)
Repayment of Stockholder Loans 46,943
Repayment of Related-Party Loans (53,933)
Proceeds from Sale of Equipment 45,222
Purchase of Investments 139,574
---------
NET CASH USED IN INVESTING ACTIVITIES (170,130)
---------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from Long-Term Debt 53,000
Principal Payments on Long-Term Debt (17,559)
Principal Payments on Debt and Obligations Under
Capital Lease (11,142)
Issuance of Common Stock 20,814
Repurchase of Common Stock (40,154)
---------
NET CASH PROVIDED BY FINANCING ACTIVITIES 4,959
---------
NET DECREASE IN CASH AND CASH EQUIVALENTS (407,043)
Cash and Cash Equivalents - Beginning of Year 407,043
---------
CASH AND CASH EQUIVALENTS - END OF YEAR $ -0-
=========
</TABLE>
The independent auditors' report and the accompanying notes are an
integral part of these financial statements.
-5-
<PAGE>
CLINICAL ASSOCIATES, P.A.
STATEMENT OF CASH FLOWS (CONTINUED)
- --------------------------------------------------------------------------------
For the Year Ended June 30, 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
- ------------------------------------------------
<S> <C>
Cash Paid During the Year for:
Interest $10,987
=======
Income Taxes $67,500
=======
</TABLE>
During the year ended June 30, 1996, the Company issued stock in exchange for a
Note Receivable in the amount of $40,000.
The independents auditors' report and the accompanying notes are an
integral part of these financial statements.
<PAGE>
CLINICAL ASSOCIATES, P.A.
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
June 30, 1996
- --------------------------------------------------------------------------------
NOTE 1: NATURE OF OPERATIONS AND CREDIT CONCENTRATIONS
- -------------------------------------------------------
Clinical Associates, P.A. (the Company) is a medical practice providing health
care services through various facilities located in Baltimore City and Baltimore
County, Maryland. The Company grants credit to patients, substantially all of
whom are local residents. The Company generally does not require collateral or
other security in extending credit; however, it routinely obtains assignment of,
or is otherwise entitled to receive, patients' benefits receivable under their
health insurance programs, plans or policies (e.g. Medicare, Medicaid, Blue
Cross, health maintenance organizations [HMO(s)] and commercial insurance
policies).
At June 30, 1996, the Company's receivables were as follows:
<TABLE>
<S> <C>
Medicare $2,401,197
Medicaid 256,224
Blue Shield 1,281,481
HMO(s) 646,827
Commercial Insurance and Other 3,959,811
----------
Total 8,545,540
Less: Reserve for Contractual Allowances
and Doubtful Accounts 4,205,120
----------
Accounts Receivable, Net $4,340,420
==========
</TABLE>
Amounts due from patients as a result of deductibles and co-payments under their
insurance policies are included in the balances due from the insurer in the
above.
During the fiscal year ended June 30, 1996, the Company received approximately
50% of its patient service revenues under the contracts with HMO(s).
Approximately 43% of patient service revenues were generated under HMO contracts
expiring in December 31, 1996. Another HMO contract, which automatically renews
for one year periods each July unless otherwise terminated, generated patient
service revenues of approximately 7% of the total.
Cash Equivalents
- ----------------
Cash and cash equivalents include investments with original maturities of three
months or less.
Estimates
- ---------
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect certain reported amounts and disclosures.
-6-
<PAGE>
CLINICAL ASSOCIATES, P.A.
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
June 30, 1996
- --------------------------------------------------------------------------------
NOTE 1: NATURE OF OPERATIONS AND CREDIT CONCENTRATIONS (Continued)
- -------------------------------------------------------------------
Advertising
- -----------
Advertising costs are charged to operations when incurred. Advertising expense
for the year ended June 30, 1996 amounted to $74,609.
NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
- ---------------------------------------------------
Accounts Receivable
- -------------------
The Company records a reserve for differences between fees billed and amounts
collectible from third party payors (contractual allowances) and for doubtful
accounts.
HMO Receivables
- ---------------
The Company's contracts with HMO(s) contain various provisions for risk sharing,
stop loss and coordination of benefits. These provisions result in settlements
after the end of each contract period. The Company has recorded an estimate of
the settlements due as of the end of the fiscal year. Differences between the
amounts estimated and the actual settlement are recorded in the year determined.
Medical Supplies
- ----------------
The Company expenses medical supplies as received.
Property and Equipment
- ----------------------
Property and Equipment are recorded at cost. Depreciation is recorded on a
straight-line basis over the estimated useful life of the equipment. Leasehold
improvements are depreciated over the remaining life of the lease. A summary of
depreciable lives used is as follows:
<TABLE>
<S> <C>
Leasehold Improvements Life of Lease
Furniture and Fixtures 7 - 10 Years
Office Equipment 5 - 7 Years
Medical Equipment 5 - 7 Years
</TABLE>
Accelerated depreciation methods are used for income tax purposes.
Allowance for Claims Incurred But Not Reported
- ----------------------------------------------
In connection with its agreements with HMO(s), the Company is liable for the
cost of services rendered to HMO members by outside providers. The Company
estimates the cost of services rendered but not yet billed to the Company based
on prior experience.
-7-
<PAGE>
CLINICAL ASSOCIATES, P.A.
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
June 30, 1996
- --------------------------------------------------------------------------------
NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
- ---------------------------------------------------------------
Deferred Income Taxes
- ---------------------
Deferred tax is provided in accordance with Statement No. 109 of the Financial
Accounting Standards Board. Deferred taxes result primarily from differences in
the timing of recognizing revenue and expenses, which are recorded on a modified
cash basis for tax purposes, and differences in depreciation rates (see note 7).
NOTE 3: RELATED PARTY TRANSACTIONS
- -----------------------------------
Some of the Company's stockholders are partners in a partnership, which owns 50%
of Security MDC Associates Partnership, the landlord under a lease in which the
Company is the tenant. Rent expense for the year ended June 30, 1996, amounted
to $213,455. The future minimum rentals due under this lease are included in
Note 9.
Notes receivable represent confessed judgment notes due from stockholders are
bearing interest at 7.5% per annum. Principal and interest payments are due
monthly through 1999.
NOTE 4: NOTES PAYABLE
- ----------------------
Note payable to First National Bank of Maryland - interest at 8.75%; monthly
principal payments of $1,472 plus interest; payable through July 1998; secured
by equipment financed.
<TABLE>
<S> <C>
$35,333
Less: Current Portion (17,667)
-------
Non-Current Portion $17,666
=======
</TABLE>
Future maturities of the non-current portion of long-term debt are as follows:
<TABLE>
<S> <C>
Year ending June 30, 1998 $17,666
=======
</TABLE>
Total interest expense on all debt for the year ended June 30, 1996 amounted to
$6,436.
NOTE 5: CAPITAL LEASES
- -----------------------
The Company is the lessee of equipment under a capital lease expiring in the
year ending June 30, 1997.
-8-
<PAGE>
CLINICAL ASSOCIATES, P.A.
