<PAGE>
As filed with the Securities and Exchange Commission on July 7, 1997
Registration No. 333-26137
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------------
Amendment No. 1 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: [_]
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Proposed Maximum
Title of Each Class of Amount to be Offering Price per Proposed Maximum Amount of
Securities to be Registered Registered Share Aggregate Offering Price Registration Fee/(1)/
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Class A Common Stock, $.01 par value 8,000,000 $3.00 $24,000,000 $7,273
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
/(1)/ Previously paid.
---------------------------------
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 JULY 7, 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, 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. The Affiliations generally involve the merger of a physician group
into, or the sale of a physician group's assets to, Flagship, 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 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 shares 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.
July __,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
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Summary........................................................ 4
Risk Factors.............................................................. 11
Use of Proceeds........................................................... 21
Dilution.................................................................. 21
Dividend Policy........................................................... 22
Selected Financial Data................................................... 23
Management's Discussion and Analysis of Financial Condition and Results
of Operations............................................................ 26
Business.................................................................. 32
Management................................................................ 48
Certain Transactions...................................................... 53
Plan of Distribution...................................................... 54
Principal Stockholders.................................................... 55
Description of Capital Stock.............................................. 57
Shares Eligible for Future Sale........................................... 62
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
<PAGE>
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 $1.1 million for the three month period ended March 31, 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
<PAGE>
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 mergers or
asset sales 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 Company's Class A Common Stock, $.01 par value (the "Class A Common
Stock") and in some cases cash. The relative proportion of the consideration to
be paid in cash and 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 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 the 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 Common Stock and $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 March
31, 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, Medical Care Partners, P.C. (the
"Springfield Affiliated Group"), that 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 Health, P.A. (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 treat patients in
western Massachusetts and northern Connecticut. Twenty-four (24) of the
physicians are engaged in primary care practices and fifteen (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 (41) of the Flagship
physicians are engaged in primary care practices, including twenty (20)
physicians with pediatric practices. Eighteen (18) 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 MCP 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, a Maryland professional association ("Clinical
Associates"), and the stockholders 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 million and 4,800,000 shares of Common Stock.
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 twenty-nine primary
care physicians, including physicians with pediatric practices, and forty-two
physicians engaged in specialist practices. Clinical Associates had patient
service revenue of approximately $36.8 million for the fiscal year ended July
31, 1996 and $26.9 million for the 9 months ended March 31, 1997. Approximately
60% 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
<PAGE>
The Offering
<TABLE>
<S> <C>
Common Stock offered by the Company............................................. 8,000,000 shares
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"). 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 Class C shares to the Investors on June 23, 1997 and the
Investors have the right to purchase up to an additional 6,153,846 Class C
shares 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
<PAGE>
Summary Financial Data
(in thousands, except per share data)
The following summary financial data for the Company and Springfield
Medical Associates, Inc. (the "Predecessor") should be read in conjunction with
the financial statements and notes thereto, "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the pro forma
financial statements of the Company and notes thereto, included elsewhere in
this Prospectus. The summary financial data of the Predecessor as of December
31, 1993, 1994 and 1995 and for the period from January 1, 1996 to August 30,
1996, have been derived from the financial statements of the Predecessor, which
have been audited by Ernst & Young LLP, independent auditors. 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 March 31, 1997, and for the three months ended
March 31, 1996 and 1997 are derived from unaudited financial statements of the
Company and the Predecessor. 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 three months ending
March 31, 1997 are not necessarily indicative of the results that may be
expected for the entire year ended December 31, 1997.
9
<PAGE>
<TABLE>
Predecessor PQC
-------------------------------------------------------- ----------------------------
Period from Three Period from
January 1, months March 20, 1995
1996 to ended (inception) to Year Ended
August 30, March 31, December 31, December 31,
1993 1994 1995 1996 1996 1995 1996
------ ------ ------ ------ ------ ------ ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Statement of Operations Data:
Net patient service revenue $6,188 $ 6,664 $ 7,022 $ 5,986 $1,855 $ - $6,027
Retained by physicians 2,383 2,470 2,315 1,080 611 - 2,195
Management fee revenue - - - - - - 3,832
Nonphysician salaries and benefits 1,616 1,814 1,930 1,215 459 - 1,816
Other practice expenses 1,374 1,613 1,922 1,733 523 - 535
General corporate expenses - - - - - 2,062 5,953
Depreciation and amortization 98 97 128 97 30 6 194
Provision for bad debts 669 755 885 1,203 288 - 214
Operating income (loss) 48 (85) (158) 658 (56) (2,068) (4,882)
Other, net (15) (14) 114 78 30 18 (13)
Income (loss) before taxes 33 (99) (44) 736 (26) (2,050) (4,895)
Income taxes (benefit) (2) (37) (130) 298 (97) 32 78
Net income (loss) $35 $(62) $86 $438 $ 71 $(2,082) $(4,973)
Net income (loss) per common share $ (0.27) $ (1.80)
Weighted average common shares and
common share equivalents outstanding 7,706 10,786
<CAPTION>
PQC
--------------------------------------------------------------------------------------
Pro Forma Actual Pro Forma
--------------------------------- -------------- -----------------------------------
Year Three months
Ended Year ended
December 31, Ended Three months March 31, Three months
1996 December 31, ended 1997 ended March 31,
Excluding 1996 Including March 31, Excluding 1997 Including
Clinical (1)(3) Clinical (2)(3) 1997 Clinical (3) Clinical (2)(3)
---------- ---------- ------ ---------- ----------
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Net patient service revenue $34,475 $70,599 $10,553 $10,553 $19,691
Retained by physicians 11,678 26,542 3,731 3,731 7,505
Management fee revenue 22,795 44,057 6,821 6,821 12,186
Nonphysician salaries and benefits 8,618 14,818 3,141 3,141 4,823
Other practice expenses 9,439 16,680 688 688 2,371
General corporate expenses 6,286 12,705 3,438 3,438 5,175
Depreciation and amortization 1,216 1,871 342 342 506
Provision for bad debts 1,880 3,221 273 273 593
Operating income (loss) (4,644) (5,238) (1,060) (1,060) (1,282)
Other, net 324 324 (27) (27) (27)
Income (loss) before taxes (4,320) (4,914) (1,087) (1,087) (1,309)
Income taxes (benefit) - - - - -
Net income (loss) $(4,320) $(4,914) $(1,087) $(1,087) $(1,309)
Net income (loss) per common share $ (0.63) $ (0.56) $ (0.04) $ (0.03) $ (0.04)
Weighted average common shares and
common share equivalents outstanding 29,739 34,539 24,757 32,449 37,249
</TABLE>
<PAGE>
<TABLE>
<CAPTION> Predecessor PQC
--------------- ---------------------------------------------------------------------
Actual Pro Forma
-------------------------- -----------------------------------------
March 31, March 31,
December 31, December 31, March 31, 1997 1997
1994 1995 1995 1996 1997 Excluding Clinical(3) Including Clinical(2)(3)
------ ------ ------ ------ --------- --------------------- ------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance Sheet Data:
Cash and cash equivalents............... $41 $179 $3,480 $1,275 $495 $25,495 $22,841
Net current assets ..................... 259 245 2,651 2,217 1,259 26,259 25,413
Total assets............................ 1,545 1,892 4,363 39,354 42,974 67,974 86,223
Total current liabilities............... 942 1,257 850 6,488 8,326 8,326 10,788
Long-term obligations................... 253 198 1,410 1,287 1,387 1,387 2,774
Class A Common Stock, subject to put.... - - - 31,851 33,283 33,283 47,683
Total stockholders' equity (deficiency). $350 $436 $2,104 $(272) $(22) $24,978 $24,978
</TABLE>
(1) Reflects affiliations completed through December 31, 1996 with the
Springfield Affiliated Group and the Flagship Affiliated Group.
(2) Reflects the transactions referred to in note 1 and the Clinical
Associates transaction as if completed at the beginning of the period presented
in the accompanying Pro forma Statements of Operations, and at March 31, 1997 in
the accompanying Pro forma Balance Sheet. See Pro-forma financial statements and
"Business - Clinical Associates Transaction."
(3) The proforma balance sheets as of March 31, 1997 reflect the issuance of
7,692,309 shares of PQC Class C Common Stock for total consideration of
$25,000,000 in connection with the Equity Financing. The proforma statements of
operations include the pro forma effect of the shares issued in connection with
the Equity Financing, but do not give effect to the use of proceeds.
12
<PAGE>
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 three-month
period ended March 31, 1997, the Company recorded a net loss of $1,086,817. 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
three-months ended March 31, 1997, net cash used by the Company in operating
activities were $5.3 million and $3.8 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
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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. 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
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 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. 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 Class A Common Shares 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 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 Common Stock at the time
of exercise. Any additional equity issuance could have an adverse effect on the
value of the shares of 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's 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
Stockholder 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. This right will terminate upon the completion of a
public offering in which PQC issues at least $50 million and meet certain other
criteria. The "put" rights are only triggered by death or disability (and in a
few instances retirement) and only apply until a qualifying public offering has
been completed. To the extent that the "put" rights 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.
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. Accordingly, the percentage ownership interest
of each then existing stockholder in the Company will be reduced proportionately
and, depending upon the valuation at which such securities are issued and the
method for determining the value of practices that enter into affiliation
transactions, such issuances may be dilutive to the then existing stockholders.
Certain officers of the Company also acquired their interest in the Company at a
substantially lower cost per share than the value being place upon the Common
Stock in the Affiliations. The net tangible book value per share at March 31,
1997 was ($2.68) ($0.12 per share if the put rights of certain stockholders are
not treated as a liability). The valuation of the Common Stock in the Clinical
Associates transaction is $3.00 per share. After adjustment for the Clinical
Associates transaction, the net tangible book value for shares would be ($6.94)
($0.05 per share if the put rights of certain stockholders are not treated as a
liability), resulting in a decrease of $4.26 (a decrease of $0.07 per share if
the put rights of certain stockholders are not treated as a liability) per share
in the net tangible book value of shares outstanding at March 31, 1997. The
purchase price per share in the Clinical Associates transaction ($3.00) is
$9.94 ($2.93 per share if the put rights of certain stockholders are not treated
as a liability) in excess of the net tangible book value of such shares. The
offering price for the Common Stock in any future offering has not yet been
determined but is expected to be substantially in excess of the net tangible
book value per share before and immediately after such sale. See "Dilution."
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."
21
<PAGE>
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
acquired. At March 31, 1997, the Company had intangible assets of approximately
$30.4 million reflected on its balance sheet and, on a pro forma basis
reflecting the Clinical Associates transaction, has intangible assets of
approximately $45.5 million as of March 31, 1997. The Company amortizes such
intangible assets over a 40 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 three month period ended March 31, 1997,
amortization of intangible assets contributed $169,835 to the Company's net loss
of $1,086,817. 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."
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 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
covered by the Prospectus may be issued in future Affiliations.
<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
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,
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 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.
The net tangible book value per share at March 31, 1997 was ($2.68)
($0.12 per share if the put rights of certain stockholders are not treated as a
liability). The valuation of the Common Stock in the Clinical Associates
transaction is $3.00 per share. After adjustment for the Clinical Associates
transaction, the net tangible book value for shares will be ($6.94) ($0.05 per
share if the put rights of certain stockholders are not treated as a liability),
resulting in a decrease of $4.26 per share (a decrease of $0.07 per share if the
put rights of certain stockholders are not treated as a liability) in the net
tangible book value of shares outstanding at March 31, 1997. The purchase price
per share in the Clinical Associates transaction ($3.00) is $9.94 ($2.93 per
share if the put rights of certain stockholders are not treated as a liability)
in excess of the net tangible book value of such shares. The offering price for
the Common Stock in any future offering has not yet been determined but
23
<PAGE>
is expected to be substantially in excess of the net tangible book value per
share before and immediately after such sale.
DIVIDEND POLICY
PQC has not declared or paid any dividends on its 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 and the
Predecessor should be read in conjunction with the financial statements and
notes thereto, "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and the pro forma financial statements of the Company and
the notes thereto, included elsewhere in this Prospectus. The selected financial
data of the Predecessor as of December 31, 1993, 1994 and 1995 and for the
period from January 1, 1996 to August 30, 1996, have been derived from the
financial statements of the Predecessor, which have been audited by Ernst &
Young LLP, independent auditors. 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 March 31, 1997, and for
the three months ended March 31, 1996 and 1997 are derived from unaudited
financial statements of the Company and the Predecessor. 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 three months ending March 31, 1997 are not necessarily indicative of the
results that may be expected for the entire year ended December 31, 1997.
25
<PAGE>
<TABLE>
<CAPTION>
Predecessor PQC
----------------------------------------------------- -----------------------------
Period from Three Period from
January 1, months March 20, 1995
1996 to ended (inception) to Year ended
August 30, March 31, December 31, December 31,
1993 1994 1995 1996 1996 1995 1996
------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Statement of Operating Data:
Net patient service revenue........ $ 6,188 $ 6,664 $ 7,022 $ 5,986 $ 1,855 $ - $ 6,027
Retained by physicians............. 2,383 2,470 2,315 1,080 611 - 2,195
Management fee revenue............. - - - - - - 3,832
Nonphysician salaries and benefits. 1,616 1,814 1,930 1,215 459 - 1,816
Other practice expenses............ 1,374 1,613 1,922 1,733 523 - 535
General corporate expenses......... - - - - - 2,062 5,953
Depreciation and amortization...... 98 97 128 97 30 6 194
Provision for bad debts............ 669 755 885 1,203 288 - 214
Operating income (loss)............ 48 (85) (158) 658 (56) (2,068) (4,882)
Other, net......................... (15) (14) 114 78 30 18 (13)
Income (loss) before taxes......... 33 (99) (44) 736 (26) (2,050) (4,895)
Income taxes (benefit)............. (2) (37) (130) 298 (97) 32 78
Net income (loss).................. $35 $(62) $86 $438 $71 $(2,082) $(4,973)
Net income (loss) per common share. $ (0.27) $ (1.80)
Weighted average common shares and
common share equivalents
outstanding....................... 7,706 10,786
<CAPTION>
PQC
---------------------------------------------------------------------------------
Pro Forma Actual Pro Forma
---------------------------------- ------------ -------------------------------
Year Three months
Ended Year ended
December 31, Ended Three months March 31, Three months
1996 December 31, ended 1997 ended March 31,
Excluding 1996 Including March 31, Excluding 1997 Including
Clinical(1)(3) Clinical(2)(3) 1997 Clinical(3) Clinical(2)(3)
-------- --------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Statement of Operating Data:
Net patient service revenue........ $34,475 $70,599 $10,553 $10,553 $19,691
Retained by physicians............. 11,678 26,542 3,731 3,731 7,505
Management fee revenue............. 22,795 44,057 6,821 6,821 12,186
Nonphysician salaries and benefits. 8,618 14,818 3,141 3,141 4,823
Other practice expenses............ 9,439 16,680 688 688 2,371
General corporate expenses......... 6,286 12,705 3,438 3,438 5,175
Depreciation and amortization...... 1,216 1,871 342 342 506
Provision for bad debts............ 1,880 3,221 273 273 593
Operating income (loss)............ (4,644) (5,238) (1,060) (1,060) (1,282)
Other, net......................... 324 324 (27) (27) (27)
Income (loss) before taxes......... (4,320) (4,914) (1,087) (1,087) (1,309)
Income taxes (benefit)............. - - - - -
Net income (loss).................. $(4,320) (4,914) (1,087) (1,087) (1,309)
Net income (loss) per common share. (0.63) $(0.56) $(0.04) $(0.03) $(0.04)
Weighted average common shares
and common share equivalents
outstanding....................... 29,739 34,539 24,757 32,449 37,249
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Predecessor PQC
---------------- ------------------------------------------------------------------
Actual Pro Forma
----------------------- -----------------------------------------
March 31, March 31,
December 31, December 31, March 31, 1997 1997
1994 1995 1995 1996 1997 Excluding Clinical(3) Including Clinical(2)(3)
------ -------- ------- ------- --------- --------------------- -----------------------
Balance Sheet Data:
<S> <C> <C> <C> <C> <C> <C> <C>
Cash and cash equivalents................ $41 $179 $3,480 $1,275 $495 $25,495 $22,841
Net current assets ...................... 259 245 2,651 2,217 1,259 26,259 25,413
Total assets............................. 1,545 1,892 4,363 39,354 42,974 67,974 86,223
Total current liabilities................ 942 1,257 850 6,488 8,326 8,326 10,788
Long-term obligations.................... 253 198 1,410 1,287 1,387 1,387 2,774
Class A Common Stock, subject to put..... - - - 31,851 33,283 33,283 47,683
Total stockholders' equity (deficiency).. $350 $436 $2,104 $(272) $(22) $24,978 $24,978
</TABLE>
(1) Reflects affiliations completed through December 31, 1996 with the
Springfield Affiliated Group and the Flagship Affiliated Group.
(2) Reflects the transactions referred to in note 1 and the Clinical Associates
transaction as if completed at the beginning of the period presented in the
accompanying Proforma Statements of Operations, and at March 31, 1997 in the
accompanying Proforma Balance Sheet. See Pro-forma financial statements and
"Business -Clinical Associates Transaction."
(3) The proforma balance sheets as of March 31, 1997 reflect the issuance of
76,923,309 shares of PQC Class C Common Stock for total consideration of
$25,000,000 in connection with the Equity Financing. The proforma statements of
operations include the pro forma effect of the shares issued in connection with
the Equity Financing, but do not give effect to the use of proceeds.
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," the Company's Financial Statements and Notes thereto and the
Predecessor'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, including the Predecessor. 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.
Financial information prior to March 20, 1995 represents the results of
operations of the Predecessor. Because the Springfield Affiliation was
consummated on August 30, 1996 and the Flagship Affiliation was completed on
December 11, 1996, the financial statements of PQC are not directly comparable
to those of the Predecessor. For purposes of comparison, this discussion reviews
the actual results of PQC and the pro forma results of the operations of the
Company as if the affiliation transactions had occurred at the beginning of 1996
and the aggregate results of operations for the Predecessor.
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
First Quarter Ended March 31, 1997 and First Quarter Ended March 31, 1996.
The completion of the Springfield and Baltimore affiliation
transactions resulted in the Company having net revenues of $10.6 million for
the first quarter ended March 31, 1997 compared to no revenues in the first
quarter fiscal of 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 $2.04 million increase in general corporate expenses reflects the
inclusion of non-salary clinic expenses. Amortization of goodwill 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.
Pro Forma Results of Operations for Year Ended December 31, 1996
PQC on a pro forma basis, as if the Springfield and Baltimore
transactions had been completed on January 1, 1996, had management fee revenue
of approximately $22.8 million. Operating expenses were $27.4 million, the most
significant of which included $18.1 million of non-physician practice expenses
and $6.3 million of general corporate expense. The net loss for the period was
$4.3 million.
Year Ended December 31, 1996 and Period from March 20, 1995 to December 31, 1995
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.
The Predecessor
Three Months Ended March 31, 1996.
Net patient service revenue was $1.9 million for this first quarter
period. This is 21% of the net patient service revenue recorded in 1996 and
therefore consistent with result for the full year. Physician compensation was
$0.6 million and is 30% of the full year results. This appears high due to the
fact that year ended 1996 physician compensation does not include distribution
of net income to physicians. Non-physician salaries and benefits were $459,000
and 22% of the full year. Other non-salary practice expenses were 20% of the
full year. The net income recorded was $71,000 and 17% of the 1995 results.
Year Ended December 31, 1996 (pro forma) and December 31, 1995
The Predecessor's net patient revenue from fiscal 1996 to fiscal 1995
increased by 27.7% from $7.0 million in 1995 to $9.0 million in 1996. Revenue
growth was driven by the maturing practices of new physicians joining the second
Springfield, Massachusetts facility in 1994 and 1995 and increased patient
visits and fees generated for sub-speciality services through the capitated
Medicare Risk contract with Tufts Health Plan's Secured Horizons product.
Physician compensation and benefits declined 13.2% from $2.3 million in 1995 to
$2.0 million in 1996, but the recorded physician compensation does not include
the distribution of net income to physicians. Physician compensation and net
income combined increased by 1.2% from $2.4 million in 1995 to $2.43 million in
1996. Non-physician salaries and benefits increased by 9.5% from $1.9 million in
1995 to $2.1 million in 1996 due to a partial year of increased staffing
necessary to support higher practice volume. Other non-salary practice expenses
increased 41.4% from $2.9 million in fiscal 1995 to $4.1 million in fiscal 1996
and as a percentage of revenue increased from 41.8% to 46.3%. The most
significant reason for the increase of non-salary practice expenses was an
increased reserve for bad debt expense in the first eight months of 1996 as
adjustments to historical accounting policies of the practices combined into the
Springfield Affiliated Group were brought into line with the accounting policies
being applied by PQC. For the last four months of 1996, the Predecessor paid a
management fee of $71,310 to PQC reflecting the new compensation arrangement as
part of the affiliation. Income taxes were deducted in 1996 at a 40% rate due to
the profitability of the business as compared to a tax benefit in 1995. Net
income in 1996 was $421,000 in 1996 as compared to $86,000 in 1995, an increase
of 388%.
Year Ended December 31, 1995 and December 31, 1994
Net patient service revenue increased by 5.4% to $7.02 million for the
year ended December 31, 1995 from $6.66 million for the year ended December 31,
1994. The increase was driven by continued patient volume growth from the
established physicians plus the full year revenues from a second primary care
physician ("PCP") satellite facility and an additional specialist physician. The
earnings retained by physicians declined by 6.3% from $2.47 million in fiscal
1994 to $2.32 million in fiscal 1995 due primarily to the fact that partner
physicians were subsidizing the start-up of the new PCP facility. Non-physician
salaries and benefits grew 6.4% from $1.81 million in fiscal 1994 to $1.93
million in fiscal 1995, reflecting a growth of facilities and number of
physicians. Other practice expenses grew 19.2% over this same period from $1.61
million to $1.92 million due to a full year impact of the opening of the PCP
satellite facility. Depreciation and amortization increased 32.0% from $97,000
in the year ended December 31, 1994 to $128,000 in the year ended December 31,
1995 due to the increase in fixed assets associated with the satellite PCP
facility. Provision for bad debts
31
<PAGE>
increased by 17.2% from $0.76 million to $0.89 to match an increase in accounts
receivable and to reflect different collection assumptions in the payor base.
The net income over this period increased from a loss of $62,000 to a profit of
$86,000 due to lower revenue retained by physicians.
Year Ended December 31, 1994 and December 31, 1993
Net patient service revenue increased by 7.7% to $6.66 million in the
year ended December 31, 1994 from $6.19 million for the year ended December 31,
1993. The increase was driven by continued growth of patient volume through the
group and its PCP satellite facility in Enfield, Connecticut. The earnings
retained by physicians increased by 3.7% from $2.38 million to $2.47 million due
to increased revenues. Non-physician salaries and benefits grew 12.3% over this
period from $1.62 million to $1.81 million, reflecting the increase in support
cost when two new physicians joined the group in August 1994. The physicians
included one specialist and one PCP who staffed a second PCP satellite facility
at a second site in Springfield, Massachusetts. Other practice expenses grew
17.4% over this period from $1.37 million to $1.61 million due primarily to the
set-up of the second PCP satellite facility. Depreciation and amortization
effectively was flat over this period--$97,000 in 1994 and $98,000 in 1993. The
provision for bad debts increased by 12.9% from $0.67 million to $0.76 million
to match an increase in accounts receivable and to reflect different collection
assumptions given changes in the payor base. The net income over this period
decreased from a profit of $35,000 to a loss of $62,000 due to increased costs
related to the satellite facility opening.
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 Common Stock was paid to physicians in the Springfield Affiliated
Group and $2.7 million in cash and $17.1 million in 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 $28 million
of the Company's total assets of $39 million at December 31, 1996. The Company
is amortizing the intangible assets over 40 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's outstanding common stock 13,313,082 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 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 have been recorded at fair value outside
of permanent equity in the accompanying balance sheet. The Company's Stockholder
Agreements also provide that in connection with 10,626,163 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"), a public offering of the Company's common
stock with proceeds to the Company of at least $50 million and the Institutional
Investors each sell shares or have the opportunity to sell shares with a value
equal to 75% of the amount invested in the Company and have sold, or have the
opportunity to sell, 50% of the capital stock into which the Class B and Class C
Common Stock is convertible. 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 for
compensation accounting purposes and, accordingly, has not recorded any
compensation expense for
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these puts and calls. As noted above, at the date of the QPO, the put and call
provisions of the shareholder agreements will expire. On December 31, 1996 and
February 12, 1997, the Company issued an aggregate of 614,000 additional shares
of Common Stock at $2.50 per share for a total consideration of $1.535 million.
The Company has generally purchased the working capital of practices in
affiliation transactions. 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 and the Predecessor had aggregate accounts
receivable of approximately $900,000 at each of December 31, 1995 and 1994. At
March 31, 1997, the Company and its affiliated entities had total net accounts
receivable of $7,163,000.
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 March 31, 1997,
the Company's outstanding borrowings under the Facility were $3.0 million and
the remaining available commitment on such date was $500,000. 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 Common Stock. In August 1996, the
Company issued $1.0 million of convertible notes, all of which were converted
into 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 Common Stock at $2.50 per share for a total consideration
of $1.535 million.
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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 March 31, 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. 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.
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 agree 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 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 is currently discussing a
transaction with Blue Cross/Blue Shield of Massachusetts, Inc. ("BCBS") which,
if completed, would result in certain physicians who are employed by BCBS being
affiliated with the Company. No definitive agreement regarding this transaction
has been reached and the Company understands that BCBS is also discussing the
transaction with at least one other party. 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 the 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 to receive such
additional Common Stock, the compensation arrangements set forth above will be
amended 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 are not met. Until there is no Shortfall (as defined
below) or PQC completes a public offering of its 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 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.
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 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 independent provider associations ("IPA") 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 were obligated to purchase and the Company is
required 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 March 31, 1997, the Company's
outstanding borrowings under the Facility were $3.0 million and the remaining
available commitment at such date was $500,000. On June 25, 1997, the Company
repaid the outstanding principal and interest on the loan and the entire
commitment remains available.
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
$718,514 for the fiscal quarter ended March 31, 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
47
<PAGE>
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 Class
A Shares originally granted to Mr. Greenberg) 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 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 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 March 31, 1997, the Company had 34 employees and the Affiliated
Groups had 553 employees, including 98 physicians.
48
<PAGE>
MANAGEMENT
Executive Officers and Directors
The executive officers and directors of the Company and their ages as
of June 23, 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
<PAGE>
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 Common Stock (adjustable up or down in
response to a change in the number of outstanding shares of 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 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 Common Stock) of the fair market value
of the 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 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 March 31, 1997, the Company had 34 employees, all of whom were
eligible to participate in the 1995 Plan. As of March 31, 1997, options to
purchase an aggregate of 574,836 shares of 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 both 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 $50,000,000, 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) $45,000,000; 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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<PAGE>
C Common Stock is entitled to a distribution upon liquidation (including a
deemed liquidation upon certain mergers) in preference to any other class of
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 Common Stock, and
no Common Stock Director may be removed without the consent of a majority of the
holders of the 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,
61
<PAGE>
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.
62
<PAGE>
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 March 31, 1997, 4,600,000 Class B Shares and 7,692,309
Class C Shares are entitled to demand registration rights and all outstanding
shares of 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 Common Stock.
At March 31, 1997, the Company had outstanding 24,071,614 shares of Class
A Common Stock and Class B 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 March 31, 1997, holders of
14,313,295, 6,984,676, 440,000 and 667,493 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 and February 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.
63
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
PHYSICIANS QUALITY CARE, INC.
Report of Independent Auditors ..........................................
*Balance Sheets as of December 31, 1995 and 1996
and March 31, 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 three months ended March 31, 1996 (Unaudited) and March 31,
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 three
months ended March 31, 1996 (Unaudited) and March 31, 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 three months ended March 31, 1996 (Unaudited) and March 31,
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, 1994 ......................................
Statement of Income for the year ended June 30, 1994 ...................
Statement of Changes in Stockholder's Equity for the year ended June 30,
1994 .................................................................
Statement of Cash Flows for the year ended June 30, 1994 ...............
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 Stockholder's Equity for the year ended June 30,
1996 .................................................................
Statement of Cash Flows for the year ended June 30, 1996 ...............
Notes to Financial Statements ..........................................
UNAUDITED FINANCIAL STATEMENTS OF CLINICAL ASSOCIATES, P.A.
Unaudited Balance Sheet as of March 31, 1997............................
Unaudited Statements of Income (loss) for the nine months ended
March 31, 1996 and March 31, 1997.....................................
Unaudited Statements of Cash Flows for the nine months ended
March 31, 1996 and March 31, 1997.....................................
UNAUDITED PRO FORMA FINANCIAL STATEMENTS OF PHYSICIANS QUALITY CARE, INC.
Unaudited Pro Forma Combined Financial Statements ......................
Unaudited Pro Forma Combined Balance Sheet as of March 31, 1997 ........
Unaudited Pro Forma Combined Statement of Operations for the year ended
December 31, 1996 ....................................................
Unaudited Pro Forma Combined Statement of Operations for the three months
ended March 31, 1997 .................................................
Notes to Unaudited Pro Forma Financial Statements ......................
</TABLE>
<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 three months ended March 31, 1996
(Unaudited) and three months ended March 31, 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, March 31,
1995 1996 1997
--------------------------------------
<S> <C> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 3,479,781 $ 1,275,405 $ 494,907
Accounts receivable, less allowance for doubtful
accounts of $1,070,052 and $1,246,333 in 1996
and 1997 (unaudited), respectively 5,366,647 7,163,199
Prepaid expenses 12,644 698,377 596,063
Due from related parties 1,104,317 1,104,317
Other current assets 8,138 260,452 226,634
---------------------------------------
Total current assets 3,500,563 8,705,198 9,585,120
Intangibles, less accumulated amortization of
$112,625 and $174,287 in 1996 and 1997 (unaudited),
respectively 28,244,274 30,384,466
Deferred affiliation and equity offering costs 772,209 137,831 21,397
Property and equipment, net 90,646 1,489,416 1,979,384
Other assets 169,489 395,293
Deferred tax asset 608,171 608,171
---------------------------------------
---------------------------------------
Total assets $ 4,363,418 $39,354,379 $ 42,973,831
=======================================
</TABLE>
2
<PAGE>
<TABLE>
<CAPTION>
(Unaudited)
December 31 March 31,
1995 1996 1997
-----------------------------------------------
<S> <C> <C> <C>
Liabilities and stockholders' equity (deficit)
Current liabilities:
Accounts payable $ 604,765 $ 2,262,432 $ 2,571,618
Accrued compensation 109,664 2,038,894 1,419,363
Accrued expenses 103,456 1,798,164 1,324,964
Income taxes payable 32,000 69,708 (10,292)
Current portion of note payable - 240,386 3,000,000
Current portion of capital lease obligations - 78,514 20,451
--------------------------------------------
Total current liabilities 849,885 6,488,098 8,326,104
Convertible promissory note 1,410,000 -
Note payable, less current maturities 34,717 -
Capital lease obligations, less current maturities 179,486 303,733
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 March 31, 1997, (unaudited), respectively 31,851,473 33,282,706
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 6,758,533 outstanding at December 31, 1996
and March 31, 1997, (unaudited), respectively 72,359 77,709
Class B-1 common stock, $.01 par value, 15,267,915
shares authorized, 2,442,866 shares issued and
outstanding at December 31, 1996 24,429 24,429
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
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 22,449,773
Accumulated deficit (2,082,264) (21,492,300) (22,579,117)
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 (272,443) (21,760)
--------------------------------------------
Total liabilities and stockholders' equity $ 4,363,418 $ 39,354,379 $42,973,831
============================================
</TABLE>
See accompanying notes.
<PAGE>
Physicians Quality Care, Inc.
Statements of Operations
<TABLE>
<CAPTION>
Period from (Unaudited)
March 20, 1995 Year ended March 31,
(inception) to December 31, -------------------------------
December 31, 1995 1996 1996 1997
----------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net patient service revenue - $ 6,026,452 - $10,552,532
Less: amounts retained by physician groups - 2,194,571 - 3,730,910
----------------------------------------------------------------------------------
Management fee revenue - 3,831,881 - 6,821,622
Operating expenses:
Nonphysician salaries and benefits - 1,816,309 - 3,141,146
Other practice expenses - 535,479 - 687,579
General corporate expenses $ 2,061,737 5,953,117 $ 1,396,789 3,438,148
Depreciation and amortization 6,704 194,481 - 341,534
Provision for bad debts - 214,404 - 273,263
----------------------------------------------------------------------------------
Total expenses 2,068,441 8,713,790 1,396,789 7,881,670
----------------------------------------------------------------------------------
Operating loss (2,068,441) (4,881,909) (1,396,789) (1,060,048)
Other income (expense):
Interest income 108,177 91,104 31,794 3,955
Interest expense (90,000) (104,255) (45,000) (30,724)
----------------------------------------------------------------------------------
18,177 (13,151) (13,206) (26,769)
----------------------------------------------------------------------------------
Loss before income taxes (2,050,264) (4,895,060) (1,409,995) (1,086,817)
Income tax provision 32,000 78,128 9,400 -
----------------------------------------------------------------------------------
Net loss $ (2,082,264) $ (4,973,188) (1,419,395) (1,086,817)
==================================================================================
Net loss available to common stock $ (2,082,264) $ (19,410,036) $(1,419,395) $(1,086,817)
==================================================================================
Net loss per common share $ (0.27) $ (1.80) $ (0.18) $ (0.04)
==================================================================================
Weighted average common shares
outstanding 7,706,250 10,785,605 7,706,250 24,756,907
==================================================================================
</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 March 31, 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
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
acquistion 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)
Net Loss (unaudited)
----------------------------------------------------------------------------
Balance at 3-31-97 (unaudited) - $ - 7,771,033 $77,709 2,442,866 $24,429
============================================================================
<CAPTION>
Series A Convertible Additional
Class B-2 Common Stock Preferred Stock Treasury Stock Paid-in
----------------------------------------------------------------------
Shares Amount Shares Amount Shares Amount Capital
-------------------------------------------------------------------------------------
<S> <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
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
acquistion 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)
Net Loss
-------------------------------------------------------------------------------------
Balance at March 31, 1997 1,557,134 $15,571 - $ - (1,012,500) $(10,125) $ 22,449,773
=====================================================================================
<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
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 (4,973,188) (4,973,188)
-------------------------------------------------------------
Balance at December 31, 1996 $(21,492,300) $ - $ (272,443) 31,851,473
Issuance of Class A Common Stock In
acquistion 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
Net Loss (1,086,817) (1,086,817)
-------------------------------------------------------------
Balance at March 31, 1997 $(22,579,117) $ - (21,760) 33,282,706
=============================================================
</TABLE>
See accompanying notes.
4
<PAGE>
Physicians Quality Care, Inc.
Statements of Cash Flows
<TABLE>
<CAPTION>
(Unaudited)
Three
Period from Months Ended
March 20, 1995 Year ended March 31,
(inception) to December 31 ---------------------------------
December 31, 1995 1996 1996 1997
------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Operating activities
Net loss $(2,082,264) $(4,973,188) $(1,419,395) $(1,086,817)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 6,704 194,481 10,891 341,534
Interest accretion on convertible promissory note 90,000 90,000 45,000 -
Changes in operating assets and liabilities, net of
effects of business acquisitions:
Increase in accounts receivable - (2,422,193) - (1,646,634)
Increase in related party receivable - (1,104,317) - -
Increase/Decrease in prepaid expenses and other assets (20,782) (274,922) (32,708) 158,688
Increase/Decrease in accounts payable, accrued 817,885 3,134,911 188,339 (806,924)
compensation and accrued expenses
Increase in income taxes payable 32,000 37,708 9,400 (80,000)
------------------------------------------------------------------------
Net cash used in operating activities (1,156,457) (5,317,520) (1,198,473) (3,120,153)
Investing activities
Purchase of property and equipment (97,350) (123,866) (57,660) (557,895)
(Increase) decrease in deferred acquisition costs (315,071) 195,436 (266,653) 98,238
Cash paid for affiliation costs - (1,839,274) - (208,188)
Cash paid for affiliation - (5,102,337) - (800,779)
------------------------------------------------------------------------
Net cash used in investing activities (412,421) (6,870,041) (324,313) (1,468,624)
Financing activities
Proceeds from issuance of common stock, net of
issuance costs 15,188 8,309,655 - 1,337,500
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 - 3,000,000
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 (29,617) 18,196
Payments on capital lease obligations - (17,162) (2,381) (216,271)
Cash Paid for Debt issuance cost (331,146)
------------------------------------------------------------------------
Net cash provided by financing activities 5,048,659 9,983,185 (31,998) (3,808,279)
------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 3,479,781 (2,204,376) (1,554,784) (780,498)
Cash and cash equivalents at beginning of period - 3,479,781 3,479,781 1,275,405
------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 3,479,781 $ 1,275,405 $ 1,924,997 $ 494,907
------------------------------------------------------------------------
</TABLE>
Supplemental disclosure of cash flow information:
During the year ended December 31, 1996, the Company entered into capital lease
obligations aggregating $271,000.
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. 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. 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.
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)
Intangibles
The cost of the long-term affiliation agreements, which represents the
affiliation consideration over the fair value of identifiable assets acquired,
has been reflected as "Intangibles" and is being amortized over 40
years, the life of the long-term affiliation agreements.
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.
The Springfield affiliation and the Flagship affiliation have been accounted for
by the purchase method of accounting and accordingly, the purchase price has
been allocated to the tangible assets acquired and liabilities assumed based on
the estimated fair value at affiliation date.
11
<PAGE>
Physicians Quality Care, Inc.
Notes to Financial Statements (continued)
4. Affiliations (continued)
The following table depicts the calculation of the Company's purchase price,
excess of purchase price over the fair value of the acquired assets and the
preliminary allocation to the acquired assets. The determination of the fair
market value of the acquired assets and the allocation of the purchase price to
both tangible and intangible assets are currently being performed and may vary
from values presented below.
<TABLE>
<CAPTION>
Allocation of purchase price:
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>
The following table presents pro forma financial information reflecting the
effects of the Springfield affiliation and the Flagship affiliation as though
they had occurred at the beginning of each period presented. Supplemental net
loss per common share assumes the conversion of the Series A convertible
preferred stock, the convertible bridge loan, and the convertible promissory
note as of January 1, 1996 (see Note 10).
<TABLE>
<CAPTION>
(Unaudited)
Period from
March 20
1995 (Unaudited)
(inception) to Year ended
December 31 December 31
1995 1996
--------------------------------
<S> <C> <C>
Revenue $35,642,000 $ 39,544,000
===================================
Net loss $(1,713,000) $ (3,340,000)
===================================
Net loss available to common stock $(1,713,000) $(17,776,848)
===================================
Net loss per common share $ (0.08) $ (0.81)
===================================
Supplemental net loss per common share $ (0.08) $ (0.74)
===================================
</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 $ 189,458
Furniture and fixtures 7,755 132,946
Office equipment 15,365 935,914
Leasehold improvements 319,658
-------------------------
97,350 1,577,976
Less accumulated depreciation 6,704 88,560
-------------------------
$90,646 $1,489,416
=========================
</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. In addition, the
Company is obligated under operating lease agreements acquired in connection
with the Springfield and Flagship affiliations (see Note 4).
Operating lease expense amounted to $14,679 and $535,479 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)
During 1996, the Company entered into capital lease agreements totaling
approximately $271,000. The Company is obligated under capital lease agreements
acquired in connection with the Springfield and Flagship affiliations (see Note
4).
At December 31, 1996, property, plant and equipment amounts included capitalized
lease assets totaling $232,257, net of accumulated depreciation of $160,629.
Future minimum lease payments under noncancelable capital and operating leases
are as follows:
<TABLE>
<CAPTION>
Capital Leases Operating Leases
-------------------------------------
<S> <C> <C>
1997 $102,602 $ 2,973,587
1998 73,830 2,666,713
1999 71,636 2,256,148
2000 39,991 2,084,329
2001 12,452 856,336
Thereafter 741,497
-------------------------------------
300,511 11,578,610
-------------------------------------
Amounts representing interest (42,511)
-------------------------------------
$258,000 $11,578,610
=====================================
</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 from related parties at December 31, 1996 represent working
capital and other adjustments in connection with the affiliations (see Note 4).
Because of the nature of the Company's arrangements with the affiliated
physician groups, substantially all transactions included in net patient service
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 were assigned to these warrants.
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.
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 for compensation accounting purposes
and, accordingly, has not recorded 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 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
Allow for Doubtful Accts 0 85,763
Net operating loss carryover 0 1,783,956
--------------------------
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%.
In February 1997, the Company issued 472,000 shares of Class A common stock for
$1,180,000 to shareholders and friends of the Company.
In April the Company issued 600,000 shares of Class B common stock to its
institutional investors for total consideration of $1,500,000.
