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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTIONS 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 1997
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OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______ to _______
Commission file number 333-26137
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Physicians Quality Care, Inc.
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(Exact Name of Registrant as Specified in its Charter)
Delaware 04-3267297
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(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
950 Winter Street, Suite 2410, Waltham, MA 02154
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(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (781) 890-5560
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Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act: NONE
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No____
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to the
Form 10-K. [_]
The aggregate value of voting common stock held by nonaffiliates of the
registrant was approximately $76,224,048, based on the Company's most recent
arms-length sale of the Common Stock of the Company on February 13, 1998. There
is no public market for the Registrant's voting Common Stock.
Number of shares outstanding of the registrant's common stock as of March 23,
1998: 26,146,844 shares of Class A Common Stock, $.01 par value, 2,809,296
shares of Class B-1 Common Stock, $.01 par value, 1,790,704 shares of Class B-2
Common Stock, $.01 par value, and 7,692,309 shares of Class C Common Stock, $.01
par value.
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PART I
The Business section and other parts of this Annual Report on Form 10-K
contain forward-looking statements that involve risks or uncertainties. The
Company's actual results may differ significantly from the results discussed in
the forward-looking statements. Factors that might cause such a difference
include, but are not limited to, those discussed in the section entitled
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Factors Affecting Future Operating Results."
ITEM 1. BUSINESS.
Physicians Quality Care, Inc., a Delaware corporation ("PQC" or the
"Company"), was incorporated in March 1995, and 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: (i) 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; (ii) assisting the affiliated practices in providing cost-effective
healthcare to special populations; (iii) 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
(iv) 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, Maryland and Atlanta. 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.
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Industry Overview
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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 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.
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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
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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.
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
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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 professional association
affiliated with PQC, assumes management of non-medical aspects of the practices
(an "Affiliated Group"). 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 185 physicians affiliated with the
Company at December 31, 1997, 128 are engaged in primary care practices and 57
are engaged in specialist practices. The Company believes the industry trend
toward integrated delivery systems will result in an increasing demand for
primary care physicians because a higher degree of coordination of care and
risk-sharing will be required than that which can be achieved in a system
controlled by specialists. The Company's strategy is to have the primary care
physician serve as the central manager in the patient system and to develop
effective coordination between specialists and the primary care physicians
within its network.
Focus on special populations. PQC believes that the management of
healthcare costs for certain populations provides significant opportunities that
are not being addressed in the marketplace. The Company believes that special
populations, including the elderly, the disabled and those with debilitating
chronic or high-cost, complex diseases represent a minority of the population
but account for a disproportionately high percentage of the healthcare costs in
the United States due to the significantly greater need of such patients for
medical care compared to the population as a whole. The Company believes that a
significant portion of these costs can be avoided with effective case
management, use of information systems, and coordinated use of the full
continuum of healthcare. At present, a relatively
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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
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General affiliation model. Although the details of each affiliation
transaction may differ, the Company has developed a general affiliation model
designed to capture the benefits of integration while preserving significant
physician autonomy (the "General Affiliation Model"). In the General Affiliation
Model, physicians initially affiliating with the Company in each geographic area
who will become stockholders of the Company transfer their practices by mergers
or asset sales to an Affiliated Group, a professional corporation ("PC") or
professional association ("PA") 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 Services Agreement, generally for
periods up to 40 years, 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
per share (the "Class A 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.
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The factors that the Company considers in selecting a physician or a
physician group for affiliation include the location of the practice, whether
the practice can be successfully integrated into an Affiliated Group, the
ability of the Company to assist the physician to increase billings and control
costs, the size of the practices, the compensation sought by the physician or
physician group, the nature of the physician's practice and the reputation of
the physician in the medical community.
All of the outstanding capital stock of each Affiliated Group is held by a
Stockholder Physician designated by the Company (the "Affiliated Group
Stockholder"). At the time of the affiliation, the Affiliated Group Stockholder
enters into an agreement (the "Designation Agreement") with the Company and the
Affiliated Group pursuant to which he or she agrees to consult with the Company
in voting the stock of the Affiliated Group, agrees to transfer the stock of the
Affiliated Group without consideration to another licensed physician at the
direction of the Company and agrees to pay over to the Company any dividend or
distribution on the stock received from the Affiliated Group. The Designation
Agreement also provides that the stock of the Affiliated Group is automatically
transferred at the direction of the Company in the event that the Affiliated
Group Stockholder attempts to transfer it to a third party. The Designation
Agreement provides, however, that the Affiliated Group Stockholder is not
required to consult with the Company as to matters requiring the exercise of
professional medical judgment.
The Employment Agreements contain certain restrictive covenants, including
covenants relating to noncompetition, confidentiality and nonsolicitation of
employees. Pursuant to these restrictive covenants, the Stockholder Physicians
agree, during the term of the employment agreement and for a one year period
thereafter, not to establish, operate or provide medical services in a specified
geographic region, 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. 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
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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, 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, revenue from patient care is used to
pay practice expenses and a fee to PQC for its services and to fund one or more
pools from which physician compensation is paid (each a "Compensation Pool").
The basis for such allocation is negotiated separately with each group of
affiliating physicians. 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.
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
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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 are comprised of: the President of the Affiliated Group (selected
by the Affiliated Group Stockholder from physicians nominated by the Stockholder
Physicians), and an equal number of members selected by the Company and the
physician stockholders. The Medical Advisory Board, which is responsible for
providing medical input on managed care contracting by the Affiliated Group and
leading the development and dissemination of medical protocols among the
physicians, consists of the Medical Director of the Affiliated Group (selected
by the Affiliated Group Stockholder from physicians nominated by the Stockholder
Physicians) and other physicians elected by the Stockholder Physicians.
Although the Affiliated Groups in the Springfield, Massachusetts area and
the greater Baltimore-Annapolis, Maryland 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 at December 31, 1997 of a total of 42 physicians, 35 of whom are
stockholders in the Company (the "Springfield Stockholder Physicians") and 7 of
whom are employed by the Springfield Affiliated Group as employees (the
"Springfield Affiliated Group"). Twenty-nine of the physicians are engaged in
primary care practices, including two physicians with pediatric practices.
Thirteen of the physicians are engaged in specialist practices, including
pulmonology, cardiology, oncology/hematology, infectious disease, rheumatology
and gastroenterology.
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 Class A 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 also received options to purchase 2,500 shares of Class A 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. Up to an additional $2.15 million, payable in Class A Common Stock
at $2.50 per share, was
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available to be paid to certain physicians if certain revenue goals were met.
During 1997, $2.1 million of additional consideration was accrued based upon the
achievements of these goals and will be paid during 1998. 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.
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
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.
On March 1, 1999, 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 August 30, 1999, 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 Affiliated Group. 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 55 physicians, transferred their practice assets to and became employed by
Flagship Health P.A., a Maryland professional association (the "Flagship
Affiliated Group"). In exchange for such affiliation, the physicians received a
combination of approximately $2.7 million in cash and 6,842,675 shares of
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Class A Common Stock (the "Initial Flagship Affiliation"). On December 1, 1997,
Clinical Associates, P.A., a Maryland professional association ("Clinical
Associates"), which also had practices in the Baltimore area, was combined with
the Flagship Affiliated Group. The stockholders of Clinical Associates received
approximately $3.0 million in cash and 4,800,000 shares of Class A Common Stock.
As of December 31, 1997, the Flagship Affiliated Group employed 143
physicians and 16 non-physician medical professional, of which 113 are
stockholders of the Company and employees of the Flagship Affiliated Group (the
"Flagship Stockholder Physicians") and 30 are employees of the Flagship
Affiliated Group. Of the physicians employed by the Flagship Affiliated Group,
99 are primary care or pediatric physicians and 44 are specialists. The
specialist practices include pulmonology, cardiology, oncology/hematology,
infectious disease, rheumatology, gastroenterology, neurology, dermatology,
endocrinology, immunology, neurology, psychiatry, obstetrics/gynecology,
ophthalmology, orthopedics, otolaryngology, plastic surgery, urology, general
surgery and vascular surgery. The Flagship Affiliated Group leases 28 practice
locations in Maryland, some of which are leased from the Flagship Stockholder
Physicians.
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 Employment Agreements with each Flagship Stockholder Physician. In
addition, the Company entered into an agreement with the Flagship Affiliated
Group pursuant to which the Company agreed to grant options to purchase, subject
to certain conditions, up to 400,000 shares of Class A Common Stock to the
Flagship Stockholder Physicians.
Pursuant to the Flagship Services Agreement and the Employment Agreements
with the Flagship Stockholder Physicians who initially affiliated with the
Flagship Affiliated Group (the "Initial Flagship Affiliated 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 "Initial 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 Initial Flagship Compensation
Pool.
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
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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.
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 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 is
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 initial Flagship Affiliated Physicians to determine whether to
merge the two compensation arrangements. In the event that PQC elects to modify
the compensation arrangements of the
-11-
<PAGE>
Initial 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.
Until June 1, 1998, the Clinical Associate physicians have the right to
elect to receive up to an additional 2,000,000 shares of Common Stock as
consideration for their affiliation with the Flagship Affiliated Group. If the
Clinical Associate physicians elect in their sole discretion to receive such
additional Common Stock, the compensation arrangements set forth above will be
amended, 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 Agreements between PQC and the Clinical Associated Physicians include a
provision that penalizes PQC if certain revenue targets described below are not
met. Until there is no Shortfall (as defined below) or PQC completes a public
offering of the Company Common Stock at a price to the public of $9.00 or more
per share, the amount that would have been allocated to PQC pursuant to the
Services Agreement will be reduced by the Adjustment Amount and the amount that
is allocated to the Account will be increased by the Adjustment Amount.
"Shortfall" means the difference between $3.0 million and the aggregate increase
in Net Adjusted Billings over baseline Net Adjusted Billing by the specialist
physicians in Clinical Associates or who are subsequently added to the practice.
The "Adjustment Amount" is 45% of any Shortfall. Consequently, unless Net
Adjusted Billing increases by $3.0 million over historical levels, and
Adjustment Amount will be due.
PQC has agreed with the stockholders of Clinical Associates that neither
PQC nor Flagship will merge with or into, become a subsidiary of, or sell
Flagship or all or substantially all of PQC's assets to, or grants governance
participation to, a Baltimore Health Care Entity without the approval of a
majority of the members of the Management Committee. A Baltimore Health Care
Entity means any hospital, medical group or other organization that principally
conducts its business in and derives its revenues from the delivery of
healthcare services in Maryland.
In the event that PQC or any of its affiliates propose the establishment of
an independent provider association ("IPA") network in the Maryland Area, PQC is
required to obtain the approval of the Joint Policy Board with respect to the
structure, governance and financial arrangements of the IPA network, including
whether the Physicians in the Flagship Affiliated Group will participate in such
IPA network. PQC will be entitled to a fee of up to 10% of the aggregate revenue
of the IPA network, which fee PQC shall not be required to share with the
physicians employed by the Flagship Affiliated Group. Any residual profits of
the IPA network (in excess of the 10% fee) that are retained by PQC shall be
allocated 50% to PQC and 50% to the physicians in the Flagship Affiliated Group.
-12-
<PAGE>
In the event that prior to December 1, 2001, 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 transaction with Clinical Associates 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.
Atlanta IPA Affiliates. The Company has acquired a 50% interest in two
related physician network management companies in Atlanta, Georgia. The two
entities, TLC Management Company, Inc. ("TLC") and Total Quality Practice
Management, Inc. ("Total Quality"), manage payor contracting for a 350-physician
network in Georgia. The network currently serves approximately 4,500 covered
lives. PQC's investment totals $5 million. The Company believes that the
Atlanta market is attractive for the Company as it is a relatively
unconsolidated physician practice market and global capitation arrangements are
expected to become a more significant market factor.
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 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.
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
-13-
<PAGE>
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 Massachusetts Board of Registration in Medicine (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 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
-14-
<PAGE>
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
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<PAGE>
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.
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
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<PAGE>
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.
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.
-17-
<PAGE>
Employees
- ---------
As of December 31, 1997, the Company had 43 employees and the Affiliated
Groups had 1,037 employees, including 198 physicians.
ITEM 2. PROPERTIES.
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 leases approximately
46,000 square feet at 13 practice locations and the Flagship Affiliated Group
leases approximately 197,000 square feet at 41 practice locations. The
facilities leased by the Company and its Affiliated Groups are sufficient for
its current operations.
ITEM 3. LEGAL PROCEEDINGS.
On June 12, 1997, Jay N. Greenberg, a founder and former executive vice
president of the Company, filed a complaint against the Company in Massachusetts
state court seeking damages of $1.4 million and a declaratory judgment that
843,750 of the shares registered in Mr. Greenberg's name (out of 1,012,500
shares of Class A Common Stock originally granted to Mr. 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 of Class A Common Stock vest (and,
depending upon counterclaims that may be brought by the Company, possibly fewer)
and is entitled to no severance payment. Mr. Greenberg claims that 843,750
shares of Class A Common Stock have vested and that his employment was
terminated in January 1997 by the Company entitling him to severance payments of
$440,000. The Company is not able to predict the outcome of this litigation. No
other claims are pending against the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of security holders of the Company,
through solicitation of proxies or otherwise, during the last quarter of the
year ended December 31, 1997.
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<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The Company did not issue or sell any equity securities during the quarter
ended December 31, 1997 that were not registered under the Securities Act of
1933, as amended.
ITEM 6. SELECTED FINANCIAL DATA.
The following selected financial data for the Company should be read in
conjunction with the financial statements and notes thereto and "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
included elsewhere in this Annual Report on Form 10K. The selected financial
data of the Company for the period from March 20, 1995 (inception) through
December 31, 1995 and for the years ended December 31, 1996 and December 31,
1997, have been derived from financial statements of the Company which have been
audited by Ernst & Young LLP, independent auditors.
-19-
<PAGE>
<TABLE>
<CAPTION>
PQC
------------------------------------------------------
PERIOD FROM
MARCH 20, 1995 YEAR ENDED YEAR ENDED
(INCEPTION) TO DECEMBER 31, DECEMBER 31,
DECEMBER 31, 1995 1996 1997
------------------------------------------------------
(in thousands, except per share data)
<S> <C> <C> <C>
STATEMENT OF OPERATING DATA:
Net patient service revenue $ - $ 6,027 $ 46,037
Retained by physicians - 2,195 15,596
------- -------- --------
Management fee revenue - 3,832 30,441
Nonphysician salaries and benefits - 1,816 13,865
Other practice expenses - 1,822 12,721
General corporate expenses 2,062 4,666 7,329
Depreciation and amortization 6 280 2,164
Provision for bad debt - 214 1,106
------- -------- --------
Operating income (loss) (2,068) (4,968) (6,743)
Other, net 18 (13) 238
------- -------- --------
Income (loss) before taxes (2,050) (4,981) (6,506)
Income taxes (benefit) 32 78 (795)
------- -------- --------
Net income (loss) (2,082) (5,059) (5,710)
======= ======== ========
Net loss available to common stock (2,082) (19,496) (12,389)
Net income (loss) per common share-basic $ (0.27) $ (1.81) $ (0.41)
Weighted average common shares and
common share equivalents outstanding 7,706 10,786 30,336
</TABLE>
<TABLE>
<CAPTION>
PQC
-------------------------
DECEMBER 31,
1995 1996 1997
-------------------------
(in thousands)
<S> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents $3,480 $ 136 $ 8,782
Net current assets 2,651 (860) 12,493
Total assets 4,363 34,790 73,411
Total current liabilities 850 2,776 2,113
Long-term obligations 1,410 521 746
Class A Common Stock, subject to put - 31,851 54,474
Total stockholders' equity (deficiency) 2,104 (358) 16,077
</TABLE>
During 1997, the Company adopted Statement of Financial Accounting
Standards No. 128 "Earnings Per Share" ("SFAS 128") which requires the
restatement of earnings per share calculations for all years presented. The
adoption of SFAS 128 did not impact the Company's earnings per share calculation
for 1995 and 1996.
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<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
Overview
- --------
The Company affiliates with and operates multi-specialty medical practice
groups. The first physician affiliation took place on August 30, 1996, with 32
physicians in the Springfield, Massachusetts and Enfield, Connecticut area. On
December 11, 1996, PQC consummated the affiliation with the Flagship Affiliated
Group, which consisted of 59 physicians in Baltimore and Annapolis, Maryland.
In connection with the affiliation transactions, the assets and liabilities of
the physician practices were transferred to newly formed PCs or PAs affiliated
with the Company. Additional physicians have been subsequently added to the
Affiliated Groups. PQC is working with these groups of physicians to improve
operating practices and to obtain managed care contracts. On October 24, 1997,
the Company also acquired a 50% interest in TLC and a 50% interest in Total
Quality. Both companies are located in Atlanta, Georgia. As of December 31,
1997, the Company had affiliations or IPA arrangements with the following
physicians:
<TABLE>
<CAPTION>
Affiliated Physicians
----------------------------
<S> <C> <C> <C>
Maryland Massachusetts Georgia
---------- ------------- -------
Primary Care: 99 29 0
Specialist: 44 13 0
Total: 143(1) 42 0
</TABLE>
<TABLE>
<CAPTION>
IPA Physicians
--------------
<S> <C> <C> <C>
Maryland Massachusetts Georgia(2)
---------- ------------- -------
Total: 0 0 350
- -----------------
</TABLE>
(1) Includes 16 non-physician medical professionals.
(2) Reflects number of physicians in IPA network in which the Company has a 50%
interest.
The Company's Fee under Service Agreements. For a discussion of the fee and
expense allocation arrangement between the Company and each Affiliated Group,
see "Item 1. Business - Affiliation Structure."
Under the Company's contractual arrangements with its Affiliated Groups,
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,
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<PAGE>
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
arrangements with the physicians formerly associated with Clinical Associates
(which became effective on December 1, 1997) PQC earns 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, 1997 during the year ended December 31, 1997:
<TABLE>
<S> <C>
Fee for Service Contracts 48.0%
Medicare 35.0%
Capitated Managed Care Contracts 12.0%
Medicaid 5.0%
------
100%
</TABLE>
Results of Operations
- ---------------------
Year Ended December 31, 1996 Compared to Period From March 20, 1995 (Inception)
to Year Ended December 31, 1995
From inception (March 20, 1995) through August 30, 1996, the Company was
primarily in a development and start up phase. The first affiliation with 32
Springfield, Massachusetts physicians was completed on August 30, 1996. Prior
to this date the Company had no revenues. On December 11, 1996, the Company
affiliated with 59 physicians in the greater Baltimore-Annapolis, Maryland area.
In connection with the affiliation transactions, the assets and liabilities
of the physician practices were transferred to newly formed PCs and PAs
affiliated with the Company. The assets and liabilities of the Springfield,
Massachusetts physicians were transferred to Medical Care Partners, P.C. ("MCP")
and the physicians became employees of MCP. The assets and liabilities of the
December 11, 1996 affiliation were transferred to Flagship Health I, P.A.
("Flagship I") and the physicians became employees of Flagship I.
The increase in revenues of $6.0 million was more than offset by increases
in operating expenses. The affiliation transactions resulted in the addition of
physician salaries and benefits, non-physician salaries and benefits, other
practice expenses, provision for bad
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<PAGE>
debt and depreciation and amortization. Prior to the completion of the first
affiliation transaction the Company incurred general corporate home office
expense only.
Year Ended December 31, 1997 Compared to Year Ended December 31, 1996
During January and February 1997, the Company affiliated with 6 physicians
in the Springfield, Massachusetts area. The assets and liabilities of the
Springfield physicians were transferred to MCP and the physicians became
employees of MCP. On December 1, 1997, the Company entered into an affiliation
agreement with a physician practice consisting of 58 physicians located in the
Baltimore/Annapolis, Maryland area. The assets and liabilities of the
Baltimore/Annapolis physicians were transferred to Flagship Health II, P.A.
("Flagship II") and the physicians became employees of Flagship II.
The completion of the Springfield and Baltimore area affiliations resulted
in the Company having net revenues of approximately $46.0 million for the year
ended December 31, 1997 compared to approximately $6.0 million for the year
ended December 31, 1996. The increase in revenues was primarily due to both the
number and dates of affiliation of the Springfield and Baltimore physicians.
The revenues for 1996 were generated from 32 physicians from August 30, 1996
through December 31, 1996 and one month of revenues from Flagship I physicians.
The revenues for 1997 consisted of a full year of revenues from both MCP and
Flagship I physicians as well as one month's revenues generated by the 58
Flagship II physicians. The source of revenue in 1997 remained largely
unchanged from 1996, with fee for service payments and Medicare accounting for
approximately 83% of revenue. Although the Company is seeking to increase its
participation in capitated managed care contracts, such agreements only amounted
for approximately 12.0% of revenue in 1997.
During the year ended December 31, 1997 as compared to the year ended
December 31, 1996, the amounts retained by physician groups, which represents
physician salaries and benefits increased approximately $13.4 million. The
increase is primarily due to the same factors which caused the increase in
revenues, namely that 1997 consisted of a fully year of operations for MCP and
Flagship I as compared to four months of operations and one month of operations
during 1996 for MCP and Flagship I, respectively. In addition, the affiliation
of Flagship II on December 1, 1997 resulted in an increase of approximately
$900,000 as compared with 1996. As a percentage of net patient service revenues
amounts retained by physician groups decreased from 36.4% in 1996 to 33.8% in
1997. This decrease was primarily due to variances in the fee and expenses
allocation arrangements between the Company and each Affiliated Group. See
"Item 1. Business-Affiliation Structure."
During the year ended December 31, 1997 as compared to the year ended
December 31, 1996, nonphysician salaries and benefits, which represents salaries
and benefits for staff engaged in the physicians' practice increased
approximately $12.0 million. Other practice expenses in 1997, which represent
primarily all non-salary and benefits expenses of physicians' practices,
increased approximately $10.9 million and provision for bad debt increased
approximately $891,000. These increases in physician affiliation expenses
resulted
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primarily from the same reasons stated above for the increase in net patient
service revenues and amounts retained by physician groups; namely that 1997
consisting of a full year of operations for MCP and Flagship I as compared with
a partial year operations in 1996 and the addition of Flagship II during 1997.
General corporate expenses consist of all costs except depreciation and
amortization of the Company's corporate home office and regional operations.
The increase in general corporate expenses of approximately $2.7 million for the
year ended December 31, 1997 as compared to the year ended December 31, 1996 was
primarily due to the increase in home office and corporate regional operations
staff and related expenses to support the Company's growth. However, corporate
expenses increased at a slower rate than overall revenue, declining from 77.4%
of net patient service revenue in 1996 to 15.9% in 1997.
Depreciation and amortization expense consists primarily of amortization of
intangibles associated with affiliated practices. The increases of
approximately $1.9 million from the year ended December 31, 1997 as compared to
the year ended December 31, 1996 was due to the increase in intangible assets
acquired as practice affiliations were completed, as well as 1997 consisting of
a full years depreciation and amortization for MCP and Flagship I as compared to
a partial year of depreciation and amortization during 1996.
On October 24, 1997, the Company acquired a 50% interest in TLC and a 50%
interest in Total Quality. The Company has accounted for the transaction using
the equity method of accounting for investments in common stock. For the year
ended December 31, 1997, the net loss in investment was approximately $98,000.
The Company made no such investments in 1996.
The increase in interest income of approximately $407,000 for the year
ended December 31, 1997 as compared to the year ended December 31, 1996 was
primarily due to a significant increase in the purchase of the Company's Class B
and Class C Common Stock by institutional investors during the year ended
December 31, 1997 as compared to the year ended December 31, 1996. Proceeds
from the issuance of common stock to institutional investors, net of issuance
costs were approximately $25.8 million for the year ended December 31, 1997 as
compared to approximately $8.0 million for the year ended December 31, 1996.
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's
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<PAGE>
principal sources of capital to date have been the issuance of Class B and Class
C Common Stock to contain institutional investors, issuances of Class A Common
Stock to Physician Stockholders, other issuances of Class A Common Stock to
private investors, borrowing under a Credit Agreement with Bankers Trust Company
(which terminated on January 31, 1998) and cash generated by the operations of
the Affiliated Groups.
During 1997 and 1996, the Company paid aggregate consideration of
approximately $23.6 and $29.5 million, respectively, in connection with
affiliation transactions. Of such amount, approximately $7.8 million in 1997 and
$5.9 in 1996 was paid in cash and approximately $15.8 million in 1997 and $23.6
in 1996 was paid in Class A Common Stock. The majority of such payments were
accounted for as an addition to intangible assets, which represented $26.1
million of the Company's total assets of $73.4 million at December 31, 1997. As
of December 31, 1997, intangible assets net of amortization costs, represent
approximately $57.3 million of the Company's total assets of approximately $73.4
million. The Company is amortizing the intangible assets over 25 years.
Of the Company Common Stock outstanding at December 31, 1997, 18,157,982
shares of Class A Common Stock are subject to a put option which provides for
the put of the shares back to the Company at fair value upon the death or
disability of the holder. In addition, 1,029,749 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 June 1998. Consequently, these 18,157,982 shares
of Class A Common Stock have been recorded at fair value outside of permanent
equity in the accompanying balance sheet. Under the Company's stockholder
agreements, the holders of an aggregate of 15,471,063 shares of Class A Common
Stock, the Company may repurchase such shares for fair value if the
shareholder's termination of employment with the Company is without cause or is
by resignation, and for the lower of cost or fair value if termination is with
cause. The terms of such repurchase provision may not permit the Company to
fully recover its affiliation payments to the physician or reflect the cost of
affiliation transactions at the time of termination. To date, no Stockholder
Physician has terminated an employment agreement or repurchased any practice
assets. All of the above put and call provisions expire on the closing of a
public offering of the Company's common stock which results in net proceeds to
the Company of at least $50.0 million and which meets certain other criteria.
In addition to the previously discussed put options, the Flagship II physicians
have the right to require the Company to repurchase (in the form of a five year
non-interest bearing note) 4.8 million shares of Class A Common Stock issued in
the Flagship II affiliation at a purchase price of $3.00 per share if the
Company has not completed an underwritten initial public offering prior to
December 1, 2001. Because the Company's shares are subject to a number of
restrictions in the stockholders' agreements and will not trade until the
occurrence of such an offering, the Company believes it is a nonpublic entity
for compensation accounting purposes and, accordingly, has not recorded any
compensation expense for these puts and calls.
Working capital existing at the date of affiliation has generally been
retained in the practices. Therefore, additional working capital investment is
generally only required to the
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<PAGE>
extent billing processing is slowed during payor administrative changes after an
affiliation and also to fund growth of revenues. The Company and its affiliated
entities had total net accounts receivable of $5.4 million and $11.9 million at
December 31, 1996 and 1997, respectively.
The Company currently anticipates that its and the Affiliated Group's
capital expenditures during 1998 will be approximately $2.5 million.
The Company has executed a contract with HMO 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.
Impact of Year 2000
- -------------------
The Company is aware of issues associated with the programming code in
existing computer systems as the year 2000 approaches. The "Year 2000" problem
is pervasive and complex, as virtually every computer operation will be affected
in the same way by the rollover of the two digit year value to 00. The issue is
whether computer systems will properly recognize date sensitive information when
the year changes to 2000. Systems that do not properly recognize such
information could generate enormous data or cause a system to fall.
The Company is utilizing both internal and external resources to identify,
correct or reprogram, and test its systems for Year 2000 compliance. It is
currently anticipated that all reprogramming efforts will be completed by July
31, 1999, allowing adequate time for testing. A preliminary assessment has
indicted that some of the Company's older personal computers and ancillary
software programs may not be Year 2000 compatible. The Company intends to
either replace or modify these computers and programs. The cost of this
replacement is not expected to be material as the shelf life of the Company's
personal computers is three to five years. The present financial systems are
all Year 2000 compliant. The practice management system is 80% compliant and the
Company plans to move to a newer version of the software which is 100% compliant
as part of it's reprogramming efforts which will be completed by July 31, 1999.
This upgrade is provided under the Company's current software maintenance
agreement with its software vendor. All new software purchased will be 100%
compliant.
The Company is also obtaining confirmations from the Company's primary
vendors that plans are already in place to address processing of transactions in
the Year 2000. However, there can be no assurance that the systems of other
companies on which the Company's systems rely also will be converted in a timely
fashion or that any such failure to convert by another company would not have an
adverse effect on the Company's systems. Management is in the process of
completing the assessment of the Year 2000 compliance costs. However, based on
currently available information (excluding the possible impact of vendor systems
which management currently is not in a position to evaluate) as noted above,
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management does not believe that these costs will have a material effect on the
Company's earnings.
Factors Affecting Future Operating Results
- ------------------------------------------
Lack of Operating History; History of Operating Losses
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. The Company has incurred losses of each of its fiscal years
through 1997. 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.
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.
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.
Risk that Future Affiliation Transactions Will Not Be Consummated; Costs of
Affiliation Transactions
There can be no assurance that any future affiliation transactions will be
consummated. In consummating 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
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<PAGE>
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.
The Company has incurred approximately $2.9 million and $567,000 during
1996 and 1997, respectively, in 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
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.
Risks Related to Expansion of Operations
Integration Risks. The Company has completed affiliation transactions with
the Springfield Affiliated Group and the Flagship Affiliated Group, 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
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<PAGE>
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.
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
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<PAGE>
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.
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.
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
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<PAGE>
over-utilization and for the actuarial risk that certain patients may consume
significantly more healthcare resources than average for patients of similar age
and sex (such patients are referred to herein as "high risk patients").