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
June 30, 1996
- --------------------------------------------------------------------------------
NOTE 5: CAPITAL LEASES (Continued)
- -----------------------------------
Future minimum lease payments under the capital lease are as follows:
<TABLE>
<S> <C>
Year Ending June 30, 1997 $ 11,714
--------
Total Commitment Under Capital Leases 11,714
Less: Amount Representing Interest 572
--------
Present Value of Future Minimum
Lease Payments 11,142
Less: Current Portion 11,142
--------
TOTAL LONG-TERM PORTION $ -0-
========
</TABLE>
Following is a summary of equipment under capital leases:
<TABLE>
<S> <C>
Telecommunications Equipment $ 49,971
Medical Equipment 58,202
--------
108,173
Less: Accumulated Amortization 108,173
--------
$ -0-
========
</TABLE>
NOTE 6: LEASE INCENTIVE
- ------------------------
In connection with one of its lease agreements, the landlord assumed the
Company's obligations under an old lease. In accordance with generally accepted
accounting principles, the value of this incentive has been recorded as a
liability and is being amortized on a straight-line basis over the life of the
new lease. The current portion reflects the amount that will be amortized
during the year ending June 30, 1997.
NOTE 7: DEFERRED INCOME TAXES
- ------------------------------
The net deferred tax liability in the accompanying balance sheet includes the
following components as of June 30, 1996:
<TABLE>
<S> <C>
Deferred Tax Liability $1,348,596
Deferred Tax Asset (43,883)
Deferred Tax Asset Valuation Allowance -0-
----------
Net Deferred Tax Liability $1,304,713
==========
</TABLE>
-9-
<PAGE>
CLINICAL ASSOCIATES, P.A.
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
June 30, 1996
- --------------------------------------------------------------------------------
NOTE 7: DEFERRED INCOME TAXES (Continued)
- ------------------------------------------
The deferred tax liability arises primarily from differences in the timing of
recognition of patient service revenues and accrued expenses for tax purposes
and financial reporting purposes, and the excess of depreciation for tax
reporting purposes over the amount for financial purposes.
Temporary differences giving rise to the deferred tax asset consist of a capital
loss carryover for tax purposes, and lease expense as outlined in Note 6.
NOTE 8: 401(K) PLAN
- --------------------
Effective January 1, 1992, the Company implemented a 401(k) plan, amending and
restating in its entirety its former Target Benefit Plan and Trust, in order to
be in compliance with current pension regulations. All participants in the
former plan continued to participate in the 401(k) plan. Those not
participating in the former plan are eligible to participate in the 401(k) plan
upon completion of one year of service and attaining the age of 21. Employees
may elect to contribute up to 8% of their compensation annually, subject to
dollar limitations set by law. Under the plan the Company can elect to match a
percentage of the employees' contributions at its discretion. The Plan also
allows the Company to contribute a profit sharing amount, determined annually by
the Company. Participants are always 100% vested in their contributions to the
Plan. Vesting in the Company's contributions is 20% after two years of service,
increasing 20% annually with full vesting after six years of service. The
Plan's year end is December 31. Total profit sharing plan expense for the year
ended June 30, 1996 amounted to $1,084,417.
NOTE 9: COMMITMENTS AND CONTINGENCIES
- --------------------------------------
Leases
- ------
The Company leases several buildings under operating leases expiring in various
years through March 31, 2002.
Minimum future rental payments under non-cancelable operating leases follow:
<TABLE>
<S> <C> <C>
Years Ending June 30, 1997 $ 1,397,582
1998 1,477,132
1999 1,616,043
2000 1,643,658
2001 1,124,900
Thereafter 3,158,320
-----------
TOTAL MINIMUM FUTURE RENTAL PAYMENTS $10,417,635
===========
</TABLE>
-10-
<PAGE>
CLINICAL ASSOCIATES, P.A.
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
June 30, 1996
- --------------------------------------------------------------------------------
NOTE 9: COMMITMENTS AND CONTINGENCIES (Continued)
- --------------------------------------------------
The Company is responsible for a proportionate share of operating expenses and
tax increases under several of its lease agreements. Several agreements also
call for rental increases based on changes in the Consumer Price Index or
specified amounts. Certain leases also provide for renewal options.
The Company also leases, on a month-to-month basis, other operating facilities.
Total lease expense for the above leases amounted to approximately $1,869,690.
Agreements to Repurchase Stock
- ------------------------------
The Company has agreements with each of its stockholders, whereby the Company
will repurchase the stock upon the death, disability, or termination of the
stockholder's employment. The purchase price varies depending on the event
triggering the repurchase.
Litigation
- ----------
Malpractice claims have been asserted against the Company by various claimants
arising in the ordinary course of business. In the opinion of management, the
Company has adequate legal defenses or insurance coverage with respect to each
of these actions and does not believe that they will materially affect the
Company's results of operations or financial position.
Assignment of Accounts Receivable and Cash Balances
- ---------------------------------------------------
In connection with its agreement with one HMO, the Company has assigned $500,000
of its accounts receivable to the HMO for the purpose of providing resources
sufficient to satisfy the Company's obligations to outside providers should the
Company fail to honor those obligations. The Company has also restricted cash
in the amount of approximately $140,000 as of June 30, 1996 in connection with
an agreement with another HMO.
NOTE 10: CREDIT RISK
- ---------------------
At June 30, 1996, the Company has deposits in a major financial institution
which exceed Federal Depository Insurance limits. This financial institution
has a strong credit rating and management believes that credit risk related to
these deposits is minimal.
The Company routinely invests its surplus operating funds in money market mutual
funds. These funds generally invest in highly liquid U.S. government and agency
obligations. Investments in money market funds are not insured or guaranteed by
the U.S. government; however, management believes that credit risk related to
these investments is minimal.
-11-
<PAGE>
CLINICAL ASSOCIATES, P.A.
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
June 30, 1996
- --------------------------------------------------------------------------------
NOTE 11: OTHER MATTERS
- -----------------------
The Company has available to finance future working capital needs a line-of-
credit facility in the amount of $500,000. Any borrowings against the facility
bear interest at the bank's prime rate plus 5/8 of one percent per annum and are
secured by the assets of the Company. No borrowings were made against the line-
of-credit as of June 30, 1996.
NOTE 12: INTERNAL REVENUE SERVICE EXAMINATION
- ----------------------------------------------
Subsequent to the balance sheet date, the Company was notified by the Internal
Revenue Service that an examination would be performed regarding a prior year's
corporate income tax return. As of the report date, the examination remains in
the preliminary stages.
-12-
<PAGE>
CLINICAL ASSOCIATES, P.A.
Table of Contents
For the Year Ended June 30, 1997
- ---------------------------------------------------------------------
PAGE
----
Independent Auditors' Report................................. 1
Financial Statements
Balance Sheet........................................... 2-2A
Statement of Income..................................... 3
Statement of Changes in Stockholders' Equity............ 4
Statement of Cash Flows................................. 5-5A
Notes to Financial Statements........................... 6-12
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors
Clinical Associates, P.A.
We have audited the accompanying balance sheet of Clinical Associates, P.A. as
of June 30, 1997, and the related statements of income, changes in stockholders'
equity, and cash flows for the year then ended. 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, in
all material respects, the financial position of Clinical Associates, P.A. as of
June 30, 1997, and the results of its operations and its cash flows for the year
then ended in conformity with generally accepted accounting principles.
Scheiner, Mister & Grandizio, P.A.
October 1, 1997
<PAGE>
CLINICAL ASSOCIATES, P.A.