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>
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, 1994, 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, 1994, 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.
December 9, 1994
1
<PAGE>
CLINICAL ASSOCIATES, P.A.
BALANCE SHEET
- --------------------------------------------------------------------------------
June 30, 1994
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
ASSETS
<S> <C>
CURRENT ASSETS
Cash and Cash Equivalents $ 569,851
Accounts Receivable - Trade
(Less reserve for contractual allowances
and doubtful accounts of $2,550,108) (Note 1) 3,986,260
Loans Receivable - Officers (Note 3) 3,000
Other Receivables 20,355
Prepaid Expenses 340,307
----------
TOTAL CURRENT ASSETS 4,919,773
----------
PROPERTY AND EQUIPMENT
Leasehold Improvements 449,786
Furniture and Fixtures 474,998
Office Equipment 375,914
Medical Equipment 422,622
Equipment under Capital Leases (Note 5) 108,173
----------
Total 1,831,493
Less: Accumulated Depreciation 837,315
----------
Total Property and Equipment 994,178
----------
OTHER ASSETS
Deferred Income Tax Asset (Note 7) 14,198
Security Deposits 763
Goodwill - Net of Amortization (Note 2) 802
----------
TOTAL OTHER ASSETS 15,763
----------
TOTAL ASSETS $5,929,714
==========
</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, 1994
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
<S> <C>
CURRENT LIABILITIES
Notes Payable - Related Parties (Note 4) $ 18,386
Current Maturities of Capital Lease Obligations (Note 5) 23,319
Accounts Payable 834,704
Allowance for Claims Incurred but not Reported 1,274,646
Current Portion of Lease Incentive (Note 6) 11,600
Deferred Income Tax Liability (Note 7) 1,137,265
Accrued Expenses and Other Current Liabilities 844,887
Income Taxes Payable (Note 11) 92,113
----------
TOTAL CURRENT LIABILITIES 4,236,920
----------
LONG-TERM LIABILITIES
Notes Payable - Related Parties,
Net of Current Portion (Note 4) 20,590
Obligation Under Capital Leases, Net of Current
Portion (Note 5) 22,177
Lease Incentive, Net of Current Portion (Note 6) 78,300
----------
TOTAL LONG-TERM LIABILITIES 121,067
----------
TOTAL LIABILITIES 4,357,987
----------
STOCKHOLDERS' EQUITY
Common Stock - Par Value - $1.00; authorized
100,000 shares; issued and outstanding
10,250 shares 10,250
Capital in Excess of Par 748,618
Retained Earnings 812,859
----------
TOTAL STOCKHOLDERS' EQUITY 1,571,727
----------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $5,929,714
==========
</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
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
For the Year Ended June 30, 1994
- --------------------------------------------------------------------------------
<S> <C>
NET PATIENT SERVICE REVENUE $34,555,200
-----------
Professional Care and Supplies 9,789,496
Salaries and Wages 15,297,130
Employee Health and Welfare 1,449,915
General and Administrative Expenses 6,683,282
Provision for Bad Debt 54,803
-----------
TOTAL EXPENSES 33,274,626
-----------
NET OPERATING INCOME 1,280,574
Other Income Net 160,804
-----------
NET INCOME BEFORE INCOME TAXES 1,441,378
-----------
PROVISION FOR INCOME TAXES
Current 143,553
Deferred 609,585
-----------
TOTAL PROVISION FOR INCOME TAXES 753,138
-----------
NET INCOME $ 688,240
===========
</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, 1994
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Capital in
Common Excess Retained
Stock of Par Earnings Total
--------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
BALANCE - BEGINNING OF
YEAR $ 10,750 $718,368 $ 249,620 $ 978,738
Purchase and Retirement
of Common Stock (1,000) (49,250) (125,001) (175,251)
Issuance of Common Stock 500 79,500 -0- 80,000
Net Income -0- -0- 688,240 688,240
-------- -------- --------- ----------
BALANCE - END OF YEAR $ 10,250 $748,618 $ 812,859 $1,571,727
======== ======== ========= ==========
</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
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
For the Year Ended June 30, 1994
- --------------------------------------------------------------------------------
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income $ 688,240
Adjustments to Reconcile Net Income to
Net Cash Provided by Operating Activities:
Depreciation 284,121
Amortization 1,600
Net (Gain) Loss on Sale and Disposal of
Property & Equipment 6,094
Net Loss on Sale of Investments 65,765
Deferred Income Taxes 609,585
(Increase) Decrease in Operating Assets:
Accounts Receivable (1,089,549)
Other Receivables 75,861
Prepaid Expenses (41,583)
Security Deposits 2,626
Increase (Decrease) in Operating Liabilities:
Accounts Payable and Allowance for Claims
Incurred but not Reported (444,099)
Lease Incentive Payable (11,600)
Accrued Expenses 483,121
Income Taxes Payable 92,113
-----------
NET CASH PROVIDED BY OPERATING ACTIVITIES 722,295
-----------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of Property and Equipment (416,535)
Proceeds from Disposal of Property and Equipment 95,662
Proceeds from Sale of Investments 976,676
Purchase of Investments (1,042,441)
-----------
NET CASH USED IN INVESTING ACTIVITIES (386,638)
-----------
CASH FLOWS FROM FINANCING ACTIVITIES
Principal Payments on Debt and Obligations Under
Capital Lease (234,666)
Purchase and Retirement of Common Stock (175,251)
Issuance of Common Stock 80,000
-----------
NET CASH USED IN FINANCING ACTIVITIES (329,917)
-----------
</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)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
For the Year Ended June 30, 1994
- --------------------------------------------------------------------------------
<S> <C>
NET INCREASE IN CASH AND CASH EQUIVALENTS $ 5,740
Cash and Cash Equivalents - Beginning of Year 564,111
--------
CASH AND CASH EQUIVALENTS - END OF YEAR $569,851
========
Cash Paid During the Year for:
Interest $ 13,086
========
Income Taxes $ 51,624
========
</TABLE>
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, 1994
- --------------------------------------------------------------------------------
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, 1994, the Company's receivables were as follows:
<TABLE>
<S> <C>
Medicare $1,865,304
Medicaid 190,937
Blue Shield 1,121,481
HMO(s) 591,886
Commercial Insurance and Other 2,766,773
----------
Total 6,536,381
Less: Reserve for Contractual Allowances
and Doubtful Accounts 2,550,108
----------
Accounts Receivable, Net $3,986,273
==========
</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, 1994, the Company received approximately
50% of its patient service revenues under the contracts with HMO(s).
Approximately 42% of patient service revenues were generated under HMO contracts
expiring in December 31, 1994. Another HMO contract, which automatically renews
for one year periods each July unless otherwise terminated, generated patient
service revenues of approximately 8% of the total.
-6-
<PAGE>
CLINICAL ASSOCIATES, P.A.
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
June 30, 1994
- --------------------------------------------------------------------------------
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 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.
Goodwill
- --------
Goodwill is recorded at cost and amortized on a straight-line basis over a five
year period. Cost and accumulated amortization as of June 30, 1994, were $8,000
and $7,198, respectively.
-7-
<PAGE>
CLINICAL ASSOCIATES, P.A.
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
June 30, 1994
- --------------------------------------------------------------------------------
NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Cont.)
- -----------------------------------------------------------
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 of 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 660 Associates, the landlord under several leases in which the Company was a
tenant. During the year ended June 30, 1994, the Company terminated its leasing
relationship with 660 Associates. Total rent expense and amounts paid to buy-
out leasing commitments totalled approximately $811,631.
Some of the Company's stockholders are partners in another partnership, which
owns 50% of Security MDC Associates Partnership, the landlord under another
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.
-8-
<PAGE>
CLINICAL ASSOCIATES, P.A.
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
June 30, 1994
- --------------------------------------------------------------------------------
NOTE 3: RELATED PARTY TRANSACTIONS (Cont.)
- -------------------------------------------
Loans receivable from officers are non-interest bearing, unsecured and are due
over periods not exceeding 12 months.
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).
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 $1,108 payable through June, 1996.
<TABLE>
<S> <C>
$38,976
Less: Current Portion 18,386
-------
Non-Current Portion $20,590
=======
</TABLE>
Future maturities of the non-current portion of long term debt are as
follows:
<TABLE>
<S> <C>
Year ending June 30, 1996 $20,590
=======
</TABLE>
NOTE 5: CAPITAL LEASES
- -----------------------
The Company is the lessee of certain equipment under capital leases expiring in
various years through 1997.
Future minimum lease payments under capital leases are as follows:
<TABLE>
<S> <C>
Year Ending June 30, 1995 $ 26,912
1996 12,778
1997 11,714
--------
Total Commitment Under Capital Leases 51,404
Less: Amount Representing Interest 5,908
--------
Present Value of Future Minimum
Lease Payments 45,496
Less: Current Portion 23,319
--------
TOTAL LONG-TERM PORTION $ 22,177
========
</TABLE>
-9-
<PAGE>
CLINICAL ASSOCIATES, P.A.
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
June 30, 1994
- --------------------------------------------------------------------------------
NOTE 5: CAPITAL LEASES (Cont.)
- -------------------------------
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 68,352
--------
$ 39,821
========
</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, 1995.
NOTE 7: DEFERRED INCOME TAXES
- ------------------------------
The net deferred tax liability in the accompanying balance sheet includes the
following components as of June 30, 1994:
<TABLE>
<S> <C>
Deferred Tax Liability $1,188,446
Deferred Tax Asset (65,379)
Deferred Tax Asset Valuation Allowance -0-
----------
Net Deferred Tax Liability $1,123,067
==========
</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, 1994
- --------------------------------------------------------------------------------
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 plan year are eligible to participate in employer
contributions. At June 30, 1994, the Company estimated and contributed employer
matching contributions in excess of funding requirements in the amount of
$55,521. Total contributions to the Plan for the year ended June 30, 1994
amounted to $845,477.
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>
Year Ended June 30, 1995 $ 1,350,953
1996 1,121,091
1997 1,085,761
1998 1,119,642
1999 1,125,943
Thereafter 5,542,033
-----------
TOTAL MINIMUM FUTURE RENTAL PAYMENTS $11,345,423
===========
</TABLE>
-11-
<PAGE>
CLINICAL ASSOCIATES, P.A.
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
June 30, 1994
- --------------------------------------------------------------------------------
NOTE 9: COMMITMENTS AND CONTINGENCIES (Cont.)
- ----------------------------------------------
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 $972,000.
See Note 3 for additional related party lease expense.
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.
Other claims asserted against the Company by former employees resulted in
settlements in the amount of $140,000, the amount of which is included in
accrued expenses at June 30, 1994. Outside council for the Company has advised
that the settlement disposes of this claim.
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.
-12-
<PAGE>
CLINICAL ASSOCIATES, P.A.
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
June 30, 1994
- --------------------------------------------------------------------------------
NOTE 10: CREDIT RISK
- ---------------------
At June 30, 1994, 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 11: INCOME TAXES
- ----------------------
Current income tax expense consists of the following for the year ended June 30,
1994:
<TABLE>
<S> <C>
Federal $ 35,845
State 7,708
--------
Subtotal 43,553
Prior Year 100,000
--------
TOTAL CURRENT INCOME TAXES $143,553
========
</TABLE>
Prior year tax expense consists of managements' estimate of income tax
liabilities due as a result of an Internal Revenue Service Audit for the year
ended June 30, 1992.
-13-
<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
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
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.
Financial Statements (Unaudited)
Nine months ended March 31, 1997 and 1996
Contents
<TABLE>
<CAPTION>
Financial Statements
<S> <C>
Balance Sheet (Unaudited).....................................................1
Statements of Income (Loss) (Unaudited).......................................2
Statements of Cash Flows (Unaudited)..........................................3
Notes to Financial Statements (Unaudited).....................................4
</TABLE>
<PAGE>
Clinical Associates, P.A.
Balance Sheet (Unaudited)
March 31, 1997
<TABLE>
<CAPTION>
<S> <C>
Assets
Current assets:
Cash and cash equivalents $ 346,147
Accounts receivable (less reserve for
contractual allowances and doubtful
accounts of $3,565,466) 3,784,566
Notes receivable--stockholders 87,448
Other receivables 65,201
Prepaid expenses 265,411
Income taxes receivable 67,499
------------
Total current assets 4,616,272
Property and equipment, net of accumulated
depreciation of $1,384,000 1,229,174
Other assets:
Notes receivable--stockholders 164,377
Cash--restricted 153,483
------------
Total other assets 317,860
------------
Total assets $6,163,306
============
Liabilities and stockholders' equity
Current liabilities:
Current maturities of long-term debt $ 35,000
Current maturities of capital lease
obligation 11,142
Accounts payable 826,177
Allowance for claims incurred but not
reported 1,090,000
Current portion of lease incentive 11,600
Deferred income tax liability 1,304,713
Accrued expenses and other current
liabilities 487,541
------------
Total current liabilities 3,766,173
Long-term liabilities:
Long-term debt, less current maturities 39,084
Lease incentive, net of current portion 43,500
------------
Total long-term liabilities 82,584
------------
Total liabilities 3,848,757
Stockholders' equity:
Common stock, par value--$1.00,
authorized--100,000 shares, issued
and outstanding--10,902 shares 10,902
Capital in excess of par 1,380,634
Retained earnings 923,013
------------
Total stockholders' equity 2,314,549
------------
Total liabilities and stockholders' equity $6,163,306
============
</TABLE>
1
<PAGE>
Clinical Associates, P.A.
Statements of Income (Loss) (Unaudited)
<TABLE>
<CAPTION>
Nine months ended
March 31
1997 1996
----------------------------
<S> <C> <C>
Net patient service revenue $26,878,945 $28,219,561
Expenses:
Professional care and supplies 4,950,535 5,675,963
Salaries and wages 13,867,205 14,015,410
Employee health and welfare 1,285,687 1,257,022
General and administrative expenses 6,211,809 5,628,062
Provision for bad debts 940,937 998,167
----------------------------
Total expenses 27,256,173 27,574,624
----------------------------
Net operating (loss) income (377,228) 644,937
Other income, net 126,264 123,657
----------------------------
Net (loss) income before income taxes (250,964) 768,594
Provision for income taxes - 201,875
----------------------------
Net (loss) income $ (250,964) $ 566,719
============================
</TABLE>
2
<PAGE>
Clinical Associates, P.A.
Statements of Cash Flows (Unaudited)
<TABLE>
<CAPTION>
Nine months ended
March 31
1997 1996
-------------------------
<S> <C> <C>
Operating activities
Net income $ (250,964) $ 566,719
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 208,376 210,185
Deferred income taxes 112,367
(Increase) decrease in operating assets: 555,854 (103,523)
Accounts receivable 139,892 40,803
Prepaid expenses 196,965 (452,508)
Income taxes receivable (23,500) 46,040
Increase (decrease) in operating liabilities:
Accounts payable and allowance for claims
incurred but not reported (53,407) 93,023
Accrued expenses (404,714) (152,061)
-------------------------
Net cash provided by operating activities 368,502 361,045
Investing activities
Purchases of property and equipment (224,339) (222,383)
Repayment of stockholder loans (61,266) (7,917)
Purchase of investments (13,908) (1,083,535)
-------------------------
Net cash used in investing activities (299,513) (1,313,835)
Financing activities
Proceeds from long-term debt 38,751
Principal payments on debt and obligations under
capital lease (11,600)
Issuance of common stock 250,007 45,000
Proceeds from related entities 500,747
-------------------------
Net cash provided by financing activities 277,158 545,747
-------------------------
Net increase (decrease) in cash and cash equivalents 346,147 (407,043)
Cash and cash equivalents at beginning of year --- 407,043
-------------------------
Cash and cash equivalents at end of year $ 346,147 $ 0
=========================
</TABLE>
3
<PAGE>
Clinical Associates, P.A.
Notes to Financial Statements (Unaudited)
March 31, 1997
1. Basis of Presentation
The unaudited financial statements for the nine months ended March 31, 1997 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. Nature of Operations
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.
3. Affiliation
The Company is currently negotiating a long-term affiliation arrangement with
Physicians Quality, Inc. (PQC). Under this arrangement, the Company would
transfer its physician practices to, and its employees would become employees
of, Flagship Health, P.A., which is an affiliate of PQC. The aggregate
consideration paid to the Company for this affiliation would be a combination of
cash and PQC common stock.
4. Internal Revenue Service Examination -- Contingent Liabilities
At March 31, 1997, the Internal Revenue Service has issued a preliminary report
for the taxable years ending June 30, 1994, 1995 and 1996. The potential tax
liability could exceed $400,000. The Company is in the process of reviewing its
options with legal counsel.
4
<PAGE>
Physicians Quality Care, Inc.
Unaudited Pro Forma Combined Financial Statements
The Unaudited Pro Forma Combined Statement of Operations for the year ended
December 31, 1996 (i) combines the historical results of Physicians Quality
Care, Inc. (PQC) with the historical results of the following entities, giving
effect to the affiliation transactions for each such entity as if it had
occurred on January 1, 1996: Springfield Medical Associates, Inc. ("SMA");
Alphonse F. Calvanese, M.D., 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. (the "Remaining Springfield
Practices"), Annapolis Medical Specialists, L.L.P., Drs. Fortier, Libber,
Clemmens & Weimer, P.A., Drs. Goldgeier, Levine & Friedman, P.A., Koeppel,
Rosen, Rudikoff, M.D., P.C., Drs. Pakula, Davick & Bogue, P.A., Park Medical
Associates and Affiliate, and Drs. Sigler, Roskes, Holden & Schuberth, P.A. (the
"Specified Flagship Practices"), and Clinical Associates, P.A. (Clinical), (ii)
gives effect to the equity transactions entered into between the Company and
Bain Capital, the proceeds of which were used to finance the affiliations with
physician groups, (iii) gives effect to the management fee paid to Bain Capital
as if the management agreement entered into on August 30, 1996 was consummated
on January 1, 1996 and (iv) gives effect to the Equity Financing as if the
financing was consummated on January 1, 1996. The Unaudited Pro Forma Combined
Statement of Operations for the three months ended March 31, 1997 (i) combines
the historical results of PQC with the historical results of Clinical giving
effect to the affiliation transaction as if it had occurred on January 1, 1997
and (ii) gives effect to the Equity Financing as if the financing was
consummated on January 1, 1997.
The Unaudited Pro Forma Combined Balance Sheet (i) combines the balance
sheets of PQC and Clinical as of March 31, 1997 as if the affiliation
transaction had occurred on March 31, 1997 and (ii) reflects the Equity
Financing as if the financing was consummated on March 31, 1997.
The Specified Flagship Practices are only a portion of the practices that
constitute the Flagship Affiliation, and the Remaining Springfield Practices,
which along with SMA constitute the Springfield Affiliation, exclude one
practice. In accordance with the regulations of the Securities and Exchange
Commission, the other practices which are part of those affiliations have not
been audited and accordingly have not been included in the pro forma financial
information.
The Unaudited Pro Forma Combined Financial Statements may not be indicative
of the results that actually would have resulted had the above affiliations
occurred as of the date indicated, or of future earnings or of the future
financial position of the Company. The Unaudited Pro Forma Combined Financial
Statements should be read in conjunction with the accompanying Notes to the
Unaudited Pro Forma Combined Financial Statements and the financial statements
of the affiliated practices included elsewhere in this Registration Statement
and Prospectus.
Physicians Quality Care, Inc.
Unaudited Proforma Combined Balance Sheet
March 31, 1997
<TABLE>
<CAPTION>
Proforma
Equity Proforma Clinical Proforma
Historical Financing Excluding Historical Proforma Including
PQC Adjustments Clinical Clinical Adjustments Clinical
-------------- --------------- -------------- ------------- ------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 494,907 $ 25,000,000(A) $ 25,494,907 $ 346,147 $ (3,000,000)(B) $ 22,841,054
Accounts receivable, net 7,163,199 -- 7,163,199 3,784,566 -- 10,947,765
Prepaid expenses 596,063 -- 596,063 265,411 -- 861,474
Due from related parties 1,104,317 -- 1,104,317 87,448 -- 1,191,765
Income tax receivable -- -- -- 67,499 -- 67,499
Other current assets 226,634 -- 226,634 65,201 -- 291,835
------------ ------------ ------------ ------------ ------------ ------------
Total current assets 9,585,120 25,000,000 34,585,120 4,616,272 (3,000,000) 36,201,392
Intangible assets, net 30,384,466 -- 30,384,466 -- 15,085,451(B) 45,469,917
Deferred affiliation and
equity offering costs 21,397 -- 21,397 -- -- 21,397
Property and equipment, net 1,979,384 -- 1,979,384 1,229,174 -- 3,208,558
Other assets 395,293 -- 395,293 317,860 -- 713,153
Deferred tax asset 608,171 -- 608,171 -- -- 608,171
------------ ------------ ------------ ------------ ------------ ------------
33,388,711 -- 33,388,711 1,547,034 15,085,451 50,021,196
------------ ------------ ------------ ------------ ------------ ------------
Total assets $ 42,973,831 $ 25,000,000 $ 67,973,831 $ 6,163,306 $ 12,085,451 $ 86,222,588
============ ============ ============ ============ ============ ============
</TABLE>
Physicians Quality Care, Inc.
Unaudited Proforma Combined Balance Sheet
March 31, 1997
<TABLE>
<CAPTION>
Proforma
Equity Proforma
Historical Financing Excluding
PQC Adjustments Clinical
-------------- ------------- -----------
Liabilities and stockholders' equity (deficit)
<S> <C> <C> <C>
Current liabilities:
Accounts payable $ 2,571,618 $ 2,571,618
Accrued compensation 1,419,363 1,419,363
Accrued expenses 1,314,672 1,314,672
Current portion of note payable 3,000,000 3,000,000
Currrent portion of capital lease obligations 20,451 20,451
-------------- ------------- ------------
Total current liabilities 8,326,104 8,326,104
Convertible promissory note
Note payable, less current maturities
Capital lease obligations, less current maturities 303,733 303,733
Deferred taxes 1,083,048 1,083,048
Commitments and contingencies
Common stock, subject to put
33,282,706 33,282,706
Stockholders' equity (deficit):
Capital Stock
Class A common stock 77,709 77,709
Class B-1 common stock 24,429 24,429
Class B-2 common stock 15,571 15,571
Class C common stock - $76,923 (A) 76,923
Preferred stock - - -
Additional paid-in capital 22,449,773 24,923,077 (A) 47,372,850
Accumulated earnings (deficit) (22,579,117) (22,579,117)
Less treasury stock (10,125) (10,125)
------------- ------------- ------------
Total stockholders equity (deficit) (21,760) 25,000,000 24,978,240
------------- ------------- ------------
Total liabilities and stockholders' equity (deficit) $ 42,973,831 $ 25,000,000 $ 67,973,831
============= ============= ============
<CAPTION>
Clinical Proforma
Historical Proforma Including
Clinical Adjustments Clinical
------------- ------------- ------------
Liabilities and stockholders' equity (deficit)
<S> <C> <C> <C>
Current liabilities:
Accounts payable $ 826,177 $ 3,397,795
Accrued compensation - 1,419,363
Accrued expenses 1,577,541 2,892,213
Current portion of note payable 35,000 3,035,000
Currrent portion of capital lease obligations 22,742 43,193
------------- ------------- ------------
Total current liabilities 2,461,460 10,787,564
Convertible promissory note
Note payable, less current maturities 39,084 39,084
Capital lease obligations, less current maturities 43,500 347,233
Deferred taxes 1,304,713 2,387,761
Commitments and contingencies
Common stock, subject to put
$14,400,000(B) 47,682,706
Stockholders' equity (deficit):
Capital Stock 10,902 (10,902)(B) -
Class A common stock 77,709
Class B-1 common stock 24,429
Class B-2 common stock - - 15,571
Class C common stock 76,923
Preferred stock - - -
Additional paid-in capital 1,380,634 (1,380,634)(B) 47,372,850
Accumulated earnings (deficit) 923,013 (923,013)(B) (22,579,117)
Less treasury stock - - (10,125)
------------- ------------ ------------
Total stockholders equity (deficit) 2,314,549 (2,314,549) 24,978,240
------------ ------------ ------------
Total liabilities and stockholders' equity (deficit) $ 6,163,306 $ 12,085,451 $ 86,222,588
============ ============ ============
</TABLE>
Physicians Quality Care, Inc.
Unaudited Proforma Combined Statement of Operations
Year ended December 31, 1996
<TABLE>
<CAPTION>
Proforma
Historical Springfield SMA and
Remaining Affiliation Remaining
Historical Historical Springfield Proforma Springfield
PQC SMA Practices Adjustments Practices
----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Revenues
Net patient service revenue $ 6,026,452 $ 5,986,482 $ 3,670,619 $ 15,683,553
Less: amounts retained by physician groups 2,194,571 1,080,234 1,899,311 $ 641,884(C) 5,816,000
----------------------------------------------------------------------------------
Management fee revenue 3,831,881 4,906,248 1,771,308 (641,884) 9,867,553
----------------------------------------------------------------------------------
Operating expenses
Nonphysician salaries and benefits 1,816,309 1,214,650 756,927 3,787,886
Other practice expenses 535,479 1,733,145 783,135 3,051,759
General corporate expenses 5,953,117 5,953,117
Depreciation and amortization 194,481 97,378 69,795 174,000(D) 535,654
Provision for bad debts 214,404 1,202,653 79,553 1,496,610
----------------------------------------------------------------------------------
Total expenses 8,713,790 4,247,826 1,689,410 174,000 14,825,026
----------------------------------------------------------------------------------
Operating income (loss) (4,881,909) 658,422 81,898 (815,884) (4,957,473)
Other income (expense):
Interest income 91,104 422 4,986 96,512
Interest expense (104,255) (17,795) (14,537) (136,587)
Other income 94,940 45,112 140,052
----------------------------------------------------------------------------------
Income (loss) before income taxes (4,895,060) 735,989 117,459 (815,884) (4,857,496)
Income tax provision (78,128) (298,168) (28,136) 404,432 (G)
----------------------------------------------------------------------------------
Net income (loss) $ (4,973,188) $ 437,821 $ 89,323 $ (411,452) $ (4,857,496)
----------------------------------------------------------------------------------
Net loss available to common stock $ (19,410,036)
---------------
Net loss per share $ (1.80)
---------------
Weighted-average common shares
and common share equivalents
outstanding 10,785,605 3,461,946(4)
--------------- ---------------
<CAPTION>
Historical Specified Proforma SMA, Proforma
Specified Flagship Remaining Springfield Equity
Flagship Practices and Specified Flagship Financing
Practices Adjustments Practices Adjustments
-------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues
Net patient service revenue $ 18,791,775 $ 34,475,328
Less: amounts retained by physician groups 6,619,108 $ (755,618)(C) 11,679,490
-------------------------------------------------------------------------
Management fee revenue 12,172,667 755,618 22,795,838
-------------------------------------------------------------------------
Operating expenses
Nonphysician salaries and benefits 4,830,066 8,617,952
Other practice expenses 6,387,522 9,439,281
General corporate expenses 333,000(E) 6,286,117
Depreciation and amortization 258,771 422,000(F) 1,216,425
Provision for bad debts 383,201 1,879,811
-------------------------------------------------------------------------
Total expenses 11,859,560 755,000 27,439,586
-------------------------------------------------------------------------
Operating income (loss) 313,107 618 (4,643,748)
Other income (expense):
Interest income 6,964 103,476
Interest expense (35,916) (172,503)
Other income 252,770 392,822
-------------------------------------------------------------------------
Income (loss) before income taxes 536,925 618 (4,319,953)
Income tax provision (24,930) 24,930(G) -
-------------------------------------------------------------------------
Net income (loss) $ 511,995 $ 25,548 $ (4,319,953)
-------------------------------------------------------------------------
Net loss available to common stock
Net loss per share
Weighted-average common shares
and common share equivalents
outstanding 7,799,520(4) 7,692,309(4)
============= ============
<CAPTION>
Proforma Clinical Proforma
Excluding Historical Proforma Including
Clinical Clinical Adjustments Clinical
-------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues
Net patient service revenue $ 34,475,328 $ 36,123,733 $ 70,599,061
Less: amounts retained by physician groups 11,679,490 14,862,120 26,541,610
-------------------------------------------------------------------------
Management fee revenue 22,795,838 21,261,613 44,057,451
-------------------------------------------------------------------------
Operating expenses
Nonphysician salaries and benefits 8,617,952 6,200,489 14,818,441
Other practice expenses 9,439,281 7,240,706 16,679,987
General corporate expenses 6,286,117 6,418,686 12,704,803
Depreciation and amortization 1,216,425 277,653 377,000(H) 1,871,078
Provision for bad debts 1,879,811 1,341,063 3,220,874
-------------------------------------------------------------------------
Total expenses 27,439,586 21,478,597 377,000 49,295,183
-------------------------------------------------------------------------
Operating income (loss) (4,643,748) (216,984) (377,000) (5,237,732)
Other income (expense):
Interest income 103,476 103,476
Interest expense (172,503) (172,503)
Other income 399,822 392,822
-------------------------------------------------------------------------
Income (loss) before income taxes (4,319,953) (216,984) (377,000) (4,913,937)
Income tax provision
-------------------------------------------------------------------------
Net income (loss) $(4,319,953) $ (216,984) $ (377,000) $ (4,913,937)
-------------------------------------------------------------------------
Net loss available to common stock $ (18,756,801) $(19,350,785)
============== =============
Net loss per share $ (0.63) $ (0.56)
============== =============
Weighted-average common shares
and common share equivalents
outstanding 29,738,930 4,800,000(B) 34,538,930
============== ============ =============
</TABLE>
Physicians Quality Care, Inc.
Unaudited Pro Forma Combined Statement of Operations
Three months ended March 31,1997
<TABLE>
<CAPTION>
Proforma
Equity Proforma Clinical Proforma
Historical Financing Excluding Historical Proforma Including
PQC Adjustments Clinical Clinical Adjustments Clinical
------------------------------- -------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Revenues
Net patient service revenue $ 10,552,532 $ 10,552,532 $ 9,138,841 $ 19,691,373
Less: amounts retained by physician
groups 3,730,910 3,730,910 3,774,820 7,505,730
---------------------------------------------------------------------------------------------
Management fee revenue 6,821,622 6,821,622 5,364,021 12,185,643
---------------------------------------------------------------------------------------------
Operating expenses
Nonphysician salaries and benefits 3,141,146 3,141,146 1,681,444 4,822,590
Other practice expenses 687,579 687,579 1,683,182 2,370,761
General corporate expenses 3,438,148 3,438,148 1,736,885 5,175,033
Depreciation and amortization 341,534 341,534 70,849 94,000 (H) 506,383
Provision for bad debts 273,263 273,263 319,919 593,182
---------------------------------------------------------------------------------------------
Total expenses 7,881,670 7,881,670 5,492,279 94,000 13,467,949
---------------------------------------------------------------------------------------------
Operating income (loss) (1,060,048) (1,060,048) (128,258) (94,000) (1,282,306)
Other income (expense):
Interest income 3,955 3,955 3,955
Interest expense (30,724) (30,724) (30,724)
Other income
---------------------------------------------------------------------------------------------
Income (loss) before income taxes $ (1,086,817) $ (1,086,817) $ (128,258) $ (94,000) $ (1,309,075)
Income tax provision
---------------------------------------------------------------------------------------------
Net income (loss) $ (1,086,817) $ (1,086,817) $ (128,258) $ (94,000) $ (1,309,075)
---------------------------------------------------------------------------------------------
Net loss available to common stock $ (1,086,817) $ (1,086,817) $ (128,258) $ (94,000) $ (1,309,075)
---------------------------------------------------------------------------------------------
Net loss per share $ (0.04) $ (0.03) $ (0.04)
---------------------------------------------------------------------------------------------
Weighted-average common shares
and common share equivalents
outstanding 24,756,907 7,692,309 (A) 32,449,216 4,800,000 (B) 37,249,216
------------ ----------- --------------------------------------------- ------------
</TABLE>
Physicians Quality Care, Inc.
Notes To Unaudited Pro Forma Combined Statement of Operations
1. Basis of Presentation
The Unaudited Pro Forma Combined Balance Sheet, Excluding Clinical,
assumes that the Equity Financing was consummated on March 31, 1997. The
unaudited Proforma Combined Balance Sheet, Including Clinical, also assumes
that the Clinical affiliation (described in Note 2(B)) was consummated on
March 31, 1997 .
The Unaudited Pro Forma Combined Statement of Operations, Excluding
Clinical, for the year ended December 31, 1996 assumes that the
affiliations with SMA, the Remaining Springfield Practices, and the
Specified Flagship Practices, and the Equity Financing, were consummated
on January 1, 1996. The Unaudited Pro Forma Combined Statement of
Operations, Including Clinical, for the year ended December 31, 1996 also
assumes the consummation of the Clinical affiliation on January 1, 1996.
The Unaudited Pro Forma Combined Statement of Operations, Excluding
Clinical, for the three months ended March 31, 1997 assumes that the Equity
Financing was consummated on January 1, 1997. The Unaudited ProForma
Combined Statement of Operations, Including Clinical, for the three months
ended March 31, 1997, also assumes that the Clinical affiliation was
consummated on January 1, 1997.
2. Proforma Adjustments to the Balance Sheet
(A) To reflect the issuance of 7,692,309 shares and the issuance of warrants to
purchase 7,692,309 shares of PQC Class C common stock for total
consideration of $25,000,000 in connection with the Equity Financing.
(B) To reflect the excess affiliation price for the Clinical affiliation of
$15,085,000 over the fair value of the assets acquired of $2,315,000. The
total affiliation price of $17,400,000 is assumed to be paid with $3,000,000
of cash and 4,800,000 shares of PQC Class A Common Stock valued at $3.00 per
share. For the purposes of the unaudited pro forma combined financial
statements, PQC has assumed that the fair value of Clinical's net assets
approximates its existing book value. The acquired assets and assumed
liabilities will be adjusted to fair value upon consummation of the
affiliation, however such adjustments are not expected to be significant.
3. Proforma Adjustments to the Statements of Operations
(C) To adjust amounts retained by physician groups reflecting actual physician
compensation based on employment agreements as if they were entered into on
January 1, 1996. Physician baseline compensation is determined based on an
agreed upon percentage of the physician's prior year compensation. For the
Springfield and Flagship physicians, the percentages are 95% and 80%,
respectively. The amounts allocated 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 Springfield are first
allocated to PQC up to 5% of the net profits. Net profits remaining
subsequent from the first allocation are then allocated 80% to PQC and 20%
to the physician groups up to 15% of the net profits. Net profits remaining
from the second allocation are then allocated equally between PQC and the
physician groups. The net profits for Flagship are allocated equally
between the Company and the physician groups.
(D) To reflect amortization of intangible asset for the SMA and
Remaining Springfield Practices' Affiliations. The adjustment records
amortization expense for the period January 1, 1996 through August 30, 1996,
the Springfield Affiliation date. The cost of long-term affiliation
agreements, which represents the affiliation consideration over the fair
value of the identifiable assets acquired, has been reflected as an
intangible asset. The total amount recorded as an intangible asset for SMA
and the Remaining Springfield Practices during 1996 was $10,716,000 which is
being amortized over 40 years, the life of the long-term affiliation
agreements.
(E) To reflect the annual management fee of $500,000 to Bain Capital as if the
management agreement had been entered into at the beginning of the period
presented. The adjustment records expense for the period January 1, 1996
through August 30, 1996, the date of the SMA and Remaining Springfield
Affiliations.
(F) To reflect amortization of intangible asset for the Specified Flagship
Practices. The adjustment records amortization expense for the period
January 1, 1996 through December 11, 1996, the Flagship Affiliation date.
The cost of long-term affiliation agreements, which represents the
affiliation consideration over the fair value of the identifiable assets
acquired, has been reflected as an intangible asset. The total amount
recorded as an intangible asset for the Specified Flagship Practices during
1996 was $17,641,000 which is being amortized over 40 years, the life of the
long-term affiliation agreements.
(G) Reversal of income taxes recorded for PQC and the affiliated practices
which include income taxes calculated at individual and corporate tax rates.
No provision for income taxes is recorded in the unaudited pro forma
statements of operations as operating losses from PQC would be significant
to offset taxable income in the affiliated practices.
(H) To reflect amortization of intangible asset for Clinical. The adjustment
records amortization expense for the period January 1, 1996 through December
31, 1996 and for the period January 1, 1997 through March 31, 1997. The cost
of long-term affiliation agreements, which represents the affiliation
consideration over the fair value of the identifiable assets acquired, has
been reflected as an intangible asset. The total amount recorded as an
intangible asset for Clinical of $15,085,000 will be amortized over 40
years, the life of the long-term affiliation agreements.
4. Net Loss per Share and Supplemental Net Loss per Share
Net loss per share of common stock on a pro forma basis for the year ended
December 31, 1996 reflects the issuance of 2,592,245 shares of Class A common
stock in connection with the SMA and Remaining Springfield Affiliations,
6,842,675 shares of Class A common stock in connection with the Specified
Flagship Affiliations, 4,000,000 shares of Class B common stock in connection
with the Bain Financing, 7,692,309 shares of Class C common stock in connection
with the Equity Financing and 4,800,000 shares of Class A common stock in
connection with the Clinical affiliation, all at January 1, 1996. The effect of
options and warrants is not considered as their effect would be antidilutive.
Net loss available to common stock reflects an adjustment to accrete common
stock subject to put to fair value at December 31, 1996 and at March 31, 1997.
Net loss per share of common stock on a pro forma basis for the three months
ended March 31, 1997 reflects the issuance of 7,692,309 shares of Class C common
stock in connection with the Equity Financing and 4,800,000 shares of Class A
common stock in connection with the Clinical affiliation as if they were
consummated on January 1, 1997.
Supplemental net loss per share on a proforma basis for the year ended
December 31, 1996 is as follows:
<TABLE>
<CAPTION>
<S> <C>
Supplemental net loss available for $(19,255,035)
common stock ============
Supplemental net loss per share $(0.53)
=======
Supplemental weighted-average 36,334,565
common shares outstanding ==========
</TABLE>
Supplemental net loss per share assumes the conversion of 1,666,151 shares of
convertible preferred stock to common stock on a one for one basis, the
conversion of a convertible promissory note payable into 625,000 shares of
common stock and the conversion of a convertible bridge loan into 402,301
shares of common stock, all as of January 1, 1996. Supplemental net loss
available to common stock excludes interest expense related to the
convertible promissory note payable and the convertible bridge loan. Since
the conversion of the promissory note and the bridge loan occurred during
1996, the presentation of supplemental net loss per share is not required for
the three months ended March 31, 1997.
<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.............................................................. *
Accounting Fees and Expenses............................................................ *
Legal Fees and Expenses................................................................. *
Printing, Engraving and Mailing Expenses................................................ *
Miscellaneous........................................................................... *
-------
Total.......................................................................... $ *
=======
</TABLE>
- --------------------
*To be completed by amendment.
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>
<TABLE>
<CAPTION>
Item 16. Exhibits
(a) Exhibits
Exhibit
No. Description
- ------- -----------
<S> <C>
3.1 Restated Certificate of Incorporation of the Registrant (as amended on June 23,
1997)
3.2 Second Amended and Restated By-Laws of the Registrant
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 Waiver of Rights and Amendment under Stockholders Agreement dated December 11, 1996
4.5 Amendment No. 2 to Stockholders Agreement dated June 23, 1997.
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* Form of Amended and Restated Flagship Service Agreement
10.23* Form of Letter Agreement between the Company and Clinical Associates
10.24* Form of Merger Agreement between the Company and Clinical Associates
10.25 Amendment No. 1 to Management Agreement, dated April 15, 1997, between the Registrant
and Bain Capital Partners, V, LP
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
</TABLE>
* To be filed by amendment.
+ Previously filed.
II-5
<PAGE>
<TABLE>
<CAPTION>
Exhibit
No. Description
- ------- -----------
<S> <C>
27 Financial Data Schedule
- ------------------
* To be filed by amendment.
</TABLE>
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 7th day of July, 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 July 7, 1997
__________________________________ and Chairman of the Board
Jerilyn P. Asher (Principal Executive Officer)
/s/ Samantha J. Trotman Chief Financial Officer July 7, 1997
__________________________________ (Principal Financial and
Samantha J. Trotman Accounting Officer)
*__________________________________ President and Director July 7, 1997
Dana Frank, M.D.
*__________________________________ Executive Vice President, Medical July 7, 1997
Arlan F. Fuller, Jr., M.D. Affairs and Director
*__________________________________ Director July 7, 1997
Alphonse Calvanese, M.D.
*__________________________________ Director July 7, 1997
Leslie Fang, M.D.
</TABLE>
II-8
<PAGE>
<TABLE>
Signature Title Date
--------- ----- ----
<S> <C> <C>
* Director July 7, 1997
----------------------------------------------------
Stephen G. Pagliuca
* Director July 7, 1997
----------------------------------------------------
Marc Wolpow
Director
- -----------------------------------------------------
Ira Fine, M.D.