While physicians often purchase reinsurance to cover some of the actuarial
risk associated with high risk patients, such insurance typically does not apply
with respect to the risk of over-utilization until a relatively high level of
aggregate claims has been experienced and therefore does not completely protect
against any capitation risk assumed. If over-utilization occurs with respect to
a given physician's enrollees (or the physician's panel of enrollees includes a
disproportionate share of high risk patients not covered by reinsurance), the
physician is typically penalized by failing to receive some or all of the
physician's compensation under the contract that is contingent upon the
attainment of negotiated financial targets, or the physician may be required to
reimburse the payor for excess costs. In addition, a physician may be liable for
over-utilization by other physicians in the same "risk pool" and for utilization
of ancillary, in-patient hospital and other services when the physician has
agreed contractually to manage the use of those services. Neither the Company
nor the Affiliated Groups currently maintain any reinsurance arrangement and, to
date, the Affiliated Groups have not experienced losses from participation in
risk pools or incurred any material penalties or obligations with respect to
excess costs under capitated contracts. The 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. Liabilities or insufficient revenues under capitated
and other risk-sharing arrangements could have a material adverse effect on the
Company.
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 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
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<PAGE>
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 PCs in Springfield prior to affiliating
with the Company were merged into the Springfield Affiliated Group, with
stockholders of each PC receiving shares of Class A Common Stock of the Company
and cash in exchange for their capital stock in the PC. Physician groups which
operated as PAs in the greater Baltimore-Annapolis area prior to affiliating
with the Company were similarly merged into the Flagship Affiliated Group, with
stockholders of each PA receiving shares of Class A Common Stock of the Company
and cash in exchange for their capital stock in the PA. Each such merger is
intended to qualify as a "reorganization" under Section 368(a) of the Internal
Revenue Code of 1986, as amended (the "Code"), in which case no gain or loss
would generally be recognized by the PC or PA or the stockholders (other than as
cash received) of the PC or PA. The Company has not sought or obtained a ruling
from the Internal Revenue Service or an opinion of counsel with respect to the
tax treatment of the mergers of PCs or PAs into the Springfield or Flagship
Affiliated Groups. The Company does not believe that the Internal Revenue
Service is issuing rulings at this time on transactions using the Company's
affiliation structure. If a merger were not to so qualify, the exchange of
shares
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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.
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. The Company does not
maintain key person life insurance with respect to Ms. Asher. As a development
stage company, PQC has experienced some turnover in staff, including two of the
founding officers. The Company and one of the departed founders are currently in
a dispute concerning the vesting of approximately 400,000 shares of Class A
Common Stock granted to the founder and the founder's right to severance
payments of approximately $440,000. 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.
Risk of the Unavailability of the Equity Facility
The remaining amount under the Class B and Class C Stock Purchase Agreement
(the "Equity Facility') with certain institutional inventors ("Institutional
Investors") is only available with the consent of the Institutional Investors
and there can be no assurance that the Institutional Investors will be willing
to provide additional capital when needed by the Company. The Equity Facility
also restricts the sources of capital available to the Company without the
consent of the Institutional Investors. Except for the Equity Facility, the
Company has no committed external sources of capital. Except with the consent
of the director elected by the Institutional Investors, the Company may not
obtain additional financing through external borrowings or the issuance of
additional securities. The Institutional Investors also have received warrants
to purchase a substantial number of shares of Class A Common Stock. These
warrants are exercisable at $2.50 or $3.25 per share, which exercise price may
be substantially below the fair market value of the Class A Common Stock at the
time of exercise. Any additional equity issuance could have an adverse effect on
the value of the shares of Class A Common Stock held by the then existing
stockholders.
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Risks from Put and Other Rights Held by Certain Stockholders
Each physician and management stockholder who is a party to the
Stockholders Agreement, dated as of August 30, 1996 (the "Stockholder's
Agreement"), has the right to require PQC to purchase the Common Stock owned by
such stockholder at fair market value upon their death or disability. Pursuant
to the Stockholders Agreement, fair market value, as determined by the Board of
Directors, reflects an arms-length private sale. In determining the fair market
value, the Board is to consider recent arms-length sales by the Company and the
stockholders, as well as other factors considered relevant. While the
Stockholders Agreement does not limit the Board's discretion, such other factors
may include changes, since the last arms-length sale, in the Company's financial
conditions or prospects and any valuation studies conducted by management of the
Company or independent valuation experts. Under the Stockholder Agreement, the
Board is not permitted to discount the fair market value of the Common Stock to
reflect the fact that the Common Stock being sold constitutes less than a
majority of the outstanding shares. The put option is only triggered by death or
disability (and in a few instances retirement) and will terminate upon the
completion of a public offering which results in at least $50.0 million in gross
revenues to the Company and which meets certain other criteria. The physician
affiliated with Clinical Associates 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
underwritten initial public offering within four years. The exercise of such
right could have a material adverse effect upon the Company. To the extent that
the "put options" are likely to be exercised, the Company expects to fund such
repurchases from working capital, the Equity Facility or other sources.
Amortization of Intangible Assets
In connection with its Affiliations, the Company has recorded, and is
expected to continue to record, a significant amount of intangible assets as the
consideration paid to physicians exceeds the value of the practice assets. At
December 31, 1997, the Company had intangible assets of approximately $57.3
million reflected on its balance sheet as long-term affiliation agreements. The
Company amortizes such intangible assets over a 25 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 year ended December 31, 1997, amortization of
intangible assets contributed approximately $1,292,000 to the Company's net loss
of $5.7 million.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK.
Not applicable.
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
All financial statements required to be filed hereunder are filed as
Appendix A, are listed under Item 14(a) and are incorporated herein by
reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
There have been no disagreements on accounting and financial disclosure
matters.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The executive officers and directors of the Company and their ages as of
December 31, 1997 are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---------------------------- --- -----------------------------------------
<S> <C> <C>
Jerilyn P. Asher 55 Chief Executive Officer and Chairman
of the Board
Alphonse Calvanese, M.D. 46 Director
Leslie Fang, M.D.(1) 52 Director
Ira Fine, M.D. 49 Director
Dana Frank, M.D. 47 President and Director
Arlan F. Fuller, Jr., M.D. 52 Executive Vice President, Medical
Affairs and Director
Stephen G. Pagliuca 42 Director
Marc Wolpow 39 Director
Timothy T. Weglicki 46 Director
Samantha J. Trotman 30 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
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<PAGE>
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 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.
-36-
<PAGE>
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
-37-
<PAGE>
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 Eldertrust, 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 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 served as Vice President of Finance from February 1997 to
February 1998. 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.
ITEM 11. 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 was greater than $100,000 in the year ended December 31, 1997
(collectively, the "Named Executive Officers"):
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<PAGE>
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Long-Term
Compensation
Annual Compensation Awards (1)
--------------------- --------------
Securities All Other
Underlying Compensation
Name and Principal Position Year Salary ($) Bonus ($) Options (#) ($)
- ----------------------------- ---- ------------ ---------- ----------- ------------
<S> <C> <C> <C> <C> <C>
Jerilyn P. Asher............. 1997 250,000 -- -- 7,996 (2)
Chief Executive Officer 1996 250,000 -- -- 9,647 (3)
Dana Frank................... 1997 220,325 (4) -- 300,000 --
President 1996 118,075 -- -- --
Samantha J. Trotman.......... 1997 125,000 -- 400,000 --
Chief Financial Officer 1996 4,808 (5) -- -- --
</TABLE>
- ----------------
(1) The Company did not grant any restricted stock or stock appreciation rights
during the year ended December 31, 1997.
(2) Represents $7,200 paid in connection with an automobile allowance and $796
of compensatory group life insurance premiums paid by the Company.
(3) Represents $7,200 paid in connection with an automobile allowance and
$2,447 of compensatory group life insurance premiums paid by the Company.
(4) Includes $120,325 paid as salary for Dr. Frank's patient care practice.
(5) Amount based on annual salary of $125,000 from December 16, 1996.
Employment Agreements
---------------------
The Company is a party to an employment agreement with Jerilyn P. 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
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<PAGE>
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 Arlan F. Fuller,
pursuant to which Dr. Fuller serves as Executive Vice President, Medical
Information Systems and Academic Development of the 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 $.01 per share. These shares are subject to vesting based on individual
performance and duration of employment, which vesting will be accelerated in the
event of a "Change in Control." The Company may terminate Dr. Fuller's
employment at any time with cause and upon 60 days' notice without cause. Dr.
Fuller may terminate his employment for any reason upon 60 days' written notice.
-40-
<PAGE>
During the term of the agreement, the Company must nominate Dr. Fuller
to and Dr. Fuller will be eligible to serve on the Board of Directors. Dr.
Fuller also agreed to standard non-competition and non-disclosure terms with the
Company.
Options Grants Table
- --------------------
The following sets forth, as to the Named Executive Officers, information
concerning stock options granted in the year ended December 31, 1997.
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
VALUE AT ASSUMED
ANNUAL RATES OF
STOCK PRICE
APPRECIATION FOR
INDIVIDUAL GRANTS OPTION TERM(1)
----------------------------------------------------------------- ---------------------
<S> <C> <C> <C> <C> <C> <C>
NUMBER OF % OF TOTAL
SECURITIES OPTIONS
UNDERLYING GRANTED TO EXERCISE
OPTION EMPLOYEES IN PRICE EXPIRATION
NAME GRANTED (#) FISCAL YEAR ($/SH)(2) DATE(3) 5% 10%
- ---------------- ------------- ------------- ---------- ----------- ------- ---------
Jerilyn Asher... -- -- -- -- -- --
Dana Frank...... 300,000(4) 13.8% $2.50 4/23/07 471,671 1,195,307
Samantha Trotman 400,000(5) 18.3% 2.50 1/1/07 628,895 1,593,742
</TABLE>
- ----------------
(1) Amounts represent hypothetical gains that could be achieved for respective
options if exercised at the end of the option term. These gains are based
on assumed rates of stock price appreciation of 5% and 10%, compounded
annually from the date the respective options were granted to their
expiration date. The gains shown are net of the option exercise price, but
do not include deductions for taxes or other expenses associated with the
exercise. Actual gains, if any, on stock option exercises will depend on
the future performance of the Common Stock, the option holder's continued
employment through the option period and the date on which the options are
exercised.
(2) The exercise price is equal to the fair market value of the Company's
Common Stock on the date of grant.
(3) The expiration date of an option is the tenth anniversary of the date on
which the option was originally granted.
(4) Of these stock options, 100,000 stock options vest immediately and the
remaining stock options vest in two equal annual installments commencing on
the first anniversary of the date on which the option was originally
granted. Of these options 120,000 are intended to qualify as incentive
stock options and the remainder are non-statutory stock options. The
vesting of these stock options is accelerated in the event of a change in
control of the Company.
(5) These stock options vest in three annual installments of 150,000, 125,000
and 125,000 shares commencing on the first anniversary of the date on which
the option was originally granted. Of these options 120,000 are intended to
qualify as incentive stock options and the remainder are non-statutory
stock options. The vesting of these stock options is accelerated in the
event of a change in control of the Company.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table sets forth the number of shares of capital stock of the
Company beneficially owned as of January 1, 1998 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.
-41-
<PAGE>
<TABLE>
<CAPTION>
Class A Common Stock(2) Class B Common Stock(2)
------------------------- --------------------------
Number Percentage Number Percentage
Name and Address of of Class of of Class
of Beneficial Owner Shares Outstanding Shares Outstanding
- -------------------------------------- ---------- ----------- ---------- -----------
<S> <C> <C> <C> <C>
Bain Capital Funds.................... -- -- 11,015,000(3) 100.0%
c/o Bain Capital, Inc.
Two Copley Plaza
Boston, Massachusetts 02116
Goldman Sachs Funds................... -- -- -- --
c/o Goldman Sachs & Co.
85 Broad Street
New York, NY 10004
ABS Capital Partners, II, L.P. Funds.. -- -- -- --
One South Street
Baltimore, MD 21201
Offshore Health Industries, Inc. ..... 1,582,500(7) 6.1% -- --
Two Park Plaza
Boston, MA 02116
Jerilyn P. Asher...................... 4,318,748(8) 16.8% -- --
Arlan F. Fuller, Jr., M.D. ........... 618,750 2.4% -- --
Samantha J. Trotman................... 150,000(9) * 1,729,016(10) 15.7%
Alphonse F. Calvanese, M.D............ 313,007(11) * -- --
Leslie Fang, M.D. .................... -- -- -- --
Ira Fine, M.D. ....................... 113,316 * -- --
Dana Frank, M.D....................... 272,904(12) * -- --
Stephen G. Pagliuca(13)............... -- -- 11,015,000(3) 100.0%
Marc Wolpow(13)....................... -- -- 11,015,000(3) 100.0%
Timothy T. Weglicki................... -- -- -- --
All directors and executive officers
as a group (10 persons) (32,115,577
(15) shares of 83.9% assuming
conversion of Class B Common Stock
into Class A Common Stock) 5,786,725 22.2%
- ---------------------
</TABLE>
*Less than 1%
<TABLE>
<CAPTION>
Class C Common Total
Stock(2) Common Stock(1)(2)
--------------------------- -------------------------
Number of Percentage of
Name and Address Number Percentage Common Common
of Beneficial Owner of Shares of Class Stock Stock
- -------------------------------------- ----------- ----------- ---------- -----------
<S> <C> <C> <C> <C>
Bain Capital Funds.................... 3,076,924(4)(5) 33.3% 14,091,924 30.7%
c/o Bain Capital, Inc.
Two Copley Plaza
Boston, Massachusetts 02116
Goldman Sachs Funds................... 3,076,924(4)(5) 33.3% 3,076,924 7.8%
c/o Goldman Sachs & Co.
85 Broad Street
New York, NY 10004
ABS Capital Partners, II,............. 9,160,004(6) 74.6% 9,160,004 21.5%
L.P. Funds
One South Street
Baltimore, MD 21201
Offshore Health -- -- 1,582,500 4.1%
Industries, Inc.
Two Park Plaza
Boston, MA 02116
Jerilyn P. Asher...................... -- -- 4,318,748 11.4%
Arlan F. Fuller, Jr., M.D. ........... -- -- 618,750 1.6%
Samantha J. Trotman................... -- -- 1,879,016 4.8%
Alphonse F. Calvanese, M.D. .......... -- -- 313,007 *
Leslie Fang, M.D. .................... -- -- -- *
Ira Fine, M.D. ....................... -- -- 113,316 *
Dana Frank, M.D. ..................... -- -- 272,904 *
Stephen G. Pagliuca................... 3,076,924(4)(5) 33.3% 14,091,924 30.7%
Marc Wolpow........................... 3,076,924(4)(5) 33.3% 14,091,924 30.7%
Timothy T. Weglicki................... 9,160,004(14) 74.6% 9,160,004 21.5%
All directors and executive officers
as a group (10 persons) (32,115,577
(15) shares of 83.9% assuming
conversion of Class B Common Stock
into Class A Common Stock)
</TABLE>
- ---------------------
*Less than 1%
-42-
<PAGE>
(1) Reflects the percentage of shares of Class A, Class B and Class C Common
Stock. The Class B and Class C Common Stock of the Company are convertible
at the option of the holder into Class A Common Stock.
(2) Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission. In computing the number of shares
beneficially owned by a person and the percentage ownership of that person,
shares of the Company's capital stock subject to options or warrants held
by that person that are exercisable on or before March 1, 1998 are deemed
outstanding. Such shares, however, are not deemed outstanding for purposes
of computing the ownership of each other person.
(3) Includes warrants to purchase 6,415,000 shares of Class B Common Stock.
(4) 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 other Institutional
Investors are entitled to purchase pursuant to the Equity Facility.
(5) Includes warrants to purchase 1,538,462 shares of Class C Common Stock.
(6) Includes warrants to purchase 4,580,002 shares of Class C Common Stock.
(7) Includes warrants to purchase 332,500 shares of Class A Common Stock.
(8) Includes warrants to purchase 52,082 shares of Class A Common Stock.
(9) Consists of options to purchase shares of Class A Common Stock.
(10) 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.
(11) Includes options to purchase 100,625 shares of Class A Common Stock.
(12) Includes options to purchase 100,000 shares of Class A Common Stock.
(13) 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.
(14) Includes 4,580,002 shares of Class C Common Stock (9,160,004 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.
(15) See notes (1), (3), (4), (5) and (8)-(14) above.
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<PAGE>
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED 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. In connection with the
Equity Financing, the Company entered into a Management Agreement dated as of
August 30, 1996 with BCPV, pursuant to which the Company will pay BCPV (or an
affiliate designated by BCPV) 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 BCPV, 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 BCPV, 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.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) The following documents are included:
1. The following financial statements (and related notes) of the Company are
included:
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<PAGE>
<TABLE>
Page
<S> <C>
Report of Independent Accountants.................................................. 1
Balance Sheets at December 31, 1997 and 1996....................................... 2
Statements of Operations for the Years Ended December 31,
1997 and 1996...................................................................... 3
Statements of Stockholders' Equity for the Years Ended
December 31, 1997 and 1996......................................................... 4
Statements of Cash Flows for the Years Ended December 31,
1997 and 1996...................................................................... 5
Notes to the Financial Statements.................................................. 6
</TABLE>
2. The schedule listed below and the Report of Independent Accountants on
financial statement schedule are filed as part of this Annual Report on
Form 10-K:
All schedules are omitted as the information required is inapplicable
or the information is presented in the financial statements or the
related notes.
3. The Exhibits listed in the Exhibit Index immediately preceding the Exhibits
filed as a part of this Annual Report on Form 10-K.
(b) The following current report on Form 8-K was filed by the Company
during the last quarter of the year ended December 31, 1997.
1. Current Report on Form 8-K dated December 2, 1997, filed with the
Securities and Exchange Commission on December 16, 1997, relating to
the closing of the merger between Clinical and Flagship pursuant to
which Clinical became affiliated with PQC.
There are no trademarks mentioned in this Annual Report on Form 10-K.
-45-
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
PHYSICIANS QUALITY CARE, INC.
By: /s/ Samantha J. Trotman
------------------------------------------
Samantha J. Trotman
Chief Financial Officer and Vice President
Date: March 31, 1998
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
- ----------------------------------- ----------------------------------- --------------
<S> <C> <C>
/s/ Jerilyn P. Asher Chief Executive Officer, Secretary March 31, 1998
- ----------------------------------- and Chairman of the Board
Jerilyn P. Asher (Principal Executive Officer)
/s/ Samantha J. Trotman Chief Financial Officer and Vice March 31, 1998
- ----------------------------------- President (Principal Financial and
Samantha J. Trotman Accounting Officer)
/s/ Dana Frank, M.D. President and Director March 31, 1998
- -----------------------------------
Dana Frank, M.D.
/s/ Arlan F. Fuller, Jr., M.D. Executive Vice President, Medical March 31, 1998
- ----------------------------------- Affairs and Director
Arlan F. Fuller, Jr., M.D.
/s/ Alphonse Calvanese, M.D. Director March 31, 1998
- -----------------------------------
Alphonse Calvanese, M.D.
</TABLE>
-46-
<PAGE>
<TABLE>
<S> <C> <C>
/s/ Leslie Fang, M.D. Director March 31, 1998
- -----------------------------------
Leslie Fang, M.D.
Director March __, 1998
- -----------------------------------
Stephen G. Pagliuca
/s/ Mark Wolpow Director March 31, 1998
- -----------------------------------
Mark Wolpow
/s/ Ira Fine, M.D. Director March 31, 1998
- -----------------------------------
Ira Fine, M.D.
/s/ Timothy T. Weglicki Director March 31, 1998
- -----------------------------------
Timothy T. Weglicki
</TABLE>
SUPPLEMENTAL INFORMATION TO BE FURNISHED WITH REPORTS FILED PURSUANT TO
SECTION 15(d) OF THE ACT BY REGISTRANTS WHICH HAVE NOT REGISTERED SECURITIES
PURSUANT TO SECTION 12 OF THE ACT.
Subsequent to the filing of this Annual Report on Form 10-K a proxy
statement will be sent to security holders.
-47-
<PAGE>
APPENDIX A
----------
Physicians Quality Care, Inc.
AUDITED FINANCIAL STATEMENTS
Years ended December 31, 1997 and 1996
CONTENTS
Report of Independent Auditors.................................... 1
Audited Financial Statements
Balance Sheets.................................................... 2
Statements of Operations.......................................... 3
Statements of Stockholders' Equity and Common
Stock Subject to Put............................................. 4
Statements of Cash Flows.......................................... 5
Notes to Financial Statements..................................... 6
<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, 1997 and 1996, and the related statements of
operations, stockholders' equity and common stock subject to put, and cash flows
for the period from March 20, 1995 (inception) to December 31, 1995 and the
years ended December 31, 1996 and 1997. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We 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, 1997 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 years ended December 31, 1996 and 1997, in conformity with generally
accepted accounting principles.
Boston, Massachusetts
March 13, 1998
1
<PAGE>
Physicians Quality Care, Inc.
Balance Sheets
<TABLE>
<CAPTION>
December 31
1997 1996
---------------------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 8,782,019 $ 136,926
Prepaid expenses 35,175 58,776
Due from affiliated physician practices 5,719,421 1,694,687
Other current assets 69,868 25,380
--------------------------------------
Total current assets 14,606,483 1,915,769
Investment in long-term affiliation agreements, less accumulated
amortization of $1,394,987 and $198,634 in 1997 and 1996,
respectively 57,340,059 32,401,305
Property and equipment, net 1,327,860 214,008
Other assets 136,181 258,491
--------------------------------------
Total assets $ 73,410,583 $ 34,789,573
======================================
<CAPTION>
December 31
1997 1996
--------------------------------------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable $ 1,218,766 $ 1,217,630
Accrued compensation 266,138 218,893
Accrued expenses 628,433 1,053,892
Income taxes payable 69,708
Note payable 200,000
Current portion of capital lease obligations 15,685
--------------------------------------
Total current liabilities 2,113,337 2,775,808
Capital lease obligations, less current maturities 55,867
Deferred taxes 746,062 464,877
Commitments and contingencies
Common stock, subject to put, 18,157,982 and 12,740,589 shares
authorized, issued and outstanding at December 31, 1997 and
1996, respectively 54,473,947 31,851,473
Stockholders' equity (deficit):
Preferred stock, $.01 par value, 10,000,000 shares authorized,
none issued
Class A common stock, $.01 par value, 75,000,000 shares
authorized, 8,505,208 and 7,236,033 shares issued and 7,492,708
and 6,223,533 outstanding at December 31, 1997 and 1996,
respectively 85,052 72,360
Class B-1 common stock, $.01 par value, 15,267,915 shares
authorized, 2,809,296 and 2,442,866 shares issued and
outstanding at December 31, 1997 and 1996, respectively 28,093 24,429
Class B-2 common stock, $.01 par value, 9,732,085 shares
authorized, 1,790,704 and 1,557,134 shares issued and
outstanding at December 31, 1997 and 1996, respectively 17,907 15,571
Class C common stock, $.01 par value, 13,846,155 shares
authorized, 7,692,309 shares issued and outstanding at
December 31, 1997 76,923
Additional paid-in capital 49,846,913 21,117,622
Accumulated deficit (33,967,526) (21,578,309)
Less treasury stock, at cost, 1,012,500 shares (10,125) (10,125)
--------------------------------------
Total stockholders' equity (deficit) 16,077,237 (358,452)
--------------------------------------
Total liabilities and stockholders' equity $ 73,410,583 $ 34,789,573
======================================
See accompanying notes.
</TABLE>
2
<PAGE>
Statements of Operations
<TABLE>
<CAPTION>
PERIOD FROM
MARCH 20
YEAR ENDED YEAR ENDED 1995 (INCEPTION)
DECEMBER 31 DECEMBER 31 TO DECEMBER 31
1997 1996 1995
----------------------------------------------------------
<S> <C> <C> <C>
Net patient service revenue $ 46,037,234 $ 6,026,452
Less: amounts retained by
physician groups (15,596,162) (2,194,571)
----------------------------------------------------------
Management fee revenue 30,441,072 3,831,881
Operating expenses:
Nonphysician salaries and benefits 13,864,792 1,816,309
Other practice expenses 12,721,065 1,822,262
Corporate and regional expenses 7,329,132 4,666,334 $ 2,061,737
Depreciation and amortization 2,163,866 280,490 6,704
Provision for bad debts 1,105,616 214,404
Total expenses 37,184,471 8,799,799 2,068,441
----------------------------------------------------------
Operating loss (6,743,399) (4,967,918) (2,068,441)
Other income (expense):
Interest income 498,095 91,104 108,177
Interest expense (161,938) (104,255) (90,000)
Loss of investment in subsidiary (98,269)
----------------------------------------------------------
237,888 (13,151) 18,177
Loss before income taxes (6,505,511) (4,981,069) (2,050,264)
Income tax (benefit)/provision (795,281) 78,128 32,000
----------------------------------------------------------
Net loss $ (5,710,230) $ (5,059,197) $(2,082,264)
==========================================================
Net loss available to common stock $(12,389,217) $(19,496,045) $(2,082,264)
==========================================================
Net loss per common share basic $(0.41) $(1.81) $(0.27)
==========================================================
</TABLE>
See accompanying notes.
3
<PAGE>
Physicians Quality Care, Inc.
Statements of Stockholders' Equity
and Common Stock Subject to Put
Period from March 20, 1995 (inception) to December 31, 1995,
and year ended December 31, 1996 and December 31, 1997
<TABLE>
<CAPTION>
Common Stock Class A Common Stock
-------------------------------------------------------------------
Shares Amount Shares Amount
-------------------------------------------------------------------
<S> <C> <C> <C> <C>
Issuance of common stock 7,706,250 $ 77,063
Issuance of convertible preferred stock, net
of issuance cost of $98,153
Issuance of warrants
Loan to stockholders
Net loss
-------------------------------------------------------------------
Balance at December 31, 1995 7,706,250 77,063
Purchase of treasury shares
Recapitalization in connection with
restatement of Charter (7,706,250) (77,063) 7,706,250 $ 77,063
Reclassification of common stock in
connection with recapitalization (5,897,914) (58,980)
Accretion of common stock subject to
put to fair value
Issuance of Class A common stock upon
conversion of Series A convertible
preferred stock 1,666,151 16,662
Issuance of Class A common stock 10,604,221 106,041
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 $2,051,095
Payment received from stockholder
Net loss
-------------------------------------------------------------------
Balance at December 31, 1996 - - 7,236,033 72,360
Issuance of Class A common stock, net
of issuance cost $108,475 6,686,568 66,866
Reclassification of common stock
subject to put to fair value (5,417,393) (54,174)
Issuance of Class B-1 and B-2 common
stock for cash
Accretion of common stock subject to
put to fair value
Issuance of Class C common stock for cash
net of issuance cost of $742,088
Options issued at below fair value in
connection with affiliation
Net loss
-------------------------------------------------------------------
Balance at December 31, 1997 - - 8,505,208 $ 85,052
===================================================================
<CAPTION>
Class B-1 Common Stock Class B-2 Common Stock
---------------------------------------------------------------------
Shares Amount Shares Amount
---------------------------------------------------------------------
<S> <C> <C> <C> <C>
Issuance of common stock
Issuance of convertible preferred stock, net
of issuance cost of $98,153
Issuance of warrants
Loan to stockholders
Net loss
---------------------------------------------------------------------
Balance at December 31, 1995
Purchase of treasury shares
Recapitalization in connection with
restatement of Charter
Reclassification of common stock in
connection with recapitalization
Accretion of common stock subject to
put to fair value
Issuance of Class A common stock upon
conversion of Series A convertible
preferred stock
Issuance of Class A common stock
Reclassification of common stock
subject to put
Issuance of Class B-1 and B-2 common
stock for cash, net of issuance costs
of $2,051,095 2,442,866 $24,429 1,557,134 $15,571
Payment received from stockholder
Net loss
---------------------------------------------------------------------
Balance at December 31, 1996 2,442,866 24,429 1,557,134 15,571
Issuance of Class A common stock, net
of issuance cost $108,475
Reclassification of common stock
subject to put to fair value
Issuance of Class B-1 and B-2 common
stock for cash 366,430 3,664 233,570 2,336
Accretion of common stock subject to
put to fair value
Issuance of Class C common stock for cash
net of issuance cost of $742,088
Options issued at below fair value in
connection with affiliation
Net loss
---------------------------------------------------------------------
Balance at December 31, 1997 2,809,296 $28,093 1,790,704 $17,907
=====================================================================
<CAPTION>
Class C Series A Convertible
Common Stock Preferred Stock Treasury Stock Additional
---------------------------------------------------------------------- Pain-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 cost of $98,153 1,666,151 $ 3,750,609
Issuance of warrants $ 420,000
Loan to stockholders
Net loss
---------------------------------------------------------------------------------------
Balance at December 31, 1995 1,666,151 3,750,609 420,000
Purchase of treasury shares (1,012,500) $(10,125)
Recapitalization in connection with
restatement of Charter
Reclassification of common stock in
connection with recapitalization (248,958)
Accretion of common stock subject to
put to fair value
Issuance of Class A common stock upon
conversion of Series A convertible
preferred stock (1,666,151) (3,750,609) 3,733,947
Issuance of Class A common stock 26,341,989
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 $2,051,095 7,908,905
Payment received from stockholder
Net loss
----------------------------------------------------------------------------------------
Balance at December 31, 1996 - - (1,012,500) (10,125) 21,117,622
Issuance of Class A common stock, net
of issuance cost $108,475 18,718,611
Reclassification of common stock
subject to put to fair value (15,889,309)
Issuance of Class B-1 and B-2 common
stock for cash 1,494,000
Accretion of common stock subject to
put to fair value
Issuance of Class C common stock for cash
net of issuance cost of $742,088 7,692,309 $76,923 24,180,989
Options issued at below fair value in
connection with affiliation 225,000
Net loss
----------------------------------------------------------------------------------------
Balance at December 31, 1997 7,692,309 76,923 - $ - (1,012,500) $(10,125) $ 49,846,913
=========================================================================================
<CAPTION>
Common
Additional Total Stock
Paid-in Accumulated Due from Stockholders' Subject
Capital Deficit Stockholders Equity to Put
--------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Issuance of common stock $ 77,063
Issuance of convertible preferred stock, net
of issuance cost of $98,153 3,750,609
Issuance of warrants $ 420,000 420,000
Loan to stockholders $(61,875) (61,875)
Net loss $ (2,082,264) (2,082,264)
--------------------------------------------------------------------------------------
Balance at December 31, 1995 420,000 (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 (248,958) (307,938) $ 307,938
Accretion of common stock subject to
put to fair value (14,436,848) (14,436,848) 14,436,848
Issuance of Class A common stock upon
conversion of Series A convertible
preferred stock 3,733,947
Issuance of Class A common stock 26,341,989 26,448,030
Reclassification of common stock
subject to put (17,038,261) (17,106,687) 17,106,687
Issuance of Class B-1 and B-2 common
stock for cash, net of issuance costs
of $2,051,095 7,908,905 7,948,905
Payment received from stockholder 51,750 51,750
Net loss (5,059,197) (5,059,197)
--------------------------------------------------------------------------------------
Balance at December 31, 1996 21,117,622 (21,578,309) (358,452) 31,851,473
Issuance of Class A common stock, net
of issuance cost $108,475 18,718,611 18,785,477
Reclassification of common stock
subject to put to fair value (15,889,309) (15,943,483) 15,943,483
Issuance of Class B-1 and B-2 common
stock for cash 1,494,000 1,500,000
Accretion of common stock subject to
put to fair value (6,678,987) (6,678,987) 6,678,991
Issuance of Class C common stock for cash
net of issuance cost of $742,088 24,180,989 24,257,912
Options issued at below fair value in
connection with affiliation 225,000 225,000
Net loss (5,710,230) (5,710,230)
--------------------------------------------------------------------------------------
Balance at December 31, 1997 $ 49,846,913 $ (33,967,526) $ - $ 16,077,237 $54,473,947
======================================================================================
See accompanying notes.