BALANCE SHEET
- -----------------------------------------------------------------------------
June 30, 1997
- -----------------------------------------------------------------------------
ASSETS
<TABLE>
<CAPTION>
CURRENT ASSETS
<S> <C>
Accounts Receivable (Less reserve for
contractual allowances and doubtful
accounts of $4,509,432) (Note 1) $ 3,889,349
Notes Receivable - Stockholders 77,447
Other Receivables 31,628
Prepaid Expenses 241,115
Income Taxes Receivable 101,531
-----------
TOTAL CURRENT ASSETS 4,341,070
-----------
PROPERTY AND EQUIPMENT
Leasehold Improvements 603,216
Furniture and Fixtures 431,794
Office Equipment 762,145
Medical Equipment 837,753
Vehicles 12,434
-----------
Total 2,647,342
Less: Accumulated Depreciation (1,404,000)
-----------
TOTAL PROPERTY AND EQUIPMENT 1,243,342
-----------
OTHER ASSETS
Notes Receivable - Stockholders 133,167
Cash - Restricted 152,406
-----------
TOTAL OTHER ASSETS 285,573
-----------
TOTAL ASSETS $5,869,985
===========
</TABLE>
The independent auditors' report and the accompanying notes are an
integral part of these financial statements
<PAGE>
CLINICAL ASSOCIATES, P.A.
BALANCE SHEET
- -----------------------------------------------------------------------------
June 30, 1997
- -----------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
CURRENT LIABILITIES
<S> <C>
Note Payable - Related Party $ 100,000
Line-of-Credit 300,000
Current Maturities of Long-Term Debt 45,000
Accounts Payable 763,341
Allowance for Claims Incurred but not Reported 952,687
Current Portion of Lease Incentive 11,600
Deferred Income Tax Liability 537,524
Accrued Expenses and Other Current Liabilities 820,547
Due to Taxing Authorities 281,667
----------
TOTAL CURRENT LIABILITIES 3,812,366
----------
LONG-TERM LIABILITIES
Long-Term Debt, Less Current Maturities 37,481
Lease Incentive, Net of Current Portion 43,500
Deferred Income Tax Liability 64,277
----------
TOTAL LONG-TERM LIABILITIES 145,258
----------
TOTAL LIABILITIES 3,957,624
----------
STOCKHOLDERS' EQUITY
Common Stock - Par Value - $1.00; authorized
100,000 shares; issued and outstanding
11,174 shares 11,174
Capital in Excess of Par 1,331,324
Retained Earnings 569,863
----------
TOTAL STOCKHOLDERS' EQUITY 1,912,361
----------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $5,869,985
==========
</TABLE>
The independent auditors' report and the accompanying notes are an
integral part of these financial statements.
<PAGE>
CLINICAL ASSOCIATES, P.A.
STATEMENT OF INCOME
- ------------------------------------------------------------------------------
For the Year Ended June 30, 1997
- ------------------------------------------------------------------------------
<TABLE>
<S> <C>
NET PATIENT SERVICE REVENUE $35,152,990
-----------
EXPENSES
Professional Care and Supplies 8,378,970
Salaries and Wages 19,102,982
Employee Health and Welfare 1,640,560
General and Administrative Expenses 7,129,841
Provision for Bad Debt 123,624
-----------
TOTAL EXPENSES 36,375,977
-----------
NET OPERATING LOSS (1,222,987)
-----------
Other Income Net 150,983
-----------
NET LOSS BEFORE PROVISION (BENEFIT) INCOME TAXES (1,072,004)
-----------
PROVISION (BENEFIT) FOR INCOME TAXES
Current 226,516
Deferred (702,912)
-----------
TOTAL PROVISION (BENEFIT) FOR INCOME TAXES (476,396)
-----------
NET LOSS $ (595,608)
===========
</TABLE>
The independent auditors' report and the accompanying notes are an
integral part of these financial statements.
<PAGE>
CLINICAL ASSOCIATES, P.A.
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
- -----------------------------------------------------------------------------
For the Year Ended June 30, 1997
- -----------------------------------------------------------------------------
<TABLE>
<CAPTION>
Capital in
Common Excess Retained
Stock of Par Earnings Total
-------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
BALANCE - BEGINNING OF
YEAR $10,598 $1,130,930 $1,173,979 $2,315,507
Purchase and Retirement
of Common Stock (126) (119,874) (8,508) (128,508)
Issuance of Common Stock 702 320,268 -0- 320,970
Net Loss -0- -0- (595,608) (595,608)
------- ---------- ---------- ----------
BALANCE - END OF YEAR $11,174 $1,331,324 $ 569,863 $1,912,361
======= ========== ========== ==========
</TABLE>
The independent auditors' report and the accompanying notes are an
integral part of these financial statements.
<PAGE>
CLINICAL ASSOCIATES, P.A.
STATEMENT OF CASH FLOWS
- ------------------------------------------------------------------------------
For the Year Ended June 30, 1997
- ------------------------------------------------------------------------------
<TABLE>
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net Loss $(595,608)
Adjustments to Reconcile Net Loss to
Net Cash Provided by Operating Activities:
Depreciation and Amortization 276,036
Net (Gain) Loss on Sale and Disposal of
Property and Equipment 18,405
Deferred Income Taxes (702,912)
(Increase) Decrease in Operating Assets:
Accounts Receivable 451,071
Other Receivables 173,465
Prepaid Expenses 221,261
Income Taxes Receivable (57,532)
Increase (Decrease) in Operating Liabilities:
Accounts Payable and Allowance for Claims
Incurred but not Reported (253,556)
Lease Incentive Payable (11,600)
Accrued Expenses (71,707)
Due to Taxing Authorities 281,667
---------
NET CASH USED IN OPERATING ACTIVITIES (271,010)
---------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of Property and Equipment (297,420)
Repayment of Stockholder Loans 129,942
Purchase of Investments (12,832)
---------
NET CASH USED IN INVESTING ACTIVITIES (180,310)
---------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from Note Payable - Related Party 100,000
Proceeds from Long-Term Debt 52,000
Principal Payments on Long-Term Debt (32,000)
Principal Payments on Obligations Under
Capital Lease (11,142)
Issuance of Common Stock 170,970
Repurchase of Common Stock (128,508)
Borrowings From Line-of-Credit 300,000
---------
NET CASH PROVIDED BY FINANCING ACTIVITIES 451,320
---------
NET DECREASE IN CASH AND CASH EQUIVALENTS -0-
Cash and Cash Equivalents - Beginning of Year -0-
---------
CASH AND CASH EQUIVALENTS - END OF YEAR $ -0-
=========
</TABLE>
The independent auditors' report and the accompanying notes are an
integral part of these financial statements.
<PAGE>
CLINICAL ASSOCIATES, P.A.
STATEMENT OF CASH FLOWS (CONTINUED)
- --------------------------------------------------------------------------------
For the Year Ended June 30, 1997
- --------------------------------------------------------------------------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
- ------------------------------------------------
Cash Paid During the Year for:
Interest $ 3,648
========
Income Taxes $100,999
========
During the year ended June 30, 1997, the Company issued stock in exchange for
notes receivable in the amount of $150,000, and purchased equipment by assuming
a note payable in the amount of $27,148.
The independent auditors' report and the accompanying notes are an
integral part of these financial statements.
<PAGE>
CLINICAL ASSOCIATES, P.A.
NOTES TO FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------
June 30, 1997
- ------------------------------------------------------------------------------
NOTE 1: NATURE OF OPERATIONS AND CREDIT CONCENTRATIONS
- -------------------------------------------------------
Clinical Associates, P.A. (the Company) is a medical practice providing health
care services through various facilities located in Baltimore City and Baltimore
County, Maryland. The Company grants credit to patients, substantially all of
whom are local residents. The Company generally does not require collateral or
other security in extending credit; however, it routinely obtains assignment of,
or is otherwise entitled to receive, patients' benefits receivable under their
health insurance programs, plans or policies (e.g. Medicare, Medicaid, Blue
Cross, health maintenance organizations [HMO(s)] and commercial insurance
policies).