Director
- -----------------------------------------------------
Timothy T. Weglicki
*By Jerilyn P. Asher
Attorney-in-Fact
/s/ Jerilyn P. Asher July 7, 1997
- ----------------------------------
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 Second Amended and Restated By-Laws of the Registrant
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 Waiver of Rights and Amendment under Stockholders Agreement dated December 11, 1996
4.5 Amendment No. 2 to Stockholders Agreement dated June 23, 1997.
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* Form of Amended and Restated Flagship Service Agreement
10.23* Form of Letter Agreement between the Company and Clinical Associates
10.24* Form of Merger Agreement between the Company and Clinical Associates
10.25 Amendment No. 1 to the Management Agreement, dated April 15, 1997, between the Company
and Bain Capital Partners, V, LP.
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+
</TABLE>
............................
* To be filed by amendment.
+ Previously filed.
<PAGE>
EXHIBIT 3.1
RESTATED CERTIFICATE OF INCORPORATION
OF
PHYSICIANS QUALITY CARE, INC.
Physicians Quality Care, Inc., a corporation organized and existing under
the General Corporation Law of the State of Delaware, hereby certifies as
follows:
1. The name of this corporation is Physicians Quality Care, Inc. This
corporation's original name was Physicians Quality Care Network, Inc. The date
of filing of the corporation's original Certificate of Incorporation in the
Office of the Secretary of State of the State of Delaware was March 20, 1995. A
Certificate of Amendment to the Certificate of Incorporation was filed with the
Office of the Secretary of State of the State of Delaware on each of April 27,
1995 and on June 21, 1995 and an Amended and Restated Certificate of
Incorporation was filed therewith on June 30, 1995 and on August 30, 1996.
2. This Restated Certificate of Incorporation restates and integrates and
further amends the provisions of the Corporation's Amended and Restated
Certificate of Incorporation, which amendments have been approved by the
stockholders of the Corporation by written consent dated June 18, 1997. This
Restated Certificate of Incorporation has been adopted by the Board of Directors
and the stockholders of the Corporation in accordance with Sections 228, 245(b)
and 242 of the General Corporation Law of the State of Delaware, and written
notice of consent has been given to all stockholders who have not consented in
writing to this Restated Certificate of Incorporation.
3. The text of this Restated Certificate of Incorporation is as follows:
FIRST: The name of the Corporation is Physicians Quality Care, Inc. (the
"Corporation").
SECOND: The address of the Corporation's registered office in the State of
Delaware is Corporation Trust Center, 1209 Orange Street in the City of
Wilmington, County of New Castle. The name of the registered agent of the
Corporation at such address is The Corporation Trust Company.
THIRD: The purpose of the Corporation is to engage in any lawful act or
activity for which corporations may be organized under the General Corporation
<PAGE>
Law of the State of Delaware.
FOURTH: Capital Stock.
1. Authorized Shares. The total number of shares of capital stock that
the Corporation has authority to issue is one hundred and fifty million
(150,000,000) shares, consisting of:
(a) one hundred and one million two hundred and ninety-two
thousand and six hundred and ninety-two (101,292,691) shares of Class A Common
Stock, par value $0.01 per share ("Class A Common Stock");
(b) six million and seven hundred and twenty-seven thousand and
forty-three (6,727,043) shares of Class B-1 Common Stock, par value $0.01 per
share ("Class B-1 Common Stock");
(c) four million and two hundred and eighty-seven thousand and
nine hundred and fifty-seven (4,287,957) shares of Class B-2 Common Stock, par
value $0.01 per share ("Class B-2 Common Stock");
(d) twenty-seven million and six hundred and ninety-two thousand
and three hundred and eight (27,692,309) shares of Class C Common Stock, par
value $0.01 per share ("Class C Common Stock"); and
(e) ten million (10,000,000) shares of Preferred Stock, par value
$0.01 per share ("Preferred Stock").
The Class B-1 Common Stock and the Class B-2 Common Stock are referred to
collectively as the "Class B Common Stock"; the Class C Common Stock, the Class
B Common Stock and the Class A Common Stock are referred to collectively as the
"Common Stock"; and each class shall be referred to as a class of Common Stock.
As of August 30, 1996, each share of every class and series of capital stock of
the Corporation authorized immediately prior to August 30, 1996 was
automatically converted into one share of Class A Common Stock of the
Corporation.
The Board of Directors of this Corporation may, at any time, and subject to
the provisions in Section 4.5 below, without any vote of the holders of this
Corporation's capital stock, issue all or any part of the unissued capital stock
of this Corporation from time to time authorized under this Restated Certificate
of Incorporation and may determine, subject to any requirements of law, the
consideration for which stock is to be issued and the manner of allocating such
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<PAGE>
consideration between capital and surplus.
The powers, designations, voting rights, preferences and relative,
participating, optional or other rights, and the qualifications, limitations and
restrictions of each class and series of the Corporation's stock are as follows:
2. Definitions. As used in this Article Fourth, the following terms have
the following definitions:
1. "Affiliate" shall mean, with respect to any Person, any other
Person directly or indirectly controlling, controlled by or under common
control with such Person, including effective control by virtue of a
contractual relationship such as a management agreement or stockholder
transfer or designation or similar agreement other than a management or
similar agreement which does not, alone or together with related
agreements, result in the control of such Person. Notwithstanding the
foregoing and for purposes of the definitions of Restricted Action and
Class B and C Director Action, no Investor shall be deemed to be an
Affiliate of the Corporation and no Person who is an Affiliate of an
Investor for reasons unrelated to the Corporation or its Subsidiaries shall
be deemed to be an Affiliate of the Corporation.
2. "Bain Capital Investor" shall mean Bain Capital Fund V, L.P., Bain
Capital Fund V-B, L.P., BCIP Associates, BCIP Trust Associates, L.P. and
their Affiliates.
3. "Board of Directors" shall mean the Board of Directors of the
Corporation.
4. "Capital Investors" shall mean ABS Capital Partners II, L.P. and
its Affiliates and Russell Ray, Steve Schuh, Stanley Blaylock, Dick Franyo,
Christopher Camut, Terry Hyman, Brent Milner, Kathy Coffey, Mark Klausner,
Michael Singer, Stuart Smith and Gary Lessing.
5. "Cause" shall mean with respect to any Person (i) any act of
fraud, embezzlement or other material dishonesty, (ii) conviction of, or
plea of nolo contendere to, any felony or any other crime involving fraud,
dishonesty or moral turpitude, or (iii) conduct that causes criminal or
material civil liabilities to the Corporation, its Subsidiaries or any of
their Affiliates.
6. "Class B Conversion Factor" shall mean, at any time as of which it
is to be determined, one (1), adjusted as provided in Article 4.6 below.
7. "Class C Conversion Factor" shall mean at any time as of which it
is to be determined as provided in Article 4.7.2(b) below.
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<PAGE>
8. "Class B and C Director Action" shall mean any authorization,
approval, ratification, consent, commitment, agreement, or other action (whether
contingent or otherwise) in respect of or relating to the Corporation or any
Subsidiary or Affiliate thereof with respect to or relating to:
(a) the issuance, reclassification, exchange, redemption,
retirement, purchase or acquisition of, rights to subscribe for, securities
exchangeable for or convertible into or any agreement providing for the
issuance (contingent or otherwise) of, or any call, commitment or claim
relating to, capital stock of the Corporation or any Subsidiary or
Affiliate thereof or stock appreciation, phantom stock, profit
participation or similar rights with respect to the Corporation or any
Subsidiary or Affiliate thereof;
(b) dividends or distributions on or in respect of capital stock of
the Corporation or any Subsidiary or Affiliate thereof (including stock
dividends or other assets, property or securities), return of any capital
to such entity's stockholders as such, recapitalization, or stock split;
(c) incurrence of Indebtedness of the Corporation or any Subsidiary
or incurrence of material Indebtedness by an Affiliate thereof;
(d) merger, consolidation, amalgamation, liquidation, winding up,
dissolution, or sale, transfer, or other action otherwise disposing of or
voluntarily parting with the control of (whether in one transaction or a
series of transactions) all or substantially all of the property, business
or assets of the Corporation or any Subsidiary or Affiliate thereof (other
than such merger, consolidation or other action pursuant to which the
stockholders of this Corporation or any Subsidiary thereof constitute the
stockholders of any surviving corporation directly or indirectly or
otherwise retain the same control after such transaction whether by voting
or otherwise, over such entity that such stockholders had prior to such
transaction);
(e) any Public Offering or Public Event;
(f) the material amendment or modification of any material
management agreement between the Corporation, its Subsidiaries and any
Affiliate thereof or material physician affiliation agreement or the
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<PAGE>
substitution or replacement of any nominee stockholder under any
stockholder designation or similar agreement; and
(g) the employment, termination and compensation (including
benefits) of the Chief Executive Officer of the Corporation.
In no event shall any such action in respect of a transaction involving the
provision of capital or sale to any of the Investors or any Affiliate thereof
under paragraphs (a)-(e) constitute a Class B and C Director Action. All Class B
and C Director Actions shall be taken in compliance with Section 2.8 of the
Corporation's by-laws.
9. "Class B and C Director Control Event" shall mean:
(a) the earlier of (x) the failure of the Company to meet 75% of the
Company's Business Plan for any two consecutive fiscal quarters or (y) the
failure of the Company to meet 50% of the Company's Business Plan for any
one fiscal quarter, such Business Plan to be approved by a majority of the
Board, which majority shall include a majority of the Class B and Class C
Directors;
(b) Jerilyn Asher is no longer employed on a full-time basis as
Chief Executive Officer by the Corporation for any reason other than her
employment having been terminated without Cause; or
(c) the Corporation has not received the prior written consent of
the Investors in respect of any Restricted Action as set forth in the
Amended and Restated Class B and C Common Stock and Warrant Purchase
Agreement among the Corporation and the parties named therein.
10. "Closing Date" shall mean the first date on which the Corporation
issues any shares of Class B Common Stock.
11. "Exchange Act" shall mean the Securities Exchange Act of 1934, as
amended.
12. "Goldman Investors" shall mean GS Capital Partners II, L.P., Goldman
Sachs & Co., Verwaltungs GmbH, GS Capital Partners II Offshore, L.P., The
Goldman Sachs Group, L.P., Bridge Street Fund 1997, L.P. and Stone Street Fund
1997, L.P. and their Affiliates.
13. "Investors" shall mean the Bain Capital Investors, the Capital
Investor and the Goldman Investors.
-5-
<PAGE>
14. "Indebtedness" shall mean all (i) indebtedness for borrowed money,
(ii) obligations evidenced by notes, bonds, debentures or similar instruments,
(iii) obligations for the deferred purchase price of assets or services (other
than trade payables or accruals therefor incurred in the ordinary course of
business), (iv) capitalized lease obligations, (v) letters of credit, and (vi)
in the nature of guarantees of the obligations described in (i) through (v)
above.
15. "Person" shall mean any individual, partnership, corporation,
association, trust, joint venture, unincorporated organization or other entity.
16. "Public Event" shall mean any transaction or other event (including,
without limitation, a merger with a public company) after or in connection with
which shares of capital stock of the Corporation or any of its Subsidiaries or
any successor are registered under the Securities Act or listed on a "national
securities exchange" as defined in the Exchange Act or the subject of a price
quotation through the National Association of Securities Dealers' Automated
Quotation System.
17. "Public Offering Time" shall mean the time of the initial sale of
shares of Class A Common Stock of the Corporation pursuant to an initial Public
Offering of such shares registered with the Securities and Exchange Commission
and immediately prior to any transfer of beneficial ownership of such shares in
such offering.
18. "Public Offering" shall mean the closing of a public offering of the
Corporation's capital stock registered under the Securities Act.
19. "Qualified Public Offering" shall mean the closing of a Public
Offering with (i) the net proceeds of the sale of such Shares by the Company and
any stockholder of the Company to equal or exceed $50,000,000 provided that (A)
the Investors shall have sold or shall be permitted to sell fifty percent of the
capital stock into which the Class B Common Stock and the Class C Common Stock
is convertible and (B) the net proceeds of the sale of such shares or the net
proceeds of the sale of such shares which would be permitted to be sold in such
offering by (1) the Capital Investors equal or exceed seventy-five percent of
the total amount invested in capital stock of the Company by the Capital
Investors up to $15,000,000, (2) the net proceeds of the sale thereof by the
Bain Capital Investors shall equal or exceed seventy-five percent of the total
amount invested in capital stock of the Company by the Bain Capital Investors up
to $15,000,000 and (3) the Goldman Investors equal or exceed seventy-five
percent of the total amount invested in capital stock of the Company by the
Goldman Investors up to $15,000,000 and (ii)
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<PAGE>
subject to a firm commitment underwriting conducted by a nationally recognized
underwriter acceptable to a majority of the Class B Directors and Class C
Directors, voting together as a single class.
20. "Subsidiary" shall mean any corporation with respect to which a
specified Person (or a Subsidiary thereof) owns a majority of the common stock
or has the power to vote or direct the voting of sufficient securities to elect
a majority of the directors.
21. "Restricted Action" shall mean any of the following:
(a) A merger, consolidation, amalgamation, liquidation, winding up,
dissolution or sale, transfer or other action otherwise disposing of or
voluntarily parting with the control of (whether in one transaction or a
series of transactions) of all or substantially all of the property,
business or assets of the Corporation, its Subsidiaries or any Affiliate
thereof other than a merger or consolidation of a Subsidiary with the
Corporation or any other Subsidiary of the Corporation provided that, in
the case of any such merger or consolidation, the person formed by such
merger or consolidation shall be a wholly-owned Subsidiary of the
Corporation.
(b) A sale, lease, transfer or other disposition of or grant or any
option or other right to purchase, lease or otherwise acquire all or a
material part of the assets of the Corporation, the Subsidiaries and any
Affiliates on a consolidated basis (other than pursuant to an agreement in
effect on the Closing Time); or
(c) Any agreement, contract, commitment or understanding with any
Person for the acquisition or affiliation entered into by the Corporation
or, its Subsidiaries or any Affiliate thereof of any business or assets
including, without limitation any management agreement, and the terms of
any securities or other consideration to be issued in connection therein or
acquired any business or assets other than acquisitions not in excess of
$1,000,000 in any 12 month period.
(d) Any dividends, distributions, repurchase, redemption,
retirement, defeasance or similar transaction for capital stock or any
warrants, rights or options to acquire such capital stock, now or hereafter
outstanding, return any capital to its stockholders as such, make any
distribution of assets, capital stock, warrants, rights, options,
obligations or securities to its stockholders as such, or issue or sell any
capital stock or any warrants, rights or options to acquire such capital
-7-
<PAGE>
stock, or permit the Corporation, its Subsidiaries or any Affiliate thereof
to do any of the foregoing.
(e) Any material change in the nature of its business of this
Corporation, its Subsidiaries and Affiliates, taken as a whole on a
consolidated basis as described in the principal business plan of the
Corporation as carried on at the date hereof and reasonable extensions
thereof.
(f) Any amendment or restatement of organizational documents
(including the Certificate of Incorporation) or Bylaws of this Corporation
or its Subsidiaries.
(g) Retain or dismiss the services of the Chief Operating Officer or
the Chief Financial Officer of the Corporation;
(h) Any transaction between (i) the Corporation or its Subsidiaries
and any Affiliate thereof and (ii) an officer, director or holder of more
than 5% of the outstanding capital stock of the Corporation which is not on
terms comparable to an arms-length transaction.
(i) The commencement, management, defense, prosecution or settlement
of any material action, suit, investigation or proceeding before any court
or governmental department, commission, board, agency or instrumentality,
domestic or foreign, affecting the Corporation, the Subsidiaries or any
Affiliate thereof other than any such action, suit, or proceeding initiated
and instituted by the holders of Class B Common Stock against the Company.
3. Shares Identical. Except as otherwise provided in this Article
Fourth, for purposes of this Article Fourth, all shares of Common Stock shall,
to the fullest extent permitted by applicable law, be identical in all respects
and shall entitle the holders thereof to the same rights, privileges and
preferences and shall be subject to the same qualifications, limitations and
restrictions. Without limiting the foregoing, except as provided in this
Article FOURTH, no distribution (whether in cash, securities or otherwise) shall
be made in respect of any class of Common Stock unless an equivalent
distribution is made with respect to each outstanding share of each class of
Common Stock.
4. Stockholder Voting Rights. Subject to the powers, preferences and
rights of any class of stock (or any series thereof) having any preference or
priority over, or rights superior to, the Common Stock that the Corporation may
hereafter become
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<PAGE>
authorized to issue, to the fullest extent permitted by applicable law, except
as otherwise provided in this Article Fourth, the holders of the Common Stock
shall have and possess all powers and voting and other rights pertaining to the
stock of the Corporation. Except as otherwise provided in this Article Fourth or
as otherwise required by applicable law, all holders of Common Stock shall vote
together as a single class.
5. Directors. The number of directors constituting the entire Board of
Directors (the "Number of Directors") shall be thirteen. The directors shall be
divided into classes, elected as follows:
(a) Class A Directors. The holders of record of outstanding
shares of Class A Common Stock, voting separately as a single class,
shall be entitled to elect two directors of the Corporation (such
directors to be designated and referred to herein as the "Class A
Directors");
(b) Class B-1 Directors. The holders of record of outstanding
shares of Class B-1 Common Stock, voting separately as a single class,
shall be entitled to elect one director of the Corporation (such
director to be designated and referred to herein as the "Class B-1
Director");
(c) Class B-2 Directors. The holders of record of outstanding
shares of Class B-2 Common Stock, voting separately as a single class,
shall be entitled to elect one director of the Corporation (such
director to be designated and referred to herein as the "Class B-2
Director," together with the Class B-1 Director, the "Class B
Directors");
(d) Class C Directors. The holders of record of outstanding
shares of Class C Common Stock, voting separately as a single class,
shall be entitled to elect two directors of the Corporation (such
director to be designated and referred to herein as the "Class C
Directors"); and
(e) Common Stock Directors. The holders of record of
outstanding shares of Common Stock, voting together as a single class,
shall be entitled to elect seven directors of the Corporation (such
directors to be designated and referred to herein as the "Common Stock
Directors").
In the event that all of the Class B Common and/or all of the
Class C Common have converted into Class A Common, the number of
directors automatically will be decreased by the number of Class B
Directors and/or Class C Directors, as the case may be.
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<PAGE>
1. Except as otherwise provided in this Article Fourth, each Class A
Director, Class B Director, Class C Director and Common Stock Director
shall be entitled to one vote on all matters to be voted on by the
directors. The Directors shall vote together as a single class on all
matters to which the Board of Directors shall be entitled to vote.
2. Any vacancy in the Board of Directors shall be filled only by vote
of the holders of a majority of the outstanding shares of the class or
classes of Common Stock which was entitled to elect the director whose
office is vacant. The Board of Directors shall be deemed to be duly
constituted notwithstanding one or more vacancies in its membership,
whether because of the failure of any class of stockholders to elect the
full number of directors to which such class is entitled or otherwise. Any
such vacancy shall automatically reduce the Number of Directors pro tanto,
until such time as the holders of the class of Common Stock which was
entitled to elect the director whose office is vacant shall have exercised
their right to elect a director to fill such vacancy, whereupon the Number
of Directors shall be automatically increased pro tanto.
3. No Class A Director, Class B Director, Class C Director or Common
Stock Director may be removed without the consent of the holders of such
class or classes of Common Stock entitled to elect such director.
4. With respect to each Class B and C Director Action, each Class B
Director and Class C Director shall be entitled to five votes.
5. Upon the occurrence of any Class B and C Director Control Event and
for so long as such Class B and C Director Control Event or any other Class
B and C Director Control Event shall continue in effect, each Class B
Director and Class C Director shall be entitled to five votes.
6. Stock Splits and Stock Dividends. The Corporation shall not in any
manner subdivide or increase (by stock split, stock dividend or other similar
manner) reclassify or combine in any manner (i) the outstanding shares of Class
A Common Stock unless a proportional adjustment is made to the Class B
Conversion Factor and the Class C Conversion Factor or (ii) the outstanding
shares of Class B Common or Class C Common unless a proportional adjustment is
made to the other classes of Common Stock. The Corporation shall 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 or the Class B Common Stock unless a proportional
adjustment is made to the Class A Common Stock.
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<PAGE>
7. Conversion Rights
1. Mandatory Conversion
(a) Class B Common Stock. Upon the earlier to occur of (i) a
Qualified Public Offering, and (ii) the date on which the number of
outstanding shares of Class B Common Stock equals the lesser of (a) 30% of
the total number of shares of Class B Common Stock issued by the
Corporation on or prior to such date and (b)(1) 1,200,000, in the event the
number of shares of Class B Common Stock issued equals or exceeds 4,000,000
and is less than 8,000,000, and (2) 1,600,000, in the event the number of
shares of Class B Common Stock issued and equals or exceeds 8,000,000 and
is less than 12,000,000, each outstanding share of Class B Common Stock
shall automatically convert into the number of shares of Class A Common
Stock determined by application of the Class B Conversion Factor.
Fractional shares shall be converted into equivalent fractional shares of
Class A Common Stock (or, at the discretion of the Board of Directors,
eliminated in return for payment therefor in cash at the fair market value
thereof, as determined in good faith by the Board of Directors). From and
after such conversion, such shares of Class B Common Stock shall be retired
and shall not be reissued.
(b) Class C Common Stock. Upon the earlier to occur of (i) a
Qualified Public Offering; and (ii) the date on which the total number of
outstanding shares of Class C Common Stock is less than 30% of the total
number of shares of Class C Common Stock issued by the Corporation on or
prior to such date, each outstanding share of Class C Common Stock shall
automatically convert into the number of shares of Class A Common Stock
determined by application of the Class C Conversion Factor. Fractional
shares shall be converted into equivalent fractional shares of Class A
Common Stock (or, at the discretion of the Board of Directors, eliminated
in return for payment therefor in cash at the fair market value thereof, as
determined in good faith by the Board of Directors. From and after such
conversion, such shares of Class C Common Stock shall be retired and shall
not be reissued.
(c) Other. Upon conversion of the Class B Common Stock and the
Class C Common Stock pursuant to this Section 4.7, (i) the holders of the
Class A Common Stock shall be entitled to elect the entire Number of
Directors consisting of the full Board of Directors and each such director
shall have one vote on all matters to be voted on by the directors, (ii)
the Restated Certificate of Incorporation shall automatically be amended to
eliminate the corresponding provisions in
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<PAGE>
Sections 4.2.8, 4.2.9, 4.2.21, 4.5.3, 4.5.4, and 4.5.5 with respect to such
class of Common Stock and (iii) upon the filing of a certificate in
accordance with Section 243 of the General Corporation Law of the State of
Delaware, the authorized shares of Class B Common Stock and Class C Common
Stock shall be eliminated.
2. Optional Conversion
(a) Class B Common Stock. At the option of any holder of the
shares of Class B Common Stock, exercisable at any time, in whole or in
part, each outstanding share of Class B Common Stock held by such holder
may be converted into the number of shares of Class A Common Stock as
determined by application of the Class B Conversion Factor. From and after
such optional conversion, such shares of Class B Common Stock shall be
retired and shall not be reissued, and upon the conversion of all
outstanding shares of Class B Common Stock and upon the filing of a
certificate in accordance with Section 243 of the General Corporation Law
of the State of Delaware, the authorized shares of Class B Common Stock
shall be eliminated.
(b) Class C Common Stock. At the option of any holder of the
shares of Class C Common Stock, exercisable at any time, in whole or in
part, each outstanding share of Class C Common Stock held by such holder
may be converted into the number of shares of Class A Common Stock as
determined by application of the Class C Conversion Factor. From and after
such optional conversion, such shares by Class C Common Stock shall be
retired and shall not be reissued, and upon the conversion of all
outstanding shares of Class C Common Stock and upon the filing of a
certificate in accordance with Section 243 of the General Corporation Law
of the State of Delaware, the authorized shares of Class C Common Stock
shall be eliminated.
(i) The conversion factor in effect at any time for the Class C Common
Stock (the "Class C Conversion Factor") shall be the quotient
obtained by dividing $3.25 by the Class C Conversion Value.
(ii) The Class C Conversion Value shall be $3.25, as adjusted as
provided below.
(A) Upon Sale of Common Stock. If the Company shall, while there
-------------------------
are any shares of Class C Common Stock outstanding, issue or
sell, or be deemed to issue and sell in accordance with this
Section 4.7.2(b)(ii), shares after the
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<PAGE>
date hereof of its Common Stock (other than Excluded Securities
(as defined below)) without consideration or at a price per
share less than the Class C Conversion Value in effect
immediately prior to such issuance or sale, then upon each such
issuance or sale such Class C Conversion Value, except as
provided in Section 4.7.2(b)(ii), shall be lowered so as to be
equal to an amount determined by multiplying the Class C
Conversion Value by a fraction: (1) the numerator of which
shall be (a) the number of shares of Common Stock outstanding
immediately prior to the issuance of such additional shares of
Common Stock, plus (b) the number of shares of Common Stock
which the net aggregate consideration, if any, received by the
Company for the total number of such additional shares of
Common Stock so issued would purchase at the Class C Conversion
Value in effect immediately prior to such issuance, and (2) the
denominator of which shall be (a) the number of shares of
Common Stock outstanding immediately prior to the issuance of
such additional shares of Common Stock, plus (b) the number of
such additional shares of Common Stock so issued.
(B) Upon Issuance of Warrants, Options and Rights to
------------------------------------------------
Purchase Common Stock.
---------------------
(1) For the purpose of this Section 4.7.2(b)(ii), the
issuance of any warrants, options, subscriptions or
purchase rights with respect to shares of Common Stock
and the issuance of any securities convertible into or
exchangeable for shares of Common Stock (or the issuance
of any warrants, options or any rights with respect to
such convertible or exchangeable securities) shall be
deemed an issuance at such time of such Common Stock if
the Net Consideration Per Share (as hereinafter
determined) which may be received by the Corporation for
such Common Stock shall be less than the Class C
Conversion Value in effect at the time of such issuance.
Any obligation, agreement or undertaking to issue
warrants, options, subscriptions or purchase rights at
any time in the future shall be deemed to be an issuance
at the time such obligation, agreement or undertaking is
made or arises. No adjustment of the Class C Conversion
Value for the
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Class C Common Stock shall be made under this Section
4.7.2(b)(ii) upon the issuance of any shares of Common
Stock which are issued pursuant to the exercise of any
warrants, options, subscriptions or purchase rights or
pursuant to the exercise of any conversion or exchange
rights in any convertible securities if any adjustment
shall previously have been made upon the issuance of any
such warrants, options or subscriptions or purchase
rights or upon the issuance of any such convertible
securities (or upon the issuance of any such warrants,
options or any rights therefor) as above provided.
Should the Net Consideration Per Share of any such
warrants, options, subscriptions or purchase rights or
convertible securities be decreased from time to time
then, upon the effectiveness of each such change, the
Class C Conversion Value shall be adjusted to such Class
C Conversion Value as would have obtained (1) had the
adjustments made upon the issuance of such warrants,
options, rights or convertible securities been made upon
the basis of the actual Net Consideration Per Share of
such securities, and (2) had the adjustments made to the
Class C Conversion Value since the date of issuance of
such securities been made to the Class C Conversion Value
as adjusted pursuant to (1) above. Any adjustment of the
Class C Conversion Value with respect to this paragraph
which relates to warrants, options, subscriptions or
purchase rights with respect to shares of Common Stock
shall be disregarded if, as, and when all of such
warrants, options, subscriptions or purchase rights
expire or are canceled without being exercised, so that
the Class C Conversion Value effective immediately upon
such cancellation or expiration shall be equal to the
Class C Conversion Value in effect at the time of the
issuance of the expired or canceled warrants, options,
subscriptions or purchase rights, with such additional
adjustments as would have been made to that Class C
Conversion Value had the expired or canceled warrants,
options, subscriptions or purchase rights not been
issued.
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<PAGE>
(2) For purposes of this paragraph, the "Net Consideration
Per Share" which may be received by the Corporation
shall be determined as follows: the "Net Consideration
Per Share" shall mean the amount equal to the total
amount of consideration, if any, received by the
Corporation for the issuance of such warrants, options,
subscriptions or other purchase rights or convertible
or exchangeable securities, plus the minimum amount of
consideration, if any, payable to the Corporation upon
exercise or conversion thereof, divided by the
aggregate number of shares of Common Stock that would
be issued if all such warrants, options, subscriptions
or other purchase rights or convertible or exchangeable
securities were exercised, exchanged or converted and
shall be determined in each instance as of the date of
issuance of warrants, options, subscriptions or other
purchase rights or convertible or exchangeable
securities without giving effect to any possible future
upward price adjustments or rate adjustments which may
be applicable with respect to such warrants, options,
subscriptions or other purchase rights or convertible
or exchangeable securities.
(C) Stock Dividends. In the event the Corporation shall make
---------------
or issue, or shall fix a record date for the determination
of holders of any stock of the Corporation other than Common
Stock entitled to receive a dividend or other distribution
payable in Common Stock or securities of the Corporation
convertible into or otherwise exchangeable for the Common
Stock of the Corporation, then such Common Stock or other
securities issued in payment of such dividend shall be
deemed to have been issued without consideration, except for
(i) dividends payable in shares of Common Stock payable to
holders of Class C Common Stock and to holders of any other
class of stock, whether or not paid to holders of any other
class of stock, or (ii) dividends payable in shares of Class
C Common Stock; so long as, in the case of (i) and (ii) the
holders of any shares of Class C Common Stock shall receive
such shares of Common Stock and the shares of Class C Common
Stock issued as such dividend and payable with respect to
the shares into which the Class C Common are
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<PAGE>
convertible.
(D) Consideration Other than Cash. For purposes of this
-----------------------------
Section 4.7.2(b)(ii), if a part or all of the consideration
received by the Corporation in connection with the issuance
of shares of the Common Stock or the issuance of any of the
securities described in this Section 4.7.2(b)(ii) consists
of property other than cash, such consideration shall be
deemed to have a fair market value as is reasonably
determined in good faith by the Class B and C Directors.
(E) Exceptions. This Section 4.7.2(b)(ii) shall not apply: (1)
----------
to the issuance of shares of Common Stock, or options
exercisable therefor, (subject to equitable adjustment in
the event of any stock-split, combination, reclassification
or other similar event involving the Common Stock) issued
and issuable, to officers, employees and consultants of the
Corporation or any Affiliate of the Corporation pursuant to
any incentive stock option plan or stock purchase plan
approved (both as to such plan and as to any issuance of
stock or options thereunder) or any stock option approved by
the Board of Directors in accordance with the provisions of
this certificate; (2) under any of the circumstances under
Section 4.6; (3) to the issuance of shares of Common Stock
upon the exchange or exercise of or pursuant to any
adjustments provided by any warrants (A) outstanding as of
the date hereof or (B) sold to the Investors in connection
with the original issuance of shares of Class C Common
Stock; (4) to the issuance of shares of Class A Common Stock
upon the conversion of any shares of Class B Common Stock or
Class C Common Stock or (5) an aggregate of 5.9 million
shares of Class A Common Stock at a purchase price of $3.00
per share issued in connection with physician affiliation
transactions approved by the Board of Directors with
Flagship Health PA and physicians associated with Clinical
Associates and in connection with physician affiliation
transaction with Medical Care Partners, P.C. and physicians
in the Springfield, Massachusetts region. The shares issued
pursuant to (1) through (5) hereof are collectively referred
to herein as the "Excluded Securities."
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<PAGE>
3. Reclassification. If the Common Stock issuable upon the conversion
of the Class B Common Stock or Class C Common Stock shall be changed into
the same or different number of shares of any class or classes of stock,
whether by reclassification or otherwise (other than a subdivision or
combination of shares or stock dividend or a reorganization, merger or sale
of assets provided for elsewhere in this Section 4.7, or Section 4.8.3 (to
the extent that such transaction is treated as a liquidation, dissolution
or winding up) or the sale of all or substantially all of the Corporation's
properties and assets to any other person), then and in each such event the
holder of each share of Class B Common Stock or Class C Common Stock shall
have the right thereafter to convert such shares into the kind and amount
of shares of stock and other securities and property receivable upon such
reclassification or other change by holders of the number of shares of
Class A Common Stock into which such shares of Class B Common Stock or
Class C Common Stock might have been converted immediately prior to such
reclassification or change, all subject to further adjustment as provided
herein.
4. Accountant's Certificate as to Adjustments; Notice by Company. In
each case of an adjustment or readjustment of the Class C Conversion Value,
the Corporation at its expense will furnish each holder of Class C Common
Stock with a certificate, prepared by independent public accountants of
recognized standing, showing such adjustment or readjustment, and stating
in detail the facts upon which such adjustment or readjustment is based.
5. Cash in Lieu of Fractional Shares. No fractional shares of Common
Stock or scrip representing fractional shares shall be issued upon the
conversion of shares of Class B Common Stock or Class C Common Stock.
Instead of any fractional share of Common Stock which would otherwise be
issuable upon conversion of Class B Common Stock of Class C Common Stock,
the Company shall pay to the holder of the shares of Class B Common Stock
or Class C Common Stock, which were converted, a cash adjustment in respect
to such fractional shares in an amount equal to the same fraction of the
market price per share of Common Stock (as determined in a reasonable
manner prescribed by the Board of Directors), but not less than the
applicable conversion factor, at the close of business on the conversion
date. The determination as to whether or not any fractional shares are
issuable shall be based upon the total number of shares of Class B Common
Stock or Class C Common Stock being converted at any one time by any holder
thereof, not upon each share of Class B Common Stock or Class C Common
Stock being converted.
6. Reservation of Common Stock; Definitions. The Corporation shall at
all times reserve and keep available out of its authorized but unissued
shares of Class A Common Stock, solely for the purpose of effecting the
conversion of
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the shares of Class B Common Stock or Class C Common Stock, such number of
its shares of Class A Common Stock as shall from time to time be sufficient
to effect the conversion of all outstanding shares of Class B Common Stock
or Class C Common Stock, and if at any time the number of authorized but
unissued shares of Class A Common Stock shall not be sufficient to effect
the conversion of all then outstanding shares of Class B Common Stock or
Class C Common Stock, the Corporation shall take such corporate action as
may be necessary to increase its authorized but unissued shares of Class A
Common Stock to such number of shares as shall be sufficient for the
purpose.
7. Validity of Shares. The Corporation agrees that it will from time
to time take all such actions as may be requisite to assure that all shares
of Common Stock which may be issued upon conversion of any share of the
Class B Common Stock and Class C Common Stock will, upon issuance, be
legally and validly issued, fully paid and non-assessable and free from all
taxes, liens and charges with respect to the issue thereof; and, without
limiting the generality of the foregoing, the Corporation agrees that it
will from time to time take all such action as may be requisite to assure
that the par value per share, if any, of the Class A Common Stock is at all
times equal to or less than the amount paid per share for the Class B
Common Stock and Class C Common Stock divided by the number of shares of
Class A Common Stock into which each share of Class B Common Stock and
Class C Common Stock can, from time to time, be converted.
8. Effect of Conversion. Upon conversion of any share of Class B
Common Stock or Class C Common Stock, the holder shall surrender the
certificate evidencing such share to the Corporation at its principal place
of business. Promptly after receipt of such certificate, the Corporation
shall issue and send to such holder a new certificate, registered in the
name of such holder, evidencing the number of shares of Class A Common
Stock into which such share has been converted. From and after the time of
conversion of any share of Class B Common Stock or Class C Common Stock,
the rights of the holder thereof as such shall cease; the certificate
formerly evidencing such share shall, until surrendered and reissued as
provided above, evidence the applicable number of shares of Class B Common
Stock or Class C Common Stock; and such holder shall be deemed to have
become the holder of record of the same number of shares of the Class A
Common Stock.
8. Liquidation Preference. In the event of any liquidation, dissolution
or winding up of the Corporation, either voluntary or involuntary, distributions
to the stockholders of the Corporation shall be made in the following manner:
1. Class C Common Stock. The holders of the Class C Common Stock
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<PAGE>
shall first be entitled to receive prior and in preference to any
distribution of any of the assets of the Company to the holders of any
other class or series of Common Stock by reason of their ownership of such
stock, an amount equal to the sum of (i) the greater of (x) $3.25 per share
of Class C Common Stock (which amount shall be subject to equitable
adjustment whenever there shall occur a stock split, combination,
reclassification or other similar event involving the Class C Common Stock)
and (y) such amount per share of Class C Common Stock which would be
payable in such liquidation, dissolution or winding up if all outstanding
shares of Class C Common were converted into Class A Common plus (ii) an
amount equal to all declared but unpaid dividends thereon, whether or not
earned, to and including the date full payment shall be tendered to the
holders of Class C Common Stock with respect to such liquidation,
dissolution or winding up. If the assets of the Corporation available for
distribution shall be insufficient to permit the payment in full to such
holders of the Class C Common Stock of the full aforesaid preferential
amount, then the entire assets of the Company legally available for
distribution shall be distributed ratably among the holders of the Class C
Common Stock in accordance with the aggregate liquidation preference of the
shares of Class C Common Stock held by each of them.
2. Other Common Stock. After payment has been made to the holders of
the Class C Common Stock of the full amounts to which they shall be
entitled as aforesaid pursuant to Sections 4.8.1, the holders of the Common
Stock (other than Class C Common Stock) shall be entitled to share ratably
in the remaining assets, based on the number of shares of Common Stock held
by them or in the case of the holders of Class B Common Stock based on the
number of shares of Class A Common Stock to which the Class B Common Stock
is convertible.
3. Treatment of Reorganizations, Consolidations, Mergers, and Sales
of Assets. A reorganization of the Common Stock, or a consolidation or
merger of the Corporation with or into any other corporation or
corporations in which the stockholders of the Corporation immediately after
the consolidation or merger do not own more than fifty percent (50%) of the
outstanding voting power (assuming conversion of all convertible securities
and the exercise of all outstanding options and warrants) of the surviving
corporation, or a sale of all or substantially all of the assets of the
Corporation shall be regarded as a liquidation, dissolution or winding up
of the affairs of the Company within the meaning of Section 4.8, unless the
holders of a majority of the then outstanding shares of Class C Common
Stock, voting as a separate class, elect not to treat any of the foregoing
events as a liquidation, dissolution or winding up by giving written notice
thereof to the Corporation, at least five (5) business days prior to such
event.
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<PAGE>
9. Replacement. Upon receipt of an affidavit of the registered owner
of one or more shares of any class of Common Stock (or such other evidence
as may be reasonably satisfactory to the Corporation) with respect to the
ownership and the loss, theft, destruction or mutilation of any certificate
evidencing such shares of Common Stock, and in the case of any such loss,
theft or destruction, upon receipt of indemnity reasonably satisfactory to
the Corporation (it being understood that if the holder is an Investor, or
any other holder of shares of Common Stock of the Corporation which is an
entity regularly engaged in the business of investing in companies and
meets such requirements of creditworthiness as may reasonably be imposed by
the Corporation in connection with the provisions of this paragraph, its
own agreement will be satisfactory), or, in the case of any such mutilation
upon surrender of such certificate, the Corporation shall execute and
deliver in lieu of such certificate a new certificate of like kind
representing the number of shares of such class represented by such lost,
stolen, destroyed or mutilated certificate and dated the date of such lost,
stolen, destroyed or mutilated certificate.
10. Amendment; Waiver. No amendment or waiver of any provision of
this Article Fourth shall be effective without the prior written consent of
the holders of a majority of the then outstanding shares of the Class B
Common Stock and Class C Common Stock voting as a single class and no
amendment or waiver of any provision of this Article Fourth which adversely
affects the holders of Class A Common Stock or increases the rights of the
Class B Common Stock and Class C Common Stock shall be effective without
the prior written consent of the holders of a majority of the then
outstanding shares of the Class A Common Stock voting as a single class;
provided, however, that as stipulated in Section 242(b)(2) of the Delaware
General Corporation Law no amendment to any class of Common Stock that
alters or changes the powers, preferences or special rights of such class
of Common Stock so as to affect them adversely shall be effective without
the prior consent of the holders of a majority of the then outstanding
shares of such class of Common Stock.
FIFTH: 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 director of the Corporation shall be
personally liable to the Corporation or its stockholders for monetary
damages for any breach of fiduciary duty as a director, notwithstanding any
provision of law imposing such liability. No amendment to or repeal of this
provision shall apply to or have any effect on the liability or alleged
liability of any director of the Corporation for or with respect to any
acts or omissions of such director occurring prior to such amendment.