</TABLE>
4
<PAGE>
Physicians Quality Care, Inc.
Statements of Cash Flows
<TABLE>
<CAPTION>
PERIOD FROM
MARCH 20
1995 (INCEPTION)
TO
DECEMBER 31 DECEMBER 31
1997 1996 1995
--------------------------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net loss $(5,710,230) $(5,059,197) $(2,082,264)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation and amortization 2,163,866 280,490 6,704
Interest accretion on convertible promissory note 90,000 90,000
Changes in operating assets and liabilities, net of effects
of business acquisitions:
Increase in due from affiliated physician practices (6,121,758) (2,522,221)
(Increase) decrease in prepaid expenses and other assets (614,070) 11,402 (335,853)
Increase (decrease) in accounts payable, accrued
compensation and accrued expenses 540,064 1,672,530 817,885
Increase (decrease) in income taxes payable (69,708) 37,708 32,000
-----------------------------------------------------------
Net cash used in operating activities (9,811,836) (5,489,288) (1,471,528)
INVESTING ACTIVITIES
Purchase of property and equipment (1,657,453) (120,218) (97,350)
Cash paid for affiliation related costs (1,016,096) (1,839,274)
Cash paid for affiliations (7,277,412) (5,880,974)
-----------------------------------------------------------
Net cash used in investing activities (9,950,961) (7,840,466) (97,350)
FINANCING ACTIVITIES
Proceeds from issuance of common stock, net of issuance costs 28,599,906 8,309,655 15,188
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
(Payment to) proceeds from note payable (200,000) 200,000
Proceeds from convertible promissory note 1,320,000
Proceeds from repayment of shareholder loan 51,750
(Increase) decrease in deferred financing costs 79,536 438,942 (457,138)
Payments on capital lease obligations (71,552) (13,448)
Net cash provided by financing activities 28,407,890 9,986,899 5,048,659
-----------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 8,645,093 (3,342,855) 3,479,781
Cash and cash equivalents at beginning of period 136,926 3,479,781
-----------------------------------------------------------
Cash and cash equivalents at end of period $ 8,782,019 $ 136,926 $ 3,479,781
===========================================================
</TABLE>
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest was $119,000, $14,000 and $0 for the years ended
December 31, 1997, 1996 and 1995, respectively.
Cash paid for income taxes was $230,000, $32,000 and $0 for the years ended
December 31, 1997, 1996 and 1995, respectively.
During 1997 and 1996 $15,943,000 and $23,587,000, respectively was paid in
connection with affiliations in the form of Class A common stock.
During 1996, the Company converted a bridge loan and a promissory note payable
totalling $2,500,000 into shares of Class A common stock.
See accompanying notes.
5
<PAGE>
Physicians Quality Care, Inc.
Notes to Financial Statements
December 31, 1997
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.
During 1996 and 1997, the Company completed affiliations with physician
practices in Springfield, Massachusetts, and in the Baltimore/Annapolis,
Maryland area. 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. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The Company enters into long-term affiliation arrangements with physician
practices, and through mergers and asset purchases, the assets and liabilities
of the physician practices are transferred to a professional corporation
affiliated with the Company. Each affiliated group has a nine member joint
Policy Board that is responsible for final decisions related to management and
administrative policies for the overall operations of the affiliated group
including decisions regarding; scope of services, patient acceptance policies
and procedures, pricing of services, negotiation and execution of contracts and
approval of operating and capital budgets. Four members of the Joint Policy
Board are appointed by the Company and four members are appointed by the
affiliated group. The President, who is the ninth member of the Joint Policy
Board, is appointed by the Company; however, the Company may only select the
President from three physicians nominated by physicians employed by the
affiliated group. Therefore, the Company cannot exercise exclusive authority
over the decision making process of the Joint Policy Board. Accordingly, for
financial reporting purposes, the Company does not consolidate the operating
results and accounts of the physician practices. For display purposes, the
Company has presented the physician practice revenues and amounts retained by
the physician practices in the accompanying statements of operations to arrive
at the Company's 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 and 1997, respectively, the Company estimates that approximately 40%
and 35% of net patient service revenue was received under government-sponsored
healthcare programs (principally, the Medicare and Medicaid programs).
6
<PAGE>
Physicians Quality Care, Inc.
Notes to Financial Statements (continued)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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.
MANAGEMENT FEE REVENUE
Management fee revenue represents net patient service revenue less amounts
retained by physician practices. The amounts retained by physician practices
represents amounts paid to the physicians pursuant to the service agreements
between the Company and the physician practices. Physician baseline
compensation is determined based on an agreed-upon percentage (80% to 95%) of
the physicians' historic compensation levels, but is subject to reduction if
physician practice net revenues are insufficient to cover the baseline
compensation for two of the physician groups. 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 $1.5 million. Net profits remaining after the second allocation are then
allocated equally between the Company and the physician groups. The net profits
for the Other Affiliated Group are allocated equally between the Company and the
physician groups.
The following details the amounts retained by physician groups and the
management fee revenue for the year ended December 31, 1997 and 1996:
<TABLE>
<CAPTION>
1997 1996
----------------------------------------
<S> <C> <C>
Amounts Retained by Physician Groups:
Excess net profits subject to allocation $ 759,041 $ 241,143
Less amount allocated to the Company (568,302) (136,957)
----------------------------------------
Amount allocated to physician groups 190,739 104,186
Physician baseline compensation 15,405,423 2,090,385
-----------------------------------------
$15,596,162 $2,194,571
========================================
Management Fee Revenue:
Amount allocated to Company $568,302 $136,957
Reimbursement of practices expenses 29,872,770 3,694,924
-----------------------------------------
$30,441,072 $3,831,881
========================================
</TABLE>
7
<PAGE>
Physicians Quality Care, Inc.
Notes to Financial Statements (continued)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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.
INVESTMENT IN LONG TERM AFFILIATION AGREEMENTS
The cost of the long-term affiliation agreements in excess of the underlying
equity of the affiliated groups is being amortized on a straight-line basis over
25 years.
STOCK COMPENSATION ARRANGEMENTS
As permitted under SFAS 123 the Company accounts for its stock compensation
arrangements under the provisions of APB Opinion No. 25, "Accounting for Stock
Issued to Employees" (APB 25). Because the exercise price of options granted
during 1997, 1996 and 1995 equals the fair value of the underlying stock at date
of grant, no compensation expense is required under APB 25.
8
<PAGE>
Physicians Quality Care, Inc.
Notes to Financial Statements (continued)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The Company has adopted disclosure-only provisions of Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation" (SFAS
123). 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.
NET LOSS PER COMMON SHARE
In February 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128 "Earnings per Share" (SFAS 128), which
establishes standards for computing and presenting earnings per share (EPS) and
applies to entities with publicly held common stock or potential common stock.
This Statement is effective for financial statements issued for both interim and
annual periods ending after December 15, 1997 and requires restatement of all
prior period EPS data. The Company has applied this standard in 1997 and has
restated EPS for 1995 and 1996.
Basic net loss per share of common stock is computed by dividing the net loss
available to common stock by the weighted-average number of common shares
outstanding during each period presented. 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.
9
<PAGE>
Physicians Quality Care, Inc.
Notes to Financial Statements (continued)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
PENDING ACCOUNTING STANDARDS
In June 1997, the Financial Accounting Standards Board issued SFAS No. 130,
Reporting Comprehensive Income and SFAS No. 131, Disclosures About Segments of
an Enterprise and Related Information. SFAS No. 130 establishes standards for
reporting and displaying comprehensive income and its components. SFAS No. 131
establishes standards for public companies to report information about operating
segments in financial statements, and supersedes SFAS No. 14, Financial
Reporting for Segments of an Business Enterprise, but retains the requirements
to report information about major customers. SFAS No. 130 and SFAS No. 131 are
effective for the Company in 1998. The Company does not believe the adoption of
these Statements will have a significant effect on its financial statements.
In November 1997, the Financial Accounting Standards Board's Emerging Issues
Task Force reached a consensus on its Issue 97-2, Consolidation of Physician
Practice Entities which is effective for the Company for its 1998 annual
financial statements. The Company is currently evaluating the guidance
contained in the consensus as it affects its current model for its affiliation
structures. However, management does not believe implementation of the
consensus guidance will materially affect the financial position or its net
results of operations.
RECLASSIFICATION
Certain amounts in the financial statements have been reclassed for the basis of
presenting corresponding items in the comparative financial statements.
3. AFFILIATIONS
Springfield
On January 1, 1997, the Company entered into long-term affiliation arrangements
with 2 physician practices (5 physicians) located in Western Massachusetts (the
Springfield Affiliation). On August 30, 1996, the Company entered into long-
term affiliation arrangements with 7 physician practices (32 physicians) located
in Western Massachusetts (the Springfield Affiliation). In connection with
these transactions, the assets and liabilities of the physician practices were
transferred to a professional corporation affiliated with the Company, Medical
Care Partners, P.C. (MCP) and the physicians became employees of MCP. The
aggregate consideration paid to the physicians for the 1997 affiliation was
approximately $2.5 million, of which $831,000
10
<PAGE>
Physicians Quality Care, Inc.
Notes to Financial Statements (continued)
3. AFFILIATIONS (CONTINUED)
was paid in cash, $1.4 million was paid by the issuance of 572,493 shares of
Class A common stock, and $225,000 was paid by the issuance of options to
purchase shares of common stock at below fair value. The aggregate consideration
paid to the physicians for the 1996 affiliation 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 Class A common stock. Up to an additional $2.15 million,
payable in Class A common stock, was available to be paid to certain physicians
if revenue goals were met. During 1997, $2.1 million of additional consideration
was accrued based on the achievement of these goals and will be paid during
1998. In addition, 29 physicians each received 2,500 options to purchase common
stock at an exercise price equal to fair value.
Baltimore
On December 1, 1997, the Company entered into a long-term affiliation
arrangement with a physician practice (58 physicians) located in the
Baltimore/Annapolis, Maryland area (the Flagship II Affiliation). In connection
with this transaction, the assets and liabilities of the physician practices
were transferred to a newly formed professional corporation affiliated with the
Company, Flagship Health II, P.A. (Flagship II) and the physicians became
employees of Flagship II. The aggregate consideration paid to the physicians
for the affiliation was approximately $17.4 million, of which $3 million was
paid in cash and $14.4 million was paid by the issuance of 4,800,000 shares of
Class A common stock.
On December 11, 1996, the Company entered into long-term affiliation
arrangements with 15 physician practices (59 physicians) located in the
Baltimore/Annapolis, Maryland area. In connection with this transaction, the
assets and liabilities of the physician practices were transferred to a newly
formed professional corporation affiliated with the Company, Flagship Health I,
P.A. (Flagship I) and the physicians became employees of Flagship I. The
aggregate consideration paid to the physicians for the affiliation 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 Class A common stock.
During 1997, the Company issued 44,900 shares of Class A common stock to the
Flagship I physicians totalling $112,000 for the settlement of working capital
adjustments.
As described in Note 2, the Company does not consolidate the operating results
or accounts of the affiliated physician practices for financial reporting
purposes. Accordingly, its investments in these long-term affiliation
agreements are accounted for in a manner similar to that used in the application
of the equity method of accounting. Therefore, the costs of the long-term
affiliation agreements in excess of the underlying equity of affiliated groups
is accounted for as an intangible asset and amortized on a straight-line basis
over 25 years.
11
<PAGE>
Physicians Quality Care, Inc.
Notes to Financial Statements (continued)
3. AFFILIATIONS (CONTINUED)
The allocation of the costs of the 1997 and 1996 affiliations were as follows:
<TABLE>
<CAPTION>
1997 AFFILIATIONS
------------------------------------------
SPRINGFIELD FLAGSHIP II
------------------------------------------
<S> <C> <C>
Cash $30,000
Fixed assets 21,000 $1,171,000
Other current assets 150,000 4,100,000
Intangibles 2,327,000 15,795,000
Accounts payable (12,000) (905,000)
Other liabilities (29,000) (2,762,000)
------------------------------------------
2,487,000 17,399,000
Other affiliation costs 115,000 461,000
------------------------------------------
Investment in long-term affiliation
agreements $2,602,000 $17,860,000
==========================================
<CAPTION>
1996 AFFILIATIONS
-------------------------------------------
SPRINGFIELD FLAGSHIP I
------------------------------------------
<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
------------------------------------------
Investment in long-term affiliation
agreements $10,946,000 $21,471,000
==========================================
</TABLE>
4. ACQUISITIONS
On October 24, 1997, the Company acquired a 50% interest in TLC Management
Company, a medical management company and a 50 % interest in Total Quality
Practice Management, Inc., a practice management company providing Medicare risk
management services. Both companies are based in Atlanta, GA. Total aggregate
consideration was $4 million paid in cash and an obligation to issue a $1
million letter of credit. As of December 31, 1997, the letter of credit has not
been issued. The Company has accounted for the transaction using the equity
method of accounting for investments in common stock. For the year ended
December 31, 1997, the net loss in investment was $98,269.
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
1997 1996
---------------------------------
<S> <C> <C>
Equipment $1,504,452 $132,163
Furniture and fixtures 10,863 34,110
Office equipment 32,753 20,509
Leasehold improvements - 85,000
---------------------------------
1,548,068 271,782
Less accumulated depreciation (220,208) (57,774)
---------------------------------
$1,327,860 $214,008
=================================
</TABLE>
Depreciation expense was $543,591, $81,853 and $6,704 for years ended December
31, 1997, 1996 and for the period from inception to December 31, 1995,
respectively.
6. TRANSACTIONS WITH RELATED PARTIES
The amounts due under the service agreements with the affiliated practices
represent management fee revenue due the Company net of nonphysician salaries
and benefits and other practice related expenses paid by the Company on behalf
of the affiliated practices.
The amounts due as a result of working capital and other adjustments at date of
affiliation, represent post closing adjustments provided for as part of the
affiliation agreements. The corresponding credits were reflected as a reduction
in the cost of the long-term affiliation agreements.
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.
13
<PAGE>
Physicians Quality Care, Inc.
Notes to Financial Statements (continued)
6. TRANSACTIONS WITH RELATED PARTIES (CONTINUED)
The following summarizes the amounts due from related parties:
<TABLE>
<CAPTION>
DECEMBER 31
1997 1996
-------------------------------------
<S> <C> <C>
Due under Service agreements:
Flagship I & II $3,164,696 $69,774
MCP 2,219,318 520,596
Working capital and other adjustments at date
of affiliation:
Flagship I & II 72,000 506,702
MCP 263,407 597,615
--------------------------------------
$5,719,421 $1,694,687
======================================
</TABLE>
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.
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 6). Pursuant to the Management Agreement, the Company has
agreed to pay Bain a management fee of $750,000, 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.
7. LEASES
The Company and its affiliates maintain operating leases for property and
certain office equipment. The property leases contain renewal options and
escalation clauses and require payments of certain utilities and taxes over
established base amounts.
Operating lease expense amounted to $3,136,822, $535,479 and $14,679 for the
years ended December 31, 1997 and 1996 and the period from inception to December
31, 1995, respectively.
Future minimum lease payments under noncancelable capital and operating leases
follow. All amounts, excluding approximately $162,000 in 1998, are the
obligations of the Company's affiliated groups.
<TABLE>
<CAPTION>
OPERATING LEASES
----------------
<S> <C>
1998 $ 4,349,000
1999 3,932,000
2000 3,721,000
2001 3,081,000
2002 2,417,000
Thereafter 2,673,000
___________
$20,173,000
===========
</TABLE>
14
<PAGE>
Physicians Quality Care, Inc.
Notes to Financial Statements (continued)
8. STOCKHOLDERS' EQUITY
Preferred Stock
- ---------------
During June 1995, the Company issued 1,666,151 shares of Series A Convertible
Preferred Stock (Preferred Stock), par value $.01, that was converted to Class A
common stock on a one-for-one basis in connection with the recapitalization
discussed below. 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.
In connection with the recapitalization, the Company authorized 10 million
shares of $.01 par value preferred stock.
Common Stock
- ------------
The Company has four classes of common stock; Class A, Class B-1, Class B-2 and
Class C. The primary difference between these four classes is voting rights.
Holders of Class A, Class B-1, Class B-2 and Class C common shares are entitled
to elect two, one, two 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, Class B-2 and Class C common shares, with each
share having a single vote.
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 and
replaced with Class A common shares.
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.
15
<PAGE>
Physicians Quality Care, Inc.
Notes to Financial Statements (continued)
8. STOCKHOLDERS' EQUITY (CONTINUED)
During August 1996, 625,000 shares of Class A common stock were issued in
connection with the conversion of a promissory note.
In connection with the Springfield Affiliation described in Note 3, 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 3, 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.
In April 1997, the Company issued 366,430 Class B-1 common shares, 233,570 Class
B-2 common shares and warrants to purchase 865,500 shares of Class B common
stock at $2.50 per share to the Institutional Investors in exchange for cash
proceeds of $1.5 million.
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.
In connection with the Flagship II Affiliation described in Note 3, on June 30,
1997, the Company issued 7,692,309 Class C common shares, at $3.25 per share to
the Institutional Investors in exchange for cash proceeds of $25 million, which
after issuance costs of approximately $700k, netted to approximately $24.3
million.
16
<PAGE>
Physicians Quality Care, Inc.
Notes to Financial Statements (continued)
8. STOCKHOLDERS' EQUITY (CONTINUED)
Puts and Calls
- --------------
Of the Company's outstanding common stock, 18,157,982 shares as of December 31,
1997 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,
1,029,749 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 June,
1998. Consequently, common shares have been recorded at fair value outside of
permanent equity in the accompanying balance sheet.
Under shareholder agreements as of December 31, 1997, the Company has the right
to purchase 15,471,063 shares of common stock 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.
In addition to the previously discussed put options, the Flagship II physicians
have the right to require the Company to repurchase (in the form of a five year
non-interest bearing note) 4.8 million shares of Class A common stock issued in
the Flagship II affiliation (note 3) at a purchase price of $3.00 per share if
the Company has not completed an underwritten initial public offering prior to
December 1, 2001.
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.
17
<PAGE>
Physicians Quality Care, Inc.
Notes to Financial Statements (continued)
8. STOCKHOLDERS' EQUITY (CONTINUED)
Warrants
- --------
At December 31, 1997, warrants to purchase shares of Class A, Class B and
Class C common stock were outstanding as follows:
<TABLE>
<CAPTION>
NUMBER OF SHARES PRICE PER SHARE 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
6,415,000 2.50 2003
50,000 3.00 2003
7,692,309 3.25 2004
</TABLE>
Shares Reserved for Future Issuance
- -----------------------------------
At December 31, 1997, the Company has reserved 24,865,381 shares of Common
Stock for future issuance for the following purposes:
Equity incentive plan 2,710,795
Warrants 15,211,535
-----------
17,922,330
===========
18
<PAGE>
Physicians Quality Care, Inc.
Notes to Financial Statements (continued)
9. Earnings Per Share
The following table sets forth the computation of basic earnings per share:
<TABLE>
<CAPTION>
1997 1996 1995
---------------------------------------------------------
<S> <C> <C> <C>
Numerator:
Net loss $ (5,710,230) $ (5,059,197) $(2,082,264)
Accretion of common stock subject to
put to fair value (6,678,987) (14,436,848)
---------------------------------------------------------
Numerator for basic earnings per
share-income available to common
stockholders (12,389,217) (19,496,045) (2,082,264)
Denominator for basic earnings per
share - weighted-average shares 30,335,607 10,785,605 7,706,250
---------------------------------------------------------
Basic earnings per share $ (0.41) $ (1.81) $ (0.27)
=========================================================
</TABLE>
The effect of options (Note 9) and warrants (Note 7) are not considered, as it
would be anti-dilutive for the years presented. At December 31, 1997, these
securities, if converted, could potentially dilute basic earnings per common
share in the future.
10. 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 3.5 million 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.
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.
19
<PAGE>
Physicians Quality Care, Inc.
Notes to Financial Statements (continued)
10. EMPLOYEE COMPENSATION PLANS (CONTINUED)
Pro forma information regarding net income and earnings per share, as if the
Company had used the fair value method of SFAS 123 to account for stock options
issued under its equity incentive plan is presented below. The fair value for
these options was estimated at the date of grant using the "minimum value
method" prescribed by SFAS 123. The following weighted-average assumptions were
used to determine the fair value for 1997, 1996 and 1995, respectively: a risk-
free interest rate of 6.08%, 6.2% and 6.0%, an expected dividend yield of 0%
each year, and a weighted-average expected life of the options of six years.
<TABLE>
<CAPTION>
1997 1996 1995
----------------------------------------------------------
<S> <C> <C> <C>
Pro forma net income $(13,379,027) $(19,541,921) $(2,084,340)
Pro forma basic earnings
per share $ (0.44) $ (1.81) $ (0.27)
</TABLE>
A summary of the Company's stock option activity and related information is as
follows:
<TABLE>
<CAPTION>
PERIOD FROM MARCH 20 1995
YEAR ENDED YEAR ENDED (INCEPTION) TO DECEMBER 31,
DECEMBER 31, 1997 DECEMBER 31, 1996 1995
------------------------------------------------------------------------------------------------------
WEIGHTED
AVERAGE
WEIGHTED AVERAGE WEIGHTED AVERAGE EXERCISE
SHARES EXERCISE PRICE SHARES EXERCISE PRICE SHARES PRICE
------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of
period 811,012 $ 0.95 476,086 $ 0.10
Granted 2,181,033 2.69 346,676 2.12 476,086 $0.10
Exercised (90,375) (0.04)
Forfeited (190,875) (1.97) (11,750) (0.08)
------------------------------------ --------------------------------------
Outstanding at end of period 2,710,795 $ 2.25 811,012 $ 0.95 476,086 $0.10
=================== ================= ===============
Exercisable at period end 600,099 140,487 --
Weighted-average fair value =================== ================== ===============
of options granted during
period $0.85 $ 0.69 $ 0.02
</TABLE>
20
<PAGE>
Physicians Quality Care, Inc.
Notes to Financial Statements (continued)
10. EMPLOYEE COMPENSATION PLANS (CONTINUED)
The following table summarizes information about stock options outstanding at
December 31, 1997:
<TABLE>
<CAPTION>
Weighted-Average
Remaining Life
EXERCISE PRICE OPTIONS OUTSTANDING Options Exercisable (Years)
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C>
$ 0.01 241,586 152,557 7.4
0.25 91,000 40,500 7.0
0.85 109,676 27,669 8.1
1.00 150,000 150,000 9.0
2.50 1,311,000 229,373 9.2
3.00 316,533 0 9.8
3.25 491,000 0 8.5
</TABLE>
All options granted vest ratable 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, 1997 and 1996,
respectively, were approximately $528,000 and $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 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 $518,000 and $187,000 to the money
purchase pension plan in 1997 and 1996, respectively.
21
<PAGE>
Physicians Quality Care, Inc.
Notes to Financial Statements (continued)
11. Income Taxes
The Company consolidates the affiliated physician practices for Federal and
State income tax purposes.
Significant components of the provision for income taxes are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1997 1996
-----------------------------------
<S> <C> <C>
Current:
Federal $22,057
State $ 111,123 56,071
-----------------------------------
111,123 78,128
Deferred:
Federal (770,443)
State (135,961)
-----------------------------------
(906,404)
-----------------------------------
Total (benefit) expense $(795,281) $78,128
===================================
</TABLE>
The components of the Company's deferred income taxes are as follows:
<TABLE>
<CAPTION>
DECEMBER 31
1997 1996
<S> <C> <C>
Deferred tax liabilities:
Adjustment of cash basis practices to accrual basis $(1,475,782) $(1,073,048)
Fixed assets differences (514,408) 85,360
---------------------------------
Total deferred tax liabilities (1,990,190) (987,688)
Deferred tax assets:
Net operating loss carryover 3,660,488 1,783,956
Other accrued liabilities 194,225 98,529
Other (charitable contribution carryover) 9,617
Capitalized start-up costs 498,410 664,547
Allowance for doubtful accounts 282,122 85,763
---------------------------------
4,644,862 2,632,795
Less valuation allowance (3,400,734) (2,109,984)
---------------------------------
Net deferred tax assets 1,244,128 522,811
---------------------------------
Net deferred tax assets (liabilities) $ (746,062) $ (464,877)
=================================
</TABLE>
22
<PAGE>
Physicians Quality Care, Inc.
Notes to Financial Statements (continued)
11. INCOME TAXES (CONTINUED)
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>
YEAR ENDED DECEMBER 31
1997 1996
----------------------------------------------------------------
<S> <C> <C> <C> <C>
Federal taxes at statutory rates $(2,211,874) 34% $(1,721,439) 35%
Add (deduct):
State income taxes, net of federal
benefit (300,555) 4.6 (209,474) 4.3
Change in valuation allowance
attributable to operations 1,290,750 (19.8) 1,999,182 (40.6)
Goodwill 402,404 6.2
Other 23,994 (0.4) 9,859 (0.2)
----------------------------------------------------------------
$ (795,281) 12.2% $ 78,128 (1.5)%
=================================================================
</TABLE>
At December 31, 1997, the Company had net operating loss carryforwards for
federal income tax purposes of approximately $9,151,000 which expire through the
year 2012. 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 $3,400,734
has been recognized to offset the deferred tax assets, including these
carryforwards, since uncertainty exist with respect to future realization of
such carryforwards. The 1997 increase in the valuation allowance of $1,290,750
is comprised of an increase in the allowance of $2,197,154 relating to the
creation of deferred tax assets in the current period that may not be realized
in future periods, and a decrease of $906,404 relating to the utilization of a
portion of these deferred tax assets to offset acquired deferred tax liabilities
unable to be offset by preacquisition deferred tax assets.
23
<PAGE>
Physicians Quality Care, Inc.
Notes to Financial Statements (continued)
12. CONTINGENCY
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 judgement that
843,750 of the shares registered in Mr. Greenberg's name (out of 1,012,500
shares of class A Common Stock originally granted to Mr. Greenberg) have
"vested" under his employment agreement. The complaint involves a dispute over
whether an amendment in December 1996 to Mr. Greenberg's employment agreement is
valid and whether Mr. Greenberg resigned or was terminated in January 1997. The
Company maintains that the amendment was fraudulently induced based upon a
commitment by Mr. Greenberg for long-term employment with the Company and that
Mr. Greenberg resigned in January 1997. Under such facts, Mr. Greenberg is
entitled to have no more than 450,000 shares of Class A Common Stock (and,
depending upon counterclaims that may be brought by the Company, possibly fewer)
and is entitled to no severance payment. Mr. Greenberg claims that 843,750
shares of Class A Common Stock have vested and that his employment was
terminated in January 1997 by the Company entitling him to severance payments of
$440,000. While the Company is not able to predict the outcome of this
litigation, it does not believe its ultimate resolution will materially affect
either the Company's financial position or its results of operations.
13. SUBSEQUENT EVENT
In February 1998 the Company entered into affiliation arrangements with 2
physicians located in the Baltimore/Annapolis, Maryland area. The aggregate
total consideration paid to the physicians in connection with the affiliation
was approximately $1.5 million, payable in a combination of cash and common
stock.