At June 30, 1997, the Company's receivables were as follows:
<TABLE>
<S> <C>
Medicare $2,431,038
Medicaid 179,061
Blue Shield 1,351,997
HMO(s) 493,873
Commercial Insurance and Other 3,942,812
----------
Total 8,398,781
Less: Reserve for Contractual Allowances
and Doubtful Accounts 4,509,432
----------
ACCOUNTS RECEIVABLE, NET $3,889,349
==========
</TABLE>
Amounts due from patients as a result of deductibles and co-payments under their
insurance policies are included in the balances due from the insurer in the
above.
During the fiscal year ended June 30, 1997, the Company received approximately
45% of its patient service revenues under the contracts with HMO(s).
Approximately 39% of gross patient service revenues were generated under HMO
contracts expiring in December 31, 1998. Another HMO contract, which
automatically renews for one year periods each July unless otherwise terminated,
generated patient service revenues of approximately 6% of the total.
NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
- ---------------------------------------------------
Accounts Receivable
- -------------------
The Company records a reserve for differences between fees billed and amounts
collectible from third party payors (contractual allowances) and for doubtful
accounts.
<PAGE>
CLINICAL ASSOCIATES, P.A.
NOTES TO FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------
June 30, 1997
- ------------------------------------------------------------------------------
NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
- ---------------------------------------------------------------
HMO Receivables
- ---------------
The Company's contracts with HMO(s) contain various provisions for risk sharing,
stop loss and coordination of benefits. These provisions result in settlements
after the end of each contract period. The Company has recorded an estimate of
the settlements due as of the end of the fiscal year. Differences between the
amounts estimated and the actual settlement are recorded in the year determined.
Medical Supplies
- ----------------
The Company expenses medical supplies as received.
Property and Equipment
- ----------------------
Property and Equipment are recorded at cost. Depreciation is recorded on a
straight-line basis over the estimated useful life of the equipment. Leasehold
improvements are depreciated over the remaining life of the lease. A summary of
depreciable lives used is as follows:
Leasehold Improvements Life of Lease
Furniture and Fixtures 7 - 10 Years
Office Equipment 5 - 7 Years
Medical Equipment 5 - 7 Years
Accelerated depreciation methods are used for income tax purposes.
Allowance for Claims Incurred But Not Reported
- ----------------------------------------------
In connection with its agreements with HMO(s), the Company is liable for the
cost of services rendered to HMO members by outside providers. The Company
estimates the cost of services rendered but not yet billed to the Company based
on prior experience.
Advertising
- -----------
Advertising costs are charged to operations when incurred. Advertising expense
for the year ended June 30, 1997 amounted to $491,373.
Cash Equivalents
- ----------------
Cash and cash equivalents include investments with original maturities of three
months or less.
<PAGE>
CLINICAL ASSOCIATES, P.A.
NOTES TO FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------
June 30, 1997
- ------------------------------------------------------------------------------
NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
- ---------------------------------------------------------------
Estimates
- ---------
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect certain reported amounts and disclosures.
Income Taxes
- ------------
Income taxes are provided for the tax effects of transactions reported in the
financial statements and consists of taxes currently due plus deferred taxes
related primarily to differences between the basis of assets and liabilities for
income tax and financial reporting. The deferred tax assets and liabilities
represent the future tax return consequences of those differences, which will
either be taxable or deductible when the assets and liabilities are recovered or
settled. Deferred taxes also are recognized for operating losses that are
available to offset future taxable income and tax credits that are available to
offset future federal income taxes.
NOTE 3: RELATED PARTY TRANSACTIONS
- -----------------------------------
Some of the Company's stockholders are partners in a partnership, which owns 50%
of Security MDC Associates Partnership, the landlord under a lease in which the
Company is the tenant. Rent expense for the year ended June 30, 1997, amounted
to $162,000. The future minimum rentals due under this lease are included in
Note 8.
Notes receivable represent confessed judgment notes due from stockholders are
bearing interest at 7.5% and 9% per annum. Principal and interest payments are
due monthly through 2002.
Note payable represents a confessed judgment note due to an officer and
stockholder and bears interest at 12% per annum. The note is due July 31, 1997.
NOTE 4: NOTES PAYABLE
- ----------------------
Notes payable to banks - interest at 8.75% to 9.50%; monthly principal payments
of $3,750 plus interest; payable through March 2000; secured by equipment
financed.
$82,481
Less: Current Portion (45,000)
-------
NON-CURRENT PORTION $37,481
=======
<PAGE>
CLINICAL ASSOCIATES, P.A.
NOTES TO FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------
June 30, 1997
- ------------------------------------------------------------------------------
NOTE 4: NOTES PAYABLE (Continued)
- ----------------------------------
Future maturities of the non-current portion of long-term debt are as follows:
<TABLE>
<S> <C>
Years Ending June 30,
1999 $24,481
2000 13,000
-------
TOTAL $37,481
=======
</TABLE>
Total interest expense on debt for the year ended June 30, 1997 amounted to
$3,648.
NOTE 5: LEASE INCENTIVE
- ------------------------
In connection with one of its lease agreements, the landlord assumed the
Company's obligations under an old lease. In accordance with generally accepted
accounting principles, the value of this incentive has been recorded as a
liability and is being amortized on a straight-line basis over the life of the
new lease. The current portion reflects the amount that will be amortized
during the year ending June 30, 1998.
NOTE 6: INCOME TAXES
- ---------------------
Current Income Taxes
- --------------------
Subsequent to the balance sheet date, the Company settled with the Internal
Revenue Service for an examination of prior years' corporate income tax returns.
The examination resulted in a $226,516 income tax liability and $54,619 of
interest expense.
Deferred Income Taxes
- ---------------------
The net deferred tax liability in the accompanying balance sheet includes the
following components as of June 30, 1997:
Deferred Tax Liability $879,900
Deferred Tax Asset (278,099)
Deferred Tax Asset Valuation Allowance -0-
--------
NET DEFERRED TAX LIABILITY $601,801
========
The deferred tax liability arises primarily from differences in the timing of
recognition of patient service revenues and accrued expenses for tax purposes
and financial reporting purposes, and the excess of depreciation for tax
reporting purposes over the amount for financial purposes.
<PAGE>
CLINICAL ASSOCIATES, P.A.
NOTES TO FINANCIAL STATEMENTS
June 30, 1997
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
NOTE 6: INCOME TAXES (Continued)
- ---------------------------------
Deferred Income Taxes (Continued)
- ---------------------------------
Differences giving rise to the deferred tax asset consist of a net operating
loss carryover generated at June 30, 1997, in the amount of $554,122 which
expires June 30, 2012, a capital loss carryover in the amount of $37,784, and
lease expense as outlined in Note 5.
Realization of the net operating and capital loss carryovers is dependent on
generating sufficient taxable income prior to expiration of the loss
carryforwards. Although realization is not assured, management believes it is
more likely than not that all of the deferred tax asset will be realized.