SIXTH:
11. Actions, Suits and Proceedings Other than by or in the Right of
---------------------------------------------------------------
the Corporation. The Corporation shall indemnify each person who was or is
---------------
a party or is threatened to be made a party to any threatened, pending or
completed action,
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<PAGE>
suit or proceeding, whether civil, criminal, administrative or
investigative (other than an action by or in the right of the Corporation),
by reason of the fact that such person is or was, or is or was serving, or
has agreed to serve, at the request of the Corporation, as a director,
officer or trustee of, or in a similar capacity with, another corporation,
partnership, joint venture, trust or other enterprise (including any
employee benefit plan) (all such persons being referred to hereafter as an
"Indemnitee"), or by reason of any action alleged to have been taken or
omitted in such capacity, against all expenses (including attorneys' fees),
judgments, fines and amounts paid in settlement actually and reasonably
incurred by such person or on such person's behalf in connection with such
action, suit or proceeding and any appeal therefrom, if such person acted
in good faith and in a manner such person reasonably believed to be in, or
not opposed to, the best interests of the Corporation, and, with respect to
any criminal action or proceeding, had no reasonable cause to believe such
person's conduct was unlawful. The termination of any action, suit or
proceeding by judgment, order, settlement, conviction or upon a plea of
nolo contendere or its equivalent, shall not, of itself, create a
---- ----------
presumption that the person did not act in good faith and in a manner which
such person reasonably believed to be in, or not opposed to, the best
interests of the Corporation, and, with respect to any criminal action or
proceeding, had reasonable cause to believe that such person's conduct was
unlawful. Notwithstanding anything to the contrary in this Article, except
as set forth in Section 6.7 below, the Corporation shall not indemnify an
Indemnitee seeking indemnification in connection with a proceeding (or part
thereof) initiated by the Indemnitee unless the initiation thereof was
approved by the Board of Directors of the Corporation. Notwithstanding
anything to the contrary in this Article, the Corporation shall not
indemnify an Indemnitee to the extent such Indemnitee is reimbursed from
the proceeds of insurance, and in the event the Corporation makes any
indemnification payments to an Indemnitee and such Indemnitee is
subsequently reimbursed from the proceeds of insurance, such Indemnitee
shall promptly refund such indemnification payments to the Corporation to
the extent of such insurance reimbursement.
12. Actions or Suits by or in the Right of the Corporation. The
------------------------------------------------------
Corporation shall indemnify any Indemnitee who was or is a party or is
threatened to be made a party to any threatened, pending or completed
action or suit by or in the right of the Corporation to procure a judgment
in its favor by reason of the fact that such person is or was, or has
agreed to become, a director or officer of the Corporation, or is or was
serving, or has agreed to serve, at the request of the Corporation, as a
director, officer or trustee of, or in a similar capacity with, another
corporation, partnership, joint venture, trust or other enterprise
(including any employee benefit plan), or by reason of any action alleged
to have been taken or omitted in such capacity, against all expenses
(including attorneys' fees) and, to the extent permitted by law, amounts
paid in settlement actually and reasonably incurred by such person or on
such person's behalf in connection with such action, suit or proceeding and
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<PAGE>
any appeal therefrom, if such person acted in good faith and in a manner
reasonably believed to be in, or not opposed to, the best interests of the
Corporation, except that no indemnification shall be made in respect of any
claim, issue or matter as to which such person shall have been adjudged to
be liable to the Corporation unless and only to the extent that the Court
of Chancery of Delaware shall determine upon application that, despite the
adjudication of such liability but in view of all the circumstances of the
case, such person is fairly and reasonably entitled to indemnity for such
expenses (including attorneys' fees) which the Court of Chancery of
Delaware shall deem proper.
13. Indemnification for Expenses of Successful Party.
------------------------------------------------
Notwithstanding the other provisions of this Article, to the extent that an
Indemnitee has been successful, on the merits or otherwise, in defense of
any action, suit or proceeding referred to in Sections 6.1 and 6.2 of this
Article, or in defense of any claim, issue or matter therein, or on appeal
from any such action, suit or proceeding, the Indemnitee shall be
indemnified against all expenses (including attorneys' fees) actually and
reasonably incurred by the Indemnitee or on the Indemnitee's behalf in
connection therewith. Without limiting the foregoing, if any action, suit
or proceeding is disposed of, on the merits or otherwise (including a
disposition without prejudice), without (i) the disposition being adverse
to the Indemnitee, (ii) an adjudication that the Indemnitee was liable to
the Corporation, (iii) a plea of guilty or nolo contendere by the
---- ----------
Indemnitee, (iv) an adjudication that the Indemnitee did not act in good
faith and in a manner the Indemnitee reasonably believed to be in or not
opposed to the best interests of the Corporation, and (v) with respect to
any criminal proceeding, an adjudication that the Indemnitee had reasonable
cause to believe the Indemnitee's conduct was unlawful, the Indemnitee
shall be considered for the purposes hereof to have been wholly successful
with respect thereto.
14. Notification and Defense of Claim. As a condition precedent to
---------------------------------
the right to be indemnified, the Indemnitee must notify the Corporation in
writing as soon as practicable of any action, suit, proceeding or
investigation involving the Indemnitee for which indemnity will or could be
sought. With respect to any action, suit, proceeding or investigation of
which the Corporation is so notified, the Corporation will be entitled to
participate therein at its own expense and/or to assume the defense thereof
at its own expense, with legal counsel reasonably acceptable to the
Indemnitee. After notice from the Corporation to the Indemnitee of its
election so to assume such defense, the Corporation shall not be liable to
the Indemnitee for any legal or other expenses subsequently incurred by the
Indemnitee in connection with such claim, other than as provided below in
this Section 6.4. The Indemnitee shall have the right to employ the
Indemnitee's own counsel in connection with such claim, but the fees and
expenses of such counsel incurred after notice from the Corporation of its
assumption of the defense thereof shall be at the expense of the Indemnitee
unless (i) the employment of counsel by the Indemnitee has been authorized
by the Corporation, (ii) counsel to the Indemnitee shall have reasonably
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<PAGE>
concluded that there may be a conflict of interest or position on any
significant issue between the Corporation and the Indemnitee in the conduct
of the defense of such action or (iii) the Corporation shall not in fact
have employed counsel to assume the defense of such action, in each of
which cases the fees and expenses of counsel for the Indemnitee shall be at
the expense of the Corporation, except as otherwise expressly provided by
this Article. The Corporation shall not be entitled, without the consent of
the Indemnitee, to assume the defense of any claim brought by or in the
right of the Corporation or as to which counsel for the Indemnitee shall
have reasonably made the conclusion provided for in clause (ii) above.
15. Advance of Expenses. Subject to the provisions of Section 6.6
-------------------
below, in the event that the Corporation does not assume the defense
pursuant to Section 6.4 of this Article of any action, suit, proceeding or
investigation of which the Corporation receives notice under this Article,
any expenses (including attorneys' fees) incurred by an Indemnitee in
defending a civil or criminal action, suit, proceeding or investigation or
any appeal therefrom shall be paid by the Corporation in advance of the
final disposition of such matter; provided, however, that the payment of
-------- -------
such expenses incurred by an Indemnitee in advance of the final disposition
of such matter shall be made only upon receipt of an undertaking by or on
behalf of the Indemnitee to repay all amounts so advanced in the event that
it shall ultimately be determined that the Indemnitee is not entitled to be
indemnified by the Corporation as authorized in this Article. Such
undertaking shall be accepted without reference to the financial ability of
the Indemnitee to make such repayment.
16. Procedure for Indemnification. In order to obtain
-----------------------------
indemnification or advancement of expenses pursuant to Section 6.1, 6.2,
6.3 or 6.5 of this Article, the Indemnitee shall submit to the Corporation
a written request, including in such request such documentation and
information as is reasonably available to the Indemnitee and is reasonably
necessary to determine whether and to what extent the Indemnitee is
entitled to indemnification or advancement of expenses. Any such
indemnification or advancement of expenses shall be made promptly, and in
any event within 60 days after receipt by the Corporation of the written
request of the Indemnitee, unless with respect to requests under Section
6.1, 6.2 or 6.5 the Corporation determines within such 60-day period that
the Indemnitee did not meet the applicable standard of conduct set forth in
Section 1 or 2, as the case may be. Such determination shall be made in
each instance by (a) a majority vote of the directors of the Corporation
consisting of persons who are not at that time parties to the action, suit
or proceeding in question ("disinterested directors"), whether or not a
quorum, (b) a majority vote of a quorum of the outstanding shares of stock
of all classes entitled to vote for directors, voting as a single class,
which quorum shall consist of stockholders who are not at that time parties
to the action, suit or proceeding in question, (c) independent legal
counsel (who may, to the extent permitted by law, be regular legal counsel
to the Corporation), or (d) a court of competent jurisdiction.
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<PAGE>
17. Remedies. The right to indemnification or advances as granted
--------
by this Article shall be enforceable by the Indemnitee in any court of
competent jurisdiction if the Corporation denies such request, in whole or
in part, or if no disposition thereof is made within the 60-day period
referred to above in Section 6.6. Unless otherwise required by law, the
burden of proving that the Indemnitee is not entitled to indemnification or
advancement of expenses under this Article shall be on the Corporation.
Neither the failure of the Corporation to have made a determination prior
to the commencement of such action that indemnification is proper in the
circumstances because the Indemnitee has met the applicable standard of
conduct, nor an actual determination by the Corporation pursuant to Section
6.6 that the Indemnitee has not met such applicable standard of conduct,
shall be a defense to the action or create a presumption that the
Indemnitee has not met the applicable standard of conduct. The Indemnitee's
expenses (including attorneys' fees) incurred in connection with
successfully establishing the Indemnitee's right to indemnification, in
whole or in part, in any such proceeding shall also be indemnified by the
Corporation.
18. Subsequent Amendment. No amendment, termination or repeal of
--------------------
this Article or of the relevant provisions of the General Corporation Law
of Delaware or any other applicable laws shall affect or diminish in any
way the rights of any Indemnitee to indemnification under the provisions
hereof with respect to any action, suit, proceeding or investigation
arising out of or relating to any actions, transactions or facts occurring
prior to the final adoption of such amendment, termination or repeal.
19. Other Rights. The indemnification and advancement of expenses
------------
provided by this Article shall not be deemed exclusive of any other rights
to which an Indemnitee seeking indemnification or advancement of expenses
may be entitled under any law (common or statutory), agreement or vote of
stockholders or disinterested directors or otherwise, both as to action in
such person's official capacity and as to action in any other capacity
while holding office for the Corporation, and shall continue as to an
Indemnitee who has ceased to be a director or officer, and shall inure to
the benefit of the estate, heirs, executors and administrators of the
Indemnitee. Nothing contained in this Article shall be deemed to prohibit,
and the Corporation is specifically authorized to enter into, agreements
with officers and directors providing indemnification rights and procedures
different from those set forth in this Article. In addition, the
Corporation may, to the extent authorized from time to time by its Board of
Directors, grant indemnification rights to other employees or agents of the
Corporation or other persons serving the Corporation and such rights may be
equivalent to, or greater or less than, those set forth in this Article.
20. Partial Indemnification. If an Indemnitee is entitled under any
-----------------------
provision of this Article to indemnification by the Corporation for some or
a portion of the
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<PAGE>
expenses (including attorneys' fees), judgments, fines or amounts paid in
settlement actually and reasonably incurred by such person or on such
person's behalf in connection with any action, suit, proceeding or
investigation and any appeal therefrom but not, however, for the total
amount thereof, the Corporation shall nevertheless indemnify the Indemnitee
for the portion of such expenses (including attorneys' fees), judgments,
fines or amounts paid in settlement to which the Indemnitee is entitled.
21. Insurance. The Corporation may purchase and maintain insurance,
---------
at its expense, to protect itself and any director, officer, employee or
agent of the Corporation or another corporation, partnership, joint
venture, trust or other enterprise (including any employee benefit plan)
against any expense, liability or loss incurred by such person in any such
capacity, or arising out of such person's status as such, whether or not
the Corporation would have the power to indemnify such person against such
expense, liability or loss under the General Corporation Law of Delaware.
22. Merger or Consolidation. If the Corporation is merged into or
-----------------------
consolidated with another corporation and the Corporation is not the
surviving corporation, the surviving corporation shall assume the
obligations of the Corporation under this Article with respect to any
action, suit, proceeding or investigation arising out of or relating to any
actions, transactions or facts occurring prior to the date of such merger
or consolidation.
23. Savings Clause. If this Article or any portion hereof shall be
--------------
invalidated on any ground by any court of competent jurisdiction, then the
Corporation shall nevertheless indemnify each Indemnitee as to any expenses
(including attorneys' fees), judgments, fines and amounts paid in
settlement in connection with any action, suit, proceeding or
investigation, whether civil, criminal or administrative, including an
action by or in the right of the Corporation, to the fullest extent
permitted by any applicable portion of this Article that shall not have
been invalidated and to the fullest extent permitted by applicable law.
24. Definitions. Terms used herein and defined in Section 145(h) and
-----------
Section 145(i) of the General Corporation Law of Delaware shall have the
respective meanings assigned to such terms in such Section 145(h) and
Section 145(i).
25. Subsequent Legislation. If the General Corporation Law of
----------------------
Delaware is amended after adoption of this Article to expand further the
indemnification permitted to Indemnitees, then the Corporation shall
indemnify such persons to the fullest extent permitted by the General
Corporation Law of Delaware, as so amended.
SEVENTH: The Corporation reserves the right to amend, alter, change or
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<PAGE>
repeal any provision contained in this Certificate of Incorporation, in the
manner now or hereafter prescribed by statute and this Certificate of
Incorporation, and all rights conferred upon stockholders herein are
granted subject to this reservation.
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<PAGE>
IN WITNESS WHEREOF, the Corporation has caused its corporate seal to be
affixed hereto and this Restated Certificate of Incorporation to be signed by
its President and attested by its Secretary this ____ day of June, 1997.
PHYSICIANS QUALITY CARE, INC.
By:
----------------------------
Jerilyn P. Asher
President
ATTEST:
- -----------------------------
[ ]
[Corporate Seal]
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<PAGE>
Exhibit 3.2
SECOND AMENDED AND RESTATED
BY-LAWS
OF
PHYSICIANS QUALITY CARE, INC.
<PAGE>
SECOND AMENDED AND RESTATED
BY-LAWS
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ARTICLE 1 -Stockholders................................................ 1
1.1. Place of Meetings...................................... 1
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1.2. Annual Meeting......................................... 1
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1.3. Special Meetings....................................... 1
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1.4. Notice of Meetings..................................... 1
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1.5. Voting List............................................ 2
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1.6. Quorum................................................. 2
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1.7. Adjournments........................................... 2
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1.8. Voting and Proxies..................................... 2
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1.9. Acting at Meeting...................................... 3
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1.10. Action without Meeting................................. 3
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ARTICLE 2 -Directors................................................... 3
2.1. General Powers......................................... 3
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2.2. Number; Election and Qualification..................... 3
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2.3. Tenure................................................. 5
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2.4. Vacancies.............................................. 5
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2.5. Resignation............................................ 5
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2.6. Regular Meetings....................................... 5
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2.7. Special Meetings....................................... 5
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2.8. Notice of Special Meetings............................. 5
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2.9. Meetings by Telephone Conference Calls................. 6
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2.10. Quorum................................................. 6
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2.11. Action at Meeting...................................... 6
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2.12. Action by Consent...................................... 7
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2.13. Removal................................................ 7
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2.14. Committees............................................. 7
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2.15. Compensation of Directors.............................. 7
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ARTICLE 3 -Officers.................................................... 8
3.1. Enumeration............................................ 8
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3.2. Election............................................... 8
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3.3. Qualification.......................................... 8
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3.4. Tenure................................................. 8
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3.5. Duties................................................. 8
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3.6. Resignation and Removal................................ 8
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3.7. Vacancies.............................................. 9
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3.8. Chairman of the Board and Vice-Chairman of the Board... 9
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3.9. Chief Executive Officer................................ 9
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3.10. President.............................................. 9
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3.11. Vice Presidents........................................ 9
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3.12. Secretary and Assistant Secretaries.................... 10
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3.13. Treasurer and Assistant Treasurers..................... 10
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3.14. Salaries............................................... 11
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ARTICLE 4 -Capital Stock............................................... 11
4.1. Issuance of Stock...................................... 11
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4.2. Certificates of Stock.................................. 11
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4.3. Transfers.............................................. 12
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4.4. Lost, Stolen or Destroyed Certificates................. 12
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4.5. Record Date............................................ 12
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ARTICLE 5 -General Provision........................................... 13
5.1. Fiscal Year............................................ 13
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5.2. Corporate Seal......................................... 13
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5.3. Waiver of Notice....................................... 13
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5.4. Voting of Securities................................... 13
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5.5. Evidence of Authority.................................. 14
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5.6. Certificate of Incorporation........................... 14
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5.7. Transactions with Interested Parties................... 14
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5.8. Severability........................................... 15
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5.9. Pronouns............................................... 15
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ARTICLE 6 -Amendments.................................................. 15
6.1. By the Board of Directors.............................. 15
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6.2. By the Stockholders.................................... 15
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SECOND AMENDED AND RESTATED
BY-LAWS
OF
PHYSICIANS QUALITY CARE, INC.
ARTICLE 1-Stockholders
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1.1. Place of Meetings. All meetings of stockholders shall be held at
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such place within or without the State of Delaware as may be designated from
time to time by the Board of Directors or the President or, if not so
designated, at the registered office of the corporation.
1.2. Annual Meeting. The annual meeting of stockholders for the
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election of directors and for the transaction of such other business as may
properly be brought before the meeting shall be held on a date to be fixed by
the Board of Directors or the President (which date shall not be a legal holiday
in the place where the meeting is to be held) at the time and place to be fixed
by the Board of Directors or the President and stated in the notice of the
meeting. If no annual meeting is held in accordance with the foregoing
provisions, the Board of Directors shall cause the meeting to be held as soon
thereafter as convenient. If no annual meeting is held in accordance with the
foregoing provisions, a special meeting may be held in lieu of the annual
meeting, and any action taken at that special meeting shall have the same effect
as if it had been taken at the annual meeting, and in such case all references
in these By-laws to the annual meeting of the stockholders shall be deemed to
refer to such special meeting.
1.3. Special Meetings. Special meetings of stockholders may be called at
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any time by the President or by any member of the Board of Directors. Business
transacted at any special meeting of stockholders shall be limited to matters
relating to the purpose or purposes stated in the notice of the meeting.
1.4. Notice of Meetings. Except as otherwise provided by law, written
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notice of each meeting of stockholders, whether annual or special, shall be
given not less than 10 nor more than 60 days before the date of the meeting to
each stockholder entitled to vote at such meeting. The notices of all meetings
shall state the place, date and hour of the meeting. The notice of a special
meeting shall state, in addition, the purpose or purposes for which the
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meeting is called. If mailed, notice is given when deposited in the United
States mail, postage prepaid, directed to the stockholder at his address as it
appears on the records of the corporation.
1.5. Voting List. The officer who has charge of the stock ledger of the
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corporation shall prepare, at least 10 days before every meeting of
stockholders, a complete list of the stockholders entitled to vote at the
meeting, arranged in alphabetical order, and showing the address of each
stockholder and the number of shares registered in the name of each stockholder.
Such list shall be open to the examination of any stockholder, for any purpose
germane to the meeting, during ordinary business hours, for a period of at least
10 days prior to the meeting, at a place within the city where the meeting is to
be held. The list shall also be produced and kept at the time and place of the
meeting during the whole time of the meeting, and may be inspected by any
stockholder who is present.
1.6. Quorum. Except as otherwise provided by law, the Certificate of
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Incorporation or these By-laws, the holders of a majority of the shares (or, if
there are two or more classes of stock entitled to vote as separate classes, the
holders of a majority of the shares of such class) of the capital stock of the
corporation issued and outstanding and entitled to vote at the meeting, present
in person or represented by proxy, shall constitute a quorum for the transaction
of business.
1.7. Adjournments. Any meeting of stockholders may be adjourned to any
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other time and to any other place at which a meeting of stockholders may be held
under these By-laws by the stockholders present or represented at the meeting
and entitled to vote, although less than a quorum, or, if no stockholder is
present, by any officer entitled to preside at or to act as Secretary of such
meeting. It shall not be necessary to notify any stockholder of any adjournment
of less than 30 days if the time and place of the adjourned meeting are
announced at the meeting at which adjournment is taken, unless after the
adjournment a new record date is fixed for the adjourned meeting. At the
adjourned meeting, the corporation may transact any business which might have
been transacted at the original meeting.
1.8. Voting and Proxies. Each stockholder shall have one vote for each
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share of stock entitled to vote held of record by such stockholder and a
proportionate vote for each fractional share so held, unless otherwise provided
in the Certificate of Incorporation. Each stockholder of record entitled to vote
at a meeting of stockholders, or to express consent or dissent to corporate
action in writing without a meeting, may vote or express such consent or dissent
in person or may authorize another person or persons to vote or act for him by
written proxy executed by the stockholder or his authorized agent and delivered
to the Secretary of
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the corporation. No such proxy shall be voted or acted upon after three years
from the date of its execution, unless the proxy expressly provides for a longer
period.
1.9. Acting at Meeting. When a quorum is present at any meeting, the
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holders of shares of stock representing a majority of the votes cast on a matter
(or if there are two or more classes of stock entitled to vote as separate
classes, then in the case of each such class, the holders of shares of stock of
that class representing a majority of the votes cast on a matter) shall decide
any matter to be voted upon by the stockholders at such meeting, except when a
different vote is required by express provision of law, the Certificate of
Incorporation or these By-Laws. When a quorum is present at any meeting, any
election of directors by stockholders shall be determined by a majority of the
votes cast on the election.
1.10. Action without Meeting. Any action required or permitted to be
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taken at any annual or special meeting of stockholders of the corporation may be
taken without a meeting, without prior notice and without a vote, if a consent
in writing, setting forth the action so taken, is signed by the holders of
outstanding stock (or, if there are two or more classes of stock entitled to
vote as separate classes, by the holders of outstanding stock of that class
entitled to vote on such action) having not less than the minimum number of
votes that would be necessary to authorize or take such action at a meeting at
which all shares entitled to vote on such action were present and voted. Prompt
notice of the taking of corporate action without a meeting by less than
unanimous written consent shall be given to those stockholders who are entitled
to vote on such action and have not consented in writing.
ARTICLE 2-Directors
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2.1. General Powers. The business and affairs of the corporation shall be
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managed by or under the direction of a Board of Directors, who may exercise all
of the powers of the corporation except as otherwise provided by law or the
Certificate of Incorporation. In the event of a vacancy in the Board of
Directors, the remaining directors, except as otherwise provided by law, may
exercise the powers of the full Board until the vacancy is filled.
2.2. Number; Election and Qualification.
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2.2.1. The number of directors which shall constitute the whole
Board of Directors shall be thirteen. The number of directors may be
decreased at any time and from time to time either by the stockholders or
by a majority of the directors then in office, but only to eliminate
vacancies existing by reason of the death, resignation, removal or
expiration of the term of one or more directors. The directors shall be
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elected at the annual meeting of stockholders by such stockholders as have the
right to vote on such election. Directors need not be stockholders of the
corporation.
2.2.2. As used in these By-laws, the term Class B and C Directors
shall mean directors of the corporation who are elected directors in manner
specified in Sections 2.2.3(b), 2.2.3(c) and 2.2.3(d), the term Class A
Directors shall mean directors of the corporation who are elected directors in
the manner specified in Sections 2.2.3.(a) and the term Common Stock Directors
shall mean directors of the corporation who are elected directors in the manner
specified in Section 2.2.3.(e).
2.2.3. So long as there are issued and outstanding shares of Class
B-1, Class B-2 or Class C Common Stock, the number of directors shall be set at
thirteen and the directors shall be divided into classes and elected as follows:
(a) Class A Directors. The holders of record of outstanding
shares of Class A Common Stock, voting separately as a
single class, shall be entitled to elect two directors
of the Corporation;
(b) Class B-1 Directors. The holders of record of
outstanding shares of Class B-1 Common Stock, voting
separately as a single class, shall be entitled to elect
one director of the Corporation;
(c) Class B-2 Directors. The holders of record of
outstanding shares of Class B-2 Common Stock, voting
separately as a single class, shall be entitled to elect
one director of the Corporation;
(d) Class C Directors. The holders of record of outstanding
shares of Class C Common Stock, voting separately as a
single class, shall be entitled to elect two directors
of the Corporation; and
(e) Common Stock Directors. The holders of record of
outstanding shares of Common Stock, voting together as a
single class, shall be entitled to elect seven directors
of the Corporation.
2.3. Tenure. Each director shall hold office until the next annual
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meeting and until his successor is elected and qualified, or until his earlier
death, resignation or removal.
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2.4. Vacancies. Any vacancy in the Board of Directors, however occurring,
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including a vacancy resulting from an enlargement of the Board, shall be filled
by vote of the holders of a majority of the outstanding shares of the class or
classes of Common Stock which was entitled to elect the director whose office is
vacant. Any such vacancy shall automatically reduce the number of directors
constituting the entire Board of Directors pro tanto, until such time as the
holders of the class of Common Stock which was entitled to elect the director
whose office is vacant shall have exercised their right to elect a director to
fill the vacancy, whereupon the number of directors constituting the entire
Board of Directors shall be automatically increased pro tanto.
2.5. Resignation. Any director may resign by delivering his written
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resignation to the corporation at its principal office or to the President or
Secretary. Such resignation shall be effective upon receipt unless it is
specified to be effective at some other time or upon the happening of some other
event.
2.6. Regular Meetings. Regular meetings of the Board of Directors may be
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held without notice at such time and place, either within or without the State
of Delaware, as shall be determined from time to time by the Board of Directors;
provided that any director who is absent when such a determination is made shall
be given notice of the determination. A regular meeting of the Board of
Directors may be held without notice immediately after and at the same place as
the annual meeting of stockholders.
2.7. Special Meetings. Special meetings of the Board of Directors may be
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held at any time and place, within or without the State of Delaware, designated
in a call by the Chairman of the Board, President, two or more directors, or by
one director in the event that there is only a single director in a particular
class then in the office.
2.8. Notice of Special Meetings. Notice of any special meeting of
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directors shall be given to each director by the Secretary or by the officer or
one of the directors calling the meeting. Notice shall be duly given to each
director (i) by giving notice to such director in person or by telephone at
least 48 hours in advance of the meeting, (ii) by sending a telegram or telex,
or delivering written notice by hand, to his last known business or home address
at least 48 hours in advance of the meeting, or (iii) by mailing written notice
to his last known business or home address at least 72 hours in advance of the
meeting. A notice or waiver of notice of a meeting of the Board of Directors
need not specify the purposes of the meeting; provided, however, notice of any
meeting of the Board of Directors called for the purpose of voting on a Class B
and C Director Action (as defined in the Certificate of Incorporation) shall
specify that a Class B and C Director Action will be voted on at the meeting.
Such a
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notice shall constitute notice to the Class A Directors and Common Stock
Directors that such meeting shall be the sole opportunity for the Class A
Directors and the Common Stock Directors to consult with the Class B and C
Directors about such proposed Class B and C Director Action.
2.9. Meetings by Telephone Conference Calls. Directors or any members of
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any committee designated by the directors may participate in a meeting of the
Board of Directors or such committee by means of conference telephone or similar
communications equipment by means of which all persons participating in the
meeting can hear each other, and participation by such means shall constitute
presence in person at such meeting.
2.10. Quorum. A majority of the total number of the whole Board of
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Directors shall constitute a quorum at all meetings called in accordance with
Section 2.8 of the Board of Directors, provided, however, in the case of any
Class B and Class C Director Action or any meeting held while a Class B and C
Director Control Event, (as defined in the Certificate of Incorporation) is in
effect, a quorum shall only exist if the Class B and Class C Directors present
at the meeting hold a majority of the total votes entitled to be cast at such
meeting and so long as (i) there are Class B Directors at least one Class B
Director is present and (ii) there are any Class C Directors at least one Class
C Director is present. In the event one or more of the directors shall be
disqualified to vote at any meeting, then the required quorum shall be reduced
by one for each such director so disqualified; provided, however, that in no
case shall less than one-third (1/3) of the number so fixed constitute a quorum.
In the absence of a quorum at any such meeting, a majority of the directors
present may adjourn the meeting from time to time without further notice other
than announcement at the meting, until a quorum shall be present.
2.11. Action at Meeting. At any meeting of the Board of Directors at
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which a quorum is present, a majority of all votes cast shall be sufficient to
take any action, unless a different vote is specified by law, the Certificate of
Incorporation or these By-Laws. Except as provided otherwise herein or in the
Certificate of Incorporation, each director shall be entitled to one vote on all
matters to be voted on by the directors and the directors shall vote together as
a single class on all matters to which the Board of Directors is entitled to
vote.
2.12. Action by Consent. Any action required or permitted to be taken at
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any meeting of the Board of Directors or of any committee of the Board of
Directors may be taken without a meeting, if all members of the Board or
committee, as the case may be, consent to the action in writing, and the written
consents are filed with the minutes of
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proceedings of the Board or committee provided that no Class B and C Director
Action shall be taken by written consent.
2.13. Removal. Except as otherwise provided by the General Corporation
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Law of Delaware, any one or more or all of the directors may be removed, with or
without cause, by the holders of a majority of the shares then entitled to vote
at an election of directors, except that the directors elected by the holders of
a particular class or series of stock may be removed, with or without cause,
only by vote of the holders of a majority of the outstanding shares of such
class or series.
2.14. Committees. The Board of Directors may, by resolution passed by a
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majority of the whole Board, designate one or more committees, each committee to
consist of one or more of the directors of the corporation. The Board may
designate one or more directors as alternate members of any committee, who may
replace any absent of disqualified member at any meeting of the committee. In
the absence or disqualification of a member of a committee, the member or
members of the committee present at any meeting and not disqualified from
voting, whether or not he or they constitute a quorum, may unanimously appoint
another member of the Board of Directors to act at the meeting in the place of
any such absent or disqualified member. Any such committee, to the extent
provided in the resolution of the Board of Directors and subject to the
provisions of the General Corporation Law of the State of Delaware, shall have
and may exercise all the powers and authority of the Board of Directors in the
management of the business and affairs of the corporation and may authorize the
seal of the corporation to be affixed to all papers which may require it
provides that no Class B and C Director Action or a Restricted Action shall be
assigned to any Committee. Each such committee shall keep minutes and make such
reports as the Board of Directors may from time to time request. Except as the
Board of Directors may otherwise determine, any committee may make rules for the
conduct of its business, but unless otherwise provided by the directors or in
such rules, its business shall be conducted as nearly as possible in the same
manner as is provided in these By-laws for the Board of Directors.
2.15. Compensation of Directors. Directors may be paid such compensation
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for their services and such reimbursement for expenses of attendance at meetings
as the Board of Directors may from time to time determine. No such payment shall
preclude any director from servicing the corporation or any of its parent or
subsidiary corporations in any other capacity and receiving compensation for
such service.
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ARTICLE 3-Officers
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3.1. Enumeration. The officers of the corporation shall consist of a
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Chief Executive Officer, a President, a Secretary, a Treasurer and such other
officers with such other titles as the Board of Directors shall determine,
including a Chairman of the Board, a Vice-Chairman of the Board, and one or more
Vice Presidents, Assistant Treasurers, and the Assistant Secretaries. The Board
of Directors may appoint such other officers as it may deem appropriate.
3.2. Election. The President, Treasurer and Secretary shall be elected
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annually by the Board of Directors at its first meeting following the annual
meeting of stockholders. Other officers may be appointed by the Board of
Directors at such meeting or at any other meeting.
3.3. Qualification. No officer need be a stockholder. Any two or more
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offices may be held by the same person.
3.4. Tenure. Except as otherwise provided by law, by the Certificate of
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Incorporation or by these By-laws, each officer shall hold office until his
successor is elected and qualified, unless a different term is specified in the
vote choosing or appointing him, or until his earlier death, resignation or
removal.
3.5. Duties. Each officer shall take all reasonable, necessary and
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desirable measures to implement the decisions and actions of the Board of
Directors, including Class B and C Director Action or actions, authorizations or
directives of the Class B and C Directors following a Class B and C Director
Control Event.
3.6. Resignation and Removal. Any officer may resign by delivering his
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written resignation to the corporation at its principal office or to the
President or Secretary. Such resignation shall be effective upon receipt unless
it is specified to be effective at some other time or upon the happening of some
other event.
Any officer may be removed at any time, with or without cause, by vote of a
majority of the entire number of directors then in office.
Except as the Board of Directors may otherwise determine, no officer who
resigns or is removed shall have any right to any compensation as an officer for
any period following his resignation or removal, or any right to damages on
account of such removal, whether his
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compensation be by the month or by the year or otherwise, unless such
compensation is expressly provided in a duly authorized written agreement with
the corporation.
3.7. Vacancies. Subject to the Certificate of Incorporation, the Board of
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Directors may fill any vacancy occurring in any office for any reason and may,
in its discretion, leave unfilled for such period as it may determine any
offices other than those of President, Treasurer, and Secretary. Each such
successor shall hold office for the unexpired term of his predecessor and until
his successor is elected and qualified, or until his earlier death, resignation
or removal.
3.8. Chairman of the Board and Vice-Chairman of the Board. The Board of
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Directors may appoint a chairman of the Board and may designate the Chairman of
the Board as Chief Executive Officer. If the Board of Directors appoints a
Chairman of the Board, he shall perform such duties and possess such powers as
are assigned to him by the Board of Directors. If the Board of Directors
appoints a Vice-Chairman of the Board, he shall, in the absence or disability of
the Chairman of the Board, perform the duties and exercise the powers of the
Chairman of the Board and shall perform such other duties and possess such other
powers as may from time to time be vested in him by the Board of Directors.
3.9. Chief Executive Officer. The Chief Executive Officer shall, subject
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to the direction of the Board of Directors, have general charge and supervision
of the business of the corporation. Unless otherwise provide by the Board of
Directors, he or she shall preside at all meetings of the stockholders and, if
he or she is a director, at all meetings of the Board of Directors.
3.10. President. Unless the Board of Directors has designated the
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Chairman of the Board or another officer as Chief Executive Officer, the
President shall be the Chief Executive Officer of the corporation. The
President shall perform such other duties and shall have such other powers as
the Board of Directors may from time to time prescribe.
3.11. Vice Presidents. Any Vice President shall perform such duties and
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possess such powers as the Board of Directors or the President may from time to
time prescribe. In the event of the absence, inability or refusal to act of the
President, the Vice President (or if there shall be more than one, the Vice
Presidents in the order determined by the Board of Directors) shall perform the
duties of the President and when so performing shall have all the powers of and
be subject to all the restrictions upon the President. The Board of Directors
may assign to any Vice President the title of Executive Vice President, Senior
Vice President or any other title selected by the Board of Directors.
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3.12. Secretary and Assistant Secretaries. The Secretary shall perform
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such duties and shall have such powers as the Board Directors or the President
may from time to time prescribe. In addition, the Secretary shall perform such
duties and have such powers as are incident to the office of the secretary,
including without limitation the duty and power to give notices of all meetings
of stockholders and special meetings of the Board of Directors, to attend all
meetings of stockholders and the Board of Directors and keep a record of the
proceedings, to maintain a stock ledger and prepare lists of stockholders and
their addresses as required, to be custodian of corporate records and the
corporate seal and to affix and attest to the same on documents.
Any Assistant Secretary shall perform such duties and possess such powers
as the Board of Directors, the President or the Secretary may from time to time
prescribe. In the event of the absence, inability or refusal to act of the
Secretary, the Assistant Secretary, (or if there shall be more than one, the
Assistant Secretaries in the order determined by the Board of Directors) shall
perform the duties and exercise the powers of the Secretary.
In the absence of the Secretary or any Assistant Secretary at any meeting
of stockholders or directors, the person presiding at the meeting shall
designate a temporary secretary to keep a record of the meeting.
3.13. Treasurer and Assistant Treasurers. The Treasurer shall perform
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such duties and shall have such powers as may from time to time be assigned to
him by the Board of Directors or the President. In addition, the Treasurer
shall perform such duties and have such powers as are incident to the office of
treasurer, including without limitation the duty and power to keep and be
responsible for all funds and securities of the corporation, to deposit funds of
the corporation in depositories selected in accordance with these By-laws, to
disburse such funds as ordered by the Board of Directors, to make proper
accounts of such funds, and to render as required by the Board of Directors
statements of all such transactions and of the financial condition of the
corporation.
The Assistant Treasurers shall perform such duties and possess such powers
as the Board of Directors, the President or the Treasurer may from time to time
prescribe. In the event of the absence, inability or refusal to act of the
Treasurer, the Assistant Treasurer (or if there shall be more than one, the
Assistant Treasurers in the order determined by the Board of Directors) shall
perform the duties and exercise the powers of the Treasurer.
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3.14. Salaries. Officers of the corporation shall be entitled to such
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salaries, compensation or reimbursement as shall be fixed or allowed from time
to time by the Board of Directors and as may be provided in the Certificate of
Incorporation.
ARTICLE 4-Capital Stock
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4.1. Issuance of Stock. Unless otherwise voted by the stockholders and
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subject to the provisions of the Certificate of Incorporation, the whole or any
part of any unissued balance of the authorized capital stock of the corporation
or the whole or any part of any unissued balance of the authorized capital stock
of the corporation held in its treasury may be issued, sold, transferred or
otherwise disposed of by vote of the Board of Directors in such manner, for such
consideration and on such terms as the Board of Directors may determine.
4.2. Certificates of Stock. Every holder of stock of the corporation
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shall be entitled to have a certificate, in such form as may be prescribed by
law and by the Board of Directors, certifying the number and class of shares
owned by him in the corporation. Each such certificate shall be signed by, or
in the name of the corporation by, the Chairman or Vice-Chairman, if any, of the
Board of Directors, or the Chief Executive Officer, President or a Vice
President, and the Treasurer or an Assistant Treasurer, or the Secretary or an
Assistant Secretary of the corporation. Any or all of the signatures on the
certificate may be a facsimile.
Each certificate for shares of stock which are subject to any restrictions
on transfer pursuant to the Certificate of Incorporation, the By-laws,
applicable securities laws or any agreement among any number of shareholders or
among such holders and the corporation shall have conspicuously noted on the
face or back of the certificate either the full text of the restriction or a
statement of the existence of such restriction.
If the corporation shall be authorized to issue more than one class of
stock or more than one series of any class, the powers, designations,
preferences and relative, participating, optional or other special rights of
each class of stock or series thereof and the qualifications, limitations or
restrictions of such preferences and/or rights shall be set forth in full or
summarized on the face or back of each certificate representing shares of such
class or series of stock, provided that in lieu of the foregoing requirements
there may be set forth on the face or back of each certificate representing
shares of such class or series of stock a statement that the corporation will
furnish without charge to each stockholder who so requests a copy of the full
text of the powers, designations, preferences and relative, participating,
option or
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other special rights of each class of stock or series thereof and the
qualifications, limitations or restrictions of such preferences and/or rights.
4.3. Transfers. Except as otherwise established by rules and regulations
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adopted by the Board of Directors, and subject to applicable law and any
agreement among the Company and any number of Shareholders, shares of stock may
be transferred on the books of the corporation by the surrender to the
corporation or its transfer agent of the certificate representing such shares
properly endorsed or accompanied by a written assignment or power of attorney
properly executed, and with such proof of authority or the authenticity of
signature as the corporation or its transfer agent may reasonably require.
Except as may be otherwise required by law, by the Certificate of Incorporation
or by these By-laws, the corporation shall be entitled to treat the record
holder of stock as shown on its books as the owner of such stock for all
purposes, including the payment of dividends and the right to vote with respect
to such stock, regardless of any transfer, pledge or other disposition of such
stock until the shares have been transferred on the books of the corporation in
accordance with the requirements of these By-laws.
4.4. Lost, Stolen or Destroyed Certificates. The corporation may issue a
--------------------------------------
new certificate of stock in place of any previously issued certificate alleged
to have been lost, stolen, or destroyed, upon such terms and conditions as the
Board of Directors may prescribe, including the presentation of reasonable
evidence of such loss, theft or destruction and the giving of such indemnity as
the Board of Directors may require for the protection of the corporation or any
transfer agent or registrar.
4.5. Record Date. The Board of Directors may fix in advance a date as a
-----------
record date for the determination of the stockholders entitled to notice of or
to vote at any meeting of stockholders or to express consent (or dissent) to
corporate action in writing without a meeting, or entitled to receive payment of
any dividend or other distribution or allotment of any rights in respect of any
change, conversion or exchange of stock, or for the purpose of any other lawful
action. Such record date shall not be more than 60 no less than 10 days before
the date of such meeting, nor more than 10 days after the date of adoption of a
record date for a written consent without a meeting, nor more than 60 days prior
to any other action to which such record date relates.
If no record date is fixed, the record date for determining stockholders
entitled to notice of or to vote at a meeting of stockholders shall be at the
close of business on the day before the day on which notice is given, or, if
notice is waived, at the close of business on the day before the day on which
the meeting is held. The record date for determining
-12-
<PAGE>
stockholders entitled to express consent to corporate action in writing without
a meeting, when no prior action by the Board of Directors in necessary, shall be
the day on which the first written consent is properly delivered to the
corporation. The record date for determining stockholders for any other purpose
shall be at the close of business on the day on which the Board of Directors
adopts the resolution relating to such purpose.