24
<PAGE>
EXHIBIT INDEX
-------------
<TABLE>
<CAPTION>
Exhibit No. Description Page
- ----------- ------------------------------------------------------------ ----
<C> <C> <S> <C>
3.1(1) -- Restated Certificate of Incorporation of the Registrant (as
amended on June 23, 1997)
3.2(1) -- Amended and Restated By-Laws of the Registrant (as
amended on June 19, 1997)
4.1(1) -- Specimen certificate for shares of Class A Common Stock
4.2(1) -- 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(1) -- 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
4.5 -- Amendment No. 2 to the Stockholders Agreement
4.6(1) -- Stockholders Agreement dated August 9, 1996 between the
Registrant and certain Springfield Stockholder Physicians
4.7(1) -- Registration Rights Agreement dated August 9, 1996, by
and among the Registrant and certain Springfield
Stockholder Physicians
10.1(1) -- 1995 Equity Incentive Plan
10.2(1) -- Management Agreement dated August 30, 1996, between
the Registrant and Bain Capital Partners V, L.P., a
Delaware limited partnership (the "Management
Agreement")
10.3(1) -- Lease dated November 1995 between Shorenstein
Management, Inc. as trustee for SRI Two Realty Trust and
the Registrant
10.4(1) -- Lease dated December 9, 1996 between Steven M. Roberts,
trustee of Northernedge/Plant One Realty Trust and the
Registrant
</TABLE>
1
<PAGE>
10.5(1) -- 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(1) -- 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(1) -- 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(1) -- Form of Affiliated Agreement dated December 11, 1996,
among the Registrant, the Flagship Affiliated Group and
certain of the Flagship Stockholder Physicians
10.9(1) -- Services Agreement dated December 11, 1996, between the
Registrant and the Flagship Affiliated Group (the "Flagship
Service Agreement")
10.10(1) -- Form of Employment Agreement dated December 11,
1996, between the Flagship Affiliated Group and each
Flagship Stockholder Physician
10.11(1) -- 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(1) -- Form of Merger Agreement among the Registrant, the
Springfield Affiliated Group and the Springfield
Stockholder Physicians and their practices
10.13(1) -- Form of Asset Purchase Agreement among the Registrant,
the Springfield Affiliated Group and certain Springfield
Stockholder Physicians
10.14(1) -- 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
2
<PAGE>
10.15(1) -- 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(1) -- 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(1) -- Credit Agreement dated January 16, 1997 among the
Registrant, Banker's Trust Company, as Agent, and various
lending institutions
*10.19(1) -- 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(1) -- Employment Agreement dated June 21, 1995 between the
Registrant and Arlan F. Fuller, M.D., as amended in
January 1996
10.21(1) -- Office Building Lease dated March 18, 1997, by and
between Harbor Court Associates and the Registrant
10.22 -- Amended and Restated Services Agreement dated July
1997, among Flagship Health II, P.A. ("Flagship II") and
the Registrant
10.23 -- Agreement dated July 31, 1997 by and among the
Registrant, Flagship, Flagship II and the Stockholders and
Optionholders of Clinical Associates, P.A.
10.24 -- Merger Agreement dated July 31, 1997, between the
Registrant, Flagship II, Clinical Associates and the
Stockholders and Optionholders of Clinical Associates
10.25 -- Amendment to the Management Agreement, dated
April 18, 1997
21.1 -- Subsidiaries of the Registrant
27 -- Financial Data Schedule
___________
(*) Management contract or compensatory plan or arrangement filed as an exhibit
to this Form pursuant to Item 14(c) of Form 10-K.
(1) Incorporated herein by reference from the Company's Registration Statement
on Form S-1 (File No. 333-26137).
3
<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
<PAGE>
Shares, Warrants and Options then held by the applicable 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
<PAGE>
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 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
<PAGE>
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 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.
<PAGE>
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 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.]
<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: /s/ Jerilyn P. Asher
---------------------------------------------
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 /s/
--------------------------------------------------
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 /s/
----------------------------------------------------
Title: Managing Director
<PAGE>
BCIP Associates
By /s/
--------------------------------------------------
Title: a general partner
BCIP TRUST ASSOCIATES, L.P.
By /s/
-----------------------------------------------
Title: a general partner
/s/ Jerilyn P. Asher
------------------------------------------------
Jerilyn P. Asher, as an individual
/s/ Jay Greenberg
-----------------------------------------------
Jay Greenberg, as an individual
/s/ Arlan Fuller, Jr., M.D.
----------------------------------------------
Arlan Fuller, Jr., M.D., as an individual
/s/ Thomas M. Zizic, M.D.
--------------------------------------------
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>
1.1. Certain Definitions. The following terms shall have the following
-------------------
meanings:
1.1.1 "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.
1.1.2. "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.
1.1.3. "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.
1.14. "Board" shall mean the Board of Directors of the Company.
-----
1.1.5. "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.
1.1.6. "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
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
-2-
<PAGE>
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.
1.1.7. "Class A Director" shall have the meaning set forth in the
----------------
Company's Restated Certificate of Incorporation.
1.1.8. "Class C Common" shall mean the Class C Common Stock, $.01 par
--------------
value per share of the Company.
1.1.9. "Common Stock" shall mean the Class A Common, the Class B Common
------------
and the Class C Common of the Company.
1.1.10. "Common Stock Director" shall have the meaning set forth in
---------------------
the Company's Restated Certificate of Incorporation.
1.1.11. "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.
1.1.12. "Effective Time" shall mean August 30, 1996.
--------------
1.1.13. "Exchange Act" shall mean the Securities Exchange Act of 1934, as
------------
amended.
1.1.14. "Executive" shall mean Jerilyn Asher or Jay Greenberg.
---------
-3-
<PAGE>
1.1.15. "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.
1.1.16. "Goldman Investors" shall mean (i) the Goldman Initial Investor
-----------------
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.
1.1.17. "Investors" shall mean the Bain Investors, the Capital Investor
---------
and the Goldman Investors.
1.1.18. "Investor Initial Shares" shall mean with respect to each Investor
-----------------------
all Shares originally issued to such Investor.
1.1.19. "Investor Majority Holders" shall mean, as of any date, the
-------------------------
holders of a majority of the Investor Shares outstanding on such date.
1.1.20. "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.
1.1.21. "Majority Stockholders" shall mean, as of any date, the
---------------------
holders of a majority of the Shares outstanding on such date.
1.1.22. "Management Majority Holders" shall mean, as of any date, the
---------------------------
holders of a majority of the Management Shares outstanding on such date.
1.1.23. "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 (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.
1.1.24. "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
-4-
<PAGE>
the Investors pursuant to which such stockholder agrees to be bound by the terms
of this Agreement applicable to Management Stockholders.
1.1.25. "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.
1.1.26. "Non-Investor Options" shall mean all Options held by any
--------------------
Stockholder other than Options held by Investors.
1.1.27. "Non-Investor Shares" shall mean all Shares other than Investor
-------------------
Shares, whenever issued.
1.1.28. "Non-Investor Warrants" shall mean all Warrants held by
---------------------
Stockholders other than Warrants held by Investors.
1.1.29. "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.
1.1.30. "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.
1.1.31. "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.
1.1.32. "Physician Shares" shall mean Shares, Warrants or Options 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.
1.1.33. "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.
-5-
<PAGE>
1.1.34. "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.
1.1.35. "Public Offering" shall mean the closing of an offering of Shares
---------------
registered under the Securities Act of Shares of the Company.
1.1.36. "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.
1.1.37. "Securities Act" shall mean the Securities Act of 1933, as
--------------
amended, and the rules and regulations of the Securities and Exchange Commission
promulgated thereunder, all as from time to time in effect.
1.1.38. "Shares" shall mean shares of Common Stock of the Company.
------
1.1.39. "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.
1.1.40. "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
-6-
<PAGE>
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.
1.1.41. "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.
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
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<PAGE>
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.
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:
-8-
<PAGE>
"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.
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
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<PAGE>
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 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."
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<PAGE>
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."
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
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 /s/
----------------------------
Title:
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<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 /s/
----------------------------
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 /s/
------------------------------
Title: Managing Director
BCIP Associates
By /s/
------------------------------
Title: a general partner
BCIP Trust Associates, L.P.
By /s/
------------------------------
Title: a general partner
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<PAGE>
ABS Capital Partners II, L.P.
By ABS Partners II, L.L.C.,
its General Partner
By /s/
------------------------------
Title: Managing Director:
/s/ Russell Ray
---------------------------------
Russell Ray
115 Longwood Road
Baltimore, MD 21210
/s/ Steve Schuh
---------------------------------
Steve Schuh
729 Skywater Road
Gibson Island, MD 21056
/s/ Stanley Blaylock
---------------------------------
Stanley Blaylock
1505 Heather Hill Lane
Hunt Valley, MD 21030
/s/ Dick Franyo
---------------------------------
Dick Franyo
925 Drohomer Place
Baltimore, MD 21210
/s/ Christopher Camut
---------------------------------
Christopher Camut
4405 Bedford Place
Baltimore, MD 21218
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<PAGE>
/s/ Terry Hyman
---------------------------------
Terry Hyman
3131 O Street, N.W.
Washington, D.C. 20007
/s/ Brent Milner
---------------------------------
Brent Milner
5505 St. Alban's Way
Baltimore, MD 21212
/s/ Kathy Coffey
---------------------------------
Kathy Coffey
1800 Broadway, #301
San Francisco, CA 94109
/s/ Mark Klausner
---------------------------------
Mark Klausner
7105 Charles Spring Way
Towson, MD 21204
---------------------------------
Michael Singer
3048 Jackson Street
San Francisco, CA 94111
/s/ Stuart Smith
---------------------------------
Stuart Smith
7834 Ellenham Road
Ruxton, MD 21204
---------------------------------
Gary Lessing
10 Queensdale Place
London, England W11 4SQ
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<PAGE>
GS CAPITAL PARTNERS II, L.P.
By: GS Advisors, L.P.
Its General Partner
By: GS Advisors Inc.
Its General Partner
By: /s/
-----------------------------
Title:
GOLDMAN, SACHS & CO. VERWALTUNGS GMBH
By: /s/
-----------------------------
Managing Director
By: /s/
-----------------------------
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: /s/
-----------------------------
Title:
-15-
<PAGE>
THE GOLDMAN SACHS GROUP, L.P.
By: The Goldman Sachs Corporation
Its General Partner
By: /s/
-----------------------------
Title: Executive Vice President
-16-
<PAGE>
_________________________________
Jerilyn P. Asher, individually
_________________________________
Arlan Fuller, Jr. M.D., individually
_________________________________
Thomas M. Zizic, M.D. individually
_________________________________
, individually
_________________________________
, individually
_________________________________
, individually
-17-
<PAGE>
Exhibit 10.16
-------------
SERVICES AGREEMENT
Services Agreement (the "Agreement") dated August 30, 1996, between
Physicians Quality Care, Inc., a Delaware corporation ("PQC"), with its
principal offices located at 950 Winter Street, Waltham, Massachusetts and
Medical Care Partners, P.C., a Massachusetts professional corporation ("MCP"),
with its principal offices located at 950 Winter Street, Waltham, Massachusetts.
Whereas MCP engages in the provision of medical and surgical services
through its physicians and has agreed to provide certain services to such
physicians in connection with its employment of physicians pursuant to MCP's
General Terms and Conditions of Physician Employment in effect as of the date
hereof (the "Terms and Conditions"); and
Whereas, MCP wishes to retain PQC to provide certain of such services on
MCP's behalf and PQC wishes to provide such services;
Now, therefore, MCP and PQC hereby agree as hereinafter provided.
1. Terms defined in the Terms and Conditions and not otherwise defined
herein shall be used herein with the meanings so defined.
2. MCP hereby appoints and engages PQC to provide the services
contemplated by Article II of the General Terms and Conditions of Member
Physician Employment and PQC accepts such appointment and engagement on and
subject to the terms and conditions set forth in this Agreement.
3. In consideration for the services to be provided by PQC pursuant to
Section 2, MCP hereby assigns to PQC all amounts allocated to MCP, including
without limitation Stage One Gross Margins, Stage Two Gross Margins, Stage Three
Gross Margins and IHS Profits, pursuant to Article VII of the Terms and
Conditions.
4. PQC shall review the payables of MCP and shall cause payment thereof to
be made out of the funds of MCP. All Operating Revenues and IHS Revenues shall
be deposited in a bank account maintained in the name of and owned by MCP with a
banking institution selected by PQC and approved by MCP, (the "Account") but
managed solely by PQC in accordance with the terms of this Agreement. A
representative of PQC shall be the authorized signatory for the Account. The
Shareholder of MCP shall also be, and MCP hereby appoints the Shareholder as, an
authorized signatory for the Account. MCP covenants that it will not permit any
funds to be withdrawn from the Account except as authorized by PQC. In addition
to billing, collecting and payment services, PQC shall manage the cash and cash
equivalents of MCP.
<PAGE>
5. MCP hereby exclusively authorizes PQC to take the following actions for
and on behalf of and in the name of MCP throughout the term of this Agreement
and thereafter in accordance with Section 7:
(a) bill, in MCP's name, under its provider number when obtained and
on its behalf, and until such time as MCP has obtained its provider
number, bill, in the Physicians= names under their respective provider
numbers and on their behalf, all claims (including co-payments due
from patients) for reimbursement or indemnification from all other
Managed Care Payors, fiscal intermediaries or patients for all covered
items and services provided by MCP or by the Physicians to patients;
(b) take possession of and endorse in the name of the Physicians or
MCP, all cash, notes, checks, money orders, insurance payments, and
any other instruments received as payment of accounts receivable (and
MCP will cause an individual Physician who receives any payments for
the benefit of MCP directly, to deliver such amounts promptly to PQC
for deposit in the Account, and MCP covenants to transfer and deliver
promptly to PQC for deposit in the Account, all funds received by MCP
from patients or Managed Care Payors for medical services), all such
funds to be deposited directly into the Account and to be applied in a
manner consistent with this Agreement;
(c) deposit all collections directly into the Account and to make
withdrawals from the Account for such purposes as are consistent with
this Agreement;
(d) in MCP's name and on its behalf, and in the Physicians' names and
on behalf of each of them, as necessary, collect and receive all
accounts receivable generated by such billings and claims for
reimbursement, place such accounts for collection, settle and
compromise claims and institute legal action for the recovery of
accounts; MCP shall cooperate fully with PQC in facilitating such
collections and in collecting accounts receivable transferred to PQC
for deposit in the Account by MCP, including endorsement of checks and
delivery to PQC for deposit in the Account of all revenues in whatever
form, received from patients or Managed Care Payors on their behalf,
and completion of all forms necessary for the collection of said
monies; and
(e) sign checks on behalf of MCP and make withdrawals from the
Accounts for payments specified in this Agreement and as requested
from time to time by MCP for purposes not inconsistent with this
Agreement.
In addition to the foregoing, MCP, to the extent not prohibited by law,
hereby grants to PQC an exclusive power of attorney and appoints PQC its
exclusive true and lawful attorney in fact to take each of the actions specified
in Sections (a) through (e) above for and on behalf of and in the name of MCP
-2-
<PAGE>
throughout the term of this Agreement and thereafter in accordance with Section
7.
Upon request of PQC, MCP shall, and shall cause each of the Physicians to,
execute and deliver to PQC and to each financial institution wherein MCP or PQC
maintains an account, such additional documents or instruments (including one or
more powers of attorney naming PQC as its or their, as the case may be,
exclusive true and lawful attorney in fact) as may be necessary or desirable to
evidence or effect the authority or the power of attorney or both granted to PQC
pursuant to this Section.
6. This Agreement shall continue in effect for forty (40) years commencing
with the date of this Agreement as noted above. Unless terminated earlier as
provided for in section 7 of this Agreement, the term of this Agreement shall be
automatically extended for additional terms of five (5) years each.
7. Termination.
(a) Termination on Default.
i. Either party shall be entitled to terminate this Agreement
if the other party fails to perform in any material respect
any material obligation required of it hereunder, and such
default continues for sixty (60) days after the giving of
written notice by the non-defaulting party, specifying the
nature and extent of such default; provided, however, that
-----------------
the non-defaulting party shall not be entitled to terminate
this Agreement if the defaulting party commences the cure of
such default within the first sixty (60) day period and
thereafter diligently and in good faith continues to cure
such default until completion.
ii. Termination at election of PQC. PQC shall be entitled to
terminate this Agreement upon written notice to MCP if:
(x) a law firm with nationally recognized expertise in
healthcare law and acceptable to PQC and the Joint
Policy Board renders an opinion to PQC, with a copy
provided to the Joint Policy Board stating that a
material provision of this Agreement is in violation of
applicable law, and the parties do not agree to amend
this Agreement pursuant to Section 10 to cure such
violation; or
-3-
<PAGE>
(y) any court or regulatory agency enters an order finding
a material provision of this Agreement is in violation
of applicable laws; or
(z) PQC is prevented by MCP or any person under the MCP's
direction or control, from entering any of the
Physician Responsibility Centers, and such inability to
enter such premises continues for more than forty-eight
(48) hours after notice thereof to the Joint Policy
Board.
iii. Termination by MCP. MCP may terminate this Agreement if and
only if such termination has been approved by the Joint
Policy Board and:
(x) upon written notice to PQC of the failure of PQC to
make any payments required under this Agreement when
due and continued failure to pay such compensation
after thirty (30) days notice of such failure to PQC
unless the amount of such payment is being contested in
good faith; or
(y) a law firm with a nationally recognized expertise in
health care law and acceptable to PQC and the Joint
Policy Board renders an opinion to MCP, with a copy
provided to the Joint Policy Board, stating that a
material provision of this Agreement is in violation of
applicable law, and the parties do not agree to amend
this Agreement pursuant to Section 10 hereof to cure
such violation; or
(z) any court or regulatory agency enters an order finding
a material provision of this Agreement is in violation
of applicable laws.
(b) Effect of Termination. Upon termination of this Agreement
---------------------
pursuant to this Section 7:
i. PQC and MCP shall cooperate and continue to perform their
obligations under this Agreement as may be necessary to
ensure the provision of proper care to patients under
treatment until appropriate alternative arrangements are
made.
ii. MCP and PQC shall cooperate to ensure the appropriate
billing and collection for all health care items and
services provided by MCP prior to the effective date of
-4-
<PAGE>
termination, and any such monies collected shall be retained
by MCP and/or paid to PQC in accordance with the terms of
this Agreement.
iii. Any amounts due and owing to PQC under any loan to MCP shall
become immediately due and payable.
iv. MCP shall reimburse PQC for all drug and pharmaceutical
inventory retained by MCP following termination to the full
extent of funds advanced by PQC for the purchase of such
inventory.
v. Provisions of this Agreement shall survive any termination
if so provided herein or if necessary or desirable fully to
accomplish the purposes of such provision.
8. All notices required or permitted under this Agreement shall be in
writing and shall be deemed effective upon personal delivery or upon deposit in
the United States Post Office, by registered or certified mail, postage prepaid,
addressed to the other party at the address shown above, or at such other
address or addresses as either party shall designate to the other in accordance
with this Section 8.
9. This Agreement constitutes the entire agreement between the parties
and supersedes all prior agreements and understandings, whether written or oral,
relating to the subject matter of this Agreement.
10. This Agreement may be amended or modified only by a written instrument
executed by PQC and MCP, provided, however, in the event (a) any state or
-----------------
federal laws or regulations, now existing or enacted or promulgated after the
Effective Date are interpreted by judicial decision, a regulatory agency, or
legal counsel in such a manner as to indicate that this Agreement or any
provision hereof may be in violation of such laws or regulations, or (b) the
Financial Accounting Standards Board or other applicable accounting standard
setting entity promulgates standards that would prevent PQC from consolidating
for financial statement presentation purposes all revenues of MCP on PQC's
consolidated financial statements, then PQC shall propose to the Joint Policy
Board and the MCP Shareholder for their approval such amendments to this
Agreement as necessary to preserve the underlying economic and financial
arrangements between PQC and MCP and without substantial economic detriment to
either PQC or MCP. Any such amendment approved by the Joint Policy Board and
MCP Shareholder shall be binding upon MCP, and MCP hereby consents to any such
amendment. To the extent any act or service required of PQC should be construed
or deemed, by any governmental authority, agency or court, to constitute the
practice of medicine by PQC, the performance of said act or service by PQC shall
be deemed waived and forever unenforceable and the provisions of this Section 10
shall be applicable. MCP hereby waives and agrees not to assert illegality as a
-5-
<PAGE>
defense to the enforcement of this Agreement or any provision hereof; instead,
any such purported illegality shall be resolved pursuant to the terms of this
Section 10.
11. This Agreement shall be construed, interpreted and enforced in
accordance with the laws of The Commonwealth of Massachusetts.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the day and year set forth above.
PHYSICIANS QUALITY CARE, INC.
By: /s/ Jerilyn P. Asher
----------------------------------------------
MEDICAL CARE PARTNERS, P.C.
By: /s/ Jay Ungar M.D.
----------------------------------------------
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Exhibit 10.22
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AMENDED AND RESTATED
SERVICES AGREEMENT
AMONG
FLAGSHIP HEALTH, P.A.,
FLAGSHIP HEALTH II, P.A.
and
PHYSICIANS QUALITY CARE, INC.
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TABLE OF CONTENTS
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Page
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1. APPOINTMENT OF PQC; RETENTION OF CLINICAL AUTHORITY..................... 1
1.1 Appointment and Authority.......................................... 1
1.2 Retention of Authority............................................. 2
2. OBLIGATIONS OF MEDICAL GROUP............................................ 2
2.1 Physician Personnel................................................ 2
2.2 Credentialing of Medical Group Physicians.......................... 2
2.3 Employment and Engagement of Medical Group Physicians.............. 2
(a) General........................................................ 2
(b) Pods........................................................... 3
(c) Form of Agreements............................................. 3
(d) Medical Group Physician Qualifications......................... 3
2.4 Licensing and Accreditation........................................ 3
2.5 Supervision and Direction of Clinical Staff........................ 4
2.6 Liability Insurance................................................ 4
2.7 Medical Records.................................................... 4
2.8 Assignment of Intellectual Property................................ 5
3. OBLIGATIONS OF PQC...................................................... 5
3.1 General............................................................ 5
3.2 Facilities......................................................... 5
3.3 Equipment and Office Furnishings................................... 6
3.4 Personnel and Payroll.............................................. 6
3.5 Borrowings......................................................... 6
3.6 Supplies and Inventory............................................. 7
3.7 Contracts.......................................................... 7
3.8 Budgets............................................................ 8
(a) General Preparation Principles................................ 8
(b) Approval of Budgets........................................... 8
(c) Reporting..................................................... 10
3.9 Preparation of Tax Returns......................................... 10
3.10 Charges............................................................ 10
3.11 Billing and Collection............................................. 10
3.12 Payment of Accounts and Indebtedness............................... 10
3.13 Power of Attorney for Billing and Payment of Accounts.............. 11
3.14 Other Billings and Charges......................................... 12
3.15 Insurance.......................................................... 12
3.16 Other Administrative Services...................................... 13
3.17 Development of Integrated Health Services.......................... 13
3.18 Advertising and Public Relations................................... 14
4. MANAGEMENT FEE; FINANCIAL ARRANGEMENTS.................................. 14
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5. TERM AND TERMINATION.................................................... 14
5.1 Term............................................................... 14
5.2 Termination on Default............................................. 14
5.3 Effect of Termination.............................................. 15
6. JOINT POLICY BOARD; CERTAIN PROVISIONS REGARDING GOVERNANCE OF
MEDICAL GROUP........................................................... 16
6.1 Joint Policy Board............................ . .................. 16
(a) Representation................................................. 16
(b) Authority and Responsibility................................... 17
(c)................................................................ 18
(d)................................................................ 19
(e)................................................................ 19
(f) Voting; Procedures............................................. 20
6.2 Medical Advisory Board........................ .................... 21
6.3 The President of Medical Group................ .................... 21
6.4 The Medical Director of Medical Group......... ................... 23
6.5 Operating Manager.................................................. 24
7. INTELLECTUAL PROPERTY................................................... 24
8. RESTRICTIVE COVENANTS................................................... 24
8.1 Noncompetition..................................................... 24
8.2 Ancillary Enterprise............................................... 25
8.3 Non-solicitation of Employees and Patients......................... 25
8.4 Enforcement of Medical Group Physician Employment
Agreements......................................................... 25
8.5 Remedies........................................................... 25
9. MISCELLANEOUS........................................................... 26
9.1 Exclusivity........................................................ 26
9.2 Names; Trademarks.................................................. 26
9.3 Independent Contractors............................................ 26
9.4 [Reserved]......................................................... 26
9.5 Severability....................................................... 26
9.6 Waiver............................................................. 26
9.7 Notices............................................................ 27
9.8 Entire Agreement................................................... 27
9.9 Amendment.......................................................... 27
9.10 Successors and Assigns............................................. 27
9.11 Governing Law...................................................... 27
9.12 Headings........................................................... 27
9.13 No Obligation to Third Parties..................................... 27
9.14 Contract Modifications for Prospective Legal Events................ 28
9.15 Availability of Certain Documents.................................. 28
9.16 Gender............................................................. 29
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APPENDIX A............................................................... 1
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APPENDIX B............................................................... 1
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SCHEDULE B-1............................................................. 8
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APPENDIX C............................................................... 1
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APPENDIX D............................................................... 1
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EXHIBIT A................................................................ 1
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FLAGSHIP HEALTH, P.A.
FLAGSHIP HEALTH II, P.A.
SERVICES AGREEMENT
This Agreement (this "Agreement") is made as of November 30, 1996,
and amended and restated as of July 31, 1997, by and among Physicians Quality
Care, Inc., a Delaware corporation ("PQC"), Flagship Health II, P.A., a Maryland
Professional corporation ("Flagship II") and Flagship Health, P.A., a Maryland
professional association ("Flagship I" and collectively with Flagship II,
"Medical Group"). (All capitalized terms not defined below in this Agreement
shall have the meanings set forth in Appendix A or B attached hereto.)
WHEREAS, Medical Group has entered into a business arrangement with PQC in
order to help effectuate the parties' mutual vision of establishing a high
quality, competitive, cost-effective health care delivery system, as part of
which Medical Group and PQC will work together to enhance the efficiency of the
business aspects of Medical Group's practice, to promote the quality of care and
patient satisfaction, and to create sufficient economies of scale to permit
Medical Group to undertake risk-based managed care obligations;
WHEREAS, Medical Group engages in the provision of medical and surgical
services through its physicians (each a "Medical Group Physician" and
collectively the "Medical Group Physicians"), who currently practice in a number
of divisions (each a "Pod"), each of which may have one (1) or more Practice
Locations; and
WHEREAS, Medical Group wishes to retain PQC to provide or arrange for
comprehensive management, administrative and other support services to manage
Medical Group and each Pod in order better to serve its patients, enhance
efficiency, and improve financial results of operation of the Medical Group's
activities.
NOW, THEREFORE, in consideration of the mutual covenants and premises
herein contained, the parties hereby agree as follows:
1. APPOINTMENT OF PQC; RETENTION OF CLINICAL AUTHORITY
1.1 Appointment and Authority. Medical Group hereby appoints and
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engages PQC as Medical Group's sole and exclusive business manager and PQC
accepts such appointment and engagement on and subject to the terms and
conditions set forth in this Agreement. Subject to the terms of this Agreement,
including applicable requirements of consultation and prior approval of the
Joint Policy Board, PQC shall have the authority and responsibility to: (i)
manage all business operations of Medical Group in an efficient and cost-
effective manner; (ii) provide or arrange for such services in any manner as
PQC, in the exercise of its reasonable business judgment, deems appropriate to
meet the day-to-day requirements of the business functions of Medical Group; and
(iii) negotiate and execute, on behalf of Medical Group, all contracts that, in
the exercise of PQC's reasonable business judgment, are necessary and
appropriate for the business and affairs of Medical Group, subject, in the case
of Payor Contracts, to the approval of the Joint Policy Board.
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1.2 Retention of Authority. Notwithstanding anything to the contrary in
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this Agreement, Medical Group will have exclusive authority and control over the
provision of medical services, including all diagnoses, treatment and ethical
determinations with respect to patients. All diagnoses, treatments, procedures
and other medical and professional services shall be provided and performed
exclusively by or under the supervision of a physician employed or otherwise
engaged by Medical Group who meets the qualifications set forth in this
Agreement. It is acknowledged that PQC is not authorized nor qualified to
engage in any activity that constitutes the practice of medicine. To the
extent, if any, that any act or service of PQC under this Agreement is
determined to constitute the practice of medicine, the performance of such act
or service by PQC shall be deemed waived and excused by Medical Group.
2. OBLIGATIONS OF MEDICAL GROUP
2.1 Physician Personnel. Medical Group, subject to oversight by the
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Medical Advisory Board, shall be solely responsible for all determinations with
respect to an individual physician concerning the recruitment, hiring,
termination, Credentialing, training and supervision of such physician. PQC
shall not exercise any control over nor have any responsibility for Medical
Group Physicians or other Clinical Staff (as defined in Section 2.5) with
respect to the provision of clinical services.
2.2 Credentialing of Medical Group Physicians. Medical Group, through
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the Medical Advisory Board, shall credential its physicians in conformity with
the requirements imposed under state and federal law and by the terms of any
third party payment agreement to which the Medical Group is bound. Medical
Group shall assure that each Medical Group Physician at all times is: (i) duly
licensed to practice medicine by the applicable state within the Geographic Area
(as defined in Section 10.10 of Appendix A); and (ii) a member in good standing
of the medical staffs of hospitals designated from time to time by the Joint
Policy Board or as may be necessary in connection with the participation in one
(1) or more Payor Contracts negotiated on Medical Group's behalf by PQC. No
physician other than those Medical Group Physicians who meet the requirements
and qualifications of this Agreement, including without limitation Section 2.3,
shall be permitted: (a) to use or occupy the Pod Practice Locations, except as
approved by the Joint Policy Board; or (b) except as may be required to assure
appropriate medical care (e.g., locum tenens coverage), to render services to
patients of Medical Group. New physicians may be employed by Medical Group, or
physician groups or practices may be acquired by Medical Group, subject to
approval of the Joint Policy Board and the Medical Advisory Board.