NOTE 7: 401(K) PLAN
- --------------------
Effective January 1, 1992, the Company implemented a 401(k) plan, amending and
restating in its entirety its former Target Benefit Plan and Trust, in order to
be in compliance with current pension regulations. All participants in the
former plan continued to participate in the 401(k) plan. Those not
participating in the former plan are eligible to participate in the 401(k) plan
upon completion of one year of service and attaining the age of 21. Employees
may elect to contribute up to 8% of their compensation annually, subject to
dollar limitations set by law. Under the plan the Company can elect to match a
percentage of the employees' contributions at its discretion. The Plan also
allows the Company to contribute a profit sharing amount, determined annually by
the Company. Participants are always 100% vested in their contributions to the
Plan. Vesting in the Company's contributions is 20% after two years of service,
increasing 20% annually with full vesting after six years of service. The
Plan's year end is December 31. Total contributions to the plan and expense for
the year ended June 30, 1997, amounted to $1,144,035.
NOTE 8: COMMITMENTS AND CONTINGENCIES
- --------------------------------------
Leases
- ------
The Company leases several buildings under operating leases expiring in various
years through December 31, 2007.
<PAGE>
CLINICAL ASSOCIATES, P.A.
NOTES TO FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------
June 30, 1997
- ------------------------------------------------------------------------------
NOTE 8: COMMITMENTS AND CONTINGENCIES (Continued)
- --------------------------------------------------
Minimum future rental payments under non-cancelable operating leases follow:
<TABLE>
<S> <C>
Years Ending June 30,
1998 $ 1,724,666
1999 1,671,266
2000 1,719,377
2001 1,402,236
2002 1,335,655
Thereafter 2,721,030
-----------
TOTAL MINIMUM FUTURE
RENTAL PAYMENTS $10,574,230
===========
</TABLE>
The Company is responsible for a proportionate share of operating expenses and
tax increases under several of its lease agreements. Several agreements also
call for rental increases based on changes in the Consumer Price Index or
specified amounts. Certain leases also provide for renewal options.
The Company also leases, on a month-to-month basis, other operating facilities.
Total lease expense for the year ended June 30, 1997 amounted to approximately
$1,890,000.
Agreements to Repurchase Stock
- ------------------------------
The Company has agreements with each of its stockholders, whereby the Company
will repurchase the stock upon the death, disability, or termination of the
stockholder's employment. The purchase price varies depending on the event
triggering the repurchase.
Litigation
- ----------
Malpractice claims have been asserted against the Company by various claimants
arising in the ordinary course of business. In the opinion of management, the
Company has adequate legal defenses or insurance coverage with respect to each
of these actions and does not believe that they will materially affect the
Company's results of operations or financial position.
Assignment of Accounts Receivable and Cash Balances
- ---------------------------------------------------
In connection with its agreement with one HMO, the Company has assigned $500,000
of its accounts receivable to the HMO for the purpose of providing resources
sufficient to satisfy the Company's obligations to outside providers should the
Company fail to honor those obligations. The Company has also restricted cash
in the amount of approximately $150,000 as of June 30, 1997 in connection with
an agreement with another HMO.
<PAGE>
CLINICAL ASSOCIATES, P.A.
NOTES TO FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------
June 30, 1997
- ------------------------------------------------------------------------------
NOTE 8: COMMITMENTS AND CONTINGENCIES (Continued)
- --------------------------------------------------
Stock Options
- -------------
Outstanding at June 30, 1997 are options to purchase 750 shares of common stock
for amounts based upon the fair market value of assets to be exchanged.
Merger
- ------
On May 7, 1997, Clinical Associates, P.A. signed a letter of intent to merge
with another entity, Flagship Health II, P.A. Consideration for the merger is
$17,400,000, consisting of cash in the amount of $3,000,000 and the remainder,
stock in the controlling entity, Physicians Quality Care, Inc.
NOTE 9: CREDIT RISK
- --------------------
At June 30, 1997, the Company has deposits in a major financial institution
which exceed Federal Depository Insurance limits. This financial institution
has a strong credit rating and management believes that credit risk related to
these deposits is minimal.
The Company routinely invests its surplus operating funds in money market mutual
funds. These funds generally invest in highly liquid U.S. government and agency
obligations. Investments in money market funds are not insured or guaranteed by
the U.S. government; however, management believes that credit risk related to
these investments is minimal.
NOTE 10: LINE-OF-CREDIT
- ------------------------
The Company has available to finance future working capital needs a line-of-
credit facility in the amount of $500,000. Any borrowings against the facility
bear interest at the bank's prime rate plus 5/8 of one percent per annum and are
secured by the assets of the Company. Borrowings made against the line-of-
credit as of June 30, 1997 amounted to $300,000.
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution
The following table sets forth the various expenses in connection with
the sale and distribution of the securities being registered. All amounts shown
are estimates except for the Securities and Exchange Commission registration
fee.
<TABLE>
<S> <C>
SEC Registration Fee.................................................................... $ 4,800
Blue Sky Fees and Expenses.............................................................. 5,000
Accounting Fees and Expenses............................................................ 150,000
Legal Fees and Expenses................................................................. 150,000
Printing, Engraving and Mailing Expenses................................................ 10,000
Miscellaneous........................................................................... 29,200
--------
Total.......................................................................... $ 350,000
========
</TABLE>
- --------------------
Item 14. Indemnification of Directors and Officers
Section 145 of the General Corporation Law of Delaware provides that a
corporation has the power to indemnify a director, officer, employee or agent of
the corporation and certain other persons serving at the request of the
corporation in related capacities against amounts paid and expenses incurred in
connection with an action or proceedings to which he or she is or is threatened
to be made a party by reason of such position, if such person shall have acted
in good faith and in a manner he or she reasonably believed to be in or not
opposed to the best interest of the corporation, and, in any criminal
proceedings, if such person had no reasonable cause to believe his or her
conduct was unlawful; provided that, in the case of actions brought by or in the
right of the corporation, no indemnification shall be made with respect to any
matter as to which such person shall have been adjudged to be liable to the
corporation unless and only to the extent that the adjudicating court determines
that such indemnification is proper under the circumstances.
Article SIXTH of the Registrant's Restated Certificate of Incorporation
provides that a director or officer of the Registrant (a) shall be indemnified
by the Registrant against all expenses (including attorneys' fees), judgments,
fines and amounts paid in settlement reasonably incurred in connection with any
litigation or other legal proceedings (other than an action by or in the right
of the Registrant) brought against such person by virtue of his or her position
as a director or officer of the Registrant if he or she acted in good faith and
in a manner he or she reasonably believed to be in or not opposed to the best
interests of the Registrant, and, with respect to any criminal action or
proceedings, had no reasonable cause to believe his or her conduct was unlawful
and (b) shall be indemnified by the Registrant against expenses (including
attorneys' fees) and amounts paid in settlement reasonably incurred in
connection with any action by or in the right of the Registrant if such person
acted in a manner he or she reasonably believed to be in or not opposed to the
best interests of the Registrant, except that no indemnification shall be made
with respect to any such matter as to which such director or officer shall have
been adjudged to be liable to the Registrant, unless and only to the extent that
a court determines that, despite the adjudication of liability but in view of
all the circumstances of the case, such person is fairly and reasonably entitled
to indemnity for such expenses as the court deems proper. Notwithstanding the
foregoing, to the extent that a director or officer has been successful, on the
merits or otherwise, such person shall be indemnified against all expenses
(including attorneys' fees) reasonably incurred by him in connection therewith.
Expenses incurred in defending a civil or criminal action, suit or proceedings
shall be advanced by the Registrant to a director or officer, at his or her
request, upon receipt of an undertaking by the director or officer to repay such
amount if it is ultimately determined that he or she is not entitled to
indemnification.