A determination of stockholders of record entitled to notice of or to vote
at a meeting of stockholders shall apply to any adjournment of the meeting;
provided, however, that the Board of Directors may fix a new record date for the
adjourned meeting.
ARTICLE 5-General Provision
---------------------------
5.1. Fiscal Year. Except as from time to time otherwise designated by the
-----------
Board of Directors, the fiscal year of the corporation shall begin on the first
day of January in each year and end on the last day of December in each year.
5.2. Corporate Seal. The corporate seal shall be in such form as shall be
--------------
approved by the Board of Directors.
5.3. Waiver of Notice. Whenever any notice whatsoever is required to be
----------------
given by law, by the Certificate of Incorporation or by these By-laws, a waiver
of such notice either in writing signed by the person entitled to such notice or
such person's duly authorized attorney, or by telegraph, cable or any other
available method, whether before, at or after the time stated in such waiver, or
the appearance of such person or persons at such meeting in person or by proxy,
shall be deemed equivalent to such notice.
5.4. Voting of Securities. Except as the directors may otherwise
--------------------
designate, the President or Treasurer may waive notice of, and act as, or
appoint any person or persons to act as, proxy or attorney-in-fact for this
corporation (with or without power of substitution) at, any meeting of
stockholders or shareholders of any other corporation or organization, the
securities of which may be held by this corporation.
5.5. Evidence of Authority. A certificate by the Secretary, or an
---------------------
Assistant Secretary, or a temporary Secretary, as to any action taken by the
stockholders, directors, a committee or any officer or representative of the
corporation shall as to all persons who rely on the certificate in good faith be
conclusive evidence of such action.
-13-
<PAGE>
5.6. Certificate of Incorporation. All references in these By-laws to the
----------------------------
Certificate of Incorporation shall be deemed to refer to the Certificate of
Incorporation of the corporation, as amended and in effect from time to time.
5.7. Transactions with Interested Parties. No contract or transaction
------------------------------------
between the corporation and one or more of the directors or officers, or between
the corporation and any other corporation, partnership, association, or other
organization in which one or more of the directors or officers are directors or
officers, or have a financial interest, shall be void or voidable solely for
this reason, or solely because the director or officer is present at or
participates in the meeting of the Board of Directors or a committee of the
Board of Directors which authorized the contract or transaction or solely
because his or their votes are counted for such purpose, if:
(1) The material facts as to this relationship or interest and as to
the contract or transaction are disclosed or are known to the
Board of Directors or the committee, and the Board or committee
in good faith authorizes the contract or transaction by the
affirmative votes of a majority of the disinterested directors,
even though the disinterested directors be less than a quorum;
(2) The material facts as to his relationship or interest and as to
the contract or transaction are disclosed or are known to the
stockholders entitled to vote thereon, and the contract or
transaction is specifically approved in good faith by vote of
the stockholders; or
(3) The contract or transaction is fair as to the corporation as of
the time it is authorized, approved or ratified, by the Board of
Directors, a committee of the Board of Directors, or the
stockholders.
Common or interested directors may be counted in determining the presence
of a quorum at a meeting of the Board of Directors or of a committee which
authorizes the contract or transaction.
5.8. Severability. Any determination that any provision of these By-laws
------------
is for any reason inapplicable, illegal or ineffective shall not affect or
invalidate any other provision of these By-laws.
-14-
<PAGE>
5.9. Pronouns. All pronouns used in these By-laws shall be deemed to
--------
refer to the masculine, feminine or neuter, singular or plural, as the identity
of the person or persons may require.
ARTICLE 6-Amendments
--------------------
6.1. By the Board of Directors. These By-laws may be altered, amended or
-------------------------
repealed or new by-laws may be adopted by the affirmative vote of a majority of
the directors present at any regular or special meeting of the Board of
Directors at which a quorum is present; provided, however, that no amendment may
be adopted which effects the provisions related to Class B and C Director
Actions or Class B and C Director Control Events without the approval of a
majority of the Class B and Class C Directors.
6.2. By the Stockholders. These By-laws may be altered, amended or
-------------------
repealed or new by-laws may be adopted by the affirmative vote of the holders of
a majority of the shares of the capital stock of the corporation issued and
outstanding and entitled to vote at any regular meeting of stockholders, or at
any special meeting of stockholders, provided notice of such alteration,
amendment, repeal or adoption of new by-laws shall have been stated in the
notice of such special meeting and provided, further, that no amendment may be
adopted which effects the provisions related to Class B and C Director Actions
or Class B and C Director Control Events without the approval of a majority of
the Class B and Class C Common Stock.
-15-
<PAGE>
EXHIBIT 4.2
Execution Copy
PHYSICIANS QUALITY CARE, INC.
AMENDED AND RESTATED CLASS B AND CLASS C
COMMON STOCK AND WARRANT PURCHASE AGREEMENT
June 20, 1997
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
1. Authorization of Class B Common Stock; Purchase and Sale of Class B
Common Stock and Class C Common Stock 1
1.1. Authorization of Class B Common Stock and Class C Common
Stock 1
1.2. Purchase and Sale of the Class B Common Stock and Warrants 2
1.3. The Closing 2
2. Representations and Warranties of the Company 4
2.1. Organization and Corporate Power 4
2.2. Authorization 4
2.3. Capitalization 4
2.4. Subsidiaries 7
2.5. Financial Statements 7
2.6. Absence of Undisclosed Liabilities 8
2.7. Absence of Certain Developments 8
2.8. Title to Properties 9
2.9. Tax Matters 10
2.10. Contracts and Commitments 10
2.11. No Defaults 10
2.12. Intellectual Property 11
2.13. Effect of Transactions 11
2.14. No Consent or Approval Required 12
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
Page
----
<S> <C>
2.15. Litigation 12
2.16. Securities Laws 12
2.17. Business 12
2.18. Brokerage 13
2.19. Employees 13
2.20. Insurance 13
2.21. Environmental and Safety Laws 14
2.22. Benefit Plans 16
2.23. Transactions with Affiliates 18
2.24. Books and Records 18
2.25. [Reserved] 18
2.26. Regulatory Matters 19
2.27. Material Facts 20
3. Representations and Warranties and other Agreements of the Investors 20
3.1. Representations and Warranties 20
3.2. Further Limitations on Disposition 21
3.3. Legends 22
4. Conditions to the Investors' Obligations at the First Closing 23
4.1. Representations and Warranties 23
4.2. Performance 23
4.3. Compliance Certificate 23
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
Page
----
<S> <C>
4.4. Restated Certificate of Incorporation 23
4.5. Qualifications; Consents 23
4.6. Proceedings and Documents 23
4.7. Stockholders Agreement 23
4.8. Opinion of Company Counsel 24
4.9. Secretary's Certificate 24
4.10. Material Adverse Change 24
4.11. MCP and Flagship Agreements 24
4.12. Amendment to By-Laws. 24
4.13. Compliance Program. 24
4.14. Capital Certificate. 24
5. Conditions of the Company's Obligations at any Closings 24
5.1. Representations and Warranties 25
5.2. Payment of Purchase Price 25
5.3. Qualifications; Consents 25
6. Conditions to the Investors' Obligations at the Additional Closings. 25
6.1. Representations and Warranties. 25
6.2. Performance. 26
6.3. Compliance Certificate. 26
6.4. Qualifications; Consents. 26
</TABLE>
-iii-
<PAGE>
<TABLE>
<CAPTION>
Page
----
<S> <C>
6.5. Proceedings and Documents. 26
6.6. Other Agreements. 26
6.7. Opinion of Company Counsel. 26
6.8. Secretary's Certificate. 26
6.9. Business Plan. 27
6.10. Material Adverse Change. 27
7. Covenants and Agreements. 27
7.1. Financial and Other Information 27
7.2. Confidentiality 29
7.3. Insurance 29
7.4. Use of Proceeds 30
7.5. Payment of Taxes; Corporate Existence, Regulatory Compliance 30
7.6. Dealings with Affiliates and Others 31
7.7. Change in Nature of Business 31
7.8. Payment of Expenses 31
7.9. Cooperation and Access 31
7.10. Allocation of Purchase Price. 32
7.11. Conduct of Business 32
7.12. Reservation of Shares 32
7.13. Future Financings. 32
7.14. Period. 34
</TABLE>
-iv-
<PAGE>
<TABLE>
<CAPTION>
Page
----
<S> <C>
7.15. Disclosure of Investment. 34
7.16. Consolidation 35
7.17. Form S-1. 35
8. Negative Covenants 35
9. Definitions 36
9.1. Certain Defined Terms 36
9.2. Certain Matters of Construction 39
9.3. Cross Reference Table 40
10. Miscellaneous 41
10.1. Survival of Covenants; Assignability of Rights 41
10.2. Incorporation by Reference 42
10.3. Parties in Interest 42
10.4. Amendments and Waivers 42
10.5. Governing Law 42
10.6. Effect of Investigations. 42
10.7. Notices 42
10.8. Effect of Headings 43
10.9. Entire Agreement 44
10.10. Severability 44
10.11. Counterparts 44
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
Page
----
<S> <C>
List of Exhibits and Schedules 51
</TABLE>
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<PAGE>
PHYSICIANS QUALITY CARE, INC.
AMENDED AND RESTATED CLASS B AND CLASS C
COMMON STOCK AND WARRANT PURCHASE AGREEMENT
This AMENDED AND RESTATED CLASS B AND CLASS C COMMON STOCK PURCHASE
AGREEMENT (the "Agreement") is made this ___ day of June, 1997 by and among
---------
PHYSICIANS QUALITY CARE, INC., a Delaware corporation (the "Company") and each
-------
of BAIN CAPITAL FUND V, L.P., a Delaware limited partnership, BAIN CAPITAL FUND
V-B, L.P., a Delaware limited partnership, BCIP ASSOCIATES, a Delaware
partnership, and BCIP TRUST ASSOCIATES, L.P., a Delaware limited partnership
(each of whom individually is referred to herein as a "Bain Investor" and
-------------
collectively they are referred to as the "Bain Investors") and ABS CAPITAL
--------------
PARTNERS II, L.P., a Delaware limited partnership ("Capital") and each of the
-------
persons set forth on Annex I hereto (each of whom individually is referred to
herein as a "Capital Investor" and, together with Capital, the "Capital
---------------- -------
Investors"), and each of GS Capital Partners II, L.P., a Delaware limited
- ---------
partnership, Goldman, Sachs & Co., Verwaltungs GmbH, GS Capital Partners II
Offshore, L.P., The Goldman Sachs Group, L.P., a Delaware limited partnership
(each of whom individually is referred to herein as a "Goldman Investor," and
----------------
collectively, they are referred to as the "Goldman Investors" and, together with
-----------------
the Capital Investors and the Bain Investors, the "Investors") amends and
---------
restates in its entirety, other than as expressly set forth in Section 2, the
Class B Common Stock and Warrant Purchase Agreement between the Company and each
of the Bain Investors dated as of August 30, 1996, as amended by Amendment No. 1
dated December 11, 1996 (the "Original Agreement").
------------------
THE PARTIES HERETO AGREE AS FOLLOWS:
1. Authorization of Class B Common Stock; Purchase and Sale of Class B Common
--------------------------------------------------------------------------
Stock and Class C Common Stock.
- ------------------------------
1. Authorization of Class B Common Stock and Class C Common Stock.
--------------------------------------------------------------
The Company has issued and sold an aggregate of 2,809,296 shares of Class B-1
Common Stock, $.01 par value per share (the "Class B-1 Common Stock") and
----------------------
1,790,704 shares of 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"). The Company has authorized the issuance and sale of up to
- ------------
13,846,155 shares of Class C Common Stock, $.01 par value per share (the "Class
-----
C Common Stock") to be issued under this Agreement; and has authorized that
- --------------
number of shares of Class B Common Stock and Class C Common Stock issuable, from
time to time, under the Class B Warrants and Class C Warrants defined below. The
rights, privileges, and preferences of the Class B Common Stock and the Class C
Common Stock are as set forth in the Restated Certificate of Incorporation, as
<PAGE>
amended and restated in the form attached to this Agreement as Exhibit B (the
"Restated Certificate").
--------------------
2. Purchase and Sale of the Class B Common Stock and Warrants.
----------------------------------------------------------
Subject to the terms and conditions of the Original Agreement and on the
basis of the representations and warranties set forth therein, the Company
sold to the Bain Investors and each such Bain Investor purchased from the
Company (a) the number of shares of Class B-1 Common Stock or Class B-2
Common Stock, as the case may be (the "Class B Shares") set forth opposite
--------------
such Investor's name on Exhibit A-1 hereto under the heading "Total Class B
Shares" and (b) the number of warrants to purchase shares of Class B Common
Stock (the "Class B Warrants") set forth opposite such Investor's name on
----------------
Exhibit A-1 hereto under the heading "Total Class B Warrants", in the form
therefor attached hereto as Exhibit C-1, and subject to adjustment as
provided herein. For purposes of this Agreement, shares of Class B Common
Stock issued pursuant to the exercise of the Class B Warrants shall be
"Reserved Class B Shares". The Class B Warrants have an initial exercise
-----------------------
price of $2.50 per share. Such initial exercise price shall be subject to
adjustment in accordance with the terms of the Class B Warrants.
(b) Purchase and Sale of the Class C Common Stock and Warrants.
----------------------------------------------------------
Subject to the terms and conditions of this Agreement and on the basis of the
representations and warranties set forth herein, the Company agrees to sell to
the Investors and each such Investor, severally and not jointly, agrees to
purchase from the Company in accordance with Section 1.3(a) with respect to the
First Closing and in accordance with Section 1.3(b) with respect to the
Additional Closing (a) the number of shares of Class C Common Stock (the "Class
-----
C Shares") set forth opposite such Investor's name on Exhibit A-2 hereto under
- --------
the heading "Total Class C Shares" and (b) the number of warrants to purchase
shares of Class C Common Stock (the "Class C Warrants") set forth opposite such
----------------
Investor's name on Exhibit A-2 hereto under the heading "Total Class C
Warrants", in the form therefor attached hereto as Exhibit C-2, and subject to
adjustment as provided herein. For purposes of this Agreement, shares of Class
C Common Stock issued pursuant to the exercise of the Class C Warrants shall be
"Reserved Class C Shares". The Class C Warrants shall have an initial exercise
-----------------------
price of $3.25 per share. Such initial exercise price shall be subject to
adjustment in accordance with the terms of the Class C Warrants. The Class B
Shares and Class C Shares shall be referred to collectively as the "Shares," the
------
Class B Warrants and the Class C Warrants shall be referred to collectively as
the "Warrants," and the Reserved Class B Shares and the Reserved Class C Shares
--------
shall be referred to collectively as the "Reserved Shares".
---------------
3. The Closings. The purchase and sale of the Class C Shares and
------------
Class C Warrants shall take place at one or more closings (the "Closings") at
--------
the offices of Ropes & Gray, One International Place, Boston, Massachusetts or
at such other place as the parties shall mutually agree. At each Closing, the
Company will deliver
<PAGE>
to each of the Investors (a) a certificate or certificates, registered in such
Investor's name, representing the number of Class C Shares to be acquired by
such Investor at such Closing and (b) the number of Class C Warrants to be
acquired by such Investor at such Closing, upon receipt from the Investors of
payment in an amount equal to the amount set forth opposite such Investor's name
on Exhibit A-2 hereto under the heading "First Closing Payment" or
---------------------
"Additional Closing Payment", as the case may be in lawful money of the
--------------------------
United States of America by wire transfer of immediately available funds to the
Company.
(a) The First Closing. The first Closing (the "First Closing")
----------------- -------------
shall take place at 10:00 a.m. Boston time on June 20, 1997 or at such
other time as the parties shall mutually agree. Upon the fulfillment of
the conditions set forth in Sections 4 and 5 hereof, the Company shall sell
and each Investor shall purchase the number of Shares set forth opposite
such Investor's name on Exhibit A-2 hereto under the heading "First Closing
-------------
Number of Shares" and the number of Warrants set forth opposite such
----------------
Investor's name on Exhibit A-2 hereto under the heading "First Closing
-------------
Warrants". At the First Closing upon receipt from each Investor of a
--------
payment equal to the amount set forth opposite such Investor's name on
Exhibit A-2 hereto under the heading "First Closing Payment", the Company
---------------------
shall deliver to each Investor one or more certificates representing the
total number of Shares set forth opposite such Investor's name on Exhibit
A-2 hereto under the heading "First Closing Number of Shares" and the
------------------------------
Company shall deliver to the Investors Warrants to purchase the total
number of shares of the Company's Class C Common Stock, as set forth
opposite such Investor's name on Exhibit A-2 under the heading "First
-----
Closing Warrants".
----------------
(b) The Additional Closings. Additional closings (the
-----------------------
"Additional Closings") shall take place, if requested by any Investor, at
--------------------
any time prior to an initial underwritten public offering of the Company's
securities, at such time and place as the parties shall mutually agree no
earlier than 15 days after the date on which such Investor's request is
received by the Company. Upon the fulfillment of the conditions set forth
in Sections 5 and 6 hereof, at any Additional Closing the Company shall
sell and each Investor that desires to participate in such Additional
Closing shall purchase an amount of shares of Class C Common Stock up to
the total number of shares to be purchased at the Additional Closing set
forth opposite such Investor's name on Exhibit A-2 hereto under the heading
-----------
"Additional Closing Number of Shares" and an equal number of Warrants. At
-----------------------------------
the Additional Closing, upon receipt from each Investor participating in
such Additional Closing of a payment equal to $3.25 multiplied by the
number of shares of Class C Common Stock to be purchased by the Investor at
such Closing, the Company shall deliver to each Investor participating in
such Additional Closing one or more certificates representing the total
number of Shares and the Company shall deliver to
-3-
<PAGE>
each Investor Warrants to purchase an equal number of shares of the
Company's Class C Common Stock.
2. Representations and Warranties of the Company.
---------------------------------------------
The Bain Investors have relied upon the Company's representations and
warranties contained in the Original Agreement as an inducement to their
purchase of the Class B Shares on each of August 30, 1996, December 11, 1996 and
April 18, 1997 thereunder and the representations and warranties contained in
the Original Agreement shall survive. In order to induce the Investors to
purchase the Class C Shares hereunder, the Company hereby represents and
warrants to each Investor with respect to Class C Shares being purchased by them
hereunder as of the date hereof and represents and warrants to each Investor
with respect to the Class C Shares being purchased by them hereunder at a
Closing as of the date of such Closing:
1. Organization and Corporate Power. Each of the Company, Medical
--------------------------------
Care Partners, P.C., a professional corporation organized under the laws of The
Commonwealth of Massachusetts ("MCP"), and Flagship Health, PA, a professional
---
association organized under the laws of the State of Maryland ("Flagship"), is
--------
a corporation duly organized, validly existing and in good standing under the
laws of its jurisdiction of incorporation and is qualified to do business as a
foreign corporation in each jurisdiction where such qualification is required.
Each of the Company, MCP and Flagship has all required corporate power and
authority to own its property, to carry on its business as presently conducted
or contemplated to be conducted and to carry out the transactions contemplated
hereby. The copies of the Amended and Restated Certificate of Incorporation and
By-laws of the Company, the Articles of Organization and By-laws of MCP, and the
Articles of Incorporation and By-laws of Flagship each as amended to date, which
have been furnished to the counsel for the Investors by the Company, are correct
and complete.
2. Authorization. This Agreement, the Stockholders Agreement as
-------------
amended by Amendment No. 2 to the Stockholders Agreement to be delivered
pursuant to Section 4.7 among the Company, the Stockholders named therein and
the Investors (as so amended the "Stockholders Agreement"), and any other
----------------------
agreements, instruments, or documents entered into by the Company pursuant to
this Agreement or the Stockholders Agreement (the "Transaction Agreements"),
----------------------
have been duly executed and delivered by the Company and are the legal, valid
and, assuming due execution and delivery by the other parties hereto and
thereto, binding obligations of the Company, enforceable in accordance with
their terms. The execution, delivery and performance of this Agreement, the
Stockholders Agreement and the Transaction Agreements and the issuance of the
Shares, the Warrants, the Reserved Shares and the Conversion Shares have been
duly authorized by all necessary corporate action of the Company.
-4-
<PAGE>
3. Capitalization. (a) Upon the filing of the Restated Certificate
--------------
but prior to the issuance of the Class C Shares to the Investors hereunder, the
entire authorized capital stock of the Company will consist of (i) 10,000,000
shares of Preferred Stock, $.01 par value per share, of which no shares are
outstanding, and (ii) 150,000,000 shares of Common Stock, $.01 par value per
share (the "Common Stock"), 101,292,692 shares of the Common Stock are
------------
designated as Class A Common Stock, of which 20,151,864 shares are issued and
outstanding 6,727,043 shares are designated as Class B-1 Common Stock, of which
2,809,296 shares are issued and outstanding; 4,287,957 shares of the Common
Stock are designated as Class B-2 Common Stock, of which 1,790,704 shares are
issued and outstanding, 27,692,310 shares of the Common Stock are designated as
Class C Common Stock, of which no shares are issued and outstanding on the date
of this Agreement. The Company has reserved (i) 2,450,766 shares of Class A
Common Stock for issuance to certain employees upon exercise by such employees
of options granted or to be granted pursuant to the Company's Equity Incentive
Plan, which plan is described in Schedule 2.3A attached hereto, (ii) up to
3,917,747 shares of Class B-1 Common Stock, 2,497,253 shares of Class B-2 Common
Stock and 13,846,155 shares of Class C Common Stock as Reserved Shares for
issuance upon exercise of the Warrants, (iii) 38,706,914 shares of Class A
Common Stock for issuance upon conversion of the Class B Common Stock and Class
C Common Stock in accordance with the terms of the Restated Certificate (the
"Conversion Shares"). The Company has reserved 13,846,155 shares of Class C
- ------------------
Common Stock for issuance at the First Closing and the Additional Closings under
Section 1.3 hereof. When issued in accordance with the terms of this Agreement,
the Class C Shares will be duly authorized, validly issued and outstanding,
fully paid and nonassessable, and the Reserved Shares and Conversion Shares
will, each upon issuance in accordance with the terms of the Company's Restated
Certificate, be duly authorized, validly issued and outstanding, fully paid and
nonassessable and free and clear of all liens, charges or encumbrances of any
kind. All outstanding capital stock of the Company has been duly authorized,
validly paid and is nonassessable. Schedule 2.3A hereto contains a list of (i)
all holders of record of capital stock of the Company, including the number of
shares of capital stock held by each such holder, and (ii) all outstanding
warrants, options, agreements, securities, (including notes and debt securities)
or other commitments convertible, exercisable or exchangeable into shares of
capital stock or other equity securities of the Company or pursuant to which the
Company is or may become obligated to issue any shares of the capital stock or
other equity securities of the Company, which names all persons entitled of
record to receive such shares or other securities and the shares of capital
stock or other securities required to be issued thereunder as of the date
hereof. Except as set forth in Schedule 2.3A, there are no outstanding
warrants, options or other rights to purchase or subscribe for or acquire from
the Company, or exchangeable for or convertible into, any shares of capital
stock or any call, commitment or claim relating to capital stock, or stock
appreciation, phantom stock, profit participation or similar rights. Except as
provided herein or as set forth in Schedule 2.3A or in the
-5-
<PAGE>
Stockholders Agreement, there are no preemptive rights with respect to the
issuance or sale by the Company of the Shares, the Reserved Shares or the
Conversion Shares. Except as provided in the Stockholders Agreement, or as set
forth on Schedule 2.3A or as imposed by applicable securities laws, upon the
Closing there are no agreements or restrictions with respect to the transfer,
purchase or voting of any shares of the Company's capital stock or the capital
stock of MCP or Flagship. Other than as set forth in the Stockholders' Agreement
or as set forth in Schedule 2.3A, there are no existing rights with respect to
registration under the Securities Act of 1933, as amended (the "Securities
----------
Act"), of any of the Company's capital stock. The Company has not violated the
- ---
Securities Act or any state Blue Sky or securities laws in connection with the
issuance of any of its securities. Except as set forth on Schedule 2.26, all
stock issued by the Company was issued in compliance with all applicable federal
and state laws.
(b) The entire authorized capital stock of MCP consists of 10,000
shares of Common Stock $.01 par value per share, of which 1,000 shares are
issued and outstanding and owned of record by Jay Ungar, M.D. (the "MCP Sole
--------
Stockholder") and no other shares are issued and outstanding. MCP holds no
- -----------
shares of Common Stock in its treasury. All capital stock of MCP has been duly
authorized, validly paid and is nonassessable and free and clear of all liens,
charges or encumbrances of any kind. Other than as set forth in the MCP
Designation Agreement or as set forth in Schedule 2.3B, there are no outstanding
warrants, options or other rights to purchase or acquire from MCP, or
exchangeable for or convertible into, any shares of the capital stock of MCP or
any call, commitment or claim relating to capital stock, or stock appreciation,
phantom stock, profit participation or similar rights. There are no preemptive
rights with respect to the issuance or sale by MCP of any shares of its capital
stock. There are no existing rights with respect to registration under the
Securities Act of any of the capital stock of MCP. MCP has not violated the
Securities Act or any state Blue Sky or securities laws in connection with the
issuance of any of its securities. The MCP Sole Stockholder, MCP and the
Company have executed and delivered that certain Shareholder Designation and
Stock Transfer Agreement (the "MCP Designation Agreement"), dated as of August
-------------------------
9, 1996, a true and complete copy of which has been provided to the Investors'
counsel. The Company and MCP have executed and delivered that certain amended
and restated Services Agreement (the "MCP Services Agreement") dated as of
----------------------
August 30, 1996, a true and complete copy of which has been provided to the
Investors' counsel. The MCP Designation Agreement and the MCP Services
Agreement are collectively referred to herein as the "MCP Agreements". Each of
--------------
the MCP Agreements is the legal, valid and binding obligation of the parties
thereto, enforceable in accordance with its terms. No breach or default by any
party to any of the MCP Agreements has occurred and is continuing, and no event
has occurred which with notice or lapse of time or both would constitute a
breach or default.
(c) The entire authorized capital stock of Flagship consists of 1,000
shares of
-6-
<PAGE>
Common Stock $5.00 par value per share, of which 1,000 shares are
issued and outstanding and owned of record by Laura Mumford M.D. (the "Flagship
--------
Sole Stockholder") and no other shares are issued and outstanding. Flagship
- ----------------
holds no shares of Common Stock in its treasury. All capital stock of Flagship
has been duly authorized, validly paid and is nonassessable and free and clear
of all liens, charges or encumbrances of any kind. Other than as set forth in
the Flagship Designation Agreement or as set forth in Schedule 2.3C, there are
no outstanding warrants, options or other rights to purchase or acquire from
Flagship, or exchangeable for or convertible into, any shares of the capital
stock of Flagship or any call, commitment or claim relating to capital stock, or
stock appreciation, phantom stock, profit participation or similar rights.
There are no preemptive rights with respect to the issuance or sale by Flagship
of any shares of its capital stock. There are no existing rights with respect
to registration under the Securities Act of any of the capital stock of
Flagship. Flagship has not violated the Securities Act or any state Blue Sky or
securities laws in connection with the issuance of any of its securities. The
Flagship Sole Stockholder, Flagship and the Company have executed and delivered
that certain Shareholder Designation and Stock Transfer Agreement dated December
11, 1996 (the "Flagship Designation Agreement"), a true and complete copy of
------------------------------
which has been provided to the Investors' counsel. The Company and Flagship
have executed and delivered that certain Services Agreement (the "Flagship
--------
Services Agreement") dated as of December 11, 1996, a true and complete copy of
- ------------------
which has been provided to the Investors' counsel. The Flagship Designation
Agreement and the Flagship Services Agreement are collectively referred to
herein as the "Flagship Agreements". Each of the Flagship Agreements is the
-------------------
legal, valid and binding obligation of the parties thereto, enforceable in
accordance with its terms. No breach or default by any party to any of the
Flagship Agreements has occurred and is continuing, and no event has occurred
which with notice or lapse of time or both would constitute a breach or default.
4. Subsidiaries. Except for (i) the Subsidiaries of the Company
------------
listed on Schedule 2.4, (ii) MCP and (iii) Flagship, the Company has no
Subsidiaries and has no investments in, or affiliations with, any other
corporation or business organization. All capital stock of each Subsidiary has
been duly authorized and is validly issued, fully paid, nonassessable and free
and clear of all liens. All such stock was issued in compliance with all
applicable state and federal laws concerning the issuance of securities. Each
of MCP, Flagship and the Subsidiaries is duly organized, validly existing and in
good standing under the laws of its respective jurisdiction of incorporation as
set forth in Schedule 2.4 and is duly qualified to do business as a foreign
corporation in each jurisdiction where such qualification is required except
where the failure to so qualify would not have a material adverse effect on the
business, assets, condition (financial or otherwise) Company and the
Consolidated Entities (as defined in Section 7.16) taken as a whole. Each of
the Subsidiaries has all required corporate power and authority to own its
property and to carry on its business as presently conducted or contemplated to
be conducted.
-7-
<PAGE>
5. Financial Statements.
--------------------
1. Attached hereto as Schedule 2.5A are the Company's (i) audited
consolidated balance sheet as of December 31, 1996 and the related
consolidated statements of income and cash flows for the fiscal year then
ended (the "1996 Financials") and (ii) the Company's unaudited consolidated
---------------
balance sheet as of March 31, 1997, and the related unaudited consolidated
statements of income and cash flows for the Company for the three-month
period then ended (the "1997 Financials," and together with the 1996
Financials, the "Financials"). The Financials are complete and correct in
----------
all material respects, have been prepared in accordance with GAAP, and
fairly present, in all material respects, the financial position of the
Company on a consolidated basis as of each such date and the results of
operations for each such period then ended subject, in the case of the 1997
Financials, to normal year-end adjustments which, in the aggregate, will
not be material.
2. The financial projections for 1997-2000 of the Company in the
form previously delivered to the Investors were prepared in good faith on
the basis of the assumptions stated therein, and the Company has no reason
to believe that such assumptions are not reasonable.
6. Absence of Undisclosed Liabilities. Except as and to the extent
----------------------------------
reflected or reserved against in the Financials or as set forth on Schedule 2.6,
neither the Company nor any of its Consolidated Entities has incurred any
accrued or contingent liability arising out of any transaction, event or state
of facts existing on or prior to the date hereof, which liability exists on the
date hereof, except for liabilities which have arisen after the date of the
Financials in the ordinary course of business and which do not result from,
arise out of, relate to, is in the nature of or was caused by any breach of
contract, breach of warranty, tort, infringement or violation of law.
7. Absence of Certain Developments. Since December 31, 1996, except as
-------------------------------
reflected in the 1997 Financials or on Schedule 2.7, there has been no material
adverse change and no event which could reasonably be expected to create a
material adverse change in the condition, financial or otherwise, of the Company
and its Consolidated Entities, taken as a whole or in the assets, liabilities,
properties, business or prospects of the Company and its Consolidated Entities,
taken as a whole. Without limiting the generality of the foregoing, since that
date there has been no:
(i) declaration, setting aside or payment of any dividend or other
distribution with respect to the capital stock of the Company
or any Consolidated Entity;
-8-
<PAGE>
(ii) loss, destruction or damage to any property of the Company or
any of its Consolidated Entities, whether or not insured,
which loss would have a material adverse affect on the Company
and its Consolidated Entities taken as a whole;
(iii) (x) labor trouble involving the Company or any of its
Consolidated Entities or (y) any material change in any of
their respective personnel or the terms and conditions of
employment of such personnel with respect to clause (y);
(iv) waiver of any valuable right by the Company or any of its
Consolidated Entities;
(v) loan or extension of credit to any officer or employee of the
Company or any of its Consolidated Entities;
(vi) disposition of any material assets (or any contract or
arrangement therefor) by the Company or any of its
Consolidated Entities other than for fair value in the
ordinary course of business;
(vii) merger, consolidation, amalgamation, liquidation, winding up,
or dissolution of the Company or any of its Consolidated
Entities;
(viii) investment in, acquisition of, or affiliation with any
business or assets of, (other than the purchase of supplies,
equipment and similar assets by physician practice groups in
the ordinary course of business) any Person by the Company or
any of its Consolidated Entities;
(ix) material change in the nature of the business conducted by the
Company or any of its Consolidated Entities;
(x) commencement or settlement of any action, suit, investigation
or proceeding before any court or governmental department,
commission, board, agency or instrumentality, domestic or
foreign, affecting the Company or any of its Consolidated
Entities;
(xi) incurrence of Indebtedness by the Company or any of its
Consolidated Entities; or
(xii) any commitment with respect to any of the foregoing.
-9-
<PAGE>
8. Title to Properties. Except as disclosed in Schedule 2.8, each of the
-------------------
Company and, to the Knowledge of the Company, each of its Consolidated Entities
has good and marketable title or valid leasehold interest to all material
properties and assets used in the business of the Company and its Consolidated
Entities, taken as a whole, as presently conducted and as proposed to be
conducted and to all of its material properties and assets, free and clear of
all mortgages, security interests, liens, restrictions or encumbrances other
than Permitted Liens. All material personal property included in such properties
which is used in the business of the Company and its Consolidated Entities taken
as a whole is in good condition and repair except for reasonable wear and tear,
and all leases of real or personal property to which the Company or any of its
Consolidated Entities is a party and which are material to the business of the
Company and its Consolidated Entities taken as a whole are fully effective and
afford the Company or such Consolidated Entity, as the case may be, peaceful and
undisturbed possession of the subject matter of the lease. Neither the Company
nor to the Knowledge of the Company any Consolidated Entity is in material
violation of any zoning, building or safety ordinance, regulation or requirement
or other law or regulation applicable to the operation of owned or leased
properties likely to impede the normal operation of the business of the Company
and its Consolidated Entities, taken as a whole, and neither the Company nor to
the Knowledge of the Company any Consolidated Entity has received any written
notice of violation with which such recipient has not complied.
9. Tax Matters. There are no material federal, state, county or local
-----------
Taxes due and payable by the Company or any Consolidated Entity which have not
been paid. The provisions for taxes in the Financial Statements are sufficient
for the payment of all accrued and unpaid federal, state, county and local Taxes
of the Company and each Consolidated Entity, whether or not assessed or disputed
as of the date of each such balance sheet. There have been no examinations or
audits of any Tax Returns or reports by any applicable federal, state or local
governmental agency. The Company and each Consolidated Entity have duly and
timely filed all federal, state, county and local Tax Returns required to have
been filed by them for any period ending on or before the date hereof, all such
returns are accurate in all material respects and there are in effect no waivers
of applicable statutes of limitations with respect to Taxes for any year.
10. Contracts and Commitments. Except for the contracts described in
-------------------------
Schedule 2.10 (the "Contracts"), true and complete copies of which have been
---------
made available to counsel for the Investors, neither the Company nor any
Consolidated Entity has any contract, obligation or commitment which involves by
its terms a commitment in excess of $50,000 or any employment or noncompetition
contracts (including contracts with any common law employee, agent or
independent contractor), stock redemption, designation or purchase agreements,
financing agreements, managed care contracts and other contracts with third-
party payors,
-10-
<PAGE>
distribution right agreements, royalty agreements, licenses under which either
the Company or any Consolidated Entity is licensee or licensor, leases of real
property, pension, profit-sharing, retirement or stock option plans or any other
Contract material to the Company. Each of the Contracts is the legal, valid and
binding obligation of the Company or the Consolidated Entity party thereto,
enforceable against the Company in accordance with its terms. No breach or
default under any Contract by the Company or the Consolidated Entity that is a
party thereto or, to the Knowledge of the Company, by any other party thereto,
has occurred and is continuing and no event has occurred which with notice or
lapse of time or both would constitute a breach or default thereunder except, in
each case, for breaches or defaults which would not have a material adverse
effect upon the Company and its Consolidated Entities, taken as a whole.
11. No Defaults. Neither the Company nor any Consolidated Entity is in
-----------
default under, or in violation of, (a) under its organizational documents or its
By-Laws, (b) any note, indenture, mortgage, lease, agreement, contract, purchase
order or other instrument, document or agreement to which it is a party or by
which it or any of its property is bound or affected or (c) any order, writ,
statute, law, rule, regulation, injunction or decree of any court or any
federal, state, municipal or other governmental department, commission, board,
bureau, agency or instrumentality, domestic or foreign except, in the case of
clause (b) and violations of statutes, laws, rules and regulations, for defaults
which would not, individually or in the aggregate have a material adverse effect
upon the Company and its Consolidated Entities, taken as a whole and except as
provided in Schedule 2.26. To the Knowledge of the Company, there exists no
condition, event or act which after notice, lapse of time, or both, could
constitute a default by the Company or any Consolidated Entity under any of the
foregoing except, in each case, for breaches or defaults which, individually or
in the aggregate would not have a material adverse effect upon the Company and
its Consolidated Entities, taken as a whole.
12. Intellectual Property. Schedule 2.12 contains a list of all patents,
---------------------
trademarks, trade names, brand names and copyrights (in each case, whether
issued or pending), and all licenses or rights with respect to any of the
foregoing, owned or possessed by the Company or any Consolidated Entity on the
date of this Agreement, all of which are in good standing and are free and clear
of all liens and encumbrances of any nature, except as set forth on Schedule
2.12. To the knowledge of the Company, (i) neither the Company nor, any
Consolidated Entity infringes any patent, copyright, trademark or other
intellectual property rights of others and (ii) no third party is infringing on
the patent, copyright, trademark or other intellectual property rights of the
Company or any Consolidated Entity. All trade secrets, know how, technical
processes and procedures developed and belonging to the Company or, to the
Knowledge of the Company, any Consolidated Entity which are material to the
business of the Company or its Consolidated Entities taken as a whole and which
have not been patented have been kept
-11-
<PAGE>
confidential. The Company and, to the Knowledge of the Company, each
Consolidated Entity has the right to use, free and clear of claims or rights of
others, all trade secrets, customer lists, processes, computer software,
patents, copyrights and trademarks required for, incident to or included in its
products and its proposed products.
13. Effect of Transactions. The execution, delivery and performance of
----------------------
this Agreement and the Stockholders Agreement, compliance with the provisions
hereof and thereof by the Company, and the issuance, sale and delivery of the
Shares, the Warrants, the Reserved Shares and the Conversion Shares, do not and
will not, with or without the passage of time or the giving of notice or both,
(a) violate any provision of law, statute, rule or regulation or any ruling,
writ, injunction, order, judgment or decree of any court, administrative agency
or other governmental body applicable to the Company or its Consolidated
Entities or (b) conflict with or result in any breach of any of the terms,
conditions or provisions of, or constitute a default (or give rise to any right
of termination, cancellation or acceleration) under, or result in the creation
of any lien, security interest, charge or encumbrance upon any of the properties
or assets of the Company or those of any Consolidated Entity under its
respective organizational documents or Bylaws or under any material note,
indenture, mortgage, lease, agreement, contract, purchase order or other
instrument, document or agreement to which the Company or any Consolidated
Entity is a party or by which any of them or any of their property is bound or
affected, including without limitation, the MCP Agreements, the Flagship
Agreements and the Contracts.
14. No Consent or Approval Required. Based in part on the representations
-------------------------------
made by the Investors in Section 3 of this Agreement, other than federal or
state securities law filings which have been made or which will be made in a
timely manner after each Closing and other than the filing of the Company's
Restated Certificate which, as of the First Closing, will have been filed, no
authorization, consent, approval or other order of, declaration to, or filing
with, any governmental agency or body or any third party is required for or in
connection with the valid and lawful authorization, execution, delivery and
performance by the Company of this Agreement, the Stockholders Agreement, the
Transaction Agreements, the MCP Agreements or the Flagship Agreements or for or
in connection with the valid and lawful authorization, issuance, sale and
delivery of the Shares and the issuance of the Warrants or for or in connection
with the valid and lawful authorization, reservation, issuance, sale and
delivery of the Reserved Shares and the Conversion Shares.
15. Litigation. Except as set forth on Schedule 2.15, there is no action,
----------
suit, proceeding or investigation pending against the Company, or any
Consolidated Entity, or, to the Knowledge of the Company, threatened against the
Company or
-12-
<PAGE>
any Consolidated Entity including without limitation any action, suit,
proceeding or investigation which questions the validity of this Agreement, the
Stockholders Agreement, the MCP Agreements, the Flagship Agreements or the right
of the Company, MCP or Flagship to enter into them or to consummate the
transactions contemplated hereby or thereby, or which seeks a material amount of
damages, fines or penalties or which might result, either individually or in the
aggregate, in any material adverse change in the business, assets, conditions,
operations, affairs, or prospects of the Company and its Consolidated Entities
taken as a whole, financial or otherwise, or any change in the current equity
ownership of the Company or of any Consolidated Entity, nor is the Company aware
that there is any basis for any such litigation or other proceeding. None of the
Company or any of its officers or directors or any Consolidated Entity or, to
the Knowledge of the Company, any of its officers or directors, is a party to,
or subject to the provisions of, any judgment or decree of any court. There is
no action, suit or proceeding by the Company or any Consolidated Entity
currently pending or which the Company or any Consolidated Entity presently
intends to initiate.