2.3 Employment and Engagement of Medical Group Physicians.
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(a) General. During the term of this Agreement, Medical Group,
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through its Pods, shall operate and maintain a full-time practice
of medicine providing primary care, medical and surgical
specialty services and such other services as are agreed upon by
the Joint Policy Board and PQC. Medical Group shall engage a
sufficient number of Medical Group Physicians to provide services
to patients of Medical Group during the normal office hours of
the Practice Locations and to provide after hours coverage for
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all patients of Medical Group whether on an inpatient or
outpatient basis (it being agreed that the practice patterns in
effect as of the Effective Date are acceptable to PQC and Medical
Group); provided, however, that a Pod may close its practice to
new patients for such period as the Joint Policy Board and
Medical Advisory Board may determine to be necessary in the event
the Pod has reached capacity.
(b) Pods. Each Medical Group Physician hired or otherwise engaged
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by Medical Group shall be a member of a Pod and shall provide
services at the Practice Locations associated with that Pod.
(c) Form of Agreements. Medical Group shall maintain employment
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agreements with all Medical Group Physicians (individually, an
"Employment Agreement"). Such Employment Agreements shall be in
substantially the form attached hereto as Annex A-1 with respect
to Medical Group Physicians who are assigned to a Pod that was
created prior to July 31, 1997 (each a "Founding Pod"), and in
substantially the form attached hereto as Annex A-2 with respect
to Medical Group Physicians who are assigned to a Pod that is
created on or after July 31, 1997 (each an "Additional Pod"), in
each case with such changes as may be agreed upon by PQC and
Medical Group and approved by the Joint Policy Board. Except as
otherwise expressly provided in this Agreement, Medical Group
shall not amend any Employment Agreements nor waive any rights
thereunder without the prior written approval of PQC. Except as
otherwise expressly provided in this Agreement, Medical Group
shall not offer, agree to or amend any salary, benefit or other
compensation terms with a Medical Group Physician except as
expressly approved by PQC in writing.
(d) Medical Group Physician Qualifications. Medical Group shall
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assure that each Medical Group Physician meets at all times each
of the qualifications set forth in the approved form of
Employment Agreement (subject to any exceptions that are approved
by PQC and the Joint Policy Board in connection with individual
Employment Agreements) and to any other qualifications reasonably
established by the Medical Advisory Board and PQC. In the event
that any disciplinary, malpractice or other actions are initiated
against any Medical Group Physician, the Medical Group, through
the Medical Advisory Board, shall immediately inform PQC of such
action and shall inform PQC of the underlying facts and
circumstances.
2.4 Licensing and Accreditation. Medical Group, through the Medical
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Advisory Board, shall ensure that all Medical Group Physicians maintain such
licenses and certifications as are reasonably necessary for the provision of
medical services by Medical Group and all Medical Group Physicians in a manner
that complies with all laws and applicable third-party payor requirements.
Medical Group shall obtain and maintain such additional licenses and
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accreditation as the Medical Advisory Board and PQC mutually determine are
advisable. Medical Group shall conduct its medical practice in compliance with
all applicable laws and all applicable contractual requirements.
2.5 Supervision and Direction of Clinical Staff. (As used in this
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Agreement, the term "Clinical Staff" shall mean nurses and any other non-
physician clinical personnel and shall not include Medical Group Physicians or
any other physician.) Medical Group Physicians shall supervise and direct the
Clinical Staff. Medical Group shall assure that all Clinical Staff members
perform only those duties permitted by applicable law and regulation to be
performed by such personnel, and only under such supervision and in such a
manner as permitted by applicable law and regulation.
2.6 Liability Insurance. Medical Group shall assure that each Medical
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Group Physician maintains in effect a policy of professional liability insurance
in accordance with the Medical Group Physician's employment agreement. Medical
Group shall maintain in effect a policy of comprehensive general liability and
professional liability insurance in the minimum amount of $1,000,000 per
occurrence or claim and $3,000,000 annual aggregate, or such greater amount as
is required by the Joint Policy Board or by law, to cover Medical Group, Medical
Group Physicians and Clinical Staff. In addition, Medical Group shall maintain
in effect (i) comprehensive general liability insurance with limits and a
deductible reasonably determined by PQC and the Joint Policy Board and (ii)
property damage insurance covering all Practice Locations and equipment with
limits and deductibles reasonably determined by PQC and the Joint Policy Board.
Each such policy shall name PQC as an additional insured. As set forth in
Section 3.15, PQC shall be responsible for administering Medical Group's
insurance policies required under this Section 2.6.
2.7 Medical Records. Medical Group, through its Pods, shall maintain
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and cause each Medical Group Physician to maintain accurate and complete patient
records in accordance with all applicable laws and regulations. Such records
shall be maintained by Medical Group in a manner sufficient to enable PQC, on
behalf of Medical Group, to bill and collect for the services provided by
Medical Group and Medical Group Physicians. Subject to the requirements of
applicable law, Medical Group shall permit PQC to access the patient records to
perform its duties under this Agreement, including, without limitation, billing
and collection services. All patient medical records relating to services
rendered by Medical Group and Medical Group Physicians shall be and remain the
property of Medical Group.
Medical Group hereby grants to PQC the exclusive right to develop and
commercialize any statistical data base or other quality assurance, utilization
review or medical management data base or software program derived from Medical
Group's medical records (collectively, "Medical Data") and agrees to include in
all patient consent forms a mutually agreeable provision permitting the
commercialization of such Medical Data; provided, however, that PQC shall in all
events delete or otherwise disguise any patient identifying information such as
the name or street address of a patient and comply with all applicable laws
concerning patient confidentiality. If PQC determines to commercialize any
Medical Data derived solely from medical records of Medical Group, then PQC
shall offer to Medical Group a right of first refusal to participate in the
effort to commercialize such Medical Data on terms consistent with those set
forth in Section 3.17 with respect to the development of Integrated Health
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Services. If PQC determines to commercialize any Medical Data derived from both
Medical Group and other PQC-managed physician practices, PQC shall offer to
Medical Group and the other PQC-managed practices a right of first refusal to
participate in the effort to commercialize such Medical Data. The terms of such
commercialization between PQC, on one hand, and the Medical Group and the other
PQC-managed practices (the "Physicians' Share"), on the other hand, shall be
consistent with those set forth in Section 3.17 with respect to the development
of Integrated Health Services. Prior to entering into any arrangement to
commercialize such Medical Data with the Medical Group and other PQC-managed
practices acting jointly, PQC shall solicit the advice of the Medical Advisory
Board, which may make a recommendation to PQC's National Medical Advisory Board,
concerning an allocation of Physicians' Share of revenue, expenses, profits and
losses from such commercialization between Medical Group and any other medical
group or entity also contributing data, software or other resources to the
commercialization effort. Such allocation shall be made in a manner that is
fair and not inconsistent with PQC's legitimate business objectives and its
obligations to its shareholders. The recommendation, if any, of the National
Medical Advisory Board shall be considered by PQC in reaching its determination
concerning any commercialization of Medical Data and the allocation of proceeds
thereof, but ultimate decision-making authority with respect to such
commercialization and any recommended allocation of proceeds thereof shall
remain exclusively within the discretion of the Board of Directors of PQC and
Medical Group shall have no right to any allocation of proceeds except and to
the extent, if any, authorized by the Board of Directors of PQC after
consultation as set forth in this Section 2.7.
2.8 Assignment of Intellectual Property. Medical Group hereby assigns
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to PQC (i) any Intellectual Property rights that Medical Group acquires or
develops during the term of this Agreement and (ii) agrees to cause each Medical
Group Physician to assign to PQC such Intellectual Property rights as may be
specified in, and subject to the terms of, the applicable employment agreement,
as the case may be.
3. OBLIGATIONS OF PQC
3.1 General. Subject to Medical Group's control of the practice of
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medicine, PQC shall have authority and responsibility to conduct, supervise and
manage the day-to-day business operation of Medical Group and shall be
responsible for providing the services set forth in this Section 3 to Medical
Group. All services, facilities, furniture, fixtures and equipment provided by
PQC under this Agreement shall be in a manner consistent with community
standards for a medical practice of similar size. Notwithstanding anything in
this Agreement to the contrary, the parties realize that development of
appropriate reporting systems for financial and utilization information and
similar tools designed to support the efficient management and development of
Medical Group should be a collaborative process between the parties, and
accordingly the parties agree to work together to develop such tools,
particularly during the initial months following the Effective Date.
3.2 Facilities. PQC shall arrange for Medical Group to use the premises
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at the locations listed on Schedule 3.2 which may be amended by PQC from time to
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time (collectively, the "Practice Locations"), subject to the terms of any
leases for the premises entered into from time to time by Medical Group or PQC,
as the case may be, and subject to approval of the Joint Policy Board. PQC
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shall provide or arrange for routine maintenance and cleaning services for the
Practice Locations required to cause the Practice Locations to satisfy the
standard set forth in Section 3.1.
3.3 Equipment and Office Furnishings. PQC shall arrange for Medical
--------------------------------
Group to have use of such equipment and office furnishings reasonably deemed
necessary by PQC, in consultation with the Joint Policy Board, for the operation
of Medical Group at each Practice Location (the "Equipment") in a manner
consistent with community standards for a medical practice of similar
characteristics. PQC shall arrange for reasonable and necessary repair and
maintenance of the Equipment. In connection with PQC's obligation hereunder,
Medical Group shall notify PQC immediately upon becoming aware of any Equipment
in need of repair.
3.4 Personnel and Payroll. PQC shall arrange for the provision to
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Medical Group of all administrative personnel deemed necessary by PQC, in
consultation with the Joint Policy Board, for the operation of Medical Group
(the "Administrative Staff"). PQC shall also arrange for the provision to
Medical Group of all Clinical Staff reasonably deemed necessary by PQC, in
consultation with Medical Group and the Joint Policy Board, for the efficient,
professional operation of Medical Group. All members of the Clinical Staff
shall be employees of Medical Group. All members of the Administrative Staff on
the Effective Date shall be employees of Medical Group. Subject to the
provisions of Section 2.5 and this Section and in consultation with Medical
Group and the Joint Policy Board, PQC shall be responsible for recruiting,
hiring, discharging and determining the compensation, benefits and conditions of
employment of the Administrative Staff and Clinical Staff. PQC shall perform
all payroll and payroll accounting transactions for the Administrative Staff,
the Clinical Staff and the Medical Group Physicians. Any member of the
Administrative Staff and Clinical Staff may, upon assignment by PQC following
consultation with the affected Pods, provide services to more than one (1) Pod.
If any Medical Group Physician is dissatisfied with the services of any employee
who provides services for such Medical Group Physician at a Practice Location,
PQC, after consultation with the Joint Policy Board, shall in good faith
determine whether the performance of that employee could be brought to
acceptable levels through counsel and assistance, or whether the employment of
such employee should be terminated. If PQC determines to retain such employee
and the Medical Group Physician is still dissatisfied with such employee's
services after a two (2) month period, PQC shall either relocate such employee
or otherwise cease to use such employee unless PQC reasonably determines that
such termination may expose Medical Group to liability.
3.5 Borrowings.
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(a) All borrowings of Medical Group shall be subject to prior
approval by the Joint Policy Board. Upon receipt of such
approval to borrow funds on behalf of Medical Group, PQC shall
arrange for such borrowing on behalf of Medical Group on terms
approved by the Joint Policy Board pursuant to Section 6. 1(b)(i)
and in accordance with the Practice Expense definition set forth
provisions in Section 10.27 of Appendix A. In addition to or in
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lieu of the foregoing, and subject always to prior approval by
the Joint Policy Board, PQC may make loans to Medical Group from
time to time to fund capital expenditures or working capital of
the Medical Group, in each case on such terms and conditions as
are agreed upon by the parties and the Joint Policy Board. The
making of any such loan shall be at the sole discretion of PQC
provided that PQC shall commit to fund loans for working capital
purposes of the Medical Group in an amount determined from time
to time by the Joint Policy Board which amount shall not exceed
$1,000,000.
(b) In the event that during the Fiscal Periods ended December 31,
1997 and December 31, 1998, Medical Group does not receive
distributions with respect to a Founding Pod under Appendix B
hereto equal to the full Baseline Amount (as defined in Section
10.2 of Appendix A) (minus the amount necessary to pay all
Deductible Expenses) due to (a) a failure by PQC to assist
Medical Group in establishing additional revenue sources from
services other than professional services so as to increase
Practice Revenues, or (b) such other cause as may be approved by
the Joint Policy Board, PQC shall loan to Medical Group with
respect to the Founding Pods an amount not to exceed an aggregate
of $1,000,000 at any one time outstanding on a non-interest
bearing basis to cover such shortfalls in Baseline Amount, and in
no event shall PQC Direct Expenses be included in determining
whether a shortfall in Baseline Amount exists (the "Loan"). The
Loan shall be carried on the balance sheet of Medical Group and
shall be repaid in successive Fiscal Periods from the first
available dollars of Net Margin allocable to Medical Group with
respect to the Founding Pods. In the event PQC undertakes a
public offering of securities at any time prior to which the Loan
has been repaid in full, the parties agree to consider in good
faith whether interest on the Loan should be assessed at a fair
market interest rate in order to comply with then applicable
health care laws.
3.6 Supplies and Inventory. PQC shall be responsible for all inventory
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systems of Medical Group at each Practice Location and for the ordering,
purchasing and maintenance of all supplies and inventory necessary for the
operation of Medical Group. All drugs shall be purchased and maintained by
Medical Group or, at PQC's discretion and to the extent consistent with
applicable law, on behalf of Medical Group by PQC.
3.7 Contracts. PQC shall negotiate and administer contracts for
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equipment, materials, supplies and data processing services for the Medical
Group and for each Pod. PQC shall seek, review, evaluate and negotiate Payor
Contracts on behalf of Medical Group. Medical Group agrees to enter into and be
bound by all such Payor Contracts negotiated on its behalf by PQC; provided,
however, that any such Payor Contract must be approved in advance by the Joint
Policy Board in the manner contemplated by Section 6.1. The Payor Contracts
listed on Schedule 3.7 shall be deemed to be approved by the Joint Policy Board.
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If required by applicable law, such contracts will be entered into in the name
of Medical Group. PQC shall arrange for administrative support appropriate to
fulfill reporting requirements under Payor Contracts, such as eligibility
verification and financial and utilization reporting.
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3.8 Budgets.
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(a) General Preparation Principles.
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(i) PQC, acting through the Operating Manager in cooperation with a
Physician representative (the "Representative") of the Pod,
shall have responsibility for the preparation of budgets for
each Pod (a "Pod Budget").
(ii) Each Pod Budget shall consist of an operating budget (revenues
and expenses) and an annual capital expenditures budget,
prepared on an accrual basis of accounting and in conformity
with generally accepted accounting principles.
(iii) PQC shall prepare, with input from the Joint Policy Board,
budget guidelines ("Budget Guidelines") that PQC shall then
follow in the preparation of each Pod Budget. Examples of
possible Budget Guidelines include but are not limited to the
following:
(A) each Pod Budget shall be constructed on management
policies that enable the Pod to achieve its financial
goals (profit from operations);
(B) each Pod Budget shall provide specific detail
sufficient for the Pod Physicians and PQC to evaluate
and prioritize changes in programs and capital
expenditures;
(C) each Pod Budget period shall be for a twelve (12) month
period ending December 31 or, for the initial Pod
Budget for each newly formed Pod, such shorter period
ending December 31 as is appropriate; and
(D) each Pod Budget shall be prepared on a pre-physician
compensation, pre-management fee and pre-tax basis.
(iv) PQC shall prepare the initial Pod Budgets for each Pod using
available historical financial information. PQC shall follow the
Budget Guidelines and identify budget preparation assumptions
that deviate from the acquired medical group's historical
financial information. Subsequent Pod Budgets shall be prepared
in a similar manner by PQC (on the basis of the prior year's
results) and take into account deviations from the Pod Budget
that occurred in the prior year.
(b) Approval of Budgets. The Joint Policy Board shall have the
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responsibility for and authority to approve each Pod Budget. PQC
shall submit each Pod Budget to the Joint Policy Board for
approval on a timely basis. Once approved in accordance with
this Section 3.8(b), all of PQC, Pod and Pod Physicians shall be
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bound by the terms of the approved Pod Budget for the following
twelve (12) month period or such lesser period as may be provided
for in the Budget Guidelines, subject only to any modifications
suggested by PQC and/or Pod Physicians and approved by the Joint
Policy Board. At any point during a Fiscal Period, including for
example if the actual Physician Pod Practice Revenues less actual
Physician Pod Practice Expenses is below budgeted levels for such
Physician Pod or if there is an actual or projected negative Net
Margin the Joint Policy Board may review the budgets for such
Physician Pod and make such changes to such budgets, including
the aggregate Pod Distributions (as defined in Section 3 of
Appendix A to the Employment Agreements), as the Joint Policy
Board deems to be appropriate. All capital and operating
budgets, and changes thereto, also shall be subject to the
approval of PQC. The Joint Policy Board shall not unreasonably
withhold its approval of a Pod Budget but if such approval is not
forthcoming, the following process shall prevail so that the Pod
may remain open to treat patients:
(i) If, prior to the commencement of any budget period, the Joint
Policy Board has not yet approved the Pod Budget, then PQC and
Medical Group will work diligently in good faith to obtain such
approval. Until such approval is obtained, the following
procedures shall apply:
(A) as to any disputed line items, the immediately
preceding budget period's Pod Budget shall be
controlling until such time, if any, as agreement is
reached on the amounts to be allocated to such disputed
line items, except that:
(1) non-recurring extraordinary items shall not be
continued from the Pod Budget for the immediately
preceding budget period;
(2) if items such as lease payments or payroll taxes
are subject to an automatic increase, such
increases shall be effective at the increased
rate; and
(3) for items such as personnel salaries, the total
salary number shall be adjusted to take into
account changes in the number and classifications
of personnel members employed or contracted; and
(B) as to any line items which are not in dispute, the new
Pod Budget submitted by PQC shall be effective for the
new budget period.
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(c) Reporting. PQC shall establish and administer the accounting
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procedures and control for Medical Group and the Pods in
accordance with generally accepted accounting principles. PQC
shall have the responsibility to prepare and submit to each Pod
and to the Joint Policy Board as soon as practicable after the
end of each month, but in any event within forty-five (45) days
of the end of each month, management reports designed to convey
Pod and Medical Group financial performance for the month and on
a year-to-year basis. PQC shall design the management reports to
highlight actual financial performance and actual to budget
variances in the Pod's financial performance. Additionally, PQC
shall from time to time attempt to identify, discuss with the
Joint Policy Board and implement appropriate management
intervention to counter adverse financial trends.
3.9 Preparation of Tax Returns. PQC shall prepare any and all required
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tax returns of Medical Group but shall not have responsibility for preparation
of individual tax returns or other tax returns (e.g., IRS forms W-2s, 5500s,
etc.) for any Medical Group Physician or for any entity of which such Medical
Group Physician was a shareholder, partner, member, or employee prior to the
date of execution of this Agreement.
3.10 Charges. PQC shall advise Medical Group on the establishment,
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maintenance and revision of a schedule of charges for physician services,
ancillary services, supplies, medication and all other services rendered by
Medical Group through each Pod. Revisions to the fee schedule of a Pod must be
approved by the Joint Policy Board.
3.11 Billing and Collection. PQC shall provide or arrange for such
----------------------
billing and collection services as are reasonably necessary to attempt to
collect in a timely manner all Practice Revenues, including without limitation
all allowable charges resulting from Medical Group's provision of all billable
items and services.
3.12 Payment of Accounts and Indebtedness.
------------------------------------
(a) PQC shall review the payables of Medical Group and shall cause
payment of any undisputed amounts thereof to be made out of the
funds of Medical Group. In addition to billing, collecting and
payment services, PQC shall manage the cash and cash equivalents
of Medical Group.
(b) All Practice Revenues shall be deposited in one or more bank
accounts maintained in the name of and owned by Medical Group
(collectively, the "Medical Group Account") but managed solely by
PQC in accordance with the terms of this Agreement and the
applicable Pod's budgets. A separate Medical Group Account shall
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<PAGE>
be established for the Founding Pods (the "Founding Pod Medical
Group Account") and the Additional Pods (the "Additional Pod
Medical Group Account"). The bank in which the Medical Group
Account is maintained shall be federally insured and shall be
selected by PQC subject to approval by the Joint Policy Board. A
representative of PQC shall be the authorized signatory for the
Medical Group Account. Medical Group hereby appoints the Medical
Group Shareholder as an additional authorized signatory for the
Medical Group Account. Medical Group covenants that it will not
permit any funds to be withdrawn from the Medical Group Account
except as authorized by PQC in accordance with the terms of this
Agreement.
3.13 Power of Attorney for Billing and Payment of Accounts. Medical
-----------------------------------------------------
Group hereby exclusively authorizes PQC to take the following actions for and on
behalf of and in the name of Medical Group throughout the term of this Agreement
and thereafter in accordance with Section 5:
(a) bill, in Medical Group's name, under its provider number when
obtained and on its behalf, and until such time as Medical Group
has obtained its provider number, bill, in the Medical Group
Physicians, names under their respective provider numbers and on
their behalf, all claims (including co-payments due from
patients) for reimbursement or indemnification from all other
Payors, fiscal intermediaries or patients for all covered items
and services provided by Medical Group or by the Medical Group
Physicians to patients;
(b) take possession of and endorse in the name of the Medical Group
Physicians or Medical Group, all cash, notes, checks, money
orders, insurance payments, and any other instruments received as
payment of accounts receivable (and Medical Group will cause an
individual Medical Group Physician who receives any payments for
the benefit of Medical Group directly, to deliver such amounts
promptly to PQC for deposit in the Founding Pod Medical Group
Account or the Additional PQC Medical Group Account, as the case
may be, and Medical Group covenants to transfer and deliver
promptly to PQC for deposit in the applicable Medical Group
Account, all funds received by Medical Group from patients or
Payors for medical services), all such funds to be deposited
directly into a Medical Group Account and to be applied in a
manner consistent with this Agreement;
(c) deposit all collections directly into the applicable Medical
Group Account and to make withdrawals from such Medical Group
Account for such purposes as are permitted by this Agreement;
(d) in Medical Group's name and on its behalf, and in the Medical
Group Physicians' names and on behalf of each of them, as
necessary, collect and receive all accounts receivable generated
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<PAGE>
by such billings and claims for reimbursement, place such
accounts for collection, settle and compromise claims and
institute legal action for the recovery of accounts (it being
agreed that Medical Group shall write-off amounts of uncollected
billings at the request of a Medical Group Physician to the
extent contemplated in the Employment Agreement); Medical Group
shall cooperate fully with PQC in facilitating such collections
and in collecting accounts receivable transferred to PQC for
deposit in the Medical Group Account by Medical Group, including
endorsement of checks and delivery to PQC of all revenues in
whatever form, received from patients or Payors on their behalf,
and completion of all forms necessary for the collection of said
monies; and
(e) sign checks on behalf of Medical Group and make withdrawals from
the Medical Group Accounts for payments specified in this
Agreement and as requested from time to time by Medical Group.
In addition to the foregoing, Medical Group, to the extent not prohibited
by law, hereby grants to PQC an exclusive power of attorney and appoints PQC its
exclusive true and lawful attorney in fact to take each of the actions specified
in Sections (a) through (e) above for and on behalf of and in the name of
Medical Group throughout the term of this Agreement and thereafter in accordance
with Section 5.
Upon request of PQC, Medical Group shall, and shall cause each of the
Medical Group Physicians to, execute and deliver to PQC and to each financial
institution wherein Medical Group or PQC maintains an account, such additional
documents or instruments (including one (1) or more powers of attorney naming
PQC as its or their, as the case may be, exclusive true and lawful attorney in
fact) as may be necessary or desirable to evidence or effect the authority or
the power of attorney or both granted to PQC pursuant to this Section.
3.14 Other Billings and Charges. PQC shall serve as Medical Group's
--------------------------
exclusive billing agent. Medical Group covenants that neither it nor any
Medical Group Physician shall bill or submit a statement of charges to, or enter
into any agreement or, except in the event of an emergency, any undertaking
with, any patient, third person or entity for the provision of items and
services (with or without consideration), nor shall it make any surcharge for
care without the prior written authorization and approval of PQC.
3.15 Insurance. PQC, on behalf of Medical Group, shall negotiate,
---------
obtain, and maintain with such licensed insurance companies as are reasonably
acceptable to the Joint Policy Board the policies of general liability, fire and
property insurance that satisfy the requirements of Section 2.6. PQC shall
furnish certificates of insurance to Medical Group evidencing the coverage set
forth in this section upon request by Medical Group. Subject to approval by the
Joint Policy Board, PQC may arrange for a group professional liability insurance
policy covering Medical Group Physicians that would satisfy Medical Group's
obligations under 2.6. The liability insurance coverage maintained as of the
date of this Agreement by PQC with respect to its own operations is set forth on
Schedule 3.15. PQC shall advise the Joint Policy Board of any material decrease
- -------- ----
in the amount or scope of such insurance coverage.
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<PAGE>
3.16 Other Administrative Services. In addition to the business and
-----------------------------
administrative services specifically described above in this Section 3, PQC
shall be responsible for providing all other administrative services necessary
to the business operations of Medical Group, including without limitation human
resource services, administrative support for Medical Group's recruitment
efforts, management information systems (including development on a uniform data
base across all Pods), accounting services and systems, and advertising, sales
and marketing services.
3.17 Development of Integrated Health Services. Neither PQC nor any
-----------------------------------------
Affiliate shall provide Integrated Health Services in the Geographic Area unless
PQC gives Medical Group the option to be the exclusive provider of these
services, as provided in this Section. To that end, if PQC or one (1) of its
Affiliates proposes to provide any Integrated Health Service in the Geographic
Area, PQC shall notify Medical Group and the Joint Policy Board of the nature of
the service and the terms upon which PQC or its Affiliate proposes to provide
the service, and the Joint Policy Board, on behalf of Medical Group, shall have
forty-five (45) days during which to elect to participate in the provision of
such Integrated Health Service in the Geographic Area on such terms as are
mutually acceptable to the Joint Policy Board and PQC. Any such proposal shall
specify the proposed manner in which the net revenues (meaning all receipts from
such Integrated Health Services less all expenses attributable to such
Integrated Health Services, determined in accordance with generally accepted
accounting principles) shall be allocated between Medical Group and PQC, but to
the extent permitted by law in any event such proposal shall offer to Medical
Group the right to receive an allocation to the Variable Distribution Pool (as
defined in the Employment Agreements) of at least fifty percent (50%) of the net
revenues attributable to such Integrated Health Service provided that as a
condition thereof Medical Group shall agree that a percentage of any net loss
attributable to such Integrated Health Service equal to the percentage of net
revenues attributable to such Integrated Health Service shall be offset against
amounts otherwise allocable to Medical Group under Appendix B in any one (1) or
more Fiscal Periods thereafter occurring. PQC agrees to use its reasonable
efforts to structure any proposal for the provision of Integrated Health
Services in the Geographic Region in a manner so that the allocation to Medical
Group contemplated by the forgoing sentence is in accordance with applicable
law. Medical Group shall not agree to participate in any Integrated Health
Service or fail to elect to participate in such Integrated Health Service except
as approved by and on such terms as have been approved by the Joint Policy
Board. If Medical Group does not elect to participate in such Integrated Health
Service in the Geographic Area within such forty-five (45) day period, PQC may,
but shall not be obligated to, provide such Integrated Health Service directly
or through another Affiliate or subsidiary (but in no event through or with any
outside third party without the prior consent of the Joint Policy Board) and
Medical Group shall have no right to participate in the revenues or income from
such Integrated Health Service; provided, however, that PQC shall not directly
-------- -------
or indirectly provide such Integrated Health Service if within such forty-five
(45) day period the Medical Advisory Board reasonably determines and notifies
PQC that the provision of such services have not been determined to be
clinically efficacious, are clinically dangerous, or would otherwise adversely
affect the reputation of PQC and/or Medical Group as to quality of care and;
provided, further, that PQC shall not directly or indirectly provide any
- -------- -------
Integrated Health Services in the Geographic Area if all of the PQC
Representatives on the Joint Policy Board voted against Medical Group
participating in such Integrated Health Service.
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<PAGE>
3.18 Advertising and Public Relations. PQC shall design and implement
--------------------------------
local public relations and advertising programs, subject to approval by the
Joint Policy Board. In the event that there is any adverse incident involving
Medical Group or any Medical Group Physician or patient, any public statement
and announcement by or on behalf of Medical Group or any Medical Group Physician
shall be approved in advance by PQC.
4. MANAGEMENT FEE; FINANCIAL ARRANGEMENTS
In consideration for the services furnished by PQC to Medical Group under
this Agreement and in order to encourage the cost-effective management of the
Medical Group, PQC shall be entitled to receive, and Medical Group hereby agrees
to pay PQC, an aggregate management fee calculated under the formulas set forth
in Appendix B -1 with respect to the Founding Pods and B-2 with respect to the
Additional Pods hereto.
5. TERM AND TERMINATION
5.1 Term. The term of this Agreement shall commence on the date first
----
written above and shall continue until the date forty (40) years thereafter,
unless terminated earlier in accordance with this Agreement. After the
expiration of the initial forty (40) year term, this Agreement shall
automatically renew for successive forty (40) year terms unless sooner
terminated in accordance with the provisions hereof.
5.2 Termination on Default.
----------------------
(a) Either party shall be entitled to terminate this Agreement if the
other party fails to perform in any material respect any material
obligation required of it hereunder, and such default continues
for sixty (60) days after the giving of written notice by the
nondefaulting party, specifying the nature and extent of such
default; provided, however, that the non- defaulting party shall
-------- -------
not be entitled to terminate this Agreement if the defaulting
party commences the cure of such default within the first sixty
(60) day period and thereafter diligently and in good faith
continues to cure such default until completion.