II-1
<PAGE>
Indemnification is required to be made unless the Registrant determines
(in the manner provided in the Restated Certificate of Incorporation) that the
applicable standard of conduct required for indemnification has not been met. In
the event of a determination by the Registrant that the director or officer did
not meet the applicable standard of conduct required for indemnification, or if
the Registrant fails to make an indemnification payment within 60 days after
such payment is claimed by such person, such person is permitted to petition a
court to make an independent determination as to whether such person is entitled
to indemnification. As a condition precedent to the right of indemnification,
the director or officer must give the Registrant notice of the action for which
indemnity is sought and the Registrant has the right to participate in such
action or assume the defense thereof.
Article SIXTH of the Registrant's Restated Certificate of Incorporation
further provides that the indemnification provided therein is not exclusive, and
provides that in the event that the Delaware General Corporation Law is amended
to expand the indemnification permitted to directors or officer, the Registrant
must indemnify those persons to the fullest extent permitted by such law as so
amended.
The Registrant intends to purchase a general liability insurance policy
which covers certain liabilities of directors and officers of the Registrant
arising out of claims based on acts or omissions in their capacity as directors
or officers.
Article FIFTH of the Registrant's Restated Certificate of Incorporation
provides that, except to the extent that the General Corporation Law of Delaware
prohibits the elimination or limitation of liability of directors for breaches
of fiduciary duty, no directors of the Registrant shall be personally liable to
the Registrant or its stockholders for monetary damages for any breach of
fiduciary duty as a director.
Item 15. Recent Sales of Unregistered Securities
The securities issued or sold by the Company since March 20, 1995, the
date of inception, which were not registered under the Securities Act are listed
below:
(i) In May 1995, the Company issued to an accredited investor a Warrant
to purchase 100,000 shares of Common Stock at $20,000 on or before December 31,
1995. The Warrant was not exercised.
(ii) From June 30, 1995 through March 10, 1997, the Registrant has
issued an aggregate of 726,586 options to purchase shares of Series A Common
Stock under the Registrant's 1995 Equity Incentive Plan (the "1995 Plan") and
90,000 options outside the 1995 Plan. At March 31, 1997, options to purchase
574,836 shares of Class A Common Stock are outstanding under the 1995 Plan.
(iii) On June 21, 1995, the Registrant issued an aggregate of 7,706,250
shares of the original common stock of the Company to its founders at a purchase
price of $0.01 per share. In February 1996, 1,012,500 shares were reacquired as
treasury stock and 6,693,750 shares were converted into Class A Common Stock on
August 30, 1996.
(v) In August 1996, the Company issued to certain accredited investors,
which notes were converted to 402,301 shares of Common Stock.
(vi) From June 30, 1995 through August 1, 1995, the Registrant issued
an aggregate 1,666,151 shares of Series A Preferred Stock and Warrants to
purchase 832,076 Series A Preferred Stock to accredited investors at a purchase
price of $2.40 per share, which shares were subsequently converted into
1,666,151 shares of Class A Common Stock on August 30, 1996.
(vii) On August 30, 1996, pursuant to an affiliation transaction with
seven medical practices, the Registrant issued 2,592,245 shares of Class A
Common Stock with a value of $2.50 per share, in consideration for such
transaction.
II-2
<PAGE>
(viii) Between August 30, 1996 and December 10, 1996, in connection
with a financing transaction with certain institutional investors, the
Registrant issued 2,442,866 shares of Class B-1 Common Stock at a purchase price
of $2.50 per share, 1,557,134 shares of the Class B-2 Common Stock at a purchase
price of $2.50 per share, and warrants.
(ix) On August 30, 1996, in connection with the sale of a convertible
promissory note and warrant dated June 30, 1995, the Registrant issued 625,000
shares of Series A Common Stock to Offshore Health Industries, Inc. at a
purchase price of $2.40 per share.
(x) On August 30, 1996, in connection with a financing, the Registrant
issued 402,300 shares of the Class A Common Stock to accredited investors at a
purchase price of $2.50 per share and warrants to purchase 201,150 Class A
Common Stock.
(xi) On December 11, 1996, pursuant to affiliation transactions with
medical practices, the Registrant issued 6,842,675 shares of Class A Common
Stock and 400,000 options to purchase shares of Class A Common Stock, in
consideration for such transactions.
(xii) On December 31, 1996 and February 11, 1997, the Registrant issued
a total of 614,000 shares of Class A Common Stock to investors at a purchase
price of $2.50 per share.
(x) On January 5, 1997, pursuant to an affiliation transaction with a
medical practice, the Registrant issued 440,000 shares of Class A Common Stock
with a value of $2.50 per share, in consideration for such transaction.
(xi) On February 12, 1997, pursuant to affiliation transactions with
medical practices, the Registrant issued 132,493 shares of Class A Common Stock
with a value of $2.50 per share in consideration for such transaction.
(xii) On February 14, 1997, pursuant to a Letter Agreement between the
Registrant and Bankers Trust Investment Partners, Inc. ("BTIP") the Registrant
issued 63,000 shares of Class B Common Stock to BTIP at a purchase price of
$2.50 per share.
(xiii) On April 18, 1997, the Registrant issued 600,000 shares of
Series B Common Stock and warrants to purchase 865,500 shares of Class B Common
Stock to the Bain Funds for $1.5 million in consideration.
(xiv) On June 23, 1997 the Registrant issued 7,692,309 shares of Class
C Common Stock and warrants to purchase 7,692,309 shares of Class C Common Stock
to certain Institutional Investors at $3.25 per share.
(xv) On June 30, 1997, the Registrant issued 667,800 shares of Class A
Common Stock to certain accredited investors at a purchase price of $2.50 per
share.
The shares of capital stock issued in the above transactions were
offered and sold in reliance upon the exemption from registration under Section
4(2) and Rule 152 under the Securities Act or Regulation D promulgated
thereunder, as transactions by an issuer not involving any public offering, or
Rule 701 promulgated under Section 3(b) of the Securities Act as transactions
pursuant to compensatory benefit plans and compensation as provided under such
Rule 701. The recipients of securities in each such transaction represented
their intentions to acquire the securities for investment only and not with a
view to or for sale in connection with any distribution thereof and appropriate
legends were affixed to the share certificates and warrants issued in such
transaction. All recipients had adequate access, through their relationships
with the Company, to information about the Registrant.
II-3
<PAGE>
Item 16. Exhibits
(a) Exhibits
<TABLE>
<CAPTION>
Exhibit
No. Description
- ------- -----------
<S> <C>
3.1+ Restated Certificate of Incorporation of the Registrant (as amended on June 23,
1997)
3.2+ Amended and Restated By-Laws of the Registrant (as amended on June 19, 1997)
4.1+ Specimen certificate for shares of Common Stock
4.2+ Amended and Restated Class B Common Stock and Warrant Purchase
Agreement dated June 20, 1997, between the Registrant and each of the
Institutional Investors
4.3+ Stockholders Agreement, dated August 30, 1996 (the "Stockholders Agreement),
among the Registrant, the Institutional Investors, each Management Stockholder
from time to time party thereto, each Physician Stockholder from time to time
party thereto and other existing stockholders from time to time party thereto
4.4+ Amendment No. 1 to Stockholders Agreement
4.5+ Amendment No. 2 to Stockholders Agreement
4.6+ Stockholders Agreement dated August 9, 1996 between the Registrant and certain
Springfield Stockholder Physicians.
4.7+ Registration Rights Agreement dated August 9, 1996, by
and among the Registrant and certain Springfield Stockholder Physicians.