16. Securities Laws. Assuming that the Investors' representations and
---------------
warranties contained in Section 3 of this Agreement are true and correct, the
offer, issuance and sale by the Company to the Investors of the Shares, the
Warrants, the Reserved Shares and the Conversion Shares are, and will be as of
each Closing, exempt from the registration and prospectus delivery requirements
of the Securities Act, and have been, or will be as of each Closing, registered
or qualified (or are, or will be as of each Closing, exempt from registration
and qualification) under the registration, permit or qualification requirements
of all applicable state Blue Sky and securities laws.
17. Business. Each of the Company and each Consolidated Entity has all
--------
their material franchises, permits, licenses and other rights and privileges
necessary to permit them to own their property and to conduct their present
business taken as a whole. The operations of the Company and the Consolidated
Entities comply with all applicable laws are, and they have been conducted, in
compliance in all material respects, except as set forth on Schedule 2.26 with
all applicable federal, state, local and foreign laws, rules, regulations and
other requirements of all governmental authorities and of all states,
municipalities and agencies thereof having jurisdiction.
18. Brokerage. Except as disclosed on Schedule 2.18, there are no claims
---------
for brokerage commissions or finder's fees or similar compensation in connection
with the transactions contemplated by this Agreement based on any arrangement
made by or on behalf of the Company or any Consolidated Entity, and the Company
agrees to pay any such brokerage commissions, finder's fees or similar
compensation whether or not listed on Schedule 2.18 and to indemnify and hold
the Investors harmless against any damages incurred as a result of any such
claim.
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<PAGE>
19. Employees. There are no controversies or labor troubles pending, or
---------
to the best knowledge of the Company, threatened between it and its employees
or, to the Knowledge of the Company, the employees of any Consolidated Entity
and the Company's employees or the employees of any Consolidated Entity. To the
Knowledge of the Company: (a) no employee of the Company or any Consolidated
Entity is in violation of any term of any employment contract, patent or other
proprietary information disclosure agreement or any other contract or agreement
relating to the right of any such employee to be employed by the Company or such
Consolidated Entity because of the nature of the business conducted or proposed
to be conducted by the Company or such Consolidated Entity or for any other
reason, and the continued employment by the Company or each Consolidated Entity
of its respective present employees will not result in any such violation; (b)
no officer or key employee of the Company or, to the Knowledge of the Company,
any Consolidated Entity has any present intention of terminating his employment
therewith nor does the Company or, to the Knowledge of the Company, any
Consolidated Entity have any present intention of terminating any such
employment; and (c) the Company and each Consolidated Entity has complied in all
material respects with all applicable state and federal laws and regulations
respecting employment and employment practices, terms and conditions of
employment, wages and hours and other laws related to employment, and there are
no arrears in the payments of wages, withholding or social security taxes,
unemployment insurance premiums or other similar obligations. Except as set
forth in Schedule 2.10, and for such agreements entered into in connection with
any affiliation transaction approved by the Investors after the date of this
Agreement neither the Company nor, to the Knowledge of the Company, any
Consolidated Entity is a party to any agreement with any of its respective
officers or employees with respect to such person's employment.
20. Insurance. Schedule 2.20 contains a complete and accurate list of all
---------
policies or binders of fire, liability, title, worker's compensation,
malpractice, professional liability and other forms of insurance (showing as to
each policy or binder the carrier, policy number, coverage limits, expiration
dates, annual premiums and a general description of the type of coverage
provided) to be in effect with respect to the Company or any Consolidated Entity
on the date of the Closing. Such insurance provides coverage to the extent and
in the manner (a) to the extent applicable, customary for a medical practice and
(b) as may be required by applicable law and by any and all Contracts to which
the Company or any Consolidated Entity and any physician employed by any
Consolidated Entity is a party. Neither the Company nor any Consolidated Entity
is in default under any of such policies or binders, and neither the Company nor
any Consolidated Entity has failed to give any notice or to present any claim
under any such policy or binder in a due and timely fashion except, in each
case, for such failure or defaults that do not have a material adverse effect on
the Company and its Consolidated Entities taken as a whole. No insurer has
advised the Company or any Consolidated Entity, or to
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<PAGE>
the Knowledge of the Company, any physician employed by any Consolidated Entity
that it intends to reduce coverage, increase premiums or fail to renew an
existing policy or binder. There are no outstanding unpaid claims under any such
policies or binders. All policies and binders provide sufficient coverage for
the risks insured against and are in full force and effect.
21. Environmental and Safety Laws.
-----------------------------
(a) As used in this Agreement, the terms "Removal," "Remedial
Action," "Release," "Hazardous Substance" and "National Priorities List"
shall have the same meaning as those terms are given in the Comprehensive
Environmental Response Compensation and Liability Act ("CERCLA") and its
------
implementing regulations, and the terms "Hazardous Waste" and "Solid Waste"
shall have the same meaning as those terms are given in the Resource
Conservation and Recovery Act, as amended ("RCRA") and its implementing
----
regulations.
(b) The ownership, use and operation by the Company or, to the
Knowledge of the Company, any Consolidated Entity of each facility used in
its business has been and, to the Knowledge of the Company, all ownership,
use and operation of each such facility by any Person has been, in
compliance in all material respects with all Federal, state and local
environmental, safety and anti-pollution laws, including without limitation
RCRA, its implementing regulations and all applicable state hazardous waste
laws; the Clean Water Act, as amended, its implementing regulations and all
applicable state and local effluent discharge laws; the Clean Air Act, as
amended, its implementing regulations and all applicable state and local
air emission laws; the Toxic Substances Control Act, as amended, its
implementing regulations and all applicable state and local toxic substance
laws; CERCLA, its implementing regulations and all applicable state and
local environmental response, compensation and liability laws; the National
Environmental Policy Act of 1969 and its implementing regulations; the
Occupational Safety and Health Act, its implementing regulations and all
applicable state and local worker safety and health laws; and all such laws
concerning particulate emissions, hazard communication, surface water
pollution, groundwater pollution, air pollution, solid wastes, hazardous
wastes, hazardous substances, medical wastes, toxic substances, storage,
handling, treatment, transportation, spills or other releases, and disposal
of any Hazardous Substances, and exposure to or notification regarding any
Hazardous Substances, and neither the Company nor, to the Knowledge of the
Company, any Consolidated Entity has reason to believe that any claim,
action, lawsuit, proceeding, complaint or charge exists or may be brought
for violation of any such laws.
(c) Neither the Company nor, to the Knowledge of the Company, any
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<PAGE>
Consolidated Entity has any liability arising out of its own actions or
inactions or, to the Knowledge of the Company, any other liability, whether
fixed, unliquidated, absolute, contingent or otherwise, under any federal,
state or local environmental, safety or anti-pollution laws, including any
liability, responsibility or obligation for investigation, removal,
Remedial Action or any fines, penalties, costs or expenses to effect
compliance with or discharge any duty, obligation or claim under any such
laws except for liabilities which would not have a material adverse effect
upon the Company and its Consolidated Entities, taken as a whole, and
neither the Company nor, to the Knowledge of the Company, any Consolidated
Entity has reason to believe that any claims, actions, suits, proceedings
or investigations under such laws exist or may be brought or threatened.
(d) There has not been, and is not occurring, at any facility owned
or operated or previously owned or operated by the Company or, to the
Knowledge of the Company, any Consolidated Entity any Release or threatened
Release of any Hazardous Substance, Hazardous Waste, Solid Waste or
petroleum, including crude oil or any fraction thereof, nor has the Company
or, to the Knowledge of the Company, any Consolidated Entity any reason to
believe such a Release either is occurring or has occurred at any time in
the past. Neither the Company nor, to the Knowledge of the Company, any
Consolidated Entity has applied or disposed of any Hazardous Substance,
Hazardous Waste, Solid Waste or petroleum, including crude oil or any
fraction thereof, in any manner which may form the basis for any present or
future claim, demand or action seeking investigation, Removal, or Remedial
Action at any facility, site, location or body of water, surface or
subsurface, including groundwater or any costs or expenses related thereto.
(e) Neither the Company nor, to the Knowledge of the Company, any
Consolidated Entity has sent, arranged for disposal or treatment, arranged
with a transporter for transport for disposal or treatment, transported, or
accepted for transport any Hazardous Substance, Hazardous Waste, Solid
Waste or petroleum, including crude oil or any fraction thereof, to a
facility, site or location, which, pursuant to CERCLA or any similar state
or local law, (a) has been placed or is proposed to be placed, on the
National Priorities List or its state equivalent or (b) which is subject to
a claim, administrative order or other request to take clean up action,
Removal or Remedial Action by any person or entity (including any
governmental entity) or which is subject to a claim for damages by any
person or entity (including any governmental entity).
(f) Neither the Company nor, to the Knowledge of the Company, any
Consolidated Entity stores, generates or produces any Hazardous Substance,
Hazardous Waste, or petroleum in any material respect in violation of any
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<PAGE>
law. There has not been any contamination of groundwater, surface waters,
soils or sediments, as a result of the manufacture, storage, processing,
loss, leak, escape, spillage, disposal or other handling or disposition by
or on behalf of the Company or by or on behalf of, to the Knowledge of the
Company, any Consolidated Entity of any product or substance on or prior to
the Closing. All Hazardous Substances, Hazardous Wastes and petroleum
stored by or on behalf of the Company by or on behalf of, to the Knowledge
of the Company, any Consolidated Entity have been stored in all material
respects in compliance with all Federal, state and local environmental,
safety and anti-pollution laws.
(g) All facilities located on owned or leased real estate of the
Company, and those of, to the Knowledge of the Company, any Consolidated
Entity have been approved by all necessary governmental authorities, and
each of the Company and each Consolidated Entity has obtained and is in
possession of all environmental and safety permits and licenses necessary
for its business including permits required by local zoning laws. There
have not been any environmental audits or assessments or occupational
health studies undertaken by or on behalf of the Company by or on behalf
of, to the Knowledge of the Company, any Consolidated Entity or
governmental agencies with respect to the Company or, to the Knowledge of
the Company, any Consolidated Entity or the Company's or, to the Knowledge
of the Company, any such Consolidated Entity's assets, employees,
facilities or properties, the results of groundwater and soil testing, the
results of underground fuel, waste or waste tank tests and soil samples,
written communications with Federal, state or local governments on
environmental, safety or anti-pollution matters, and Occupational Safety
and Health Administration citations.
1. There have been no Hazardous Substances, Hazardous Wastes, Solid
Wastes, petroleum, tanks, containers, cylinders, drums, bottles or cans
buried, stored or deposited in or on any real property currently or
formerly owned or operated by the Company or, to the Knowledge of the
Company, any Consolidated Entity while owned or operated by the Company or,
to the Knowledge of the Company, any Consolidated Entity, or to the
Knowledge of the Company, before owned or operated by the Company or any
Consolidated Entity.
22. Benefit Plans.
-------------
(a) Except as set forth in Schedule 2.22, neither the Company nor,
to the Knowledge of the Company, any Consolidated Entity is a party to any
written or unwritten (i) "employee benefit plan" (as that term is described
in
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<PAGE>
Section 3(3) of the Employment Retirement Income Security Act of 1974, as
amended ("ERISA"), including but not limited to any pension, retirement,
profit sharing, savings, bonus, incentive, deferred compensation, group
health insurance or group life insurance plan or obligation, or (ii) any
"fringe benefit" plan or vacation pay or policy. The Company does not have
any obligations to provide to its active employees or current retirees any
post-retirement non-pension benefits. Any or all of the plans listed on
Schedule 2.22 may be terminated by the Company or the Consolidated Entity,
as the case may be, without restriction or limitation.
(b) Except as set forth in Schedule 2.22, no employee has any claims
threatened or pending against the Company or, to the Knowledge of the
Company, any Consolidated Entity (whether under any law, any employment
agreement or otherwise) on account of or for (i) overtime pay, other than
overtime pay for the current payroll period or with respect to which
accruals or reserves are reflected in the Financials, or, with respect to
the Company after the date of such Financials and with respect to any
Consolidated Entity, on the books and records thereof, (ii) wages or salary
(excluding bonuses and amounts accruing under pension and profit sharing
plans) for any period other than the current payroll period or with respect
to which accruals or other reserves are reflected in the Financials, or,
after the date of such Financials and with respect to any Consolidated
Entity on the books and records of thereof, (iii) vacation, time off or pay
in lieu of vacation or time off, other than that earned in respect of the
current fiscal year or with respect to which accruals or reserves are
reflected in the Financials, or, with respect to the Company after the date
of such Financials and with respect to any Consolidated Entity, on the
books and records, (iv) any violation of any statute, ordinance or
regulation relating to minimum wages or maximum hours of work or (v) ERISA.
(c) All plans listed on Schedule 2.22 that are intended to qualify
(the "Qualified Plans") under Section 401(a) of the Internal Revenue Code
of 1986, as amended (the "Code") have been determined by the Internal
Revenue Service to be so qualified, and copies of such determination
letters are included as part of Schedule 2.22. No such plan has incurred an
accumulated funding deficiency, as defined in Section 412(a) of the Code
and Section 302(1) of ERISA, and the Company has not incurred any resulting
liability for excise tax or penalty due to the Internal Revenue Service nor
any liability to the Pension Benefit Guaranty Corporation. There has been
no termination, partial termination or discontinuance of any contributions
to any such Qualified Plan without notice to and approval by the Internal
Revenue Service.
(d) With respect to all Employee Benefit Plans for which any
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<PAGE>
employee is or was eligible to participate in, the Company or, to the
Knowledge of the Company, any Consolidated Entity or any entity which,
within the last six (6) years, has been under common control or affiliated
with the Company or, to the Knowledge of the Company, any Consolidated
Entity (an "ERISA Affiliate") within the meaning of Section 414(b), (c) or
---------------
(m) of the Code, is in compliance in all material respects with the
requirements prescribed by any and all statutes, orders or governmental
rules or regulations currently in effect, including, but not limited to,
ERISA and the Code, applicable to such employee benefit plans and each of
the Company and each Consolidated Entity is in compliance in all material
respects with its obligations under the terms of such plans. Except as
disclosed on Schedule 2.22, all reports and other documents required by law
or contract to be filed with any governmental agency or distributed to plan
participants have been timely filed or distributed. None of the employee
benefit plans are subject to Title IV of ERISA. Neither the Company nor
any ERISA Affiliate has ever been obligated to contribute to any "multi-
employer plan" as such term is defined in Section III(37) of ERISA. No
employee benefit plan of the Company or any ERISA Affiliate has engaged in
any prohibited transaction as such term is defined in Section 4975 of the
Code or Section 406 of ERISA.
23. Transactions with Affiliates. Except as disclosed in Schedule 2.23,
----------------------------
no stockholder, officer or director of the Company or those of any Consolidated
Entity nor any "affiliate" or "associate" of such persons (as such terms are
defined in the rules and regulations promulgated under the Securities Act)
(herein, a "Related Party") is a party to any transaction in an amount greater
-------------
than $10,000 with the Company or any Consolidated Entity, including, without
limitation, any contract, agreement or other arrangement providing for the
rental of real or personal property from, or otherwise requiring payments to,
any Related Party. Except as set forth in Schedule 2.23, no employee of the
Company or, to the Knowledge of the Company, of any Consolidated Entity nor any
Related Party is indebted in an amount greater than $1,000 to the Company or any
Consolidated Entity and neither the Company nor, to the Knowledge of the
Company, any Consolidated Entity is indebted to any such employee or Related
Party other than reimbursement in the ordinary course of business and travel
expenses not exceeding, in the aggregate, $5,000 and accrued and unpaid salary
and vacation from the most recent regularly scheduled payroll period.
24. Books and Records. The minute books of the Company and those of each
-----------------
of the Consolidated Entities contain complete and accurate records of all
meetings and other corporate actions of each of their respective stockholders,
Boards of Directors and all committees, if any, appointed by their respective
Boards of Directors. The stock ledger of the Company and that of each of the
Consolidated Entities are complete and correct and reflect all issuances,
transfers, repurchases and cancellations of shares of capital stock of each of
the Company and such
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<PAGE>
Consolidated Entities.
25. [Reserved].
26. Regulatory Matters.
------------------
(a) The Company and each of the Consolidated Entities and, to the
Knowledge of the Company, all physicians employed by such Consolidated
Entities have all licenses, permits, franchises, approvals, authorizations,
consents or orders of, or filings with ("Permits") any federal, state,
-------
local, foreign or other governmental agency, instrumentality, commission,
authority, board or any other Person, necessary or desirable to conduct
their business as now being conducted except where the failure to have any
such Permit does not have a material adverse effect on the Company or its
Consolidated Entities, taken as a whole. All Permits of the Company and
the Consolidated Entities and, to the Knowledge of the Company, all
physicians employed by the Consolidated Entities are valid and in full
force and effect except where the failure to have any such Permit does not
have a material adverse effect on the Company and its Consolidated
Entities, taken as a whole. No notice to, declaration, filing or
registration with, or Permit or consent from, any governmental or
regulatory body or authority, or any other Person or entity, is required to
be made or obtained by the Company or any Consolidated Entity in connection
with the execution, delivery or performance of this Agreement and the
consummation of the transactions contemplated hereby.
(b) Neither the Company nor any of the Consolidated Entities, nor any
other persons or, to the Knowledge of the Company, entities providing
professional services for the Consolidated Entities, have engaged in any
activities which are prohibited under 42 U.S.C. (S)1320a-7b, or the
regulations promulgated thereunder pursuant to such statutes, or related
state or local statutes or regulations, or any federal or state self-
referral laws, or which are prohibited by rules of professional conduct,
including but not limited to the following: (i) knowingly and willfully
making or causing to be made a false statement or representation of a
material fact in any application for any benefit or payment; (ii) knowingly
and willfully making or causing to be made any false statement or
representation of a material fact for use in determining rights to any
benefit or payment; (iii) failure to disclose knowledge by a claimant of
the occurrence of any event affecting the initial or continued right to any
benefit or payment on its own behalf or on behalf of another, with intent
to fraudulently secure such benefit of payment; and (iv) knowingly and
willfully soliciting or receiving any remuneration (including any kickback,
bribe or rebate), directly or indirectly, overtly or covertly, in cash or
in kind or offering to pay or receive such remuneration (a) in return for
referring an individual to a person for the furnishing or arranging for the
furnishing of any
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<PAGE>
item or service for which payment may be made in whole or in part by
Medicare or Medicaid, or (b) in return for purchasing, leasing, or ordering
or arranging for or recommending purchasing, leasing, or ordering any good,
facility, service, or item for which payment may be made in whole or in
part by Medicare or Medicaid.
(c) The representations and warranties contained in this Section
2.26 are hereby qualified by Schedule 2.26.
27. Material Facts. This Agreement, the Schedules hereto and furnished
--------------
contemporaneously herewith, and each other agreement, document, certificate or
written statement furnished or to be furnished to the Investors through the
Closings by or on behalf of the Company or any Consolidated Entity in connection
with the transactions contemplated hereby including the Form S-1 as provided to
the Investors as of the date hereof (as defined in Section 7.16), taken as a
whole, do not contain any untrue statement of a material fact or omit to state a
material fact necessary to make the statements contained therein or herein in
light of the circumstances in which they were made not misleading. To the
Knowledge of the Company, there is no fact which has not been disclosed herein
or otherwise by the Company to the Investors and which may materially adversely
affect the business, properties, assets or condition, financial or otherwise, of
the Company or of any Consolidated Entity.
3. Representations and Warranties and other Agreements of the Investors.
--------------------------------------------------------------------
1. Representations and Warranties. Each Investor severally and not
------------------------------
jointly hereby represents and warrants that:
(a) Authorization. Such Investor has full power and authority to
-------------
execute, deliver and perform this Agreement, the Stockholders' Agreement
and the Transaction Agreements to which it is a party and to acquire the
Shares and, each of this Agreement, the Stockholders Agreement and the
Transaction Agreements constitute the valid and legally binding obligation
of such Investor, enforceable against such Investor in accordance with
their respective terms.
(b) Purchase Entirely for Own Account. The Shares and Warrants to
---------------------------------
be received by such Investor and the Reserved Shares received upon exercise
of the Warrants and the Conversion Shares received upon conversion of the
Shares (collectively, the "Securities") will be acquired for investment for
----------
such Investor's own account, not as a nominee or agent and not with a view
to the distribution of any part thereof. Such Investor has no present
intention of selling, granting any participation in, or otherwise
distributing the same. Such
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<PAGE>
Investor does not have any contract, undertaking, agreement or arrangement
with any person to sell, transfer, or grant participations to such person
or to any third person, with respect to any of the Securities.
(c) Restricted Securities. Such Investor understands that the
---------------------
Securities may not be sold, transferred, or otherwise disposed of without
registration under the Securities Act, or an exemption therefrom, and that
in the absence of an effective registration statement covering the Shares,
the Warrants, the Reserved Shares or the Conversion Shares or an available
exemption from registration under the Securities Act, the Securities must
be held indefinitely. In the absence of an effective registration
statement covering the Securities such Investor will sell, transfer, or
otherwise dispose of the Securities only in a manner consistent with its
representations and agreements set forth herein and the terms and
conditions set forth in the Stockholders Agreement.
(d) Formation. Such Investor represents that it was not organized
---------
for the purpose of making an investment in the Company.
(e) Suitability. Such Investor is an Accredited Investor as such
-----------
term is defined in Rule 501(a) promulgated pursuant to the Securities Act.
(f) Financial Condition. Such Investor's financial condition is such
-------------------
that it is able to bear the risk of holding the Shares for an indefinite
period of time and can bear the loss of its entire investment in its
Shares.
(g) Experience. Such Investor has such knowledge and experience in
----------
financial and business matters and in making high risk investments of this
type that it is capable of evaluating the merits and risks of the purchase
of the Shares.
(h) Brokerage. There are no claims for brokerage commissions or
---------
finder's fees or similar compensation in connection with the transactions
contemplated by this Agreement based on any arrangement or agreement made
by or on behalf of such Investor, and such Investor agrees to indemnify and
hold the Company and the other Investors harmless against any damages
incurred as a result of any such claims.
(i) Massachusetts. Each of the Investors which was within the
-------------
jurisdiction of The Commonwealth of Massachusetts at the time it received
the offer to purchase the Shares and/or consummated the sale of the Shares,
represents and warrants that (i) it is a corporation or other entity not
formed for the purpose of acquiring the Shares being purchased by it, (ii)
it has total assets in excess of $5,000,000, (iii) a substantial part of
its business activities consists of investing, purchasing, selling or
trading in securities issued by
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<PAGE>
others and (iv) its investment decisions are made by persons who have such
knowledge and experience in financial and business matters as to be capable
of evaluating the merits and risks of an investment in the Shares.
2. Further Limitations on Disposition.
----------------------------------
(a) Each Investor further agrees not to make any disposition of all
or any portion of the Shares, the Warrants or the Reserved Shares unless
and until:
(i) There is then in effect a registration statement under the
Securities Act covering such proposed disposition and such
disposition is made in accordance with such registration
statement and all applicable state securities laws; or
(ii) (A) Such Investor shall have notified the Company of the
proposed disposition and shall have furnished the Company with
a statement of the circumstances surrounding the proposed
disposition, and (B) such Investor shall have furnished the
Company with a reasonably satisfactory opinion from counsel,
reasonably satisfactory to the Company, that such disposition
will not require registration of such shares under the
Securities Act and that all requisite action has been or will,
on a timely basis, be taken under any applicable state
securities laws in connection with such disposition.
(b) Notwithstanding the provisions of paragraphs (i) and (ii) above,
no such registration statement or opinion of counsel shall be necessary for
a transfer by any Investor pursuant to Rule 144A or Rule 144 promulgated
under the Securities Act or a transfer in compliance with the Securities
Act by an Investor to a partner, subsidiary, shareholder or affiliate of
such Investor or to an Affiliated Fund or to any director, officer or
employee of the Company, MCP or Flagship, if the transferee agrees in
writing to be subject to the terms hereof to the same extent as if such
transferee were an original Investor hereunder.
3. Legends. It is understood that the certificates evidencing the Shares
-------
(and the certificates evidencing the Conversion Shares) may bear substantially
the following legends:
(a) "These securities have not been registered under the Securities
Act of 1933. They may not be sold, offered for sale, pledged or
hypothecated in the absence of a registration statement in effect with
respect to the securities under such Act or an opinion of counsel
satisfactory to the Company that
-23-
<PAGE>
such registration is not required or unless sold pursuant to Rule 144A or
Rule 144 of such Act."
(b) Any legend required by the Stockholders Agreement or the laws of
any other applicable jurisdiction.
(c) Upon the consummation of any event requiring the removal of a
legend hereunder, the Company, upon the surrender of certificates
containing such legend and receipt of evidence to the Company's reasonable
satisfaction of the occurrence of such events from the Investors shall, at
its own expense, deliver to the holder of any such shares as to which the
requirement for such legend shall have terminated, one or more new
certificates evidencing such shares not bearing such legend.
4. Conditions to the Investors' Obligations at the First Closing.
-------------------------------------------------------------
The obligations of the Investors under Section 1.3(a) of this Agreement to
purchase shares at the First Closing are subject to the fulfillment on or before
the Closing of each of the following conditions unless waived by the Investors
in accordance with Section 9.5 hereof:
1. Representations and Warranties. The representations and warranties of
------------------------------
the Company contained in Section 2 (i) that contain a materiality qualification
shall be true and correct, and (ii) that do not contain a materiality
qualification shall be true and correct in all material respects on and as of
the date of such Closing with the same effect as though such representations and
warranties had been made on and as of the date of such Closing.
2. Performance. The Company shall have performed and complied with all
-----------
agreements, obligations, and conditions contained in this Agreement that are
required to be performed or complied with by it on or before such Closing.
3. Compliance Certificate. The Chief Executive Officer of the Company
----------------------
shall deliver to the Investors at such Closing a certificate certifying that the
conditions specified in Sections 4.1, 4.2, 4.4, 4.5, 4.7, 4.10, 4.11 and 4.13
have been fulfilled and stating that except as disclosed on Schedule 2.7 there
has been no material adverse change in the business affairs, operations,
properties, assets, or condition or prospects of the Company and its
Consolidated Entities, taken as a whole since March 31, 1997.
4. Restated Certificate of Incorporation. The Company shall have filed
-------------------------------------
with the Secretary of State of Delaware the Restated Certificate which is
attached hereto as Exhibit B.
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<PAGE>
5. Qualifications; Consents. All consents, authorizations, approvals, or
------------------------
Permits, if any, of any governmental authority or regulatory body of the United
States or of any state or of any third party that are required to be obtained by
the Company in connection with the consummation of the transactions contemplated
hereby and the lawful issuance and sale of the Shares and the issuance of the
Warrants to the Investors pursuant to this Agreement shall have been duly
obtained and shall be effective on and as of such Closing other than those which
are not required to be obtained before such Closing.
6. Proceedings and Documents. All corporate and other proceedings in
-------------------------
connection with the transactions contemplated at such Closing and all documents
incident thereto shall be satisfactory in form and substance to the Investors
and the Investors' counsel, and they shall have received all such counterpart
original and certified or other copies of such documents as they may request.
7. Stockholders Agreement. Amendment No. 2 to the Stockholders Agreement
----------------------
substantially in the form of Exhibit D attached hereto shall have each been
executed and delivered by the parties (other than the Investors) thereto.
8. Opinion of Company Counsel. The Investors shall have received from
--------------------------
Hale and Dorr, counsel for the Company, an opinion dated as of such Closing in
substantially the form attached hereto as Exhibit E.
9. Secretary's Certificate. The Secretary of the Company shall deliver to
-----------------------
the Investors at such Closing a Certificate, dated as of such Closing,
certifying: (a) that attached thereto is a true and complete copy of the By-Laws
of the Company as in effect on the date of such certification; (b) that attached
thereto is a true and complete copy of all resolutions adopted by the Board of
Directors and the stockholders of the Company authorizing the execution,
delivery and performance of this Agreement and the Stockholders Agreement, the
issuance, sale and delivery of the Shares, the issuance of the Warrants, and
reservation, issuance and delivery of the Reserved Shares and the Conversion
Shares, and that all such resolutions are in full force in effect and are all
the resolutions adopted in connection with the transactions contemplated by this
Agreement and the Stockholders Agreement; (c) that attached thereto is a true
and complete copy of the Restated Certificate as in effect on the date of such
certification; and (d) to the incumbency and specimen signature of certain
officers of the Company.
10. Material Adverse Change. Since December 31, 1996 there shall have
-----------------------
been, in the judgment of the Investors, no material adverse change in the
business affairs, operations, properties, assets or condition or prospects of
the Company, Flagship or MCP.
11. MCP and Flagship Agreements. The MCP and Flagship Agreements shall
---------------------------
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<PAGE>
be in full force and effect and no amendments to or waivers thereunder shall
have occurred.
12. Amendment to By-Laws. The Company's By-laws shall be amended
--------------------
substantially in the form attached to Exhibit F hereto.
13. Compliance Program. The Company shall have implemented procedures
------------------
designed to detect and deter violations of applicable health care and other
laws, including without limitation establishment of a Compliance Committee of
the board of directors comprised solely of physician and management
representatives and engagement of qualified professional advisers to review
operations and acquisitions.
14. Capital Certificate. The Company shall deliver to Capital a
-------------------
certificate substantially in the form attached hereto as Exhibit G.
5. Conditions of the Company's Obligations at any Closings.
-------------------------------------------------------
The obligations of the Company under Sections 1 of this Agreement are
subject to the fulfillment on or before any such Closing of each of the
following conditions:
1. Representations and Warranties. The representations and warranties of
------------------------------
the Investors contained in Section 3 shall be true and correct on and as of the
date of such Closing with the same effect as though such representations and
warranties had been made on and as of the date of such Closing.
2. Payment of Purchase Price. The Investors shall have delivered payment
-------------------------
of the applicable aggregate purchase price of the Shares to be purchased by them
at such Closing as set forth in Section 1.3.
3. Qualifications; Consents. All consents, authorizations, approvals, or
------------------------
Permits, if any, of any governmental authority or regulatory body of the United
States or of any state or of any third party that are necessary in connection
with the consummation of the transactions contemplated hereby and the lawful
issuance and sale of the Shares and the issuance of the Warrants to the
Investors pursuant to this Agreement shall have been duly obtained and shall be
effective on and as of such Closing other than those which are not required to
be obtained before such Closing.
6. Conditions to the Investors' Obligations at the Additional Closings.
-------------------------------------------------------------------
The obligations of any Investor under Section 1.3(b) hereof that desires to
purchase shares at any of the Additional Closings are subject to the fulfillment
on or before each such Closing of each of the following conditions:
-26-
<PAGE>
1. Representations and Warranties. The representations and warranties in
------------------------------
Sections 2.1, 2.2, 2.8 (other than the incurrence of any liens or defect in
title either (i) approved by the Board of Directors in accordance with the terms
of the Restated Certificate or, if applicable, Section 8 or (ii) existing with
respect to the assets of a physician practice at the time of its affiliation
with the Company) through 2.24, 2.26 and 2.27 (i) that contain a materiality
qualification shall be true and correct, and (ii) that do not contain a
materiality qualification, shall be true and correct in all material respects as
if made on the date of such closing. The representations in Section 2.3 shall be
true and correct in all material respects except for changes in the
capitalization and the issuances of stock, option, warrants and other securities
approved by the Board of Directors of the Company in accordance with the
Restated Certificate after the First Closing and the Investors in accordance
with Section 8 of this Agreement. The representations in Section 2.4 shall be
correct in all material respects except for changes with respect to the
Company's Subsidiaries and Consolidated Entities approved by the Board of
Directors of the Company in accordance with the Restated Certificate after the
First Closing and the Investors in accordance with Section 8 of this Agreement.
The audited financial statements for the most recent fiscal year and the
unaudited financial statements for the most recent interim period provided to
the Investors (the "Most Recent Financial Statements") shall be complete and
--------------------------------
correct, shall have been prepared in accordance with GAAP and shall fairly
present, in all material respects, the financial position of the Company and its
Consolidated Entities. The representations in Sections 2.6 and 2.7 shall be
true and correct except that references therein to the Financials shall be the
Most Recent Financial Statements and references to December 31, 1996 shall be to
the date of the Most Recent Financial Statements.
2. Performance. The Company shall have performed and complied in all
-----------
material respects with all agreements, obligations, and conditions contained in
this Agreement that are required to be performed or complied with by it on or
before such Closing.
3. Compliance Certificate. The Chief Executive Officer of the Company
----------------------
shall deliver to the Investors at such Closing a certificate certifying that the
conditions specified in Sections 6.1, 6.2, 6.4, 6.6 and 6.9 have been fulfilled
and stating that there has been no material adverse change in the business
affairs, operations, properties, assets, or condition or prospects of the
Company and its Consolidated Entities since March 31, 1997.
4. Qualifications; Consents. All consents, authorizations, approvals, or
------------------------
Permits, if any, of any governmental authority or regulatory body of the United
States or of any state or of any third party that are necessary in connection
with the consummation of the transactions contemplated hereby and the lawful
issuance and sale of the Shares to the Investors pursuant to this Agreement
shall have been duly obtained and shall be effective on and as of such Closing
other than those which are
-27-
<PAGE>
not required to be obtained before such Closing. Without limiting the generality
of the foregoing, all applicable waiting periods (any extensions thereof) under
the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the "HSR
---
Act") shall have expired or otherwise been terminated.
- ---
5. Proceedings and Documents. All corporate and other proceedings in
-------------------------
connection with the transactions contemplated at such Closing and all documents
incident thereto shall be satisfactory in form and substance to the Investors
and the Investors' counsel, and they shall have received all such counterpart
original and certified or other copies of such documents as they may request.
6. Other Agreements. Neither the Company nor the Management Stockholders
----------------
shall have breached or failed to perform its obligations under the Stockholders
Agreement and no party shall have breached or failed to perform its obligations
under the MCP Agreements or the Flagship Agreements.
7. Opinion of Company Counsel. The Investors shall have received from
--------------------------
Hale and Dorr, counsel for the Company, or such other counsel reasonably
satisfactory to the Investors an opinion dated as of such Closing in form
reasonably satisfactory to the Investors and their counsel.
8. Secretary's Certificate. The Secretary of the Company shall deliver to
-----------------------
the Investors at such Closing a Certificate, dated as of such Closing,
certifying: (a) that attached thereto is a true and complete copy of the By-Laws
of the Company as in effect on the date of such certification; (b) that attached
thereto is a true and complete copy of all resolutions adopted by the Board of
Directors and the stockholders of the Company authorizing the execution,
delivery and performance of this Agreement, the Stockholders Agreement and the
Transaction Agreements, the issuance, sale and delivery of the Shares, the
issuance of the Warrants, and reservation, issuance and delivery of the Reserved
Shares and the Conversion Shares, and that all such resolutions are in full
force and effect and are all the resolutions adopted in connection with the
transactions contemplated by this Agreement, the Stockholder Agreement and the
Transaction Agreements; (c) that attached thereto is a true and complete copy of
the Restated Certificate of Incorporation as in effect on the date of such
certification; and (d) to the incumbency and specimen signature of certain
officers of the Company.
9. Business Plan. The Company shall be in compliance with its budgeted
-------------
results of operations and other components of its Business Plan as in effect at
the time of such Additional Closing and as previously approved by the Board of
Directors of the Company.
10. Material Adverse Change. Since the date of the Most Recent Financial
-----------------------
Statements there shall have been, in the judgment of the Investors, no material
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<PAGE>
adverse change in the business affairs, operations, properties, assets or
condition or prospects of the Company, Flagship or MCP.
7. Covenants and Agreements.
------------------------
1. Financial and Other Information.
-------------------------------
(a) Accounts and Reports. The Company will maintain a standard
--------------------
system of accounts in accordance with generally accepted accounting
principles consistently applied.
(b) Annual and Quarterly Financial Statements. The Company will
-----------------------------------------
deliver to each Investor: (i) within ninety (90) days after the end of each
fiscal year a copy of the consolidated balance sheet of the Company and the
Consolidated Entities as of the end of such year, together with
consolidated and consolidating statements of income and of cash flows of
the Company and the Consolidated Entities for such year, all in reasonable
detail, prepared in accordance with generally accepted accounting
principles, consistently applied, and certified in an audit report by
independent public accountants of national standing selected by the Board
of Directors of the Company, and (ii) copies of all financial statements
and reports which the Company and each Consolidated Entity shall send to
its stockholders or file with the Securities and Exchange Commission or any
stock exchange on which any securities of the Company or any Consolidated
Entity may be listed. The Company shall also deliver to each Investor,
within forty-five (45) days after the end of each of the first three
quarters of each fiscal year, a copy of the consolidated balance sheet of
the Company and each Consolidated Entity as of the end of such quarter and
consolidated statements of income and of cash flows of the Company and each
Consolidated Entity for the fiscal quarter and for the portion of the
fiscal year ending on the last day of such quarter, each of the foregoing
balance sheets and statements to set forth in comparative form the
corresponding figures for the same period of the prior fiscal year, and
actual versus budgeted amounts, to be in reasonable detail provided,
--------
however, such financials are subject to year-end adjustments and may not
-------
contain all footnotes required under generally accepted accounting
principles and to be certified, subject to normal year-end audit
adjustments, by the principal financial officer of the Company that they
are true and accurate in all material respects as of their dates.
(c) Monthly Financial Statements and Budgets. The Company will
----------------------------------------
furnish to each Investor: within thirty (30) days after the end of each
month, other than the last month of any fiscal quarter or of the fiscal
year of the Company and each Consolidated Entity, a copy of the
consolidated balance
-29-
<PAGE>
sheet of each of the Company and the Consolidated Entities as of the end of
such month and consolidated statements of income and of cash flows of each
of the Company and the Consolidated Entities for such month, each of the
foregoing balance sheets and statements to set forth in comparative form
the corresponding figures for the prior fiscal period, to be in reasonable
detail, to be prepared in accordance with generally accepted accounting
principles, consistently applied, and to be certified, subject to normal
year-end audit adjustments, by the principal financial officer of the
Company that they are true and accurate in all material respects as of
their dates; and, to the extent provided to the Board of Directors, as soon
as possible, but in any event at least thirty (30) days prior to the
beginning of each fiscal year, a budget, prepared on a period by period
basis with each period including four or five weeks, and operating plan for
such fiscal year, each approved by the Company's Board of Directors,
including projected balance sheets and statements of income and changes in
financial condition of the Company and the Consolidated Entities for such
months.
(d) Visits and Discussions. The Company will permit each Investor
----------------------
and the authorized representatives of each such Investor, at all reasonable
times during normal business hours upon reasonable notice and as often as
reasonably requested, to visit and inspect, at the expense of such
Investor, any of the properties of the Company and any Consolidated Entity,
including their respective books and records and, subject to reasonable
arrangements with any transfer agents of the Company and any Consolidated
Entity, lists of security holders, and to make extracts therefrom and to
discuss the affairs, finances, and accounts of the Company and each
Consolidated Entity with their respective officers; provided, however, that
-------- -------
the Investors agree to use reasonable efforts to coordinate their visits
and inspections to minimize disruptions to the Company's operations.
(e) Adverse Change; Litigation. The Company will promptly advise
--------------------------
each Investor in writing of each suit or proceeding commenced or threatened
against the Company or any Consolidated Entity which seeks a material
amount of damages or, if adversely determined, would result in a material
adverse change in the condition or business, financial or otherwise, of the
Company and its Consolidated Entities taken as a whole and of any facts
that come to the Company's attention which question in any material respect
the accuracy or completeness of the representations and warranties
contained herein when made.
(f) Other Information. The Company will also furnish to each
-----------------
Investor with reasonable promptness, such other information and data with
respect to the Company or any Consolidated Entity as such Investor may from
time to time reasonably request.
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2. Confidentiality. Each of the Investors further covenants and agrees
---------------
that any person or entity receiving information under Section 7.1 or exercising
rights of visitation or inspection granted hereunder shall maintain the
confidentiality of all financial, confidential and proprietary information of
the Company or any Consolidated Entity acquired by them in exercising such
rights. Notwithstanding the preceding sentence, each Investor may (1) disclose
such information when required by law or governmental order or regulation, or
when required by a subpoena or other process, (2) disclose such information to
the extent necessary to enforce this Agreement, (3) disclose such information to
its attorneys, accountants, consultants and other professionals to the extent
necessary to obtain their services in connection with its investment in the
Company, provided that the Investor informs such attorney, accountant,
consultant or other professional of the confidential nature of such information,
or (4) disclose such information as may be required by any prospective purchaser
of any Shares, Warrants, Reserved Shares or Conversion Shares from such
Investor, provided that such prospective purchaser agrees in writing to be bound
by the provisions of this subsection. An Investor may also disclose such
information to any affiliate, partner, shareholder or subsidiary of such
Investor provided the Investor informs such persons of the confidential nature
of such information.