(b) Termination at election of PQC. PQC shall be entitled to
terminate this Agreement upon written notice to Medical Group if:
(i) a law firm with a nationally recognized expertise in health care
law and acceptable to PQC and the Joint Policy Board renders an
opinion to PQC, with a copy provided to the Joint Policy Board,
stating that a material provision of this Agreement is in
violation of applicable law, and the parties do not agree to
amend this Agreement pursuant to Section 9.14 hereof to cure such
violation; or
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<PAGE>
(ii) any court or regulatory agency enters an order finding a material
provision of this Agreement is in violation of applicable laws
and the parties do not agree to amend this Agreement pursuant to
Section 9.14 hereof to cure such violation; or
(iii) PQC is prevented by Medical Group or any person under the
Medical Group's direction or control, from entering any material
portion of the Pod Practice Locations considered on any aggregate
basis, and such inability to enter such premises continues for
more than forty-eight (48) hours after notice thereof to the
Joint Policy Board.
(c) Termination by Medical Group. Notwithstanding Section 5.2(a),
Medical Group may terminate this Agreement (if and only if such
termination has been approved by the Joint Policy Board) for the
reasons set forth below:
(i) upon written notice to PQC of the failure of PQC to remit any
funds or make any payments required under this Agreement when due
and continued failure to remit those funds or make the payment
after thirty (30) days notice of such failure to PQC unless the
amount of such payment is being contested in good faith; or
(ii) a law firm with a nationally recognized expertise in health care
law and acceptable to PQC and the Joint Policy Board renders an
opinion to the Medical Group, with a copy provided to the Joint
Policy Board, stating that a material provision of this Agreement
is in violation of applicable law, and the parties do not agree
to amend this Agreement pursuant to Section 9.14 hereof to cure
such violation; or
(iii) any court or regulatory agency enters an order finding a
material provision of this Agreement is in violation of
applicable laws, and the parties do not agree to amend this
Agreement pursuant to Section 9.14 hereof to cure such violation.
Medical Group shall take appropriate action to terminate this
Agreement pursuant to this Section (c) if recommended by the Joint
Policy Board.
5.3 Effect of Termination. Upon termination of this Agreement pursuant
---------------------
to this Section 5:
(a) PQC and Medical Group shall cooperate and continue to perform
their obligations under this Agreement as may be necessary to
ensure the provision of proper care to patients under treatment,
consistent with applicable law concerning continuation of
benefits under Payor Contracts, until appropriate alternative
arrangements are made.
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<PAGE>
(b) Medical Group and PQC shall cooperate to ensure the appropriate
billing and collection for all health care items and services
provided by Medical Group prior to the effective date of
termination, and any proceeds of such billings or collections
shall be retained by Medical Group and/or paid to PQC in
accordance with the terms of this Agreement.
(c) Any amounts due and owing to PQC under any loan to Medical Group
shall become immediately due and payable, subject to offset for
amounts owed hereunder by PQC to Medical Group.
(d) Medical Group shall reimburse PQC for all drug and pharmaceutical
inventory retained by Medical Group following termination to the
full extent of funds advanced by PQC for the purchase of such
inventory pursuant to Section 3.6.
(e) Provisions of this Agreement shall survive any termination if so
provided herein or if necessary or desirable fully to accomplish
the purposes of such provision.
(f) PQC shall use its reasonable efforts to have Medical Group
continue to participate in any Payor Contracts with respect to
which PQC and not Medical Group is the contracting party.
6. JOINT POLICY BOARD; CERTAIN PROVISIONS REGARDING GOVERNANCE OF MEDICAL
GROUP
6.1 Joint Policy Board. Medical Group and PQC shall establish and
------------------
maintain the Joint Policy Board, which shall have the representation,
responsibility and authority described below.
(a) Representation. For purposes of this Agreement, "Physician
--------------
Members" means only those Medical Group Physicians whose
Employment Agreement permits them to share in Net Revenues as
provided in Appendix B-1 or B-2 and, for purposes of this Section
6.1, such other non-physician healthcare providers that are
employees of Medical Group as the Joint Policy Board shall
designate from time to time including the persons listed on
Schedule 6.1(a). The Joint Policy Board shall consist of nine
(9) individuals: four (4) elected by plurality vote of the
Physician Members (the "Medical Group Representatives"), at least
one of whom must be a primary care physician and at least one of
whom shall be a specialist; four (4) appointed by PQC (the "PQC
Representatives"), and the President of Medical Group (who shall
serve ex-officio with vote). Each Medical Group Representative
shall be a physician selected until June 30, 2000 for a one year
term and thereafter for a three (3) year term by Physician
Members; provided, however, that new members of the Joint Policy
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<PAGE>
Board shall be selected as of July 31, 1997 (the "Effective
Date"); that with respect to the 12 month period ending on the
first anniversary of the Effective Date two (2) of the Medical
Group Representatives shall be selected by the Founding Pods and
two (2) of the Medical Group Representatives shall be selected by
Pod R; that with respect to the next succeeding twelve month
period, the Medical Group Representatives shall include at least
two (2) Physician Member assigned to a Founding Pod and at least
two (2) Physician Member assigned to Pod R and, in each case,
selected by the Physician Members of the Founding and Additional
Pods voting as a single group; and that with respect to any
period beginning on or after the second anniversary of the
Effective Date, the Medical Group Representatives shall be any
Physician Member meeting the above criteria selected by the
Founding and Additional Pods voting as a single group. Each
Medical Group Representative may serve an unlimited number of
terms and shall serve until a successor is selected. The PQC
Representatives shall be appointed from time to time by PQC and
shall include the chief operating officer of Medical Group. The
Medical Group Representatives shall select, from among the
physicians who are members of the Joint Policy Board, the Chair
of the Joint Policy Board. The Medical Director shall be
provided with notice of and shall be entitled to attend meetings
of the Joint Policy Board but shall not be entitled, unless the
Medical Director is also a Medical Group Representative or a PQC
Representative, to vote on any matter before the Joint Policy
Board.
(b) Authority and Responsibility. The Joint Policy Board shall be
----------------------------
responsible for periodically reviewing and making any appropriate
recommendations to PQC and the Board of Directors of Medical
Group regarding the operations of Medical Group, and, to the
extent expressly provided in this Agreement, shall have the right
to approve certain decisions by Medical Group and PQC. Any
amendment of this Agreement that would limit or otherwise
materially diminish the authority or responsibility of the Joint
Policy Board, including without limitation any changes to this
Section 6 or Appendices B-1 or B-2, shall require the prior
approval of the Joint Policy Board. In addition, the following
actions shall require the affirmative vote of a majority of the
members of the Joint Policy Board:
(i) approval of all budgets and borrowings pursuant to Section 6.1;
(ii) approval of the number and type of physicians required for the
efficient operation of Medical Group;
(iii) review and approval of all advertising and other marketing of
the services performed by Medical Group;
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<PAGE>
(iv) approval of Integrated Health Services and the scope of those
services to be provided by Medical Group as contemplated by
Section 3.17;
(v) approval of the formation, maintenance and/or termination of
relationships with institutional health care providers and
payors, including Payor Contracts in accordance with Section 3.7;
(vi) approval of all contracts material to Medical Group, including
all amendments to real property leases in effect as of the date
of this Agreement, and all the terms of and amendments to real
property leases entered into after such date governing the space
utilized by any Medical Group Physician;
(vii) consideration and determination of non-clinical matters raised
by Medical Group Physicians;
(viii) approval of fee schedules and charges;
(ix) approval of business and strategic plans;
(x) approval of the Operating Manager;
(xi) approval of Medical Group's termination of a Medical Group
Physician on the basis of disability;
(xii) approval of any change in the Baseline Amount (as defined in
Section 10.2) to reflect the addition or termination of Medical
Group Physicians; and
(xiii) approval of the modification or waiver of the restrictive
covenants applicable to any Medical Group Physician.
The Joint Policy Board may consult with Medical Group, PQC and any Medical
Group Physician before taking any action specified in this Section 6.1(b), but,
except as otherwise provided in this Agreement, neither the recommendations of
Medical Group, PQC nor any Medical Group Physician shall be binding on the Joint
Policy Board. Any determination of the Joint Policy Board pursuant to (i),
(ii), (iii), (iv), (v), (vi), (xii) and (xiii) shall not be effective unless
approved by the Medical Group Shareholder.
(c) Certain Matters Requiring Supermajority Approval.
-------------------------------------------------
Notwithstanding anything in Section 6.1(b) to the contrary,
approval of any action with respect to the following matters
shall require the approval of two thirds of the members of the
Joint Policy Board (including during the first two years after
the Effective Date at least one (1) Medical Group Representative
from a Founding Pod and at least (1) Medical Group Representative
from an Additional Pod and thereafter, at least one Physician
Representative):
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<PAGE>
(i) changes in existing physician practice patterns;
(ii) any reimbursement contract providing for compensation to
Medical Group at below market rates;
(iii) the addition of new physicians; and
(iv) any significant budgetary changes or any material changes in
the governance or financial provisions of this Agreement
following a Change in Control Transaction.
(d) Certain Matters Regarding Medical Advisory Board Recommendation.
---------------------------------------------------------------
Notwithstanding anything in this Section 6.1 to the contrary, the
Joint Policy Board shall not be authorized to take any action
with respect to the following matters unless requested by the
Medical Advisory Board:
(i) referrals of patients' accounts to collection agencies and
development and execution of courtesy and write-off
policies;
(ii) technical procedures pursued by a Medical Group Physician
(as long as appropriate credential requirements are
satisfied);
(iii) non-monetary aspects of quality assurances and
credentialing decisions, including dismissal for quality
assurance reasons of any healthcare professional; and
(iv) the determination for quality assurance or credentialing
reasons to terminate any Employment Agreement in the form
attached hereto as Annex A-2 pursuant to Sections 8(c)(i),
(B), (C), (D), (E), (F), (G), (K) or (L) of such Employment
Agreement; provided, however, that a determination that
termination of an Employment Agreement pursuant to Sections
8(c)(i)(C), (F), (G), (K) or (L) of such Employment
Agreement is in the best interests of Medical Group for any
other reason, including the reputation, financial results or
financial condition of Medical Group, may be made by the
Joint Policy Board without recommendation by the Medical
Advisory Board.
(e) Medical Advisory Board Recommendations Regarding New Physicians.
---------------------------------------------------------------
(i) Notwithstanding anything in this Section 6.1 to the contrary,
the Joint Policy Board shall not authorize the employment of any
additional physicians (other than in connection with the merger
of a physician group into Medical Group) unless the Joint Policy
Board shall have sought the recommendation of the Medical
Advisory Board whether the addition of such physicians is
advisable on the basis of the reputation and ability of the
proposed physician and the compatibility of such physician with
the existing Medical Group Physicians with the same area of
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<PAGE>
practice. In making its recommendation to the Joint Policy
Board, the Medical Advisory Board shall consult with Medical
Group Physicians in similar practice areas as the proposed
additional physician. If the Medical Advisory Board recommends
the physician, the Joint Policy Board shall be free to approve an
Employment Agreement with such physician. If the Medical
Advisory Board recommends that a physician not be approved by the
Joint Policy Board, the Medical Advisory Board must recommend to
the Joint Policy Board, within six months of the initial request
by the Joint Policy Board, another physician with the same
speciality or practice area and whose Baseline Net Adjusted
Billings would be comparable to the physician proposed by the
Joint Policy Board who is prepared to become a Medical Group
Physician. The Medical Advisory Board shall act expeditiously in
considering whether to recommend any physician to the Joint
Policy Board. If the Medical Advisory Board fails to make such a
recommendation within the six month period, the Joint Policy
Board shall be free to offer employment to the physician
originally proposed to the Medical Advisory Board if Medical
Advisory Board recommended against such physician on the basis of
lack of compatibility with existing Medical Group Physicians or
the Medical Advisory Board made no determination.
(ii) Notwithstanding anything in this Section 6.1 to the contrary, the
Joint Policy Board shall not authorize the employment of any
additional physicians in connection with the merger of a physician
group into Medical Group unless the Joint Policy Board shall have
sought the recommendation of the Medical Advisory Board whether the
addition of such physicians is advisable on the basis of the
reputation and ability of the proposed physician(s) and the
compatibility of such physician(s) with the existing Medical Group
Physicians with the same area of practice. The Medical Advisory Board
must make a recommendation to approve or reject the employment of such
physician(s) within 30 days of being advised of the proposed
transaction. In reaching its recommendation, the Medical Advisory
Board shall only consider the reputation and ability of the proposed
physicians and the compatibility of such physicians with the existing
Medical Group Physicians with the same area of practice. The Medical
Advisory Board may consult with Medical Group Physicians in similar
practice areas as the proposed additional physician. If the Medical
Advisory Board recommends the physician(s) or fails to make a
recommendation with the thirty-day period, the Joint Policy Board
shall be free to approve Employment Agreement(s) with such
physician(s).
(f) Voting; Procedures.
------------------
(i) Each Medical Group Representative shall have one (1) vote
and shall have the right to grant his proxy to another
Medical Group Representative. Each of the PQC
Representatives and the President of Medical Group shall
have one (1) vote and shall have the right to grant his
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<PAGE>
proxy to another member of the Joint Policy Board. Except
as provided in clause (c)(ii) below, no action of the Joint
Policy Board shall be effective unless authorized by a
majority (or, in the case of matters set forth in Sections
6.1(c), by two-thirds) of the members of the Joint Policy
Board. A quorum of the Joint Policy Board shall consist of
at least three (3) Medical Group Representatives and three
(3) PQC Representatives, present in person or by proxy;
provided, however, that if a meeting is called and a quorum
cannot be obtained within thirty (30) days of notice of such
meeting, then the quorum requirement shall be automatically
reduced for the first meeting thereafter to a majority of
the members of the Joint Policy Board, present in person or
by proxy.
(ii) The Joint Policy Board shall meet from time to time when a
meeting is called by the chair or by three (3) or more
members of the Joint Policy Board upon at least five (5)
days' written notice to the other members of the Joint
Policy Board, which notice requirement may be waived with
respect to any member of the Joint Policy Board by the
attendance at such meeting. The Joint Policy Board may also
hold meetings by telephone or act by written consent
according to procedures established by the Joint Policy
Board. Minutes shall be kept of all formal actions taken by
the Joint Policy Board. The Joint Policy Board may appoint
a secretary who is not a member of the Joint Policy Board.
6.2 Medical Advisory Board. A Medical Advisory Board shall be
----------------------
established, which shall be responsible for: (i) providing medical advice to
Medical Group on managed care contracting, including oversight of all
utilization review, risk management, and peer review functions required by any
Payor Contract; (ii) developing and disseminating, subject to Medical Group's
approval, medical protocols and quality and outcome measures for Medical Group
and the Physicians; (iii) advising Medical Group with respect to the number and
qualifications of physicians required for the efficient operation of Medical
Group's practice; (iv) overseeing the recruitment by Medical Group and
credentialing of new physicians; and (v) whether to recommend that the Joint
Policy Board consider the matters set forth in Section 6.1(d). The Medical
Advisory Board shall consist of seven (7) members. The members of the Medical
Advisory Board shall be the Medical Director of Medical Group and six (6) other
licensed physicians elected by a plurality vote of the Physician Members, of
whom three (3) shall be primary care physicians and three (3) shall be engaged
in a specialist practice. The Medical Director of Medical Group shall act as
chair of the Medical Advisory Board.
6.3 The President of Medical Group.
------------------------------
(a) Medical Group shall appoint, in the manner set forth in (b)
below, a physician to act as President of Medical Group who shall
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<PAGE>
work in conjunction with PQC in order to implement the policies
established by the Joint Policy Board. Such individual shall
also be an employee of PQC. Subject to the direction and
supervision of the Medical Group Shareholder, the duties of the
President shall include, without limitation:
(i) interfacing with representatives from the national corporate
offices of PQC;
(ii) implementing the business and strategic plans of Medical Group
and overseeing the business operation of Medical Group; and
(iii) working with PQC representatives in negotiating and interfacing
with Payors and other regulatory agencies.
The Medical Group Shareholder shall determine the salary and fringe
benefits of the President.
(b) Subject to the By-Laws of Medical Group (which shall not be
amended to reduce the rights of the Medical Group Physicians
under this section without the prior consent of a majority of the
Physician Members), the Physician Members shall nominate by
plurality vote three (3) candidates, who shall be Physician
Members, for the position of President, and the Medical Group
Shareholder shall select one (1) candidate from among such
nominees to be President. In the event that there is a vacancy
in the position of President at any time for any reason, the
Medical Group Shareholder shall have the authority to appoint a
person to serve as interim President until another person is duly
appointed in accordance with the above specified procedures. The
President shall serve part-time in this capacity until such time
as his responsibilities warrant full-time employment status.
Notwithstanding the foregoing, the President shall be a Medical
Group Physician active in the practice of medicine, until such
time as the President's responsibilities warrant full-time
employment status with the Medical Group. Medical Group may
remove the President at any time in the event that the employment
agreement between the President and PQC is terminated, but in
such event the position of President may be filled by Medical
Group Shareholder for an interim period only until a successor to
the position of President has been appointed in accordance with
the provisions of this Section 6.3(b). Medical Group shall
assist in the development of procedures for the nomination,
appointment and replacement of the President in such a manner as
to ensure a smooth transition period in the medical practice of
any individual who assumes the position of the President.
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<PAGE>
6.4 The Medical Director of Medical Group.
-------------------------------------
(a) Medical Group shall hire and appoint a physician to act as
Medical Director to provide guidance and advice to Medical Group
on clinical issues. The duties of the Medical Director shall
include, without limitation:
(i) interfacing with the National Medical Advisory Board of PQC and
representing Medical Group on the PQC National Medical Advisory
Board;
(ii) chairing the Medical Advisory Board;
(iii) providing medical advice on managed care contracting by Medical
Group;
(iv) leading the development and dissemination of medical protocols,
quality and outcome measures; and
(v) overseeing the recruitment and credentialing of new physicians.
The Medical Group Shareholder shall determine the salary and fringe
benefits of the Medical Director.
(b) Subject to the By-Laws of Medical Group (which shall not be
amended to reduce the rights of the Medical Group under this
Section without the prior consent of a majority of Physician
Members), the Physician Members shall nominate by plurality vote
three (3) candidates who shall be Physician Members for the
position of Medical Director, and the Medical Group Shareholder
shall select one (1) candidate from among such nominees to be
Medical Director. In the event that there is a vacancy in the
position of Medical Director at any time for any reason, the
Medical Group Shareholder shall have the authority to appoint a
person to serve as interim Medical Director until another person
is duly appointed in accordance with the above specified
procedures. The Medical Director shall serve part-time in this
capacity until such time as his responsibilities warrant full-
time employment status. Notwithstanding the foregoing, the
Medical Director shall be a Medical Group Physician active in the
practice of medicine, until such time as the Medical Director's
responsibilities warrant full-time employment status with the
Medical Group. Medical Group shall assist in the development of
procedures for the nomination, appointment and replacement for
the Medical Director in such a manner as to ensure a smooth
transition period in the medical practice of any individual who
assumes the position of the Medical Director. The Physician
Members shall have the right to remove the Medical Director upon
a two-thirds (2/3) vote of all Physician Members, but in such
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event the position of Medical Director may be filled only in
accordance with the provisions of this Section 6.4(b).
6.5 Operating Manager. Subject to the reasonable approval of the Joint
-----------------
Policy Board, PQC shall retain a full-time non-physician employee to serve as an
operating manager (the "Operating Manager"). The Operating Manager shall manage
and administer all of the day-to~day business transactions necessary for the
operation of Medical Group. PQC shall determine the salary and fringe benefits
of the Operating Manager, who shall be an employee of PQC. At the direction,
supervision and control of PQC, the Operating Manager shall implement the
policies established by Medical Group and the Joint Policy Board and shall
generally perform the duties and have the responsibilities of an administrator.
7. INTELLECTUAL PROPERTY
Medical Group acknowledges that PQC will continually develop Intellectual
Property and that Medical Group may have access to and use Intellectual Property
during the term of this Agreement. Medical Group agrees that, except as
required for the proper operation of the medical practice in accordance with
applicable law and the terms of this Agreement, it will not, directly or
indirectly, use or disclose any Intellectual Property. Medical Group
understands and agrees that this restriction will continue to apply after the
termination of this Agreement for any reason.
Medical Group agrees that all Intellectual Property to which it has access
as a result of its relationship with PQC under this Agreement is and shall
remain the sole and exclusive property of PQC. Except as required for the
proper operation of the medical practice in accordance with applicable law and
the terms of this Agreement, Medical Group will not copy any documents, tapes or
other media containing Intellectual Property ("Documents"). Medical Group will
return to PQC immediately after this Agreement terminates, and at such other
times as may be specified by PQC, all Documents and copies of Documents.
Medical Group shall use its best efforts to assure that all Medical Group
Physicians and other employees and agents of Medical Group are aware of and
comply with the restrictions on disclosure and use of Intellectual Property set
forth in this Section. (For purposes of this Section, references to PQC shall
be deemed to refer to PQC and any Affiliates.)
8. RESTRICTIVE COVENANTS
The parties recognize that the services to be provided by PQC hereunder
shall be feasible only if Medical Group operates an active medical practice to
which the physicians associated with Medical Group devote their full time and
attention. Accordingly, the parties hereto agree as follows:
8.1 Noncompetition. During the term of this Agreement, Medical Group
--------------
shall not, without the prior written consent of PQC, establish, operate or
provide physician or other medical services at any medical office, clinic or
other health care facility providing services similar to those provided by
Medical Group, PQC or any Affiliate of PQC, within the Geographic Area.
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<PAGE>
8.2 Ancillary Enterprise. During the term of this Agreement, except as
--------------------
permitted by this Agreement, Medical Group shall not provide any of the
additional services that have been approved by the Joint Policy Board and PQC as
"Integrated Health Services" or any other services provided by PQC. For two
(2) years after termination of this Agreement, except as permitted by this
Agreement, Medical Group shall not provide any of the additional services that
have been approved by the Joint Policy Board and PQC as "Integrated Health
Services" or any other services provided by PQC, within fifteen (15) miles of
any Pod Practice Location.
8.3 Non-solicitation of Employees and Patients. During the term of this
------------------------------------------
Agreement and for a two (2) year period thereafter, Medical Group shall not
recruit, solicit or induce or attempt to induce, any employee or employees of
PQC to terminate their employment with, or otherwise cease their relationship
with, PQC. During the term of this Agreement and for a one (1) year period
thereafter, Medical Group shall not solicit, attempt to divert or to take away,
the business or patronage of any of the patients, clients, customers or
accounts, or prospective patients, clients, customers or accounts of PQC or any
of its Affiliates.
8.4 Enforcement of Medical Group Physician Employment Agreements.
------------------------------------------------------------
Medical Group shall enforce the Employment Agreements of Medical Group
Physicians, including, without limitation, restrictive covenants and liquidated
damages provisions contained in such agreements. In the event that, after a
request by PQC, Medical Group does not pursue any remedy that may be available
to it by reason of a breach or default of the restrictive covenants and
liquidated damages provisions or any other provision of any Employment
Agreement, upon the request of PQC, and Medical Group shall assign to PQC such
causes of action and any other rights it has related to such breach or default
and shall cooperate with and provide reasonable assistance to PQC with respect
thereto.
8.5 Remedies. PQC and Medical Group acknowledge and agree that a remedy
--------
at law for any breach or attempted breach of the provisions of this Section 8
shall be inadequate, and, therefore, either party shall be entitled to specific
performance and injunctive or other equitable relief in the event of any such
breach or attempted breach, in addition to any other rights or remedies
available to either party at law or in equity or under the Employment
Agreements, including without limitation provisions thereunder relating to the
repurchase by the Medical Group and/or the Medical Group Physicians of certain
assets. Each party hereto waives any requirement for the securing or posting of
any bond in connection with the obtaining of any such injunctive or other
equitable relief. If any provision of this Section 8 relating to the
restrictive period, scope of activity and the territory described therein shall
be declared by a court of competent jurisdiction to exceed the maximum time
period, scope of activity restricted or geographical area such court deems
reasonable and enforceable under applicable law, the time period, scope of
activity restricted and area of restriction held reasonable and enforceable by
the court shall thereafter be the restrictive period, scope of activity
restricted and the territory applicable to such provision of this Section 8.
The invalidity or non-enforceability of any provision of this Section 8 in any
respect shall not affect the validity or enforceability of the remainder of this
Section 8 or of any other provisions of this Agreement.
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<PAGE>
9. MISCELLANEOUS
9.1 Exclusivity. During the term of this Agreement, PQC shall be the
-----------
exclusive provider to Medical Group of the types of services to be provided
under this Agreement by PQC (the "Management Services"). During the Term,
Medical Group shall not establish, operate, or provide medical services or
practice medicine at a medical office, clinic or other health care facility
anywhere except at offices, clinics and facilities at which PQC is the exclusive
provider of Management Services; provided, however, that the Medical Group may
provide (i) services at hospital and other facilities unaffiliated with PQC so
long as PQC retains the sole right to provide Management Services in connection
with all activities conducted by Medical Group at such hospitals and other
facilities and (ii) the services set forth on Schedule 9.1. Except in
connection with any Integrated Health Services which PQC is permitted to provide
itself or through an Affiliate pursuant to Section 3.8 or except as two-thirds
of the members of the Joint Policy Board shall otherwise approve, neither PQC
nor any Affiliate may, during the term of this Agreement, provide to any other
person or entity which is located or doing business in the Maryland Area, the
management or other services to be provided by PQC pursuant to this Agreement or
any medical or other medical related services of the type provided by Medical
Group or Clinical Associates on the Effective Date, including the management of
capitated contracts. If during the term of this Agreement, either PQC or any
Affiliate proposes to establish an IPA in the Maryland Area, the terms set forth
in Appendix E shall apply to such IPA unless another arrangement is approved by
two- thirds of the members of the Joint Policy Board. For purposes of this
Section 9.1, "Maryland Area" means the state of Maryland and the following
counties in the Commonwealth of Pennsylvania:
9.2 Names; Trademarks. Medical Group and the Pods shall conduct their
-----------------
professional practice under the name or names mutually agreed upon by PQC and
Medical Group and subject to the terms of applicable trademark licenses between
PQC and Medical Group.
9.3 Independent Contractors. For the purpose of this Agreement and for
-----------------------
all services to be provided hereunder, each party will be, and will be deemed to
be, independent contractors and not (except to the limited extent provided in
Sections 3.7, 3.13 and 3.14) employees or agents of the other party.
9.4 [Reserved]
--------
9.5 Severability. If any provision of this Agreement is found by a
------------
court of competent jurisdiction to be void, invalid or unenforceable, the same
will either be reformed to comply with applicable law or stricken if not so
conformable, so as not to affect the validity or enforceability of the remainder
of this Agreement.
9.6 Waiver. Failure of either party to enforce a right under this
------
Agreement will not act as a waiver of that right or the ability to later assert
that right relative to the particular situation involved.
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<PAGE>
9.7 Notices. Any notice required to be given pursuant to the terms and
-------
provisions of this Agreement shall be in writing and shall be sent by certified
mail, return receipt requested, postage prepaid or by reputable overnight
delivery service, to PQC and Medical Group at their respective places of
business as designated from time to time by the parties and to the Joint Policy
Board at the address of its Chair. Notices shall be effective the second day
after mailing (in the case of certified mail) or the first day after mailing (in
the case of overnight delivery). A copy of any notice given to Medical Group
shall be addressed to the President of Medical Group with a copy to PQC.
9.8 Entire Agreement. This Agreement, together with all appendices,
----------------
schedules and exhibits attached hereto, constitutes the entire agreement among
the parties pertaining to the subject matter hereof and supersedes all prior and
contemporary agreements, understandings, negotiations, and discussion, whether
oral or written, of the parties respecting the subject matter hereof. All
appendices, schedules and exhibits attached hereto are hereby made a part of
this Agreement.
9.9 Amendment. Except as specifically provided elsewhere in this
---------
Agreement, no change or modification of this Agreement shall be valid unless the
same shall be in writing and signed by an authorized officer of Medical Group
and PQC and shall have been approved by the Joint Policy Board. Except as
specifically provided elsewhere in this Agreement, no waiver of any material
provision of this Agreement shall be valid unless the same shall be in writing
and signed by an authorized officer of Medical Group and PQC and shall have been
approved by the Joint Policy Board.
9.10 Successors and Assigns. PQC shall have the right to assign its
----------------------
rights and obligations under this Agreement to any entity controlled by,
controlling or under common control with PQC. Except as set forth in the prior
sentence, neither PQC nor Medical Group may assign its rights or delegate its
obligations under this Agreement without the prior written consent of the other
party. This Agreement shall be binding upon and shall inure to the benefit of
the parties hereto and their respective transferees, successors and assigns.
9.11 Governing Law. This Agreement will be construed and enforced in
-------------
accordance with the laws of the State of Maryland. Each of the parties hereto
submits to the exclusive jurisdiction of the United States federal district
courts seated in that state and agrees that process may be served upon it if it
cannot otherwise be served in such state by registered or certified mail
addressed as provided for notices under this Agreement.
9.12 Headings. Headings in this Agreement are inserted for convenience
--------
only and are not to be considered in construing the provisions hereof.