5.1+ Opinion of Hale and Dorr LLP
10.1+ 1995 Equity Incentive Plan form of non-statutory stock option agreement
10.2+ Management Agreement dated August 30, 1996, between the Registrant and Bain
Capital Partners V, L.P., a Delaware limited partnership
10.3+ Lease dated November 1995 between Shorenstein Management, Inc. as trustee for
SRI Two Realty Trust and the Registrant
10.4+ Lease dated December 9, 1996 between Steven M. Roberts, trustee of
Northernedge/Plant One Realty Trust and the Registrant
10.5+ Maryland Full-Service Office Lease of Camden Yards North Warehouse dated
October 12, 1995, by and between the Maryland Stadium Authority and the
Registrant
10.6+ Form of Merger Agreement dated December 11, 1996, among the Registrant, the
Flagship Affiliated Group and certain of the Flagship Stockholder Physicians
and their practices.
10.7+ Form of Asset Purchase Agreement dated December 11, 1996, among the
Registrant, the Flagship Affiliated Group and certain of the Flagship Stockholder
Physicians and their practices
10.8+ Form of Affiliated Agreement dated December 11, 1996, among the Registrant,
the Flagship Affiliated Group and certain of the Flagship Stockholder Physicians
</TABLE>
II-4
<PAGE>
<TABLE>
<CAPTION>
Exhibit
No. Description
- ------- -----------
<S> <C>
10.9+ Services Agreement dated December 11, 1996, between the Registrant and the
Flagship Affiliated Group (the "Flagship Service Agreement")
10.10+ Form of Employment Agreement dated December 11, 1996, between the Flagship
Affiliated Group and each Flagship Stockholder Physician
10.11+ Form of Shareholder Designation and Stock Transfer Agreement dated
December 11, 1996, among the Registrant, the Flagship Affiliated Group and the
Flagship Affiliated Group Stockholder, Laura M. Mumford, M.D.
10.12+ Form of Merger Agreement among the Registrant, the Springfield Affiliated
Group and the Springfield Stockholder Physicians and their practices
10.13+ Form of Asset Purchase Agreement among the Registrant, the Springfield
Affiliated Group and certain Springfield Stockholder Physicians
10.14+ Form of Employment Agreement between the Springfield Affiliated Group and
certain Springfield Stockholder Physicians, including General Terms and
Conditions of Employment for the Springfield Affiliated Group and Form of
Addendum thereto relating to the Springfield Stockholder Physicians
10.15+ Form of Affiliation Agreement dated August 30, 1996, among the Registrant, the
Springfield Affiliated Group and the Springfield Stockholder Physicians
10.16+ Services Agreement dated August 30, 1996, among the Registrant and the
Springfield Affiliated Group
10.17+ Shareholder Designation and Stock Transfer Agreement dated August 9, 1996,
among the Registrant, the Springfield Affiliated Group and the Springfield
Affiliated Group Stockholder, Jay Ungar, M.D.
10.18+ Credit Agreement dated January 16, 1997 among the Registrant, Banker's Trust
Company, as Agent, and various lending institutions
10.19+ Employment Agreement dated June 21, 1995 between the Registrant and Jerilyn
P. Asher, as amended in January 1996 and on August 30, 1996
10.20+ Employment Agreement dated June 21, 1995 between the Registrant and Arlan F.
Fuller, M.D., as amended in January 1996
10.21+ Office Building Lease dated March 18, 1997, by and between Harbor Court
Associates and the Registrant
10.22+ Amended and Restated Services Agreement dated July , 1997, among Flagship Health
II, P.A. ("Flagship II") and the Registrant
10.23+ Agreement dated July 31, 1997 by and among the Registrant, Flagship, Flagship II and
the Stockholders and Optionholders of Clinical Associates
10.24+ Merger Agreement dated July 31, 1997, between the Registrant, Flagship II, Clinical
Associates and the Stockholders and Optionholders of Clinical Associates.
10.25+ Amendment to the Management Agreement (Exhibit 10.2)
11.1+ Statement regarding computation of earnings per share
21.1+ Subsidiaries of the Registrant
23.1+ Consent of Hale and Dorr LLP (contained in Exhibit 5.1)
23.2 Consent of Ernst & Young LLP, Independent Auditors
23.3+ Consent of Scheiner, Mister & Grandizio, P.A., Independent Auditors
24.1+ Power of Attorney (See Page II-7 to Registration Statement as originally filed)
27+ Financial Data Schedule
</TABLE>
............................
+ Previously filed.
Item 17. Undertakings
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the provisions continued in the Restated Certificate of
Incorporation and Amended and Restated By-Laws of the Registrant and the laws of
the State of Delaware, or otherwise, the Registrant has been advised that in the
opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Securities Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the Registrant of expenses incurred or
paid by a director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
II-5
<PAGE>
Item 17. Undertakings
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the provisions contained in the Restated Certificate of
Incorporation and Amended and Restated By-Laws of the Registrant and the laws of
the State of Delaware, or otherwise, the Registrant has been advised that in the
opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Securities Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the Registrant of expenses incurred or
paid by a director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are
being made, a post-effective amendment to this Registration Statement:
(i) To include any prospectus required by section
10(a)(3) of the Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events
arising after the effective date of the registration
statement (or the most recent post-effective
amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the
information set forth in the registration statement.
Notwithstanding the foregoing, any increase or
decrease in volume of securities offered (if the
total dollar value of securities offered would not
exceed that which was registered) and any deviation
from the low or high end of the estimated maximum
offering range may be reflected in the form of
prospectus filed with the Commission pursuant to
Rule 424(b) if, in the aggregate, the changes in
volume and price represent no more than a 20% change
in the maximum aggregate offering price set forth in
the "Calculation of Registration Fee" table in the
effective registration statement.
(iii) To include any material information with respect to
the plan of distribution not previously disclosed in
the registration statement or any material change to
such information in the registration statement.
(2) That, for the purpose of determining any liability under
the Securities Act, each such post-effective amendment shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
(3) To remove from registration by means of a post-
effective amendment any of the securities being registered which remain
unsold at the termination of the offering
II-6
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended,
the Registrant has duly caused this Registration Statement to be signed on its
behalf by the undersigned, in the City of Waltham, Commonwealth of
Massachusetts, on the 10th day of November, 1997.
PHYSICIANS QUALITY CARE, INC.
By: /s/ Jerilyn P. Asher
--------------------------------------
Jerilyn P. Asher
Chief Executive Officer, Secretary and
Chairman of the Board
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Jerilyn P. Asher Chief Executive Officer, Secretary November 10, 1997
- ----------------------------------- and Chairman of the Board
Jerilyn P. Asher (Principal Executive Officer)
/s/ Samantha J. Trotman Chief Financial Officer November 10, 1997
- ----------------------------------- (Principal Financial and
Samantha J. Trotman Accounting Officer)
* President and Director November 10, 1997
- -----------------------------------
Dana Frank, M.D.
* Executive Vice President, Medical November 10, 1997
- ----------------------------------- Affairs and Director
Arlan F. Fuller, Jr., M.D.
* Director November 10, 1997
- -----------------------------------
Alphonse Calvanese, M.D.
* Director November 10, 1997
- -----------------------------------
Leslie Fang, M.D.
* Director November 10, 1997
- -----------------------------------
Stephen G. Pagliuca
</TABLE>
II-8
<PAGE>
<TABLE>
Signature Title Date
--------- ----- ----
<S> <C> <C>
* Director November 10, 1997
--------------------------------
Marc Wolpow
* Director November 10, 1997
- ---------------------------------
Ira Fine, M.D.