3. Insurance. Each of the Company and each Consolidated Entity will
---------
maintain a commercially reasonable amount of insurance with respect to all its
insurable properties against loss or damage by fire and other risks; maintain
public liability insurance against claims for personal injury, death or property
damage suffered by others upon or in or about any premises occupied by it or
arising from equipment owned by the Company or any Consolidated Entity and
leased to and located upon or in or about any premises occupied by any other
person; maintain all such worker's compensation or similar insurance as may be
required under the laws of any state or jurisdiction in which it may be engaged
in business; and maintain malpractice, professional liability, stop-loss
insurance relating to capitated contracts, and all such other insurance as is
usually maintained by persons engaged in the same or similar business as is the
Company and the Consolidated Entities. All such insurance shall be maintained
against such risks and in at least such amounts as such insurance is usually
carried by persons engaged in the same or similar businesses, and all insurance
herein provided for shall be effected and maintained in force under a policy or
policies issued by insurers of recognized responsibility, except that the
Company and the Consolidated Entities may effect worker's compensation or
similar insurance in respect of operations in any state or other jurisdiction
either through an insurance fund operated by such state or other jurisdiction or
by causing to be maintained a system or systems of self-insurance which is in
accord with applicable laws.
4. Use of Proceeds. The Company will use the proceeds of the sale of the
---------------
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<PAGE>
Class C Shares in the Closing in order to finance the acquisitions approved by
the Board of Directors and, if applicable, the Investors pursuant to Section 8
hereof, and for working capital, including the funding of operating losses,
capital expenditures and repayment of indebtedness to Banker's Trust.
5. Payment of Taxes; Corporate Existence, Regulatory Compliance. Each of
------------------------------------------------------------
the Company and each Consolidated Entity (unless the Company has no ownership or
management responsibility for or liability in respect of Taxes for such
Consolidated Entity) will:
(a) pay and discharge promptly, or cause to be paid and discharged
promptly, when due and payable, all Taxes, assessments and governmental
charges or levies imposed upon it or upon its income or upon any of its
property, real, personal and mixed, or upon any part thereof, as well as
all claims of any kind (including claims for labor, materials and supplies)
which, if unpaid might by law become a lien or charge upon its property;
provided, however, that neither the Company nor any Consolidated Entity
-------- -------
shall be required to pay any Tax, assessment, charge, levy or claim if the
amount, applicability or validity thereof shall currently be contested in
good faith by appropriate proceedings and if the Company or any
Consolidated Entity, as the case may be, shall have set aside on its books
reserves (classified to the extent required by generally accepted
accounting principles) deemed by it adequate with respect thereto; and
provided further, that neither the Company nor any Consolidated Entity
shall have any obligation to make any payments under this paragraph (a)
with respect to property subject to leases pursuant to the terms of which
the lessees thereof have undertaken to make such payments;
(b) do or cause to be done all things necessary to preserve and keep
in full force and effect its corporate existence, rights and franchises,
provided, however, that nothing in this paragraph (b) shall (i) prevent the
abandonment or termination of the Company's or any Consolidated Entity's
authorization to do business in any foreign state or jurisdiction if, in
the opinion of its Board of Directors, such abandonment or termination is
in the interest of the Company and not disadvantageous in any material
respect to the holders of the Shares or (ii) require compliance with any
law so long as the validity or applicability thereof shall be disputed or
contested in good faith;
(c) maintain and keep, or cause to be maintained and kept, its
properties in good repair, working order and condition in all material
respects, and from time to time make, or cause to be made, all repairs,
renewals and replacements which in the opinion of the Company are necessary
and proper so that the business carried on in connection therewith may be
properly and advantageously conducted at all times; and
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<PAGE>
(d) comply in all material respects with all applicable statutes,
regulations and orders of, and all applicable restrictions imposed by, all
governmental bodies in respect of the conduct of the business conducted by
the Company and the Consolidated Entities.
6. Dealings with Affiliates and Others. Other than with respect to the
-----------------------------------
Management Agreement, neither the Company nor any Consolidated Entity shall
enter into any transaction, including, without limitation, any loans or
extensions of credit or royalty agreements, with any officers or directors of
the Company or any Consolidated Entity, nor shall it enter into any transaction,
on terms less favorable to the Company or any Consolidated Entity than the
Company or any Consolidated Entity would be able to obtain in a transaction with
a person or entity unaffiliated with the Company or any Consolidated Entity,
with a holder of at least one percent (1%) or more of the capital stock of the
Company or any Consolidated Entity, or any member of their respective families
or any Affiliate thereof.
7. Change in Nature of Business. Neither the Company nor any Consolidated
----------------------------
Entity shall make any material change in the nature of its business as carried
on at the date hereof or as contemplated in the Company's Registration Statement
on Form S-1 (333-26137), as filed with the Securities and Exchange Commission
unless approved by the Investors.
8. Payment of Expenses. The Company shall pay at each Closing, the costs
-------------------
incurred to such Closing Date by the Investors and Bain Capital, Inc. in
connection with the transactions contemplated hereby and such Closing which
shall be an adjustment to purchase price; provided, that for purposes of the
--------
antidilution provisions contained in the Restated Certificate and the Warrant
the purchase price shall be deemed to be initially $3.25 per share, including
without limitation, the fees and expenses of Ropes & Gray, counsel to the Bain
Investors, Hogan & Hartson, counsel to the Capital Investors, Fried, Frank,
Harris, Shriver & Jacobson, counsel to the Goldman Investors and Price
Waterhouse LLP, accountants to the Investors.
9. Cooperation and Access. The Company shall, and shall cause each
----------------------
Consolidated Entity to (a) use its reasonable best efforts, as promptly as
practicable to obtain all consents, approvals or actions of, to make all filings
with and to give all notices to governmental or regulatory authorities or any
other third party required to consummate the transactions contemplated hereby
including, without limitation, the expiration or earlier termination of all
applicable waiting periods under the HSR Act, as amended, and (b) provide such
other information and communications to such governmental or regulatory
authorities or other third parties as such governmental or regulatory
authorities or other third parties may reasonably request in connection
therewith. The Company and the Investors shall cooperate with each other to
satisfy the conditions to each of the Closings contained in this Agreement and
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<PAGE>
neither of them shall take, nor will the Company permit any Consolidated Entity
to take any action (other than an action required by any law) that could
reasonably be expected to result in the nonfulfillment of any such condition.
The Company shall, and shall cause each Consolidated Entity to, provide the
Investors and their respective officers, employees, counsel, accountants,
financial advisors, consultants, environmental engineers and other
representatives (together, "Representatives") with full access, upon 24 hours'
---------------
prior notice and during normal business hours, to all officers, employees,
agents and accountants of the Company and each Consolidated Entity and to its
assets and properties and its books and records, including without limitation
any documents or properties related to any potential acquisition or affiliation
by the Company or any Consolidated Entity with any physician practice group. No
investigation by the Investors or their Representatives shall limit or otherwise
affect the Company's representations and warranties hereunder.
10. Allocation of Purchase Price. The Company and the Investors agree
----------------------------
that for Tax and financial reporting and all other purposes the purchase price
paid by the Investors shall be allocated among the Shares and Warrants purchased
in the various Closings in proportion to their relative fair market values at
the time of each Closing to the extent consistent with applicable law, as
determined in good faith by the Investors.
11. Conduct of Business. Prior to the Closing, except as otherwise
-------------------
contemplated by this Agreement, the Company shall cause each Consolidated Entity
to carry on its business in the usual and ordinary course. Without limiting the
foregoing, except as otherwise contemplated by this Agreement, the Company shall
not and shall cause or not permit any Consolidated Entity, other than in the
ordinary course of business, to incur any capital expenditures, issue stock,
declare dividends, adopt benefit plans, change accounting methods, sell or
purchase material assets or incur liabilities or do any other thing that could
have the effect of rendering the representations and warranties contained herein
to become untrue or incomplete in any respect.
12. Reservation of Shares. The Company shall at all times reserve and
---------------------
make available (a) sufficient Reserved Shares for issuance upon exercise of the
Warrants; and (b) sufficient Conversion Shares for issuance upon conversion of
the Shares or the Reserved Shares.
13. Future Financings.
-----------------
1. Exclusivity. The Company hereby agrees that it will not, and it
-----------
will cause the Consolidated Entities and each of their respective
affiliates, directors, officers, employees, representatives and agents not
to, directly or
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<PAGE>
indirectly, solicit or initiate or enter into discussions, agreements or
transactions with, or encourage, or provide any information to, any
corporation, partnership or other entity or group (other than the Investors
and their designees) concerning any debt or equity investment in the
Company or any Consolidated Entity other than the investments contemplated
hereby (subject to the terms and conditions hereof) by the Investors.
2. Participation Rights. The Company agrees that neither the Company
--------------------
nor any Consolidated Entity shall issue or sell any of their respective
equity and debt securities (including but not limited to capital stock or
securities convertible into, exchangeable for, or options, warrants, or
other rights to purchase such capital stock and indebtedness for money
borrowed, promissory notes, demand notes, bonds, debentures, letters of
credit, or similar instruments and guarantees of the foregoing obligations)
(collectively, the "Future Securities") to any person without first
-----------------
providing each Investor the right to subscribe for such Future Securities
at a price and on such other terms (including the method of purchase;
provided, however, that each Investor shall have the option of purchasing
-------- -------
Future Securities with cash, regardless of the method of purchase offered
to such Person) which are no less favorable as shall be offered to such
third party and which shall have been specified by the Company in a writing
delivered to each Investor (the "Proposal"). The Proposal by its terms
--------
shall remain open and irrevocable for a period of 20 days from the date it
is delivered by the Company to each Investor (the "Future Securities
-----------------
Exercise Period"). The Proposal shall also certify that the Company intends
---------------
in good faith to make an offering of its securities at the price and on the
terms set forth in such certification.
3. Notice. Notice of an Investor's intention to accept, in whole or
------
in part, the Proposal made pursuant to Section 7.13.2 shall be made in
writing signed by the Investor and delivered to the Company prior to the
end of the Future Shares Exercise Period, setting forth that portion of the
Future Shares, which the Investor elects to purchase (the "Notice of
---------
Purchase"). If the total number of Future Securities is sufficient to
--------
satisfy the elections of Investors contained in the Notices to Purchase
such Future Securities shall be allocated in accordance with their
elections; if not the available Future Securities shall be allocated among
the Investors in proportion to their election, provided, that, such
-------- ----
allocation shall be adjusted if necessary so that no Investor is allocated
more Future Securities than it has elected to purchase.
4. Sale to Third Parties. In the event that the Investors elect not
---------------------
to purchase all (or any part) of the Future Securities, the Company shall
have 120 days from the expiration of the Future Securities Exercise Period
to offer and sell all or any part of such Future Securities not purchased
by the
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<PAGE>
Investors (the "Refused Future Securities") to any other Person(s), but
-------------------------
only upon terms and conditions in all respects (including, without
limitation, unit price and interest rates) which are no more favorable to
such other Person(s) or less favorable to the Company than those set forth
in the Proposal; provided that such Sale be to the same Person(s) or their
--------
affiliates identified in the Proposal, if so identified pursuant to Section
7.13.2. In the event that the Company so sells the Refused Future
Securities to such other Person(s), the sale to each Investor of the Future
Securities in respect of which a Notice of Purchase was delivered to the
Company by such Investor shall occur upon the closing of the sale to such
other Person(s) of Refused Future Securities (which closing shall include
full payment to the Company). If there are no Refused Future Securities,
the sale to such Investor of such Future Securities shall occur within 20
days of the expiration of the Future Securities Exercise Period. If such
offering or sale of Refused Future Securities shall be terminated, the
Company shall promptly give such Investor written notice of such
termination and such Investor may, but shall not be required to, purchase
such Future Securities, in which case such purchase shall occur within 30
days of the date of such termination. In any event, the sale to such
Investor of such Future Securities shall be on the terms specified in the
Proposal. Any Refused Future Securities not purchased by such other
Person(s) within such 120-day period shall remain subject to this Section
7.
5. Exceptions. Notwithstanding anything to the contrary stated
----------
above, the provisions of, and the rights of the Investors under, this
Section 7.14 shall not apply to (i) Future Securities issued in connection
with stock splits or other stock dividends, issued on a pro rata basis to
the holders of all shares of Common Stock outstanding and securities
convertible into or exercisable for shares of Common Stock, in accordance
with the number of shares of Common Stock and held by such holder or
issuable upon conversion or otherwise, as applicable, (ii) any sale of
Future Securities pursuant to a Public Offering, (iii) any sale or grant of
Future Securities by the Company to its employees, consultants, advisory
committee members or directors (or employees of any Consolidated Entity
eligible to participate in such plan), pursuant to a bona fide employee
stock purchase, option or similar benefit plan or other arrangement
approved by the Company's Board of Directors, (iv) Future Securities issued
upon exchange or exercise of warrants outstanding as of the date of this
Agreement including the Warrants, (v) Future Securities issued in
connection with an acquisition of assets or other business combination
permitted under the terms of the Purchase Agreement, and (vi) Future
Securities issued to lender which is a bank under the Bank Holding Company
Act which has an interest rate payable in cash at such lender's rate
charged generally for corporate loans and which does not have any equity
securities or securities convertible or exchangeable or exercisable for
equity securities of the Company or any Consolidated Entity issued in
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<PAGE>
connection therewith or any commitments to issue the foregoing.
14. Period. The foregoing provisions of this Section 7 (other than
------
Sections 7.1, 7.10, and 7.12) shall terminate on a Qualified Public Offering.
15. Disclosure of Investment. The Company shall not permit any of its
------------------------
subsidiaries to (i) except as may be necessary or desirable in connection with a
request by or a filing with a governmental agency, regulatory or supervisory
authority or court or as required by law, disclose the transactions contemplated
by this Agreement or any of the Transaction Agreements or any of the terms
thereof without the prior consent of the Investors, (ii) use in advertising or
publicity the name of any Investor, or any partner or employee of such Investor
or any of its respective affiliates, or any trade name, trademark, trade device,
service mark, symbol or any abbreviation, contraction or simulation thereof
owned by any Investor or any of its respective affiliates, in either case
without the prior written consent of such Investor or (iii) represent, directly
or indirectly, any product or any service provided by any or any of its
subsidiaries has been approved or endorsed by any Investor without the prior
written consent of the Investor; provided, however, the Company may orally
-------- -------
disclose: (i) that the Investors are stockholders of the Company, (ii) the
aggregate purchase price paid by each Investor in connection with the investment
contemplated by this Agreement and (iii) the percentage of the outstanding
shares of capital stock of the Company held by each Investor.
16. Consolidation. The Company agrees that it will use its reasonable
-------------
best efforts, consistent with the Business Plan and in consultation with the
Board of Directors of the Company, to take such action as is reasonably
necessary, including, amend the governance provisions of the organizational
documents of the Joint Policy Board and, to the extent necessary, the MCP
Agreements and Flagship Agreements, to cause each of MCP, Flagship and each
physician practice group acquired by or affiliated with (whether by management
agreement or stockholder transfer or designation or similar agreement or
otherwise) the Company or any of its Affiliates, (unless consented to by the
Investors) to be consolidated in the financial statements of the Company in
accordance with GAAP, including without limitation consensuses as in effect or
expressed on the date hereof with respect to Issue No. 97-2 of the Emerging
Issues Task Force of the Financial Accounting Standards Board, and in accordance
with rules, regulations and views of the Securities and Exchange Commission as
in effect or expressed on the date hereof. For purposes of this Agreement, each
consolidated entity referred to in the foregoing sentence shall be a
"Consolidated Entity" and collectively, the "Consolidated Entities".
------------------- ---------------------
17. Form S-1. The Company's Registration Statement on Form S-1
--------
(333-26137) (the "Form S-1") and all documents filed as Exhibits thereto will,
--------
when declared effective by the Securities and Exchange Commission pursuant to
the Securities Act, conform in all material respects to the requirements of the
Securities
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<PAGE>
Act, and the rules and regulations thereunder, and will not contain any untrue
statement of a material fact or omit to state a material fact required to be
stated therein or necessary to make the statements therein not misleading.
8. Negative Covenants.
------------------
So long as the Investors hold in the aggregate at least 30% of the
aggregate number of shares of Class B Common Stock and Class C Common Stock
(together the "Class B&C Stock") then issued and outstanding collectively,
---------
neither the Company nor any Consolidated Entity will, at any time, without the
prior written consent of the Investors holding in the aggregate at least two-
thirds of the aggregate number of shares of the Class B & C Stock then issued
and outstanding (a "Supermajority") take any Restricted Action or permit any
Restricted Action to be taken; provided that such Supermajority shall include
-------- ----
the Bain Investors. The obligations under this Section 8 shall terminate on a
Qualified Public Offering.
9. Definitions.
-----------
1. Certain Defined Terms. As used in this Agreement, the following terms
---------------------
have the following definitions:
1. "Affiliate" shall mean, with respect to any Person, any other
---------
Person directly or indirectly controlling, controlled by or under common
control with such Person, including effective control by virtue of a
contractual relationship such as a management agreement or stockholder
transfer or designation or similar agreement. Notwithstanding the
foregoing, with respect to the definition of Restricted Action, no Investor
shall be deemed to be an Affiliate of the Company and no Person who is an
Affiliate of an Investor for reasons unrelated to the Company or any
Consolidated Entity shall be deemed to be an Affiliate of the Company.
2. "Affiliated Fund" shall mean any limited partnership or other
---------------
Person formed for the purpose of investing in other companies or businesses
and for which (a) any general partner of any Investor or any of its
Affiliates has the right to direct the voting of shares of corporations in
which such limited partnership or other Person invests or (b) any general
partner of an Investor or any of their respective Affiliates provides
management services.
3. "Employee Benefit Plan" shall mean any (a) nonqualified deferred
---------------------
compensation or retirement plan or arrangement, (b) qualified defined
contribution retirement plan or arrangement, (c) qualified defined benefit
retirement plan or arrangement or (d) "employee welfare benefit plan" (as
such term is defined in Section 3(1) of ERISA) or material fringe benefit
plan or program.
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<PAGE>
4. "GAAP" shall mean the generally accepted accounting
----
principles as in effect in the United States of America as of the Closing
Date.
5. "Knowledge" shall mean with respect to any Person if (a) such
---------
Person is actually aware of such fact or other matter; or (b) a reasonable
Person would be expected to discover or otherwise become aware of such fact
or other matter in the course of conducting a reasonable investigation.
The Company will be deemed to have "Knowledge" of a particular fact or
matter if any individual who is serving as a senior member of management of
the Company (or in any similar capacity) has Knowledge of such fact or
other matter.
6. "Indebtedness" shall mean all (i) indebtedness for borrowed
------------
money, (ii) obligations evidenced by notes, bonds, debentures or similar
instruments, (iii) for the deferred purchase price of assets or services
(other than trade payables and accruals therefor incurred in the ordinary
course of business), (iv) capitalized lease obligations, (v) letters of
credit, and (vi) in the nature of guarantees of the obligations described
in (i) through (v) above.
7. "Permitted Liens" shall mean such of the following as to
---------------
which no enforcement, collection, execution, levy or foreclosure proceeding
shall have been commenced: (a) liens for taxes, assessments and
governmental charges or levies to the extent required to be paid and for
which adequate reserves are reflected on the Financials; (b) liens imposed
by law, such as materialmen's mechanics', carriers', workmen's and
repairmen's liens and other similar liens arising in the ordinary course of
business securing obligations that (i) are not overdue and (ii) either
individuals or when aggregated with all other Permitted Liens outstanding
on any date of determination, do not materially affect the use or value of
the property to which they relate; (c) pledges or deposits to secure
obligations under workers' compensation laws or similar legislation or to
secure public or statutory obligations; (d) easements, rights of way and
other encumbrances on title to real property that do not render title to
the property encumbered thereby unmarketable or materially adversely affect
the use of such property for its present purposes; and (e) liens existing
on acquired physician practices approved by the Board of Directors in
accordance with the Restated Certificate, or if applicable, Section 8 of
this Agreement.
8. "Person" shall mean any individual, partnership, corporation,
------
association, trust, joint venture, unincorporated organization or other
entity.
9. "Qualified Public Offering" shall mean the closing of a
-------------------------
Public Offering with (i) the net proceeds of the sale of such Shares by the
Company
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<PAGE>
and any stockholder of the Company to equal or exceed $50,000,000 provided
that (A) the Investors shall have sold or shall be permitted to sell fifty
percent of the capital stock into which the Class B Common Stock and the
Class C Common Stock is convertible and (B) the net proceeds of the sale of
such shares or the net proceeds of the sale of such shares which would be
permitted to be sold in such offering by (1) the Capital Investors equal or
exceed seventy-five percent of the total amount invested in capital stock
of the Company by the Capital Investors up to $15,000,000, (2) the net
proceeds of the sale thereof by the Bain Investors shall equal or exceed
seventy-five percent of the total amount invested in capital stock of the
Company by the Bain Capital Investors up to $15,000,000 and (3) the Goldman
Investors equal or exceed seventy-five percent of the total amount invested
in capital stock of the Company by the Goldman Investors up to $15,000,000
and (ii) subject to a firm commitment underwriting conducted by a
nationally recognized underwriter acceptable to a majority of the Class B
Directors and Class C Directors, voting together as a single class.
10. "Restricted Action" shall mean any of the following:
-----------------
(a) A merger, consolidation amalgamation, liquidation, winding
up, or dissolution of the Company or any Consolidated Entity thereof with
any Person other than a merger or consolidation of a Subsidiary with the
Company or any other Subsidiary of the Company provided that, in the case
of any such merger or consolidation, the person formed by such merger or
consolidation shall be a wholly-owned Subsidiary of the Company.
(b) A sale, lease, transfer or other disposition of or grant or
any option or other right to purchase, lease or otherwise acquire all or a
material part of the assets of the Company, the Subsidiaries or any
Affiliates (other than pursuant to an agreement in effect on the Closing
Date); or
(c) Any agreement, contract, commitment or understanding with
any Person for the acquisition or affiliation entered into by the Company,
or any of its Consolidated Entities of any business or assets including,
without limitation any management agreement, and the terms of any
securities or other consideration to be issued in connection therein or
acquired any business or assets other than acquisitions not in excess of
$1,000,000 in any 12 month period.
(d) Any dividends, distributions, repurchase, redemption,
retirement, defeasance or similar transaction for capital stock or any
warrants, rights or options to acquire such capital stock, now or hereafter
outstanding, return any capital to its stockholders as such, make any
distribution of assets, capital
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<PAGE>
stock, warrants, rights, options, obligations or securities to its
stockholders as such, or issue or sell any capital stock or any warrants,
rights or options to acquire such capital stock, or permit the Company, its
Subsidiaries or any Consolidated Entity to do any of the foregoing.
(e) Any material change in the nature of its business of this
Company and its Consolidated Entities, taken as a whole, as carried on at
the date hereof and reasonable extensions thereof.
(f) Any amendment or restatement of organizational documents
(including the Certificate of Incorporation) or Bylaws of the Company or
any Consolidated Entity.
(g) Retain or dismiss the services of the Chief Operating
Officer or the Chief Financial Officer of the Company; or grant any
increase in compensation to its employees as a class, or to its officers or
directors, except in accordance with past practice and as required by law;
effect any change in retirement benefits to any class of employees or
officers other than in connection with affiliations with physician practice
groups approved by the Class B Directors and the Class C Directors, except
as may be required by law, or enter into any benefit plans or similar
agreements or arrangements;
(h) Adopt or approve an annual operating budget for the Company
and the Consolidated Entities, including the budget for capital
expenditures;
(i) Any transaction between the Company and its Consolidated
Entities between an officer, director, or holder of more than 5% of the
outstanding capital stock of the Corporation which is not in all material
respects upon terms consistent with an arms-length transaction between
unaffiliated parties.
(j) The commencement, management, defense, prosecution or
settlement of any material action, suit, investigation or proceeding before
any court or governmental department, commission, board, agency or
instrumentality, domestic or foreign, affecting the Company, the
Subsidiaries or any Affiliate thereof other than any such action, suit or
proceeding initiated and instituted by the holders of Class B Common Stock
or the holders of Class C Common Stock against the Company.
11. "Subsidiary" shall mean any corporation with respect to
----------
which a specified Person (or a Subsidiary thereof) owns a majority of the
capital stock or has the power to vote or direct the voting of sufficient
securities to elect a majority of the directors.
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<PAGE>
12. "Taxes" shall mean all federal, state, county, local,
-----
foreign and other taxes (including, without limitation, income, gross
income, profits, premium, estimated, excise, sales, services, use,
occupancy, gross receipts, franchise, license, ad valorem, severance,
capital levy, production, stamp, transfer, withholding, employment,
unemployment, social security, payroll and property taxes, customs duties
and other governmental charges and assessments), together with any
interest, additions to tax or penalties.
13. "Tax Returns" shall mean all returns, amended returns,
-----------
declarations, reports, estimates, information returns and statements
required or permitted to be filed in respect of Taxes.
2. Certain Matters of Construction. In addition to the definitions
-------------------------------
referred to as set forth in Section 9.1:
(a) The words "hereof", "herein", "hereunder" and words of
similar import shall refer to this Agreement as a whole and not to any
particular Section or provision of this Agreement, and reference to a
particular Section of this Agreement shall include all subsections thereof;
(b) Definitions shall be equally applicable to both the singular
and plural forms of the terms defined; and
(c) The masculine, feminine and neuter genders shall each
include the other.
3. Cross Reference Table. The following terms defined elsewhere in this
---------------------
Agreement in the Sections set forth below shall have the respective meanings
therein defined:
<TABLE>
<CAPTION>
Term Definition
---- ----------
<S> <C>
"Additional Closing" Section 1.3
"Agreement" Preamble
"Bain Investor" Preamble
"Capital" Preamble
"Capital Investors" Preamble
"CERCLA" Section 2.21
"Class B Common Stock" Section 1.1
"Class B-1 Common Stock" Section 1.1
"Class B-2 Common Stock" Section 1.1
"Class B & C Common Stock" Section 8
</TABLE>
-42-
<PAGE>
<TABLE>
<S> <C>
"Class B Shares" Section 1.2(a)
"Class B Warrants" Section 1.2
"Class C Common Stock" Section 1.1
"Class C Shares" Section 1.2(b)
"Class C Warrants" Section 1.2(b)
"Closings" Section 1.3
"Code" Section 2.22(c)
"Common Stock" Section 2.3(a)
"Company" Preamble
"Company Financials" Section 2.5.1
"Consolidated Entity" Section 7.6
"Consolidated Entities" Section 2.5.3
"Contracts" Section 2.10
"Conversion Shares" Section 2.3(a)
"ERISA" Section 2.22(a)
"ERISA Affiliate" Section 2.22(d)
"Financials" Section 2.5.1
"First Closing" Section 1.3
"Flagship" Section 2.1
"Flagship Agreement" Section 2.3(c)
"Flagship Designation Agreement" Section 2.3(c)
"Flagship Services Agreement" Section 2.3(c)
"Future Securities" Section 7.13.2
"Future Securities Exercise Period" Section 7.13.2
"Goldman Investors" Preamble
"HSR Act" Section 6.4
"Installments" Section 1.3
"Investors" Preamble
"MCP" Section 2.1
"MCP Agreements" Section 2.3(b)
"MCP Designation Agreement" Section 2.3(b)
"MCP Services Agreement" Section 2.3(b)
"Notice of Purchase" Section 7.13.3
"1996 Financials" Section 2.5.1
"1997 Financials" Section 2.5.1
"Original Agreement" Preamble
"Permits" Section 2.26(a)
"Proposal" Section 7.13.2
"Qualified Plans" Section 2.22(c)
"RCRA" Section 2.21(a)
"Refused Future Securities" Section 7.13.4
"Related Party" Section 2.23
"Representatives" Section 7.9
"Reserved Class B Shares" Section 1.2(a)
</TABLE>
-43-
<PAGE>
<TABLE>
<S> <C>
"Reserved Class C Shares" Section 1.2(b)
"Restated Certificate" Section 1.1
"Second Closing" Section 1.3(b)
"Securities" Section 3.1(b)
"Securities Act" Section 2.3(a)
"Shares" Section 1.2(b)
"Sole Stockholder" Section 2.3(b)
"Stockholders Agreement" Section 2.2
"Supermajority" Section 8
"Transaction Agreements" Section 2.2
"Warrants" Section 1.2(b)
</TABLE>
10. Miscellaneous.
-------------
1. Survival of Covenants; Assignability of Rights. All covenants,
----------------------------------------------
agreements, representations and warranties of the Company made herein and
in the certificates, lists, exhibits, schedules or other written
information delivered or furnished to any Investor in connection herewith
shall be deemed material and to have been relied upon by such Investor, and
shall survive the delivery of the Shares and the Warrants, and shall bind
the Company's successors and assigns, whether so expressed or not, and,
except as provided otherwise in this Agreement, all such covenants,
agreements, representations and warranties shall inure to the benefit of
the Investors' successors and assigns and to transferees of the Shares and
the Warrants, whether so expressed or not.
2. Incorporation by Reference. All exhibits and schedules appended
--------------------------
to this Agreement are herein incorporated by reference and made a part
hereof.
3. Parties in Interest. All covenants, agreements, representations,
-------------------
warranties and undertakings in this Agreement made by and on behalf of any
of the parties hereto shall bind and inure to the benefit of the respective
successors and assigns of the parties hereto whether so expressed or not.
4. Amendments and Waivers. Except as set forth in this Agreement,
----------------------
changes in or additions to this Agreement may be made, or compliance with
any term, covenant, agreement, condition or provision set forth herein may
be omitted or waived (either generally or in a particular instance and
either retroactively or prospectively), or representatives to act on behalf
of the holders of all of the Shares may be designated, upon the written
consent of the Company and a majority of the voting power of the Shares.
5. Governing Law. This Agreement shall be deemed a contract made
-------------
under the laws of The Commonwealth of Massachusetts and, together with the
rights of obligations of the parties hereunder, shall be construed under
and governed by the
-44-
<PAGE>
laws of such Commonwealth.
6. Effect of Investigations. No investigation by the parties hereto
------------------------
made heretofore or hereafter, whether pursuant to this Agreement or
otherwise, shall affect the representations and warranties of the parties
which are contained herein and each such representation and warranty shall
survive such investigation.
7. Notices. All notices, requests, consents and demands shall be in
-------
writing and shall be personally delivered, mailed, postage prepaid,
telecopied or telegraphed, to the Company at:
Physicians Quality Care, Inc.
950 Winter Street
Suite 2410
Waltham, Massachusetts 02154
Attn: Jerilyn Asher
with a copy to:
David Phelan, Esq.
Hale and Dorr
60 State Street
Boston, Massachusetts 02109
or to each Bain Investor at its address set out on Exhibit A-1 hereto
with a copy to:
Lauren I. Norton, Esq.
Ropes & Gray
One International Place
Boston, Massachusetts 02110
or to the Capital Investors at:
ABS Capital Partners
One South Street
Baltimore, Maryland 21202
Attn: Timothy T. Weglicki
with a copy to:
Michael J. Silver, Esq.
Hogan & Hartson, L.L.P.
111 South Calvert Street
Baltimore, Maryland 21202
-45-
<PAGE>
or to the Goldman Investors at:
GS Capital Partners
85 Broad Street
New York, New York 10004
Attn: Carla Skodinski
with a copy to:
Stuart Z. Katz, Esq.
Fried, Frank, Harris, Shriver & Jacobson
One New York Plaza
New York, New York 10004-1980
or such other address as may be furnished in writing to the other parties
hereto. All such notices, requests, demands and other communication shall,
when mailed (registered or certified mail, return receipt requested,
postage prepaid), personally delivered, or telegraphed, be effective four
days after deposit in the mails, when personally delivered, or when
delivered to the telegraph company, respectively, addressed as aforesaid,
unless otherwise provided herein and, when telecopied, shall be effective
upon actual receipt.
8. Effect of Headings. The section and paragraph headings herein are
------------------
for convenience only and shall not affect the construction hereof.
9. Entire Agreement. This Agreement and the Exhibits and Schedules
----------------
hereto together with the Stockholders Agreement and the Transaction
Agreements constitute the entire agreement among the Company and the
Investors with respect to the subject matter hereof. This Agreement, the
Stockholders Agreement and such Transactions Agreements supersede all prior
agreements between the parties with respect to the shares purchased
hereunder and the subject matter hereof.
10. Severability. The invalidity or unenforceability of any
------------
provision hereof shall in no way affect the validity or enforceability of
any other provision.
11. Counterparts. This Agreement may be executed in counterparts,
------------
all of which together shall constitute one and the same instrument.
[The rest of this page has been intentionally left blank.]
-46-
<PAGE>
IN WITNESS WHEREOF, each of the undersigned has duly executed this
Agreement (or caused this Agreement to be executed on its behalf by its
officer or representative thereunto duly authorized) under seal as of the
date first above written.
PHYSICIANS QUALITY CARE, INC.
By
-------------------------------
Title:
-47-
<PAGE>
BAIN CAPITAL FUND V, L.P.
By Bain Capital Partners V, L.P., a
Delaware limited partnership,
its general partner
By Bain Capital Investors V, Inc., its
general partner
By
-------------------------------
Title: Managing Director
BAIN CAPITAL FUND V-B, L.P.
By Bain Capital Partners V, L.P., a
Delaware limited partnership,
its general partner
By Bain Capital Investors V, Inc., its
general partner
By
------------------------------
Title: Managing Director
BCIP ASSOCIATES
By
----------------------------------
Title: a general partner
BCIP TRUST ASSOCIATES, L.P.
By
----------------------------------
Title: a general partner
-48-
<PAGE>
ABS CAPITAL PARTNERS II, L.P.
By
----------------------------------
ABS Partners II, LLC,
its general partner
By
----------------------------------
Timothy T. Weglicki, Managing Member
------------------------------------
Russell Ray
115 Longwood Road
Baltimore, MD 21210
------------------------------------
Steve Schuh
729 Skywater Road
Gibson Island, MD 21056
-------------------------------------
Stanley Blaylock
1505 Heather Hill Lane
Hunt Valley, MD 21030
-------------------------------------
Dick Franyo
925 Drohomer Place
Baltimore, MD 21210
-------------------------------------
Christopher Camut
4405 Bedford Place
Baltimore, MD 21218
-49-
<PAGE>
-------------------------------------
Terry Hyman
3131 O Street, N.W.
Washington, D.C. 20007
-------------------------------------
Brent Milner
5505 St. Alban's Way
Baltimore, MD 21212
-------------------------------------
Kathy Coffey
1800 Broadway, #301
San Francisco, CA 94109
-------------------------------------
Mark Klausner
7105 Charles Spring Way
Towson, MD 21204
-------------------------------------
Michael Singer
3048 Jackson Street
San Francisco, CA 94111
-------------------------------------
Stuart Smith
7834 Ellenham Road
Ruxton, MD 21204
-------------------------------------
Gary Lessing
10 Queensdale Place
London, England W11 4SQ
-50-
<PAGE>
GS CAPITAL PARTNERS II, L.P.
By: GS Advisors, L.P.
Its General Partner
By: GS Advisors Inc.
Its General Partner
By:
----------------------------------
Title:
GOLDMAN, SACHS & CO. VERWALTUNGS GMBH
By:
----------------------------------
Managing Director
By:
----------------------------------
Managing Director or
Registered Agent
GS CAPITAL PARTNERS II OFFSHORE, L.P.
By: GS Advisors II (Cayman), L.P.
Its General Partner
By: GS Advisors II, Inc.
Its General Partner
By:
-------------------------------------
Title:
-51-
<PAGE>
THE GOLDMAN SACHS GROUP, L.P.
By: The Goldman Sachs Corporation
Its General Partner
By:
-------------------------------
Title: Executive Vice President
-52-
<PAGE>
List of Exhibits and Schedules
------------------------------
<TABLE>
<CAPTION>
Exhibits
- --------
<S> <C>
A-1. List of Holders of Class B Shares and Warrants
A-2. List of Holders of Class C Shares and Warrants
B. Form of the Company's Restated Certificate of Incorporation
C-1. Form of Class B Warrant
C-2. Form of Class C Warrant
D. Form of Amendment No. 2 to Stockholders Agreement
E. Form of Opinion of Company Counsel
F. Form of the Company's Amended By-Laws
G. Form of Capital Certificate
<CAPTION>
Schedules
- ---------
<S> <C>
2.3. Outstanding Warrants and Options and Other Rights
2.4. Subsidiaries and Affiliates
2.5. Financial Statements
2.6 Undisclosed Liabilities
2.7 Absence of Material Changes
2.8. Properties
2.10. Contracts
2.12. Intellectual Property
2.18. Brokerage Commissions
2.20. Insurance
2.22. Employee Benefit Plans
2.23. Transactions With Affiliates
2.26 Compliance with All Laws
</TABLE>
-53-
<PAGE>
Exhibit 4.4
EXECUTION COPY
--------------
WAIVER OF RIGHTS AND AMENDMENT
UNDER STOCKHOLDERS AGREEMENT
This Waiver of Rights and Amendment under Stockholders Agreement
("Waiver of Rights") is made and entered into as of December 11, 1996, by and
among Physicians Quality Care, Inc., a Delaware corporation (the "Company"), and
each of the undersigned parties (the "Majority Stockholders"). Capitalized
terms not defined herein shall have the meanings set forth in the Stockholders
Agreement (as hereinafter defined).
WHEREAS, the Company and the Majority Stockholders, along with certain
other holders of the Company's securities, are parties to a Stockholders
Agreement dated as of August 30, 1996, as amended and in effect from time to
time (the "Stockholders Agreement");
WHEREAS, the Majority Stockholders collectively hold a majority of all
Shares currently outstanding and subject to the Stockholders Agreement and
collectively hold a majority of the Non-Bain Investor Shares currently
outstanding and subject to the Stockholders Agreement;
WHEREAS, each of the physicians listed on Exhibit A (the "Non-Retiree
---------
Flagship Physicians") are becoming parties to the Stockholders Agreement for all
purposes by executing an Instrument of Joinder to Stockholders Agreement dated
as of even date herewith; and
WHEREAS, pursuant to the provisions of Section 12.2 of the
Stockholders Agreement, the Company and the Majority Stockholders desire to
waive certain of the Company's rights under the Stockholders Agreement as set
forth below.
NOW, THEREFORE, the parties to this Waiver of Rights agree as follows:
1. As applied to each of the Non-Retiree Flagship Physicians, Section
5.1.1. of the Stockholders Agreement is hereby amended to read in its
entirety as follows:
5.1.1. Termination by the Company Without Cause. If such
----------------------------------------
termination is the result of termination of such holder's
employment by the Company, its Subsidiaries or any Affiliate
thereof without Cause or as a result of the death or Disability
(as defined in such holder's written employment agreement with the
Company, its Subsidiary or its Affiliate, as applicable (the
"Employment Agreement")) of such holder, the Company (or its
designee), upon written notice delivered within 90 days of
termination, may purchase all or any portion of the Shares,
Warrants and Options then held by the applicable
<PAGE>
Call Stockholder Group at a price equal to the Fair Market Value
of such securities; provided, however, that upon termination of
-------- -------
the employment by the Company, its Subsidiary or any Affiliate
thereof of a holder of Physician Shares as a result of a
Disability of such Physician Stockholder, the Company shall have
no right to purchase all or any portion of the Shares, Warrants
and Options then held by the applicable Call Stockholder Group for
such period of time, if any, as such Physician Stockholder is in
all respects a Qualified Holder with a Total Disability, as
hereafter defined.
5.1.1.1. It shall be the responsibility of such Physician
Stockholder or his/her legal guardian, if any, to notify the
Company in writing within 30 days of termination of employment as
a result of Total Disability that such Physician Stockholder
should be considered a Qualified Holder with a Total Disability
and the failure of the Physician Stockholder or his/her legal
guardian to do so in a timely manner shall be determinative of the
matter. Following said notice, the Physician Stockholder (in the
case of seeking such qualification pursuant to Section
5.1.1.3(d)(i), upon the Company's request, or in the case of
seeking such qualification pursuant to Section 5.1.1.3(d)(ii),
upon the request of the NMA Board (as defined below in Section
5.1.1.3(d)(ii)) shall submit to the examination and testing of up
to three physicians selected by the Company or the NMA Board,
respectively. In order for the Physician Stockholder to be
medically certified as having a Total Disability hereunder
pursuant to Section 5.1.1.3(d)(i), each of the physicians so
selected must conclude that the Physician Stockholder has a Total
Disability in accordance with Section 5.1.1.3(d)(i) hereof. In the
case of Physician Stockholders who qualify as Totally Disabled
hereunder pursuant to Section 5.1.1.3(d)(i), the Company may
require the Physician Stockholder to be recertified quarterly
thereafter by up to three physicians and the Physician Stockholder
shall be recertified only by unanimous determination of the
physicians selected by the Company. In the case of Physician
Stockholders who qualify as Totally Disabled hereunder pursuant to
Section 5.1.1.3(d)(ii), the NMA Board may require the Physician
Stockholder to be examined by a physician from time to time as the
NMA Board determines appropriate but in no event more frequently
than annually. If the Physician Stockholder shall fail to submit
to any medical examination or testing requested by the Company or
the NMA Board hereunder, the Physician Stockholder shall cease to
be a Qualified Holder with a Total Disability.