9.13 No Obligation to Third Parties. Except as expressly set forth in
------------------------------
this Section 9.13, none of the obligations and duties of PQC or Medical Group
under this Agreement shall in any way or in any manner be deemed to create any
obligation of PQC or of the Medical Group to, or any rights in, any person or
entity not a party to this Agreement. Notwithstanding the foregoing, in
accordance with and subject to the terms of the provisions of the Employment
Agreements between the Medical Group Physicians and Medical Group, the Medical
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<PAGE>
Group Physicians are hereby made third party beneficiaries of and may enforce
the obligations of PQC hereunder (as the same may be amended from time to time
in accordance with the provisions of Section 9.9 hereof) by any means, at law or
in equity, all in accordance with any procedural requirements set forth in the
said Employment Agreements; it being expressly agreed that this Agreement may be
amended by the parties in accordance with Section 9.9 without the consent of the
Medical Group Physicians. In the event that a dispute arises between PQC and
Medical Group, or between PQC, Medical Group and a Medical Group Physician, that
is not to be resolved by the Joint Policy Board under this Agreement or the
Employment Agreements, the parties to the dispute shall submit the dispute to
binding arbitration in Baltimore, Maryland. Each of PQC and Medical Group (in
the case of a dispute between PQC and Medical Group) or PQC and the Medical
Group Physician (in the case of a dispute between PQC or Medical Group and a
Medical Group Physician) shall select, within 30 days of the notice of the other
party's's election to arbitrate, one arbitrator, who shall not be affiliated
with PQC, Medical Group or any Medical Group Physician. Each of the arbitrators
so selected shall select, within 10 days of their selection, select a third
arbitrator. Each of the parties to the arbitration shall present their case to
the arbitrators within 30 says of the selection of the final arbitrator. All
disputes shall be settled by the vote of a majority of the arbitrators. The
arbitration shall be conducted in accordance with the rules of the American
Arbitration Association.
9.14 Contract Modifications for Prospective Legal Events. In the event
---------------------------------------------------
(a) any state or federal laws or regulations, now existing or enacted or
promulgated after the Effective Date are interpreted by judicial decision, a
regulatory agency, or legal counsel with a nationally recognized expertise in
the field of law in question in such a manner as to indicate that this Agreement
or any provision hereof may be in violation of such laws or regulations, or (b)
the Financial Accounting Standards Board, Emerging Issues Task Force or other
applicable accounting standard setting entity promulgates standards or issues a
consensus that would prevent PQC from consolidating for financial statement
presentation purposes all Practice Revenues of Medical Group on PQC's
consolidated financial statements, then PQC shall propose to the Joint Policy
Board and Medical Group for their approval such amendments to this Agreement as
necessary to conform the Agreement to all applicable law and preserve the
underlying economic and financial arrangements between PQC and Medical Group
without substantial economic detriment to either PQC or Medical Group. Any such
amendment approved by the Joint Policy Board and Medical Group shall be binding
upon Medical Group, and Medical Group hereby consents to any such amendment. To
the extent any act or service required of PQC should be construed or deemed, by
any governmental authority, agency or court, to constitute the practice of
medicine by PQC, the performance of said act or service by PQC shall be deemed
waived and forever unenforceable and the provisions of this Section 9.14 shall
be applicable. To the fullest extent permitted by law, Medical Group hereby
waives and agrees not to assert illegality as a defense to the enforcement of
this Agreement or any provision hereof, instead, any such purported illegality
shall be resolved pursuant to the terms of this Section 9.14.
9.15 Availability of Certain Documents. The parties agree, to the
---------------------------------
extent required by law necessary to permit receipt of reimbursement for services
by Medical Group, to make available to the Secretary of Health and Human
Services, the Comptroller General of the General Accounting Office, or their
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<PAGE>
authorized representatives, any books, documents and records in their possession
relating to the nature and extent of the costs of services hereunder for a
period of four (4) years after the provision of such services.
9.16 Gender. References herein to the masculine shall be deemed to
------
refer to the feminine or neuter gender as the context may require.
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<PAGE>
IN WITNESS WHEREOF, the parties have caused this Agreement to be executed
as of the date first written above.
FLAGSHIP HEALTH, P.A. PHYSICIANS QUALITY CARE, INC. ("PQC")
By: /s/ Dana Frank, M.D. By: /s/ Samantha J. Trotman
---------------------------------- -----------------------------
Dana Frank, M.D. Samantha J. Trotman
President Chief Financial Officer and
Vice President
FLAGSHIP HEALTH II, P.A.
By: /s/ Dana Frank, M.D.
----------------------------------
Dana Frank, M.D.
President
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<PAGE>
APPENDIX A
----------
DEFINITIONS
10.1. As used in this Agreement, the following terms shall have the
meanings set forth below:
10.2. "Affiliate" or "Affiliates" means with respect to any person, a
--------- ----------
person that directly or indirectly through one (1) or more intermediaries
controls, or is controlled by or is under common control with, such person.
10.3. "Baseline Amount" means with respect to the Founding Pods the sum of
---------------
Eight Million, Four Thousand, Six Hundred Fifty Six Dollars ($8,004,656). The
Baseline Amount shall be adjusted from time to time as determined by the Joint
Policy Board and Medical Group (i) to reflect the addition of new Physicians to
the Founding Pods or the termination or resignation of any Medical Group
Physician included in a Founding Pod or (ii) to reflect such other factors as
PQC and the Joint Policy Board shall mutually agree to be appropriate, in
consultation with the Medical Group Compensation Committee, as appropriate.
10.4. "Baseline Net Adjusted Billings" with respect to each Medical Group
------------------------------
Physician in an Additional Pod shall mean initially the amount set forth as the
Baseline Net Adjusted Billings in an appendix to the Medical Group Physician's
employment agreement with Medical Group, which amount is based upon such
physician's estimated Net Adjusted Billings as an employee of Clinical
Associates for the fiscal year ended June 30, 1997. PQC shall have the right to
adjust such initial Baseline Net Adjusted Billings amount to reflect such
physician's actual Net Adjusted Billings as an employee of Clinical Associates
for the fiscal year ended June 30, 1997 as soon as such information is
available. Baseline Net Adjusted Billings for a Medical Group Physician shall
also be adjusted by PQC for changes in practice patterns (i.e., weekly hours
worked, part time status), which changes shall be notified by Medical Group and
the Medical Group Physician to PQC immediately; provided that Baseline Net
Adjusted Billings shall be adjusted back in the event that the practice patterns
of the physicians return to their original status. PQC shall be entitled to
review each Medical Group Physician's Baseline Net Adjusted Billings at the end
of each Fiscal Year. PQC shall be entitled, without the approval of the Joint
Policy Board, to reduce the Baseline Net Adjusted Billings of Medical Group
Physicians engaged in a primary care practice (including OB/GYN) to reflect the
Net Adjusted Billings of such Medical Group Physicians in the event that average
fee for service collections for such primary care Medical Group Physicians as a
percentage of fee for service billings declines by more than 5% compared to the
percentage realized by such primary care Medical Group Physicians for the year
ended June 30, 1997; provided, however, that the amount of such reduction shall
only be equal to the excess of the actual percentage decline over 5%. PQC shall
also be entitled, without the approval of the Joint Policy Board, to reduce the
Baseline Net Adjusted Billings of Medical Group Physicians engaged in a
specialist practice to reflect then current Net Adjusted Billings for such
Medical Group Physicians in the event that average fee for service collections
for such specialist Medical Group Physicians as a percentage of fee for service
billings declines by more than 5% compared to the percentage realized by such
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<PAGE>
specialist Medical Group Physicians for the year ended June 30, 1997; provided,
however, that the amount of such reduction shall only be equal to the excess of
the actual percentage decline over 5%.
10.5. "Book Value" means the value of an asset, after deduction for any
----------
depreciation or amortization, reflected on a balance sheet prepared in
accordance with generally accepted accounting principles.
10.6. "Change in Control Transaction" means any transaction or series of
-----------------------------
related transactions pursuant to which a single person or entity or a group of
entities under common control acquire more than 50% of the capital stock of PQC;
provided, however, that a Change in Control Transaction shall not be deemed to
have occurred if Bain Capital, Inc or its affiliates acquires 50% or more of the
outstanding capital stock of PQC or becomes entitled to exercise or exercises
management control of PQC pursuant to the terms of PQC's Articles of
Incorporation.
10.7. "Deductible Expenses" with respect to any Fiscal Period shall mean,
-------------------
when used with respect to any Pod, an amount equal to (i) any income tax Medical
Group is required to pay or withhold with respect to Medical Group Physicians
assigned to such Pod, (ii) the cost of any pension and any other benefits not
included in Practice Expenses, in each case that are provided to such Medical
Group Physicians and (iii) any Discretionary Expenses; provided, however, that
the parties agree and understand that Deductible Expenses may include items that
are not deductible for income tax purposes, and PQC makes no representation as
to the deductibility of such items for purposes of income tax liabilities of any
Medical Group Physician or Medical Group.
10.8. "Discretionary Expenses" means, during the Fiscal Period ended
----------------------
December 31, 1996, any increase in actual staffing or other expenses, including
Physician Pod Practice Expenses, above the levels set forth in Appendix D to
this Agreement, subject to adjustment in successive Fiscal Periods pursuant to
approval by the Joint Policy Board as part of the budgetary process contemplated
in Appendix A to the form of Employment Agreement attached hereto. With respect
to any Fiscal Period commencing after December 31, 1996, Discretionary Expenses
means any personnel, operating and other expenses, including Physician Pod
Practice Expenses, over and above the standard levels developed by the Joint
Policy Board and approved by PQC and included in a Pod's annual operating
budget, as adjusted from time to time in accordance with Appendix B attached
hereto or the terms of any Employment Agreement. In addition, "Discretionary
Expenses" shall include for a given Pod any liability (in the case of Flagship
II, in excess of the amount accrued therefor on Flagship II financial statements
as of the Effective Date) for federal, state, local or other taxes attributable
to the merger into Medical Group (or attributable to taxable periods preceding
the merger) of any entity owned by one or more Medical Group Physicians
practicing in such Pod; provided, however that there shall be excluded any such
tax liability if and to the extent that Medical Group or PQC has received
payment from the Physician Members of the applicable Pod pursuant to the
indemnification provisions of any agreement of merger pursuant to which the said
merger has occurred; and provided, further that if any such Discretionary
Expense arises prior to an initial public offering of PQC stock, the Joint
Policy Board may recommend to PQC that it consider taking steps to finance such
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<PAGE>
taxes or otherwise stage the imposition of such Discretionary Expenses over a
period of three years, which recommendation shall be subject to the Board of
Directors of PQC.
10.9. "Effective Date" means July 31, 1997.
--------------
10.10. "Fiscal Period" means the twelve (12) month or shorter period
-------------
ending on December 31 of each year.
10.11. "Geographic Area" means the states of Maryland, Delaware,
---------------
Pennsylvania (including all areas within a 15 mile radius of Philadelphia),
Virginia, West Virginia, and the District of Columbia
10.12. "Gross Margin" means, for any Fiscal Period, the excess (or
------------
deficit) of Practice Revenues over Practice Expenses.
10.13. "Including" or "to include" any item shall mean containing or to
--------- ----------
contain such item as part of a whole, without any implied exclusion of other
items.
10.14. "Incremental Amount" means the excess, if any, of Net Adjusted
------------------
Billings attributable to a Medical Group Physician over the Market Compensation
for such physicians. "Market Compensation" means 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 selected by the
Joint Policy Board.
10.15. "Integrated Health Services" means any business that Medical Group
--------------------------
or PQC establishes in the Geographic Area, whether directly or through a
subsidiary, that (i) provides medical or medical related services that are not
traditionally performed by physicians or physician practices at medical offices
(it being agreed that in-office laboratory and other ancillary services
performed by the Medical Group Physicians on the Effective Date of this
Agreement shall be deemed to be medical services and are not Integrated Health
Services) and (ii) are determined to be Integrated Health Services by PQC,
Medical Group, and the Joint Policy Board.
10.16. "Intellectual Property" means all (i) patents, patent applications,
---------------------
patent disclosures and all related continuation, continuation-in-part,
divisional, reissue, re-examination, utility model, certificate of invention and
design patents, registrations and applications for registrations, (ii)
trademarks, services marks, trade dress, logos, trade names and corporate names
and registration and applications for registration thereof, (iii) copyrights and
registrations and applications for registration thereof, (iv) mask works and
registrations and applications for registration thereof, (v) computer software,
data and documentation, (vi) trade secrets and confidential business
information, whether patentable or non-patentable and whether or not reduced to
practice, know-how, clinical product and service processes and techniques,
research and development information, medical protocols, copyrightable works,
financial, marketing and business data, pricing and cost information, business
and marketing plans and customer and supplier lists and information, (vii) other
proprietary rights relating to the foregoing (including, without limitations,
remedies against infringement thereof and rights of protection of interest
therein under the laws of all jurisdictions) and (viii) copies and tangible
embodiments thereof; provided, however, that there is excluded from the
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<PAGE>
definition of "Intellectual Property" any information (a) previously known to or
under development by a Medical Group Physician and listed on an Appendix to his
Employment Agreement, (b) generally known in the health care industry, or (c)
obtained by a Medical Group Physician from a third party lawfully possessing
such Intellectual Property
10.17. "Medical Group Shareholder" means the individual or individuals in
-------------------------
whose name the shares of Medical Group have been issued.
10.18. "Net Adjusted Billings" shall have the meaning set forth in
---------------------
Schedule 10.18 attached hereto, as such schedule shall be amended from time to
- --------------
time by the Joint Policy Board.
10.19. "Net Margin" means, for any Fiscal Period, the excess (or deficit)
----------
of Gross Margin less the sum of (i) the Baseline Amount, and (ii) PQC Direct
Expenses.
10.20. "Non-Established Physician" shall mean any Medical Group Physician
-------------------------
assigned to an Additional Pod (i) who did not have an established practice that
is merged into the Medical Group, (ii) listed in Schedule B-2, or (iii) whose
------------
Baseline Net Adjusted Billings would be less than the Market Compensation (as
defined in 10.13) for such physician; provided, however, that a Medical Group
Physician shall cease to be a Non-Established Physician on the basis of clauses
(i) or (ii) above at such time as the Joint Policy Board determines to be
appropriate.
10.21. "Payor" shall mean any insurer, health maintenance organization,
-----
preferred provider organization, self-insured employer, labor union or other
organization or entity that arranges for the delivery of health care services to
enrollees or patients, including the Medicare and Medicaid programs and
including independent practice associations, physician-hospital organizations,
medical groups and other licensed providers.
10.22 "Payor Contracts" shall mean the contracts, agreements and
---------------
arrangements between Medical Group and Payors for the provision of health care
items and services.
10.23. "Physician Draw" shall mean, with respect to each Physician, for
--------------
each Fiscal Period (prorated for any partial Fiscal Periods) the amount of cash
to be advanced to Physician on a bi-weekly or monthly basis as an interim
payment of, in the case of the Founding Pods, the portion of Gross Margin and
Net Margin due to Physician hereunder, and in the case of the Additional Pods,
the Available Amount. Physician Draw shall be subject to change from time to
time in accordance with the provisions of Appendix B hereof. For purposes of
the Fiscal Period commencing January 1, 1996, the Physician Draw shall be, for
each Physician, the amount set forth on Schedule B-1 attached to this Agreement.
10.24. "Pod Physician" shall mean, with respect to a Pod, all Medical
-------------
Group Physicians who are assigned to the Pod.
10.25. "Pod Practice" or "Pod" shall mean, with respect to a Pod, the
------------ ---
medical practice of Medical Group as conducted through the Pod: (i) a Pod
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<PAGE>
Practice Location, or (ii) a group of Pod Practice Locations, or (iii) a
functional line of business such as a laboratory, and in the case of clause (ii)
or (iii), as approved by the Joint Policy Board to function as a distinct
reporting unit within Medical Group.
10.26. "Pod Practice Locations" shall mean, with respect to a Pod, all
----------------------
Practice Locations assigned to the Pod.
10.27. "PQC Direct Expenses" or "Direct Expenses" shall mean all actual
------------------- ---------------
direct expenses of PQC incurred in connection with providing management services
to Medical Group under this Agreement calculated in accordance with generally
accepted accounting principles, including rent, utilities, cleaning, and other
occupancy costs attributable to PQC's Baltimore office or any other office in
the Geographic Area maintained for the purpose of supporting one (1) or more Pod
Practice Locations (together with PQC's Baltimore office, the "Area Offices");
salary and benefit expense for PQC's employees providing services to benefit any
one (1) or more of the Pod Practice Locations; depreciation and amortization of
equipment located at the Area Offices except depreciation and amortization with
respect to the assets initially acquired by PQC or Medical Group from Medical
Group Physicians on their practices; telephone, facsimile, and similar
communication charges (including the cost of any so-called tie-line from the
Area Offices to the office housing the principal central computer system for
physician practice sites managed by PQC or any of its affiliates); maintenance
and repair costs for the Area Offices and equipment located therein; insurance
related to the Area Offices and PQC's employees based in any such office or any
one (1) or more of the Pod Practice Locations; professional services (including
legal and accounting) related directly to the Area Offices or any of the Pod
Practice Locations; office supplies used by PQC's Area Offices or any of PQC's
employees located at any of the Pod Practice Locations; and other expenses
incurred by PQC with the consent of the Joint Policy Board.
10.28. "Practice Expenses" shall mean, with respect to a Pod, the
-----------------
following expenses:
(a) Salaries, fringe benefits, and employment taxes and insurance (or self
insured losses) of all Administrative Staff and Clinical Staff (as defined in
Sections 3.4 and 2.5 of this Agreement) and physicians who are not Medical Group
Physicians, whether employees or independent contractors, working at or for the
direct benefit of the Pod Practice Locations; and employment taxes and expenses
for a standard package of health and disability insurance approved by the
parties prior to the Effective Date and for up to $50,000 of term life insurance
coverage for Pod Physicians;
(b) The direct cost (excluding any general and administrative overhead of
PQC) of any other management, administrative or professional services provided
at or in connection with the Pod Practice that are incurred by PQC or Medical
Group, including management, billing and collections, business office
consultation, accounting and legal services for the Pod Practice;
(c)
(i) The cost of capital (including actual interest on indebtedness
incurred by or on behalf of Medical Group but only to the extent actual interest
A-5
<PAGE>
is incurred from a third party other than Bain Capital), to finance or refinance
obligations of Medical Group related to the Pod Practice, to purchase medical or
nonmedical equipment for the Pod Practice (other than those assets, if any,
purchased by PQC as part of the initial acquisition of the medical practice that
served as the basis of the Pod) or to provide working capital or finance new
ventures of Medical Group related to the Pod Practice;
(ii) depreciation and amortization charges to be paid to PQC, the
amounts of which shall be set forth in the Pod Budget or for costs of capital
described in Section 10.27(e)(i) of this Appendix A, or, if in excess of the
budgeted amount, is agreed upon by PQC and the Joint Policy Board (expressly
excluding any depreciation and amortization charges relating to assets, if any,
purchased by PQC as part of the initial acquisition of the medical practice that
served as the basis of the Pod;
(d) Occupancy costs attributed be the Pod Practice (whether principal,
interest, depreciation, taxes or rent) incurred in obtaining, improving,
developing, leasing, operating, maintaining; replacing and preserving office
space and equipment for the Pod Practice, including janitorial services, refuse
disposal and medical waste disposal;
(e) Direct costs incurred in obtaining, leasing, operating, maintaining and
replacing computer systems and software located at the Pod Practice Locations,
including billing systems, outcomes reporting systems and financial reporting
systems and the cost of so-called tielines;
(f) All utilities, including but not limited to telephone service
(including business calls on cellular telephones), answering services,
electricity, heat, water, and sewer that are used at the Pod Practice Locations;
(g) Postage, facsimile, collection and credit verification costs incurred
for the Pod Practice;
(h) Pharmaceuticals, x-ray and laboratory expenses (both in-house and
other) for the Pod Practice;
(i) Medical supplies for the Pod Practice;
(j) All office supplies for the Pod Practice;
(k) Copying charges for the Pod Practice;
(l) Professional journals and books, professional dues and memberships, and
magazine and newspaper subscriptions for the Pod Practice;
(m) Continuing Medical Education expenses for the Pod Physicians, within
guidelines approved by the Joint Policy Board;
(n) Direct advertising, accounting and legal expenses incurred in
connection with the Pod Practice;
A-6
<PAGE>
(o) Insurance expenses, including but not limited to (1) general liability,
fire, and property for each Pod Practice Location and (2) professional liability
insurance for Pod Physicians and for Clinical Staff while providing services in
connection with the Pod Practice; provided, that, in the event that PQC causes
Pod R to change professional liability insurance carriers, Practice Expenses
shall not include the cost of coverage to the extent, but only to the extent,
that the aggregate cost of the new professional liability policy and the nose
and/or tail coverage exceeds the cost of the professional liability coverage
maintained by the physicians in Rod R on the Effective Date;
(p) Any casualty losses suffered by Medical Group that are related to the
Pod Practice to the extent that such losses are not reimbursed by any third
party responsible therefor or through insurance;
(q) A pro rata share calculated on the basis of the ratio of the number of
Pod Physicians to the number of Medical Group Physicians or such other
reasonable allocation methodology as PQC may develop from time to time and as
may be approved by the Joint Policy Board, of expenses incurred by PQC and
included within a budget approved by the Joint Policy Board for Medical Group as
a whole (excluding any corporate-related general and administrative overhead of
PQC), for example, Medical Group-wide management information system expenses,
malpractice costs for Medical Group as a whole (as opposed to individual
physicians), accounting and pension plan services, Medical Group tax return
preparation, and providing or arranging for other necessary administrative,
accounting and legal services. Overhead of Medical Group and PQC included in
Practice Expenses shall be allocated by PQC and the Joint Policy Board among the
Additional and Founding Pods in an equitable manner that (i) does not penalize
the Additional Pods for (a) the higher historical overhead expenses of the
Founding Pods compared to Pod R and (b) increased overhead expense incurred by
Medical Group to improve the profitability of the Founding Pods and (ii) does
not penalize the Founding Pods for increased overhead expense due to the
Additional Pods.
(r) With respect to Pod R, 100% (subject to the limitations set forth in
Section 7.5(a) of the Merger Agreement between Flagship II, Clinical Associates
and PQC) of any Damages (as defined in the Merger Agreement ) arising out of, or
relating to, the conduct of the business of Clinical Associates prior to August
1, 1997, except to the extent that PQC recovers such Damages pursuant to Article
VII of the Merger Agreement.
29. "Practice Revenues" with respect to a Pod, the amount equal to all
-----------------
revenues of Medical Group attributable to the Pod Practice or assigned by the
Pod Physicians pursuant to their Employment Agreements with the Medical Group,
net of federal, state and local income taxes of Medical Group, adjustments for
uncollectible accounts, Medicare, Medicaid and other contractual allowances,
discounts, workers' compensation adjustments, professional courtesies and other
reductions in collections, including: (a) all professional fees and other
charges actually recorded each month on an accrual basis of accounting under
generally accepted accounting principles as a result of medical services
rendered by Medical Group through the Pod and the Pod Physicians, whether
rendered in an outpatient or inpatient setting; (b) the technical component of
fees earned with respect to services rendered by Medical Group through the
Medical Group Pod (including all fees for technical and ancillary services and
A-7
<PAGE>
all facility fees and similar charges); (c) all collections from managed care
organizations and Payors, or payments made in respect of enrollees of such
managed care organizations or Payors, including payments made periodically on a
per member basis for the partial or total medical needs of a subscribing member,
and any co-payments and incentive bonuses, management fees and other amounts
received and fees paid in respect of services provided by or through the Pod as
a result of a capitation plan or risk-sharing arrangement; (d) grants, fees and
other payments in connection with basic or clinical research conducted by Pod
Physicians or under grant programs, whether publicly or privately funded,
including grants or programs for the care of special patient populations; (e)
consulting fees of Pod Physicians, including without limitation honoraria,
witness fees and like amounts; (f) fees and payments for workers compensation
evaluations or independent medical examinations; (g) all coordination of
benefits, patient co-payments or deductibles and third-party liability
recoveries; and (h) any other revenues from the practice of medicine or
provision of health care items and services of any kind, except to the extent
that the parties may otherwise agree in writing). With respect to Pod R,
Practice Revenues shall also include, without duplication of the foregoing, all
revenues earned with respect to Pod R from sources of revenue that were included
in the revenues of Clinical Associates prior to the Closing Date.
Notwithstanding the foregoing, Practice Revenues shall not include any income
unrelated to any of the foregoing items that is personal to a Pod Physician and
unrelated to the provision of health care or ancillary services (e.g., personal
dividend or trust income), and provided further that the Joint Policy Board may
approve in writing the retention by a Pod Physician of limited honoraria and
similar amounts.
A-8
<PAGE>
APPENDIX B-1
------------
FINANCIAL ARRANGEMENTS
FOUNDING PODS
-------------
1. General. As set forth in greater detail below and subject to all of
-------
the conditions and provisions hereof, the parties agree that the aggregate
compensation to be paid to PQC for services rendered under this Agreement with
respect to the Founding Pods shall equal the sum of (1) all PQC Direct Expenses
which are incurred in connection with the provision of services to Medical Group
and (2) additional compensation equal to fifty percent (50%) of Net Margin of
the Founding Pods. This Appendix B-1 also provides for the priority of
application of Practice Revenues of the Founding Pods to various categories of
expenditures.
2. Application of Practice Revenues of the Founding Pods.
-----------------------------------------------------
Practice Revenues of the Founding Pods shall be applied to expenses and
other required distributions under this Agreement in the following order of
priority:
(a) Step 1 - Practice Revenues of the Founding Pods shall be applied to pay
--- ------
Practice Expenses of the Founding Pods.
(b) Step 2 - Any Gross Margin attributable to the Founding Pods remaining
--- ------
after Step 1 above shall next be applied to payment of (i) the Baseline Amount
(minus the amount necessary to pay all Deductible Expenses of the Founding Pods)
and (b) PQC Direct Expenses on a proportional basis equal to the ratio of (i)
the Baseline Amount to (ii) PQC Direct Expenses as approved by the Joint Policy
Board for the then current Fiscal Period or in the absence of approval of a
budget for the then current Fiscal Period, in the ratio set forth on Schedule B-
1 attached to this Agreement. By way of example only and not as a limitation,
if the Baseline Amount is $12 million and budgeted PQC Direct Expenses allocated
to the Founding Pods are $1 million, then under this Step 2 12/13ths or 92.31%
of each dollar of Gross Margin shall be allocated to Medical Group for payment
of the Baseline Amount and the remaining 1/13th or 7.69% of each dollar of Gross
Margin shall be allocated to PQC.
(c) Step 3 - After completion of Step 2, any remaining Net Margin
--- ------
attributed to the Founding Pods shall be allocated fifty percent (50%) to
Medical Group for distribution to the Medical Group Physicians in the Founding
Pods and fifty percent (50%) to PQC as additional compensation hereunder.
Subject to review by the Joint Policy Board, PQC shall calculate the
amounts of Gross Margin and Net Margin to be allocated to each of Medical Group
and PQC under this Section 2. If the Gross Margin is negative in any Fiscal
Period, such negative amount shall constitute Practice Expenses of the Founding
Pods for the next following Fiscal Period. In the event Net Margin is negative
in the Fiscal Periods ending December 31, 1997 or December 31, 1998, PQC may be
obligated to make a loan to Medical Group in accordance with the provisions of
Section 3.5 of the Agreement.
B-1
<PAGE>
3. Payment of Physician Draw. On a bi-weekly basis, PQC shall distribute
-------------------------
to Medical Group from the Founding Pod Medical Group Account referred to in
Section 3.12 of this Agreement an amount equal to one twenty-sixth of the
budgeted aggregate Physician Draw (minus the amount necessary to pay all
Deductible Expenses) for distribution by Medical Group; provided, however, if
(a) at any time during a Fiscal Period, PQC determines that the amount of
Practice Revenues allocated to the payment of aggregate Physician Draw under
this Appendix B-1 for any Fiscal Period may be less than ninety-five percent
(95%) of the budgeted aggregate Physician Draw of Medical Group Physicians in
the Founding Pods for such Fiscal Period, or (b) if PQC or the Joint Policy
Board determines (1) the aggregate Practice Expenses of a Founding Pod for such
Fiscal Period will exceed the aggregate budgeted Practice Expenses of such
Founding Pod for such Fiscal Period, or (2) the aggregate Practice Revenues of a
Founding Pod will be less than the aggregate budgeted Practice Revenues of such
Founding Pod, PQC may, and upon direction from the Joint Policy Board, shall,
reduce the aggregate Physician Draw in such manner as PQC determines to be
appropriate. Subject to the provisions of Section 3.5 of this Agreement, the
aggregate Physician Draw of Medical Group Physicians in the Founding Pods shall
be adjusted to reflect the addition of new Medical Group Physicians to a
Founding Pod or the termination or resignation of any Medical Group Physician
assigned to a Founding Pod or to reflect such other factors as PQC and the Joint
Policy board shall mutually agree to be appropriate. PQC may, but shall not be
required to, advance money to the Compensation Pool as defined in Appendix A to
the Employment Agreement to fund such Physician Draw.
4. Payment of Variable Distribution Pool. Within forty-five (45) days of
-------------------------------------
the end of each of the first three (3) calendar quarters in each Fiscal Period,
PQC shall advise Medical Group's Compensation Committee (as defined in
Employment Agreements) of the amount (the "Variable Distribution"), if any, of
Net Margin allocable to Medical Group under Section 2 of this Appendix B-1 that
has not been used, or is not reasonably anticipated by PQC to be needed for
Medical Group to fund, all amounts required to be funded by Section 3. PQC
shall disburse to Medical Group from the Founding Pod Medical Group Account
referred to in Section 3.12 of this Agreement the amount of the Variable
Distribution, which shall be distributed to the Medical Group Physicians in the
Founding Pods in such manner consistent with law as is described in Section 4 of
Appendix A to the Employment Agreements.