Director November 10, 1997
- ---------------------------------
Timothy T. Weglicki
*By Jerilyn P. Asher
Attorney-in-Fact
/s/ Jerilyn P. Asher
- ---------------------------------
Jerilyn P. Asher
</TABLE>
II-9
<PAGE>
<TABLE>
<CAPTION>
Exhibit
No. Description
- ------- -----------
<S> <C>
3.1+ Restated Certificate of Incorporation of the Registrant (as amended on June 23,
1997)
3.2+ Amended and Restated By-Laws of the Registrant (as amended on June 19, 1997)
4.1+ Specimen certificate for shares of Common Stock
4.2+ Amended and Restated Class B Common Stock and Warrant Purchase
Agreement dated June 20, 1997, between the Registrant and each of the
Institutional Investors
4.3+ Stockholders Agreement, dated August 30, 1996 (the "Stockholders Agreement),
among the Registrant, the Institutional Investors, each Management Stockholder
from time to time party thereto, each Physician Stockholder from time to time
party thereto and other existing stockholders from time to time party thereto
4.4+ Amendment No. 1 to Stockholders Agreement
4.5+ Amendment No. 2 to Stockholders Agreement
4.6+ Stockholders Agreement dated August 9, 1996 between the Registrant and certain
Springfield Stockholder Physicians.
4.7+ Registration Rights Agreement dated August 9, 1996, by
and among the Registrant and certain Springfield Stockholder Physicians.
5.1+ *Opinion of Hale and Dorr LLP
10.1+ 1995 Equity Incentive Plan form of non-statutory stock option agreement
10.2+ Management Agreement dated August 30, 1996, between the Registrant and Bain
Capital Partners V, L.P., a Delaware limited partnership
10.3+ Lease dated November 1995 between Shorenstein Management, Inc. as trustee for
SRI Two Realty Trust and the Registrant
10.4+ Lease dated December 9, 1996 between Steven M. Roberts, trustee of
Northernedge/Plant One Realty Trust and the Registrant
10.5+ Maryland Full-Service Office Lease of Camden Yards North Warehouse dated
October 12, 1995, by and between the Maryland Stadium Authority and the
Registrant
10.6+ Form of Merger Agreement dated December 11, 1996, among the Registrant, the
Flagship Affiliated Group and certain of the Flagship Stockholder Physicians
and their practices.
10.7+ Form of Asset Purchase Agreement dated December 11, 1996, among the
Registrant, the Flagship Affiliated Group and certain of the Flagship Stockholder
Physicians and their practices
10.8+ Form of Affiliated Agreement dated December 11, 1996, among the Registrant,
the Flagship Affiliated Group and certain of the Flagship Stockholder Physicians
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Exhibit
No. Description
- ------- -----------
<S> <C>
10.9+ Services Agreement dated December 11, 1996, between the Registrant and the
Flagship Affiliated Group (the "Flagship Service Agreement")
10.10+ Form of Employment Agreement dated December 11, 1996, between the Flagship
Affiliated Group and each Flagship Stockholder Physician
10.11+ Form of Shareholder Designation and Stock Transfer Agreement dated
December 11, 1996, among the Registrant, the Flagship Affiliated Group and the
Flagship Affiliated Group Stockholder, Laura M. Mumford, M.D.
10.12+ Form of Merger Agreement among the Registrant, the Springfield Affiliated
Group and the Springfield Stockholder Physicians and their practices
10.13+ Form of Asset Purchase Agreement among the Registrant, the Springfield
Affiliated Group and certain Springfield Stockholder Physicians
10.14+ Form of Employment Agreement between the Springfield Affiliated Group and
certain Springfield Stockholder Physicians, including General Terms and
Conditions of Employment for the Springfield Affiliated Group and Form of
Addendum thereto relating to the Springfield Stockholder Physicians
10.15+ Form of Affiliation Agreement dated August 30, 1996, among the Registrant, the
Springfield Affiliated Group and the Springfield Stockholder Physicians
10.16+ Services Agreement dated August 30, 1996, among the Registrant and the
Springfield Affiliated Group
10.17+ Shareholder Designation and Stock Transfer Agreement dated August 9, 1996,
among the Registrant, the Springfield Affiliated Group and the Springfield
Affiliated Group Stockholder, Jay Ungar, M.D.
10.18+ Credit Agreement dated January 16, 1997 among the Registrant, Banker's Trust
Company, as Agent, and various lending institutions
10.19+ Employment Agreement dated June 21, 1995 between the Registrant and Jerilyn
P. Asher, as amended in January 1996 and on August 30, 1996
10.20+ Employment Agreement dated June 21, 1995 between the Registrant and Arlan F.
Fuller, M.D., as amended in January 1996
10.21+ Office Building Lease dated March 18, 1997, by and between Harbor Court
Associates and the Registrant
10.22+ Amended and Restated Services Agreement dated July , 1997, among Flagship Health
II, P.A. ("Flagship II) and the Registrant
10.23+ Agreement dated July 31, 1997 by and among the Registrant, Flagship, Flagship II and
the Stockholders and Optionholders of Clinical Associates
10.24+ Merger Agreement dated July 31, 1997, between the Registrant, Flagship II, Clinical
Associates and the Stockholders and Optionholders of Clinical Associates.
10.25+ Amendment to the Management Agreement (Exhibit 10.2)
11.1+ Statement regarding computation of earnings per share
21.1+ Subsidiaries of the Registrant
23.1+ Consent of Hale and Dorr LLP (contained in Exhibit 5.1)
23.2 Consent of Ernst & Young LLP, Independent Auditors
23.3+ Consent of Scheiner, Mister & Grandizio, P.A., Independent Auditors
24.1+ Power of Attorney (See Page II-7 to Registration Statement as originally filed)
27+ Financial Data Schedule
</TABLE>
............................
+ Previously filed.
Item 17. Undertakings
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the provisions continued in the Restated Certificate of
Incorporation and Amended and Restated By-Laws of the Registrant and the laws of
the State of Delaware, or otherwise, the Registrant has been advised that in the
opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Securities Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the Registrant of expenses incurred or
paid by a director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
<PAGE>
Exhibit 23.2
Consent of Independent Auditors
We consent to the reference to our firm under the caption "Summary Financial
Data" and "Selected Financial Data" and to the use of our reports:
. dated March 28, 1997 as it relates to Physicians Quality Care, Inc.
. dated November 21, 1996 as it relates to Springfield Medical Associates,
Inc., Alphonse F. Calvanese, M.D., P.C., Cardiology and Internal Medicine
Associates, Inc., James F. Haines and William J. Belcastro, Partnership, Jay
M. Ungar, M.D. and Western Massachusetts Medical Group, Inc. . dated
September 20, 1996 as it relates to Annapolis Medical Specialists, LLP, Drs.
Fortier, Libber, Clemmens & Weimer, P.A., Drs. Goldgeier, Levine & Freidman,
P.A., Park Medical Associates, P.A. and Park Medical Labs, Inc. and Drs.
Sigler, Roskes, Holden & Schuberth, P.A.
. dated November 18, 1996 as it relates to Koeppel, Rosen, Rudikoff, M.D., P.C.
and Drs. Pakula, Davick & Bogue, P.A.
all included in Amendment No. 4 to the Registration Statement (Form S-1 No.
333-26137) and related Prospectus of Physicians Quality Care, Inc. for the
registration of 8,000,000 shares of its common stock.
Ernst & Young LLP
Boston, Massachusetts
November 6, 1997