5.1.1.2. A Physician Stockholder shall notify the Company in
writing immediately if the Physician Stockholder ceases, in any
respect, to be a Qualified Holder with a Total Disability in
accordance with Section 5.1.1.3(c) hereof. Any Physician
Stockholder who is determined to be a Qualified Holder with a
Total Disability hereunder shall no longer qualify as such in the
event that the Physician Stockholder ceases to meet in full all of
the criteria set forth
-2-
<PAGE>
in Section 5.1.1.3(c) hereof. The date on which the Company
determines, and provides notice of such determination to the
Physician Stockholder, that such Physician Stockholder ceases to
be a Qualified Holder with a Total Disability shall be the
"Disqualification Date". In the event a Physician Stockholder
ceases to be certified or recertified as having a Total Disability
or otherwise ceases to be a Qualified Holder with a Total
Disability, the Physician Stockholder shall be treated for
purposes of this Agreement as being terminated for Cause as of the
Disqualification Date.
5.1.1.3. Definitions. For purposes of this Agreement, the
-----------
following definitions shall apply:
(a) "Basic Activities of Daily Living" shall mean
bathing, dressing, toileting, continence, eating and the ability
to move from a sitting to a lying position and vice versa.
(b) "Cognitive Impairment" shall mean confusion or
disorientation resulting from a deterioration or loss of
intellectual capacity as a result of Alzheimer's disease, senility
or other irreversible dementia, which deterioration or loss is
capable of being diagnosed, and is diagnosed, by standardized
testing or instruments.
(c) A "Qualified Holder with a Total Disability"
shall mean a Physician Stockholder who (i) is Totally Disabled in
accordance with Section 5.1.1.3 (d) hereof; (ii) is in compliance
with and intends to remain in compliance with all of his/her
obligations under the Employment Agreement (including without
limitation the restrictive covenants), excluding only the
Physician Stockholder's obligation to provide services thereunder;
and (iii) is not working in any capacity, with or without
compensation, whether as an employee, partner, independent
contractor or otherwise.
(d) A Physician Stockholder shall be certified as
having a "Total Disability" by a physician selected by the Company
hereunder only if (i) the Physician Stockholder (A) is unable to
perform three or more of the Basic Activities of Daily Living
without substantial human physical assistance and/or constant
supervision or is suffering from a Cognitive Impairment and (B) is
unable to work in any capacity, or (ii) in the event that (after
having been examined in accordance with the requirements of and
followed the procedures set forth in Section 5.1.1.1 above) the
Physician Stockholder fails to be certified as having a Total
Disability pursuant to Section 5.1.1.3(d)(i), (A) the Physician
Stockholder appeals to the National Medical Advisory Board of the
Company (the "NMA Board"), and the NMA Board (by vote of the
majority of all its members) certifies in its sole discretion that
the Physician Stockholder is permanently disabled and is not able
to contribute meaningfully
-3-
<PAGE>
as a member of the medical profession, and that such determination
will not unfairly and adversely affect the other physician
employees of the Company or its Subsidiaries or Affiliates and (B)
the NMA Board (by vote of the majority of all its members) has not
subsequently revoked such certification.
2. MISCELLANEOUS.
2.1. Authority; Effect. Each party hereto represents and warrants to
-----------------
and agrees with each other party that the execution and delivery
of this Waiver of Rights and the consummation of the transactions
contemplated hereby have been duly authorized on behalf of such
party and do not violate any agreement or other instrument
applicable to such party or by which its assets are bound. Except
to the extent specifically amended hereby, the provisions of the
Stockholders Agreement shall remain unmodified and the provisions
of the Stockholders Agreement are hereby confirmed as being in
full force and effect. This Waiver of Rights does not, and shall
not be construed to, give rise to the creation of a partnership
among any of the parties hereto, or to constitute any of such
parties members of a joint venture or other association.
2.2. Notices. Notices and other communications provided for in this
-------
Waiver of Rights shall be given as directed in Section 14.2 of the
Stockholders Agreement.
2.3. Binding Effect, etc. This Waiver of Rights constitutes the
-------------------
entire agreement of the parties with respect to its subject
matter, supersedes all prior or contemporaneous oral or written
agreements or discussions with respect to such subject matter, and
shall be binding upon and inure to the benefit of the parties
hereto and their respective heirs, representatives, successors and
assigns.
2.4. Descriptive Headings. The descriptive headings of this Waiver
--------------------
of Rights are for convenience of reference only, are not to be
considered a part hereof and shall not be construed to define or
limit any of the terms or provisions hereof.
2.5. Counterparts. This Waiver of Rights may be executed in multiple
------------
counterparts, each of which shall be deemed an original, but all
of which taken together shall constitute one instrument.
2.6. Severability. If in any judicial proceedings a court shall
------------
refuse to enforce any provision of this Waiver of Rights, then
such unenforceable provision shall be deemed eliminated from this
Waiver of Rights for the purpose of such proceedings to the extent
necessary to permit the remaining provisions to be enforced. To
the full extent, however, that the provisions of any applicable
law may be waived, they are hereby waived to the end that this
Waiver of Rights
-4-
<PAGE>
be deemed to be valid and binding agreement enforceable in
accordance with its terms, and in the event that any provision
hereof shall be found to be invalid or unenforceable, such
provision shall be construed by limiting it so as to be valid and
enforceable to the maximum extent consistent with and possible
under applicable law.
2.7. Governing Law. Except to the extent that any provision of this
-------------
Waiver of Rights is contrary to any mandatory provision of the
General Corporation Law of the State of Delaware (in which case
such mandatory statutory provision shall apply), this Waiver of
Rights shall be governed by and construed in accordance with the
domestic substantive laws of The Commonwealth of Massachusetts
without giving effect to any choice or conflict of laws provision
or rule that would cause the application of the domestic
substantive laws of any other jurisdiction.
[Balance of this page intentionally left blank.]
-5-
<PAGE>
IN WITNESS WHEREOF, each of the undersigned has duly executed this
Waiver of Rights (or caused this Waiver of Rights to be executed on its behalf
by its officer or representative thereunto duly authorized) under seal as of the
date first above written.
THE COMPANY: Physicians Quality Care, Inc.
By:
-----------------------------------
Name: Jerilyn P. Asher
Title: Chief Executive Officer and President
MAJORITY STOCKHOLDERS: Bain Capital Fund V, L.P.
By Bain Capital Partners V, L.P., a
Delaware limited partnership,
its general partner
By Bain Capital Investors V, Inc., its
general partner
By
-----------------------------
Title: Managing Director
Bain Capital Fund V-B, L.P.
By Bain Capital Partners V, L.P., a
Delaware limited partnership,
its general partner
By Bain Capital Investors V, Inc., its
general partner
By
----------------------------------
Title: Managing Director
<PAGE>
BCIP Associates
By
------------------------------------
Title: a general partner
BCIP Trust Associates, L.P.
By
------------------------------------
Title: a general partner
--------------------------------------
Jerilyn P. Asher, as an individual
--------------------------------------
Jay Greenberg, as an individual
--------------------------------------
Arlan Fuller, Jr., M.D., as an individual
--------------------------------------
Thomas M. Zizic, M.D., as an individual
<PAGE>
Exhibit A -- Non-Retiree Flagship Physicians
- --------------------------------------------
Charles S. Angell, M.D.
John Aucott, M.D.
David C. Barnes, M.D.
Nancy K. Barnett, M.D.
Barbara L. Bean, M.D.
Marshall S. Bedine, M.D.
Richard Berg, M.D.
Peter C. Belitsos, M.D.
Lauren L. Bogue, M.D.
Joyce Burd, M.D.
Nicholas Capozzoli, M.D.
Michael R. Clemmens, M.D.
Enser W. Cole, III, M.D.
Alan M. Davick, M.D.
Timothy F. Doran, M.D.
Barbara A. Duffy, M.D.
Ira Fine, M.D.
Dwight N. Fortier, M.D.
Dana H. Frank, M.D.
Allen M. Friedman, M.D.
Neil Friedman, M.D.
Peter R. Graze, M.D.
Andre Gvozden, M.D.
Faith Hackett, M.D.
Dennis L. Headings, M.D.
Katherine S. Koch, M.D.
S. David Krimins, M.D.
Timothy L. Krohe, M.D.
Alan M. Lake, M.D.
Marshall A. Levine, M.D.
Samuel M. Libber, M.D.
Ann C. Massey, M.D.
Susan M. Molinaro, M.D.
Laura Mumford, M.D.
Mary M. Newman, M.D.
Alan Rosen, M.D.
Saul D. Roskes, M.D.
Michael Rudikoff, M.D.
Peter Schilder, M.D.
Jeffrey Schmidlein, M.D.
Kenneth C. Schuberth, M.D.
Eric J. Seifter, M.D.
Stuart Selonick, M.D.
Stanley P. Watkins, M.D.
Stanley R. Weimer, M.D.
Julia Wen, M.D.
Milan Wister, M.D.
Robert A. Wood, M.D.
<PAGE>
EXHIBIT 4.5
Execution Copy
AMENDMENT NO. 2 TO
STOCKHOLDERS AGREEMENT
This Amendment No. 2 to the Stockholders Agreement (the "Amendment")
is made and entered into as of June 23, 1997 by and among Physicians Quality
Care, Inc., a Delaware corporation (the "Company"), the Bain Initial Investors,
ABS Capital Partners II, L.P., a Delaware limited partnership, Russell Roy,
Steve Schuh, Stanley Blaylock, Dick Franyo, Christopher Camut, Terry Hyman,
Brent Milner, Kathy Coffey, Mark Klausner, Michael Singer, Stuart Smith and Gary
Lessing (collectively, the "Capital Investors"), GS Capital Partners II, L.P.,
Goldman, Sachs & Co. Verwaltungs GmbH, GS Capital Partners II Offshore, L.P. and
The Goldman Sachs Group, L.P. (collectively, the "Goldman Initial Investors")
and the Class A Common Stockholders listed on the signature page hereof ( the
"Class A Holders"). Capitalized terms not defined herein shall have the meanings
set forth in the Stockholders Agreement (as hereinafter defined).
WHEREAS, the Company, the Bain Initial Investors and the Non-Bain Majority
Stockholders along with certain other holders of the Company's Securities, are
parties to a Stockholders Agreement dated as of August 30, 1996, as amended on
December 31, 1996 and as amended and in effect from time to time (the
"Stockholders Agreement");
WHEREAS, the undersigned Stockholders of the Company collectively hold a
majority of all Shares currently outstanding;
WHEREAS, the Class A Holders collectively hold a majority of Non-Bain
Investor Shares currently outstanding and subject to the Stockholders Agreement;
WHEREAS, the Capital Investors, the Goldman Initial Investors and the
Bain Investors are purchasing shares of Class C Common Stock of the Company
pursuant to an Amended and Restated Class B and Class C Common Stock and Warrant
Purchase Agreement dated the date hereof and as a condition thereto have
required certain amendments to the Stockholders Agreement;
NOW, THEREFORE, the parties agree as follows:
1. Section 1 of the Stockholders Agreement is hereby amended and restated
in its entirety as follows:
"1. DEFINITIONS. For purposes of this Agreement:
<PAGE>
1. Certain Definitions. The following terms shall have the following
-------------------
meanings:
1. "Affiliate" shall mean, with respect to any specified Person, any
---------
Person that, directly or indirectly, through one or more intermediaries,
controls, is controlled by or is under common control with, the Person
specified including effective control by virtue of a contractual
relationship such as a management agreement or a stockholder transfer or
designation or similar agreement other than a management or similar
agreement which does not, alone or together with related agreements, result
in control of such Person.
2. "Affiliated Fund" shall mean any limited partnership or other
---------------
Person formed for the purpose of investing in other companies or businesses
and for which (a) any general partner of any Investor or any of its
Affiliates has the right to direct the voting of shares of corporations in
which such limited partnership or other Person invests or (b) any general
partner of an Investor or an Investor or any of their respective Affiliates
provides management services.
3. "Bain Investor" shall mean (i) any Bain Initial Investor and (ii)
-------------
any Affiliated Fund of a Bain Investor which, from time to time, acquires
Shares or Warrants and becomes party to this Agreement by executing and
delivering to the Company an instrument in form satisfactory to the Company
pursuant to which such stockholder agrees to be bound by the terms of this
Agreement to the same extent as a Bain Initial Investor.
4. "Board" shall mean the Board of Directors of the Company.
-----
5. "Capital Investor" shall mean (i) ABS Capital Partners II, L.P.,
----------------
a Delaware limited partnership, Russell Roy, Steve Schuh, Stanley Blaylock,
Dick Franyo, Christopher Camut, Terry Hyman, Brent Milner, Kathy Coffey,
Mark Klausner, Michael Singer, Stuart Smith and Gary Lessing and (ii) any
Affiliated Fund of a Capital Investor which, from time to time, acquires
Shares or Warrants and becomes party to this Agreement by executing and
delivering to the Company an instrument in form satisfactory to the Company
pursuant to which such stockholder agrees to be bound by the terms of this
Agreement to the same extent as the Capital Investor.
6. "Cause" shall mean, (a) in the context of termination of the
-----
employment of any Management Stockholders, any of the following events or
conditions: (i) such person's significant failure to perform (other than
by reason of disability) his or her duties and responsibilities to the
Company and
-2-
<PAGE>
its Affiliates which failure causes material injury to the
Company and is not cured within fourteen (14) days after written notice by
the Company to such person, (ii) any act of fraud, embezzlement or other
material dishonesty, (iii) conviction of, or plea of nolo contendere to,
any felony or any other crime involving fraud, dishonesty or moral
turpitude, or (iv) conduct which causes criminal or material civil
liabilities to the Company, its Subsidiaries or Affiliates thereof; and (b)
shall mean, in the context of a Physician, any of the following events or
conditions: (i) fraud or dishonesty with respect to the Company, its
Affiliates or their employees, patients or visitors; (ii) suspension or
termination from Medicare, Medicaid or any third-party reimbursement
program, for cause other than by reason of the fact of employment by the
Company or its Affiliates; (iii) ceases to be licensed to practice medicine
without restriction under the laws of any state in which the Physician is
licensed; (iv) ceases to maintain a current and valid Federal Drug
Enforcement Agency license; or (v) conviction of, or plea of nolo
contendere to, any felony or any other crime involving fraud, dishonesty or
moral turpitude, (vi) conduct causes criminal or material civil liabilities
to the Company, its Subsidiaries or Affiliates thereof or (vii) breach of
noncompetition agreement with the Company or any of its Subsidiaries or
Affiliates thereof.
7. "Class A Director" shall have the meaning set forth in the
----------------
Company's Restated Certificate of Incorporation.
8. "Class C Common" shall mean the Class C Common Stock, $.01 par
--------------
value per share of the Company.
9. "Common Stock" shall mean the Class A Common, the Class B Common
------------
and the Class C Common of the Company.
10. "Common Stock Director" shall have the meaning set forth in the
---------------------
Company's Restated Certificate of Incorporation.
11. "Cost" shall mean, in the context of the Cost of securities
----
subject to the provisions of Section 5, (i) in the case of Shares, the
amount (in the form of subscription price or exercise price or otherwise)
paid to the Company upon issuance of such Shares and (ii) in the case of
Warrants or Options, an amount equal to the value of the consideration paid
therefor as determined by the Board; in each case adjusted appropriately to
take account of any stock splits, stock dividends, conversions or
consolidations of stock or substantially similar reorganizations of the
Company's capital stock.
-3-
<PAGE>
12. "Effective Time" shall mean August 30, 1996.
--------------
13. "Exchange Act" shall mean the Securities Exchange Act of 1934, as
------------
amended.
14. "Executive" shall mean Jerilyn Asher or Jay Greenberg.
---------
15. "Fair Market Value" shall mean, as of any date, the fair value of
-----------------
any Share as of the applicable date, as determined pursuant to Section 5.5.
16. "Goldman Investors" shall mean (i) the Goldman Initial Investors
-----------------
and (ii) any Affiliated Fund of a Goldman Investor which, from time to
time, acquires Shares or Warrants and becomes party to this Agreement by
executing and delivering to the Company an instrument in form satisfactory
to the Company pursuant to which such stockholder agrees to be bound by the
terms of this Agreement to the same extent as the Goldman Investors.
17. "Investors" shall mean the Bain Investors, the Capital Investors
---------
and the Goldman Investors.
18. "Investor Initial Shares" shall mean with respect to each
-----------------------
Investor all Shares originally issued to such Investor.
19. "Investor Majority Holders" shall mean, as of any date, the
-------------------------
holders of a majority of the Investor Shares outstanding on such date.
20. "Investor Shares" shall mean all Shares issued to (or issued upon
---------------
conversion of or otherwise with respect to Shares, Warrants or Options
issued to) or held by the Investors whenever issued.
21. "Majority Stockholders" shall mean, as of any date, the holders
---------------------
of a majority of the Shares outstanding on such date.
22. "Management Majority Holders" shall mean, as of any date, the
---------------------------
holders of a majority of the Management Shares outstanding on such date.
23. "Management Shares" shall mean all Shares issued to (or issued
-----------------
upon conversion of or otherwise with respect to Shares issued to) or held
by the Management Stockholders, whenever issued, including without
limitation all Shares issued pursuant to the exercise of any Warrants or
Options, whenever issued; provided, however, that for purposes of this
Agreement Management Shares shall not include Shares issued upon exercise
of Options
-4-
<PAGE>
(i) outstanding on the Effective Time (ii) which are exercisable
as of the Effective Time or on or prior to December 31, 1997, (iii) which
Shares shall not exceed 303,057 in the aggregate and (iv) are held by such
Management Stockholders listed on Schedule A hereto in the amounts
specified therein.
24. "Management Stockholder" shall mean any officer or employee of
----------------------
the Company or any of its subsidiaries who, from time to time, acquires
Shares or Options and becomes party to this Agreement by executing and
delivering to the Company an instrument in form satisfactory to the Company
and the Investors pursuant to which such stockholder agrees to be bound by
the terms of this Agreement applicable to Management Stockholders.
25. "Members of the Immediate Family" shall mean, with respect to any
-------------------------------
individual, each spouse, parent, brother, sister or child of such
individual, each spouse of any such Person, each child of any of the
aforementioned Persons, each trust created solely for the benefit of one or
more of the aforementioned Persons and each custodian or guardian of any
property of one or more of the aforementioned Persons in his capacity as
such custodian or guardian.
26. "Non-Investor Options" shall mean all Options held by any
--------------------
Stockholder other than Options held by Investors.
27. "Non-Investor Shares" shall mean all Shares other than Investor
-------------------
Shares, whenever issued.
28. "Non-Investor Warrants" shall mean all Warrants held by
---------------------
Stockholders other than Warrants held by Investors.
29. "Options" shall mean any options to subscribe for, purchase or
-------
otherwise acquire Shares, including, without limitation, any and all
options issued pursuant to the Company's Equity Incentive Plan or any
similar plan.
30. "Permitted Transferee" shall mean as to each Management Share and
--------------------
Physician Share, a transferee of such Management Share or Physician Share
in compliance with Section 4.1 or 4.2.
31. "Person" shall mean any individual, partnership, corporation,
------
company, association, trust, joint venture, unincorporated organization or
other entity, or any government, governmental department or agency or
political subdivision thereof.
32. "Physician Shares" shall mean Shares, Warrants or Options
----------------
-5-
<PAGE>
issued pursuant to the acquisition by an Affiliate of the Company of group
practices of certain physicians which are held by Persons who become
parties to this Agreement by executing and delivering to the Company an
instrument in form satisfactory to the Company and the Investors pursuant
to which such stockholder agrees to be bound by the terms of this Agreement
applicable to Physician Stockholders.
33. "Prime Rate" shall mean the rate of interest as announced from
----------
time to time by Fleet Bank, at its principal office in Boston,
Massachusetts as its prime lending rate, the Prime Rate to change when and
if such prime lending rate changes.
34. "Public Event" shall mean any transaction or other event
------------
(including, without limitation, a merger with a public company) after or in
connection with which shares of common stock of the Company or any
successor are registered under the Securities Act or listed on a "national
securities exchange" as defined in the Exchange Act or the subject of price
quotation through the National Association of Securities Dealers' Automated
Quotation System.
35. "Public Offering" shall mean the closing of an offering of Shares
---------------
registered under the Securities Act of Shares of the Company.
36. "Qualified Public Offering" shall mean the closing of a Public
-------------------------
Offering with (i) the net proceeds of the sale of such Shares by the
Company and any stockholder of the Company to equal or exceed $50,000,000
provided that the Investors shall have sold or shall be permitted to sell
fifty percent (50%) of the Shares then held by the Investors and the net
proceeds of the sale thereof to or the net proceeds of the sale thereof
which would be permitted to be sold by the (A) Capital Investor shall equal
or exceed seventy-five percent of the total amount invested in capital
stock of the Company by the Capital Investors up to $15,000,000, (B) the
net proceeds of the sale thereof to the Bain Investors shall equal or
exceed seventy-five percent of the total amount invested in capital stock
of the Company by the Bain Investors up to $15,000,000 and (C) the net
proceeds of the sale thereof to the Goldman Investors shall equal or exceed
seventy-five percent of the total amount invested in capital stock of the
Company by the Goldman Investors up to $15,000,000 and (ii) subject to a
firm commitment underwriting conducted by a nationally recognized
underwriter acceptable to a majority of the Class B Directors and Class C
Directors, voting together as a single class.
37. "Securities Act" shall mean the Securities Act of 1933, as
---------------
amended, and the rules and regulations of the Securities and Exchange
-6-
<PAGE>
Commission promulgated thereunder, all as from time to time in effect.
38. "Shares" shall mean shares of Common Stock of the Company.
------
39. "Transfer" shall mean to sell, assign, pledge, grant a
--------
participation interest in, encumber, or otherwise dispose of any Shares to
any other Person whether directly, indirectly, voluntarily, involuntarily,
by operation of law, pursuant to judicial process (including, without
limitation, divorce decree) or otherwise.
40. "Underlying Shares" shall mean the (i) Shares issuable upon
-----------------
exercise of any Option or Warrant, (ii) without duplication, any Shares
issued upon the conversion of such Shares referred to in clause (i) above
and (iii) any Shares issued or issuable with respect to the securities
referred to in clauses (i) or (ii) above by way of stock dividend or stock
split or in connection with a combination of shares, recapitalization,
merger, consolidation or other reorganization. For purposes of this
Agreement, any Person who holds Options or Warrants shall be deemed to be
the holder of the Underlying Shares obtainable upon exercise of the Options
or Warrants in connection with the transfer thereof or otherwise regardless
of any restriction or limitation on the exercise of the Options or
Warrants; provided, however, that such Underlying Shares shall not be
deemed to be outstanding for purposes of this Agreement until they are
actually issued. As to any particular Underlying Shares, such shares shall
cease to be Underlying Shares when they have been (a) registered under the
Securities Act and disposed of in accordance with the registration
statement covering them or (b) distributed to the public through a broker,
dealer or market maker pursuant to Rule 144 under the Securities Act or any
similar provision then in force as the requirements of which may be
modified by Rule 701 ("Rule 144"), in each case in compliance with any
applicable provisions of this Agreement.
41. "Warrants" shall mean any warrants to subscribe for, purchase or
--------
otherwise acquire Shares, including, without limitation, any and all
warrants issued pursuant to the Purchase Agreement."
2. Section 1.3 is amended to replace the term " Registrable Bain Investor
Securities" with "Registrable Investor Securities" wherever it appears.
3. Section 2 is amended and restated in its entirety as follows:
"TERMINATION OF PRIOR STOCKHOLDERS AGREEMENT AND REGISTRATION RIGHTS
AGREEMENT AND AGREEMENT OF FUTURE STOCKHOLDERS.
-7-
<PAGE>
2.1. Termination of Prior Agreements. By the
-------------------------------
execution and delivery hereof by certain parties hereto, the
Stockholders Voting Agreement dated June 30, 1995 among the
Company, Jerilyn Asher, Nancy Kelley and The Investor (as
defined therein), the Registration Rights Agreement dated as of
June 30, 1995 among the Company and the Purchasers named therein
and any agreement pursuant to which any Stockholder hereto is a
party which provides for the right to register any securities of
the Company under the Securities Act and related rights are
terminated and superseded by this Agreement.
2.2. Future Stockholders. The Company agrees not to issue
-------------------
any shares of capital stock (or any securities convertible,
exchangeable or exercisable into shares of capital stock) to any
person that is not a party to this Agreement, unless such Person
agrees to be subject to the provisions of this Agreement and
shall be bound by and subject to the terms hereof, unless the
Board, including a majority of the Class B and Class C
Directors, approves the exclusion of such Person from being a
party hereto."
4. Section 3.1 is amended to add the following at the end of the first
paragraph: "Each holder of Class C Common hereby agrees to cast all votes to
which such holder is entitled in respect of Class C Common now or hereinafter
owned by such holder, whether at any annual or special meeting of stockholders,
by written consent or otherwise to (i) elect as a Class C Director of the
Company any one individual who is designated to serve on the Board by the
Capital Investors and (ii) in the event that and from and after such time as the
Goldman Investors have purchased all of the Class C Common allocated to the
Goldman Investors as set forth in Exhibit A-2 to the Amended and Restated Class
B and Class C Common Stock and Warrant Purchase Agreement dated the date hereof,
elect as a Class C Director of the Company any one individual who is designated
to serve on the Board by the Goldman Investors. Unless and until the Goldman
Investors have purchased the shares contemplated in (ii) above, the additional
Class C Director shall remain unfilled and there shall be a vacancy in the
Board.
5. Sections 3.1, 3.5, 4, 5.4, 6, 7, (other than the last sentence under
Section 7.1.1(b)), and 9 are amended to replace the term "Bain Investors" with
"Investors" wherever it appears.
6. Sections 7, 8, 9 and 10 are amended to replace the term "Bain Investor
Shares" with "Investor Shares" wherever it appears.
-8-
<PAGE>
7. Section 3.4 is amended by deleting the first sentence thereof and
replacing it with the following: "The Company agrees to permit the Bain
Investors to have two representatives, the Capital Investor to have two
representatives and the Goldman Investor to have two representatives attend
meetings of the Board of Directors of the Company."
8. Section 3.5 is amended (i) to replace the term "Bain Investor Initial
Shares" with "Investor Initial Shares" and (ii) to replace "30%" with "15%
subject to adjustment for stock splits, reclassifications, and other similar
transactions."
9. Section 6 is amended (i) to replace the term "Proposed Bain Investor
Seller" with "Proposed Investor Seller" wherever it appears and (ii) replace the
term "Bain Investor Majority Holders" with "Investor Majority Holders" wherever
it appears.
10. Section 6.3 is amended and restated as follows:
"Further Assurances. Each Participating Seller shall, whether in his
------------------
capacity as a Participating Seller, stockholder, officer or director
of the Company, or otherwise, take or cause to be taken all such
actions as may be reasonably requested in order expeditiously to
consummate each Sale pursuant to Section 6.1. Each such Participating
Seller agrees (i) to vote all Shares with respect to which he holds
power to vote in favor of any proposal to stockholders in connection
with the Sale which is approved by the holders of a majority of the
outstanding Shares entitled to vote with respect to such matter and
(ii) to execute and deliver such agreements as may be necessary for
the Participating Seller to be subject to the same terms and
conditions with respect to the Sale as apply to the Proposed Investor
Seller, including without limitation, an agreement by such
Participating Seller to be subject to such purchase price escrow or
adjustment provisions as may apply to Stockholders generally and to be
liable in respect of any individual representations, warranties,
agreements and indemnities to be given by selling Stockholders in the
Sale."
11. Section 7 is amended to add in the first sentence after "Shares", in
each case, the term "or Warrants."
12. Section 8 is amended to replace the term "Initial Bain Investor" with
"Investor" wherever it appears.
-9-
<PAGE>
13. Section 9 is amended (i) to replace the term "Registrable Bain
Investor Securities" with "Registrable Investor Securities" wherever it appears
and to delete Section 9.1.3 in its entirety.
14. Section 9.1.1 is amended by deleting clause (ii) to the proviso and
inserting in lieu thereof: "(ii) the number of Shares offered for the account
of the Investors pursuant to Section 9.2.1 shall only be reduced in accordance
with the terms of Section 9.2.1."
15. Section 9.2.1 is amended to delete the term "twenty-five percent
(25%)" and replace it with "fifteen percent (15%)."
16. Section 9.2.1 is amended to add the following sentences to the end of
the first paragraph:
"Whenever the Company proposes to register any shares of its Common
Stock pursuant to a request for registration under this Section 9.2,
the Company shall furnish each Investor prompt written notice of its
intent to do so. Upon the request of any Investor given by notice to
the Company within twenty (20) days after the effectiveness of such
notice from the Company, the Company will use its reasonable best
efforts to cause to be included in such registration all of the Shares
which such Investor requests to be included therein.
Neither the Company nor any Person other than an Investor shall be
permitted to register any Shares in connection with a registration
requested pursuant to this Section 9.2 unless all Shares which have
been requested by the Investors to be included in the registration
statement have been so included. If the Investors are advised in
writing in good faith by any managing underwriter of the securities
being offered pursuant to a Public Offering under this Section 9.2
that the number of Shares so offered by the Investors and the
Initiating Holders is greater than the number of such shares which can
be included in such Public Offering, the number of shares offered by
the Investors and the Initiating Holders may be reduced pro rata
(based upon the number of Shares offered for the accounts of such
Investor) to a number of Shares deemed satisfactory by such managing
underwriter; provided, however, that in the event that the number of
-------- -------
Shares offered for the account of an Investor
-10-
<PAGE>
are reduced more than 20%, such registration shall not be included in
the calculation of registration under Section 9.2.4.
17. Section 9.3 is amended by replacing "30 " with "60".
18. Section 9.3 is amended by adding the following paragraph immediately
following paragraph (h):
"(i) The Company shall pay all expenses of the holders of Shares
participating in any Public Offering pursuant to Section 9.1 or 9.2
(including the fees and expenses payable to a Qualified Independent
Underwriter (as such term is defined in Conduct Rule 2720 of the
National Association of Securities Dealers, Inc.'s By-laws) other than
underwriting discounts and commissions, if any, applicable transfer
taxes, if any, and fees and charges of attorneys or other advisors
retained by the holders of Shares to advise it in connection with such
Public Offering; provided, that the Company shall be required to pay
the expenses of one counsel to the Investors for each Class of Common
Stock retained by any such holders in connection with the Public
Offering."
19. Section 9.5 is amended as follows: (i) by deleting "the Bain
Investors" and inserting, following "selected by" and prior to "an," the
following phrase: "holders of a majority of the Investor Shares participating
in the public offering."
20. Section 9.6 is amended to add: (i) immediately following "Each " in
the first sentence, "of the Company and" and (ii) immediately after "Transfer,"
"or issue, as the case may be."
21. Section 12.2 is amended to replace the term "Non-Bain Investor
Stockholders" with "Non-Investor Stockholders" wherever it appears and to
replace the term "Non-Bain Investor Majority Holders" with "Non-Investor
Majority Holders" wherever it appears.
22. Section 12.2 is amended: by adding the following at the end of the
first sentence: "; provided, further, however, that no such amendment,
-------- ------- -------
modification, extension, termination or waiver which affects the rights of the
Investors will be effective unless and until the consent of the Investor
Majority Holders have been obtained."
-11-
<PAGE>
23. Section 14.2 is amended to add the following:
If to the Capital Investors, to them at :
ABS Capital Partners II, L.P.
1 South Street
Baltimore, MD 21202
Attn: Timothy T. Weglicki
If to the Goldman Investors, to them at:
GS Capital Partners II, L.P.
85 Broad Street
New York, New York 10004
Attn: Joseph Gleberman
-12-
<PAGE>
IN WITNESS WHEREOF, each of the undersigned has duly executed this
Amendment (or caused this Amendment to be executed on its behalf by its officer
or representative thereunto duly authorized) under seal as of the date first
above written.
Physicians Quality Care, Inc.
By________________________________
Title:
-13-
<PAGE>
Bain Capital Fund V, L.P.
By Bain Capital Partners V, L.P., a
Delaware limited partnership,
its general partner
By Bain Capital Investors V, Inc., its
general partner
By_____________________________
Title: Managing Director
Bain Capital Fund V-B, L.P.
By Bain Capital Partners V, L.P., a
Delaware limited partnership,
its general partner
By Bain Capital Investors V, Inc., its
general partner
By_____________________________
Title: Managing Director
BCIP Associates
By___________________________________
Title: a general partner
BCIP Trust Associates, L.P.
By__________________________________
Title: a general partner
ABS Capital Partners II, L.P.
By ABS Partners II, L.L.C.,
its General Partner
-14-
<PAGE>
By__________________________________
Title: Managing Director:
___________________________________
Russell Ray
115 Longwood Road
Baltimore, MD 21210
___________________________________
Steve Schuh
729 Skywater Road
Gibson Island, MD 21056
___________________________________
Stanley Blaylock
1505 Heather Hill Lane
Hunt Valley, MD 21030
___________________________________
Dick Franyo
925 Drohomer Place
Baltimore, MD 21210
___________________________________
Christopher Camut
4405 Bedford Place
Baltimore, MD 21218
-15-
<PAGE>
___________________________________
Terry Hyman
3131 O Street, N.W.
Washington, D.C. 20007
___________________________________
Brent Milner
5505 St. Alban's Way
Baltimore, MD 21212
___________________________________
Kathy Coffey
1800 Broadway, #301
San Francisco, CA 94109
___________________________________
Mark Klausner
7105 Charles Spring Way
Towson, MD 21204
___________________________________
Michael Singer
3048 Jackson Street
San Francisco, CA 94111
___________________________________
Stuart Smith
7834 Ellenham Road
Ruxton, MD 21204
___________________________________
Gary Lessing
10 Queensdale Place
London, England W11 4SQ
-16-
<PAGE>
GS CAPITAL PARTNERS II, L.P.
By: GS Advisors, L.P.
Its General Partner
By: GS Advisors Inc.
Its General Partner
By:________________________
Title:
GOLDMAN, SACHS & CO. VERWALTUNGS GMBH
By: ________________________
Managing Director
By: ________________________
Managing Director or
Registered Agent
GS CAPITAL PARTNERS II OFFSHORE, L.P.
By: GS Advisors II (Cayman), L.P.
Its General Partner
By: GS Advisors II, Inc.
Its General Partner
By:________________________
Title:
-17-
<PAGE>
THE GOLDMAN SACHS GROUP, L.P.
By: The Goldman Sachs Corporation
Its General Partner
By: ________________________
Title: Executive Vice President
-18-
<PAGE>
____________________________________
Jerilyn P. Asher, individually
____________________________________
Arlan Fuller, Jr. M.D., individually
____________________________________
Thomas M. Zizic, M.D. individually
____________________________________
, individually
____________________________________
, individually
____________________________________
, individually
-19-
<PAGE>
Exhibit 10.25
BAIN CAPITAL PARTNERS V, L.P.
Two Copley Place, 7th Floor
Boston, Massachusetts 02116
April 15, 1997
Physicians Quality Care, Inc.
950 Winter Street, Suite 2410
Waltham, Massachusetts 02154
Re: Amendment No. 1 to Management Agreement (the "Amendment")
---------------------------------------------------------
Ladies and Gentlemen:
Bain Capital Partners V, L.P. ("Bain") and Physicians Quality Care, Inc.
(the "Company") hereby agree as follows:
1. REFERENCE TO MANAGEMENT AGREEMENT. Reference is made to the Management
---------------------------------
Agreement (the "Agreement") dated August 30, 1996 between Bain and the Company.
Terms defined in the Agreement and not otherwise defined herein are used herein
with the meanings so defined.
2. AMENDMENTS TO AGREEMENT. The Company and Bain agree that, effective as
-----------------------
of the date hereof, Section 2(a) of the Agreement is amended and restated in its
entirety as follows:
"a. during the Term, pay to Bain (or an affiliate of Bain designated
by it) a management fee of $750,000 per annum in exchange for the
services provided to the Company by Bain, as more fully described
in Section 1 of this Agreement, such fee being payable by the
Company quarterly in advance, the first such payment to be made at
the closing of the first Equity Investment; provided, however,
that with the consent of Bain, the Company may accrue $250,000 of
such management fee per annum until the earlier of (i) five
business days following notification by Bain to the Company to
make such payment, or (ii) 30 days prior to an initial public
offering of the Company's capital stock; and"
3. MISCELLANEOUS. Except to the extent specifically amended hereby, the
-------------
provisions of the Agreement shall remain unmodified and the Agreement as amended
hereby is hereby confirmed as being in full force and effect. This Amendment
may be executed in counterparts which together shall constitute one instrument
and shall be deemed by a contract made under and laws of The Commonwealth of
Massachusetts and shall be construed under
<PAGE>
and governed by the laws of such Commonwealth and shall bind and inure to the
benefit of the parties hereto and their respective successors and assigns.
IN WITNESS WHEREOF, each of the parties has caused this Agreement to be
executed on its behalf as an instrument under seal as of the date first above
written by its officer or representative thereunto duly authorized.
THE COMPANY: PHYSICIANS QUALITY CARE, INC.
By:
-----------------------------
Title:
BAIN: BAIN CAPITAL PARTNERS V, L.P.
By: Bain Capital Investors V, Inc.,
Its general partner
By:
-----------------------------
Title:
-2-
<PAGE>
Exhibit 11.1 - Computation of Earnings Per Share
Physicians Quality Care, Inc.
<TABLE>
<CAPTION>
Period from March 20, Three months Three months
1995 (inception) to Year ended ended ended
December 31, December 31, March 31, March 31,
Primary and Fully-diluted earnings per share (1) 1995 1996 1996 1997
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net loss $2,082,264 $ 4,973,188 $ 1,419,395 $ 1,086,817
Accretion on common stock subject to fair value put 14,436,848 -- --
-----------------------------------------------------------------------------
Net loss available to common stockholders $2,082,264 $19,410,036 $ 1,419,395 $ 1,086,817
=============================================================================
Weighted average common shares outstanding 7,706,250 10,785,605 7,706,250 24,756,907
=============================================================================
Primary and fully-diluted loss per common share $ 0.27 $ 1.80 $ 0.18 $ 0.04
=============================================================================
</TABLE>
(1) The effect of options, warrants and convertible securities are not
considered as it would be antidilutive.
<PAGE>
Exhibit 23.2
Consent of Ernst & Young LLP, 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. 1 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.
/s/ Ernst & Young LLP
Boston, Massachusetts
July 2, 1997
<PAGE>
Exhibit 23.3
CONSENT OF SCHEINER, MISTER & GRANDIZIO, P.A., INDEPENDENT AUDITORS
We consent to the use of our reports dated January 20, 1997, November 17, 1995
and December 9, 1994, with respect to the financial statements of Clinical
Associates, P.A. included in Amendment No. 1 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.
Lutherville, MD
July 2, 1997
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE AUDITED
FINANCIAL STATEMENTS OF THE COMPANY FOR THE YEAR ENDED DECEMBER 31, 1996 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C> <C>
<PERIOD-TYPE> YEAR 3-MOS
<FISCAL-YEAR-END> DEC-31-1996 DEC-31-1997
<PERIOD-START> JAN-01-1996 JAN-01-1997
<PERIOD-END> DEC-31-1996 MAR-31-1997
<CASH> 1,275,405 494,907
<SECURITIES> 0 0
<RECEIVABLES> 6,436,699 8,409,532
<ALLOWANCES> 1,070,052 1,246,333
<INVENTORY> 0 0
<CURRENT-ASSETS> 8,705,198 9,585,120
<PP&E> 1,577,976 2,347,816
<DEPRECIATION> 88,560 368,432
<TOTAL-ASSETS> 39,354,379 42,973,831
<CURRENT-LIABILITIES> 6,488,098 8,326,104
<BONDS> 214,203 303,733
31,851,473 33,282,706
0 0
<COMMON> 112,359 117,709
<OTHER-SE> (384,802) (139,469)
<TOTAL-LIABILITY-AND-EQUITY> 39,354,379 42,973,831
<SALES> 6,026,452 10,552,532
<TOTAL-REVENUES> 6,117,556 10,556,487
<CGS> 0 0
<TOTAL-COSTS> 10,693,957 11,339,317
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 214,404 273,263
<INTEREST-EXPENSE> 104,255 (30,724)
<INCOME-PRETAX> (4,895,060) (1,086,817)
<INCOME-TAX> 78,128 0
<INCOME-CONTINUING> (4,973,188) (1,086,817)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (4,973,188) (1,086,817)
<EPS-PRIMARY> (1.80) (0.04)
<EPS-DILUTED> 0 0
</TABLE>