5. Annual Reconciliation of Distributions. Within sixty (60) days after
--------------------------------------
the end of each year, PQC shall (i) total and report Practice Revenues and
Practice Expenses for each of the Founding Pods, (ii) total and report aggregate
Practice Revenues for all Founding Pods and aggregate Practice Expenses for all
Founding Pods, (iii) total and report PQC Direct Expenses, (iv) total and report
all amounts advanced as Physician Draws and Variable Distributions with respect
to the Founding Pods, (v) total and report the level of Gross Margin, whether
positive or negative, and (vi) total and report the level of Net Margin, whether
positive or negative (taking into account any adjustments necessary in the event
that distributions during the said Fiscal Period or any prior Fiscal Periods
have resulted in an over-advancement or under-advancement of funds). Each
Founding Pod, as a Discretionary Expense of its Medical Group Physicians, may
inspect Medical Group's books and records and PQC's books and records in order
to verify the amount and proper calculation of the sums to be determined
hereunder. PQC may not charge any Pod or Physician Member any access or similar
fee in connection with any request to review books and records. If such
B-2
<PAGE>
independent accounting presents a report identifying a departure in such
financial reports from generally accepted accounting principles, which departure
has had a material adverse effect on the revenues allocated to Physician Group,
PQC shall reimburse the Physician Members for the cost of such report.
6. Distribution in Event of Actual or Anticipated Negative Gross Margin.
--------------------------------------------------------------------
In the event that for any calendar quarter, Gross Margin is a negative number or
in the event either party gives notice to the other that there is reason to
believe Gross Margin may be a negative number, PQC shall promptly propose a
remedial plan of action to the Joint Policy Board and the parties agree to
cooperate in good faith in order to implement such remedial plan or such other
corrective action as shall be approved by the Joint Policy Board. At PQC's sole
discretion, PQC may elect to advance working capital funds to Medical Group in
such amounts and at such times, and from time to time, as PQC shall determine
necessary to satisfy aggregate Practice Expenses for all Founding Pods, such
advances to be treated as loans, the repayment of which shall be required in
accordance with the definition of "Practice Expenses" in Section 10.27 of
Appendix A hereto. In the event PQC shall elect not to make advances sufficient
to satisfy aggregate Practice Expenses for all Founding Pods and Medical Group
has not otherwise satisfied Practice Expenses from its own resources, either
party shall have the right to terminate this Agreement upon thirty (30) days'
written notice.
7. Manner of Payment of Final Reconciliation. Within seventy (70) days
-----------------------------------------
after the end of the Fiscal Period, Medical Group and PQC shall make such
payments, if any, to each other as may be required under the provisions of this
Appendix B-1. Medical Group covenants to distribute any amounts to the Medical
Group Physicians in a manner that complies with all applicable law.
8. Manner of Payment of PQC Direct Expenses and Compensation to PQC. PQC
----------------------------------------------------------------
shall arrange for the payment of PQC Direct Expenses and the compensation to PQC
itself in accordance with the terms of this Appendix and is hereby authorized to
make withdrawals from the Founding Pod Medical Group Account for such amounts at
the time or times that the amounts become due. Medical Group hereby authorizes
PQC to make such withdrawals from the Founding Pod Medical Group Account for
accrued but unpaid PQC Direct Expenses and compensation owed to PQC under the
provisions of this Appendix B-1 after termination of this Agreement.
B-3
<PAGE>
APPENDIX B-2
------------
FINANCIAL ARRANGEMENTS
ADDITIONAL PODS
---------------
1. General. As set forth in greater detail below and subject to all of
-------
the conditions and provisions hereof, the parties agree that the aggregate
compensation to be paid to PQC for services rendered under the Agreement with
respect to the Additional Pods shall be the aggregate of the amounts determined
in paragraphs 2, 3, 4, 5, 6 and 7 below.
A Revenue Flow table is attached as Schedule B-2.
Practice Revenue Attributable to Net Adjusted Billings.
2. Pod R Specialists. Net Adjusted Billings with respect to Physicians
-----------------
with specialists practice (a specialist being a physician at least 80% of whose
billings are derived from a specialist practice, excluding OB/GYN and mental
health) in Pod R on the Effective Date ("Net Adjusted Specialists Billings") for
any Fiscal Year shall, except as provided in Section 4 of this Appendix B-2, be
allocated between PQC and Medical Group in the following order of priority:
(a) Step 1 - Net Adjusted Specialist Billings shall be allocated to the
------
Additional Pod Medical Group Account until an amount equal to the
Baseline Net Adjusted Billings for Medical Group Physicians with
specialist practices in Pod R on the Effective Date has been allocated
to the Additional Pod Medical Group Account.
(b) Step 2 - The next $3 million (or any lesser amount, if there shall not
------
be $3 million of additional Net Adjusted Specialist Billings) of Net
Adjusted Specialist Billings shall be allocated 35% to PQC as
compensation for its services and 65% to the Additional Pod Medical
Group Account.
(c) Step 3 - Any Net Adjusted Specialist Billings that remains unallocated
------
after Steps 1 and 2, shall be allocated 20% to PQC as compensation for
its services and 80% to the Additional Pod Medical Group Account.
3. Other Physicians. Net Adjusted Billings with respect to primary care
----------------
physicians and any physicians with specialist practices who are not subject to
paragraph 2 or 4 ("Net Adjusted Physician Billings") for any Fiscal Year shall,
except as provided in Section 4 of this Appendix B-2, shall be allocated between
PQC and Medical Group in the following order of priority:
(a) Step 1 - Net Adjusted Physician Billing shall be allocated to
------
Additional Pod Medical Account until an amount equal to the Baseline
Adjusted Net Billings for primary care Group Medical Physicians and
Group Medical Physicians with specialist practices who are not subject
to paragraphs 2 or 4 has been allocated to the Additional Pod Medical
Group Account.
B-4
<PAGE>
(b) Step 2 - Any Net Adjusted Physician Billing not allocated in Step 1
------
shall be allocated 20% to PQC as compensation for its services under
this Agreement and 80% to the Additional Pod Medical Group Account.
4. Non-Established Physicians. With respect to any Non-Established
--------------------------
Physician, 20% (unless a different percentage is approved by the Joint Policy
Board) of the Incremental Amount with respect to such physician shall be
allocated to PQC as compensation for its services under this Agreement and the
remaining Net Adjusted Billings with respect to such Medical Group Physician
(less the compensation payable to the Non-Established Physician under the Non-
Established Physician's employment agreement with Medical Group) shall be
allocated to the Additional Pod Medical Group Account.
Practice Revenue Not Attributable to Net Adjusted Billings.
5. Revenue not included in Net Adjusted Billings. Any Practice Revenues
----------------------------------------------
of the Additional Pods for any fiscal year that are not included in Net Adjusted
Billings ("Other Revenues") shall be allocated to Additional Pod Medical Group
Account, provided, however, if Practice Expenses are less than [__% to be
included based upon historical Net Adjusted Billings] ("Historical Overhead") of
Practice Revenue, PQC shall be allocated an amount equal to 50% of (x) Practice
Revenue multiplied by (y) the difference between Historical Overhead and
Overhead for such fiscal year. Overhead shall be calculated in the manner set
forth on Schedule B-2(b).
Ancillary Revenue
6. Laboratory Services. Net Margin from centralized laboratory services
--------------------
(which for purposes of this paragraph 6 shall mean revenue from laboratory
ancillary services less (i) direct expenses of such laboratory ancillary
services and (ii) an allocation of overhead of the Medical Group, which
allocation, or the methodology used to make such allocation, shall be approved
by the Joint Policy Board) attributable to Additional Pods will be allocated 80%
to PQC and 20% to the Additional Pods Medical Group Account.
7. Non- Laboratory Ancillary Services. Net Margin from incremental non-
-----------------------------------
laboratory ancillary services other than the non-laboratory ancillary services
listed in Schedule 10.17 (which for purposes of this paragraph 7 shall mean
--------------
revenue of non-laboratory ancillary services less (i) direct expenses from such
non-laboratory ancillary services and (ii) an allocation of Medical Group
overhead, which allocation, or the methodology used to make such allocation,
shall be approved by the Joint Policy Board) will be allocated 50% to PQC and
50% in the aggregate to the Found Pod Medical Group Account and the Additional
Pod Medical Group Account.
B-5
<PAGE>
Certain Practice Expenses
8. Certain Expense Not Practice Expenses. Expenses of administrative
--------------------------------------
staff and support services (including all PQC or Flagship support services)
included within Clauses (a) and (b) of the definition of Practice Expenses shall
not be deemed to be Practice Expense of Pod R to the extent, but only to the
extent, that the costs of such administrative staff and support services are in
excess of historical levels for Clinical Associates and such increase in costs
is specifically attributable to (x) services performed by such administrative
staff for Pods other than Pod R and not to the addition of physicians to Pod R
or change in the market costs for such services or labor rates or (y) additional
support services to which Pod R, acting reasonably, shall have objected at the
time their implementation was proposed by PQC.
Medical Group Account
9. Allocation of Net Adjusted Billings to Medical Group Account. Amounts
-------------------------------------------------------------
allocable to the Additional Pod Medical Group Account pursuant to paragraphs 2,
3, 4, 5, 6 and 7 (to the extent the allocation in made to the Additional Pods)
shall first be used to pay all Practice Expenses of the Additional Pods. Any
amount remaining after the payment of Practice Expenses shall be available for
distribution to Medical Group Physicians in the Additional Pods.
10. Payment of Physician Draw. On a monthly basis, PQC shall distribute
-------------------------
to Medical Group from the Additional Pod Medical Group Account referred to in
Section 3.12 of this Agreement an amount equal to one twelfth of the budgeted
aggregate Physician Draw of Medical Group Physicians in the Additional Pods
(minus the amount necessary to pay all Deductible Expenses) for distribution by
Medical Group; provided, however, if (a) at any time during a Fiscal Period, PQC
determines that the amount of Net Adjusted Billings allocated to the Additional
Pod Medical Group Account pursuant to this Appendix B-2 net of Practices
Expenses (the "Available Amount") for any Fiscal Period may be less than ninety-
five percent (95%) of the budgeted aggregate Physician Draw for such Fiscal
Period with respect to the Medical Group Physicians in the Additional Pods, or
(b) if PQC or the Joint Policy Board determines (1) the aggregate Practice
Expenses of an Additional Pod for such Fiscal Period will exceed the aggregate
budgeted Practice Expenses for such Additional Pod for such Fiscal Period, or
(2) the aggregate Net Adjusted Billings allocable to the Additional Pod Medical
Group Account with respect to an Additional Pod will be less than the aggregate
budgeted Net Adjusted Billings allocable to the Medical Group with respect to
such Additional Pod, PQC may, and upon direction from the Joint Policy Board,
shall, reduce the aggregate Physician Draw with respect to the Additional Pods
in such manner as PQC determines to be appropriate. Subject to the provisions
of Section 3.5 of this Agreement, the aggregate Physician Draw with respect to
the Additional Pods shall be adjusted to reflect the addition of new Medical
Group Physicians to an Additional Pod or the termination or resignation of any
Medical Group Physician from an Additional Pod or to reflect such other factors
as PQC and the Joint Policy board shall mutually agree to be appropriate. PQC
may, but shall not be required to, advance money to the Compensation Pool as
defined in Appendix A to the Employment Agreement to fund such Physician Draw.
B-6
<PAGE>
11. Payment of Variable Distribution Pool. Within forty-five (45) days of
-------------------------------------
the end of each of the first three (3) calendar quarters in each Fiscal Period,
PQC shall advise Medical Group's Compensation Committee (as defined in
Employment Agreements) of the amount (the "Variable Distribution"), if any, of
the Available Amount that has not been used, or is not reasonably anticipated by
PQC to be needed for Medical Group to fund, all amounts required to be funded by
paragraph 10. PQC shall disburse to Medical Group from the Additional Pod
Medical Group Account referred to in Section 3.12 of this Agreement the amount
of the Variable Distribution, which shall be distributed to the Medical Group
Physicians in the Additional Pod in such manner consistent with law as is
described in Section 4 of Appendix A to the Employment Agreements.
12. Annual Reconciliation of Distributions. Within sixty (60) days after
--------------------------------------
the end of each year, PQC shall (i) total and report Net Adjusted Billings and
Practice Expenses for each Additional Pod, (ii) total and report aggregate Net
Adjusted Billings and Practice Expenses for all Additional Pods, (iii) total and
report all amounts advanced as Physician Draws and Variable Distributions with
respect to the Additional Pods. Each Additional Pod, as a Discretionary Expense
of its Medical Group Physicians, may inspect Medical Group's books and records
and PQC's books and records in order to verify the amount and proper calculation
of the sums to be determined hereunder. PQC may not charge any Pod or Physician
Member any access or similar fee in connection with any request to review books
and records. If such independent accounting presents a report identifying a
departure in such financial reports from generally accepted accounting
principles, which departure has had a material adverse effect on the revenues
allocated to Physician Group, PQC shall reimburse the Physician Members for the
cost of such report and appropriate adjustments to the Additional Pod Medical
Group Account.
13. Manner of Payment of Final Reconciliation. Within seventy (70) days
-----------------------------------------
after the end of the Fiscal Period, Medical Group and PQC shall make such
payments, if any, to each other as may be required under the provisions of this
Appendix B-2. Medical Group covenants to distribute any amounts to the
Physicians in a manner that complies with all applicable law.
14. Manner of Payment of Compensation to PQC. PQC shall arrange for the
----------------------------------------
payment of the compensation to PQC itself in accordance with the terms of this
Appendix B-2 and is hereby authorized to make withdrawals from the Medical Group
Account for such amounts at the time or times that the amounts become due.
Medical Group hereby authorizes PQC to make such withdrawals from the Additional
Pod Medical Group Account for compensation owed to PQC under the provisions of
this Appendix B-2 after termination of this Agreement.
B-7
<PAGE>
SCHEDULE B-1
------------
I. Name of Physician Physician Draw for Fiscal Period Ending
December 31, 1996
---------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
[See Section 6 of Appendix A to the Employment Agreements with the Physician
Members.]
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
II. Ratio of Baseline Amount to budgeted PQC Direct Expenses
- -------------------------------------------------------------------------------
B-8
<PAGE>
APPENDIX C
----------
LIST OF PHYSICIANS
------------------
Name of Pod Partner Physicians Employed Physicians
- ----------- ------------------ -------------------
Pod A
Pod B
Pod C
Pod D
Pod E
Pod F
Pod G
Pod H
Pod I
Pod J
Pod K
Pod L
Pod M
Pod N
Pod O
Pod P
Pod Q
Pod R
C-1
<PAGE>
Services Agreement Schedules
Schedule 2 - Facilities
Flagship leases offices at the following addresses:
Lease Agreement by and between Park Medical Associates, P.A. and Johns Hopkins
Suburban Health Center Limited Partnership for Green Spring Station, dated
January 28, 1994.
Sublease by and between Broadway Medical Management Corp. and Marshall S.
Bedine, M.D., P.A., dated December 11, 1995, for lease of office space at 10751
Falls Road, Lutherville, Maryland 21093.
Lease Agreement by and between Johns Hopkins Suburban Health Limited Partnership
and Drs. Berg & Wen, P.A. dated April 5, 1996.
Standard Full Service Office Building Lease Agreement by and between Joppa Green
II Limited Partnership and Ira T. Fine, M.D. and Joyce K. Burd, M.D., dated
August 25, 1989, as amended by an amendment by and between Joppa Green II
Limited Partnership and Ira T. Fine, M.D., dated August 8, 1994, for lease of
office space at 2328 W. Joppa Road, Lutherville, MD.
Lease Agreement by and between Johns Hopkins Suburban Health Center Limited
Partnership and Ira T. Fine, M.D., and Joyce K. Burd, M.D., dated April 7, 1994,
for lease of office space located at 10755 Falls Road, Lutherville, MD 21093.
Sublease Agreement between Ira T. Fine, M.D. & Joyce K. Burd, M.D., P.A.
(Sublandlord) and Johns Hopkins Health System Corporation (Subtenant), dated
April 1, 1996, for sublease of office space located at 10755 Falls Road,
Lutherville, MD 21093.
Agreement of Lease by and between Suite B, 222 West Cold Spring Lane, a Maryland
general partnership, and Koeppel, Rosen, Rudikoff, M.D., P.C., dated December
31, 1994, for lease of office space at 222 West Cold Spring Lane, Baltimore,
Maryland 21210.
Sublease by and between Steinbach & Benesh, P.A. (Landlord) and Koeppel, Rosen,
Rudikoff, M.D., P.C. (Tenant), dated April 4, 1994, for sublease of office space
at 21 Crossroads Drive, Suite 400, Owings Mill, Maryland 21117.
Agreement of Lease by and between Naylors Lane Limited Partnership and Drs.
Goldgeier, Levine, Friedman and Halle, dated November 28, 1994, for use of
office space at 4000 Old Court Road, Suite 306, Pikesville, Maryland 21208.
The Rotunda Office Lease by and between Rotunda Associates and Drs. Goldgeier,
Levine, Friedman, Zygler, Bardin, P.A., dated July 14, 1993, as amended by First
-1-
<PAGE>
Amendment of Lease by and between Rotunda Associates and Drs. Goldgeier, Levine
and Friedman, P.A., undated, and as amended by Second Amendment of Lease by and
between Rotunda Associates and Drs. Goldgeier, Levine and Friedman, P.A., dated
July 11, 1996, for use of premises at 711-733 West 40th St., Baltimore, Maryland
21211.
Sublease Agreement by and between Sinai Hospital of Baltimore, Inc.
(Sublandlord) and Drs. Goldgeier, Levine and Friedman, P.A. (Subtenant) dated
August 1, 1996.
Sublease Agreement by and between Drs. Goldgeier, Levine and Friedman, P.A.
(Sublandlord) and Barry D. Stein (Subtenant), dated July 1, 1996, for use of 533
square feet of space at 4000 Old Court Road, Pikesville, Maryland 21208.
Lease for office space at 19 Walker Ave. Suite 203 by and between Milan Wister,
M.D. and Stanley Friedler, M.D. (Walker Center), effective July 1, 1992.
Lease for 10807 Falls Road, Lutherville, MD by and between Green Spring
Professional Associates Limited Partnership (was Falls-Valley Limited
Partnership and currently is Maryland Prime Investors, Inc.) and Sigler, Roskes,
Holden & Schuberth, P.A. (was Sigler, Rosenstein, Roskes & Holden, P.A.), dated
November 9, 1976, amended August 31, 1987, September 5, 1991, and September 16,
1991.
Sublease by and between Sigler, Roskes, Holden and Schuberth, P.A. (Landlord)
and Sinai Hospital of Baltimore, Inc. (Tenant), dated July 1, 1994 (no signed by
Sinai).
Rent: $25,200/year (approximately 1,200 square feet) (rent includes all
- ----
utilities (heat, air conditioning, electricity, water, and local telephone);
plus up to $2,400 to cover additional costs for insurance, cleaning services,
office supplies, utilities, etc., if costs of the foregoing are greater than the
monthly rent; plus an additional amount for expenditures exceeding the $2,400,
provided that the tenant must give prior consent to such expenditures.
Agreement of Lease by and between Johns Hopkins Suburban Health Center Limited
Partnership and Drs. Pakula and Davick, P.A. [now known as Drs. Pakula, Davick &
Bogue, P.A.], dated February 28, 1995, for lease of office space at 10755 Falls
Road, Suite 260, Lutherville, Maryland 21093.
License Agreement by and between Drs. Pakula and Davick, P.A. [now known as Drs.
Pakula, Davick & Bogue, P.A.], and Sandra S. Rosenblatt, Ph.D., undated, for
lease of office space at 10755 Falls Road, Lutherville, Maryland 21093.
Oral lease by and between Neuro-Realty Partners (Landlord) and Peter Schilder,
M.D., and Nicholas Capozzoli, M.D., P.A. (Tenant) for the lease of Unit 230,
Weems Creek Medical Center, Annapolis, Maryland.
-2-
<PAGE>
Lease Agreement by and between Drs. Sutton, Fortier, Gordon and Libber, P.A.,
and YWCA of Annapolis and Anne Arundel County, Maryland, dated January 1, 1994,
for use of office space at 1517 Governor Ritchie Highway, Arnold, Maryland
21012.
Lease assigned to Drs. Sutton, Fortier, Gordon and Libber, P.A., pursuant to
Assignment and Assumption of Lease by and between Stanley R. Weimer, M.D., and
Drs. Sutton, Fortier, Gordon, Libber, P.A., dated February 1, 1996, and Consent
of Landlord, dated February 1, 1996.
Lease Agreement by and between Annapolis Pediatrics and Piera Family Limited
Partnership, dated September 22, 1993, as amended by Amendment to Lease
Agreement, dated October 28, 1996, for use of office space at 1202-B Annapolis
Road, Odenton, Maryland.
Lease Agreement by and between Monterey Medical Associates and Drs. Sutton,
Fortier, Gordon and Libber, P.A., dated July 1, 1992, for use of office space at
200 Forbes Street, Annapolis, Maryland 21401.
Lease for 900 Bestgate Road dated May 2, 1991 by and between Bestgate "900"
Limited Partnership and Richard Peeler, Robert Biern, Stanley Watkins, Enser
Cole, Barry Nathanson, Stuart Selonick, Mary Michels [sic] and David Barnes
(Lease not executed), with: (1) Memorandum of Amendment dated December 13, 1991
(copy not available, although terms of this amendment have been superseded), (2)
Memorandum of Lease Modification dated December 1, 1991 (not executed), and (3)
First Addendum to Lease dated December 14, 1995, by and between Bestgate "900"
Limited Partnership and Annapolis Medical Specialists.
Memorandum of Lease Modification dated December 1, 1991, by and between Bestgate
"900" Limited Partnership and Richard Peeler, Robert Biern, Stanley Watkins,
Enser Cole, Barry Nathanson, Stuart Selonick, Mary Michels and David Barnes.
[Not executed.]
Rent: Rent Schedule for the period December 1, 1991 to November 1992 is
- ----
attached to the Memorandum.
Lease Agreement by and between Johns Hopkins Suburban Health Center Limited
Partnership (Landlord) and Laura M. Mumford, M.D. (Tenant), dated February 16,
1996.
Sublease Letter Agreement by and between Laura Mumford, M.D. (Landlord) and
Johns Hopkins Suburban Health Center Limited Partnership (Tenant), dated July
15, 1996 (signed only by Dr. Mumford) (letter is addressed to Gil Wylie, BMMC).
Net Lease by and between Stone/Snyder General Partnership and Faith Hackett,
M.D. and Jeffrey C. Schmidlein, M.D., dated October 18, 1991 and amended
September 17, 1996.
Net Lease by and between Stone/Snyder General Partnership and Faith Hackett,
M.D. and Jeffrey C. Schmidlein, M.D., dated October 18, 1991 and amended
September 17, 1996.
-3-
<PAGE>
Office Lease by and between Severn Professional Center and Andre B. Gvozden,
M.D., dated September 24, 1996, for 605 Baltimore-Annapolis Boulevard, Suite B.
Agreement of Lease by and between University of Maryland Medical System
Corporation (Landlord) and Andre Gvozden, [M.D.]
<TABLE>
<CAPTION>
RENTAL PROPERTY
- --------------------------------------------------------------------------------------------------
Lessor Monthly Payment Lessor Monthly Payment
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
G.S. Properties $ 5,590.59 Mark Kaplan $ 225.00
- --------------------------------------------------------------------------------------------------
600.00
G.S. Properties 4,928.83 Noel McCall (some months)
750.00
- --------------------------------------------------------------------------------------------------
Sea 25,745.60 Landmark 750.00
- --------------------------------------------------------------------------------------------------
Wabash 410.00 Tower Management 2,463.79
- --------------------------------------------------------------------------------------------------
Security MDC 13,500.00 Helen McGill 2,400.00
- --------------------------------------------------------------------------------------------------
Lawrence Boas 1,800.00 Nissim, Schonfeld 2,500.00
- --------------------------------------------------------------------------------------------------
keiffer Mitchell 500.00 Woodholme Medical 10,354.04
- --------------------------------------------------------------------------------------------------
York Road Association 3,103.33 O'Dea Medical Arts 3,258.78
Building
- --------------------------------------------------------------------------------------------------
Herbert Yousim 1,741.16 Towson Building 75,000.00/year
Associates
- --------------------------------------------------------------------------------------------------
Hill Management 6,704.53 William Tucker 500.00
- --------------------------------------------------------------------------------------------------
</TABLE>
-4-
<PAGE>
Schedule 3.07 - Payor Contracts
ELP
U.S. Healthcare
PHYCP (Prudential)
-5-
<PAGE>
Schedule 3.15 - Insurance
Separately provided.
-6-
<PAGE>
Schedule 6.1 - Acceptable Non-Physicians
William Bartholomay
Sarah Bodnar
Marla Caplan
-7-
<PAGE>
Schedule 9.1
none
-8-
<PAGE>
Additional schedules available upon written request to the Company.
-9-
<PAGE>
Exhibit 10.23
-------------
AGREEMENT
Agreement entered into as of November 30, 1997 by and among Physicians
Quality Care, Inc., a Delaware corporation ("PQC"), Flagship Health, P.A., a
Maryland professional association ("Flagship I"), Flagship Health II, P.A.
("Flagship II" and collectively with Flagship I, "Flagship"), and the physicians
listed on the signature page of this Agreement who are former stockholders and
optionholders (the "Stockholders") of Clinical Associates, a Maryland
professional association.
This Agreement provides for certain understandings between the Stockholders,
PQC and Flagship in connection with the Amended and Restated Services Agreement
between PQC and Flagship and the Employment Agreements between each Stockholder
and Flagship.
Now, therefore, in consideration of the representations, warranties and
covenants herein contained, the parties agree as follows. Capitalized terms
used in this Agreement and not defined in this Agreement shall have the meaning
assigned to them in the Services Agreement.
1. Addition of Founding Medical Group Physicians to Additional Pod
---------------------------------------------------------------
Compensation Model. The Services Agreement provides for a different
- ------------------
compensation methodology for the Founding Pods and the Additional Pods. As a
part of their long-term business goals, PQC and Flagship may determine that it
is in their best interest to merge the compensation arrangements of the Founding
Pods into the compensation arrangements for the Additional Pods. While PQC and
Flagship shall have no obligation to do so, PQC and Flagship shall have the
right to amend the Services Agreement, including Appendices B-1 and B-2 thereto,
to merge the compensation arrangements of the Founding Pods into the
compensation arrangements for the Additional Pods; provided that such merger and
its material terms are approved by PQC and two-thirds of the Stockholders who
continue to be Medical Group Physicians at such time. In the event that the
compensation arrangements for the Founding Pods and the Additional Pods are
merged, PQC shall provide a guarantee (which shall be in a form acceptable to
two-thirds of the Stockholders, acting reasonably) to the Stockholders that for
a two year period (commencing on the date of the merger of the compensation
arrangements for at least ten physicians in one or more Founding Pods into the
compensation arrangements for the Additional Pods) that the compensation of each
Stockholders who continues to be a Medical Group Physician will not be less than
the Physician Draw for such Stockholders as in effect at the time of such
merger; provided that the guarantee shall provide for reduction of the
guaranteed Physician Draw for the Stockholders to reflect declines, if any, in
productivity and billing. At the end of the two-year period covered by the
guarantee, the Services Agreement shall be amended, if requested by two-thirds
of the members of the Management Committee, to establish a separate Medical
Group Account and Compensation Pool with respect to Pod R.
2. Option to Amend Purchase Price. Within six months after the Effective
------------------------------
Date, the Stockholders, by the approval of two-thirds of the Stockholders, shall
have the right to elect to receive up to an additional 2,000,000 shares of Class
<PAGE>
A Common Stock of PQC (the "Common Stock") as additional consideration for the
merger of Clinical Associates into Flagship. As a condition to receipt of such
additional shares, the Stockholders must agree to amend, effective upon delivery
of such Common Stock, the Services Agreement and their Employment Agreements so
that an additional $760,000 (or such proportionately reduced amount if less than
2,000,000 shares of Common Stock are elected) with respect to each fiscal year
is payable to PQC from the amount that would otherwise be allocated pursuant to
Appendix B-2 of the Services Agreement to the Additional Pod Medical Group
Account.
3. Right to Additional Compensation in the Event of a Shortfall. With
--------------------------------------------------------------
respect to each fiscal year during the Shortfall Period (as defined below), the
amount that would have been allocated to PQC pursuant to Appendix B-2 of the
Services Agreement shall be reduced by the Adjustment Amount and the amount that
is allocated to the Additional Pod Medical Group Account shall be increased by
the Adjustment Amount; provided, however, that if with respect to any fiscal
year 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, this
Section 3 shall be of no further effect and no further adjustment shall be made
pursuant to this Section 3 during any subsequent fiscal year. "Shortfall Period"
shall mean every fiscal year commencing after December 31, 1997 to and including
the earlier of (i) the first fiscal year in which there is no Shortfall or (ii)
the fiscal year immediately preceding the date of the closing of a public
offering of Common Stock with a price to the public of $9.00 or more.
"Shortfall" shall mean the difference, if a positive amount, between $3 million
and the aggregate increase in Net Adjusted Billings over Baseline Net Adjusted
Billings by the specialist physicians in any Additional Pod; provided, however,
that there shall not be deemed to be a Shortfall in the event that there is less
than $3 million increase in Net Adjusted Billings because the specialist
physicians in the Additional Pods do not have the capacity to accept (unless the
Additional Pods are attempting in good faith to add physicians with the
applicable speciality and do add such additional capacity within six months of
notification from PQC), or were otherwise unwilling to accept (provided that PQC
shall give the Management Committee one month to cure any such unwillingness to
accept new patients if such refusals to accept new patients are isolated
occurrences and are not recurring), such referrals. "Adjustment Amount" with
respect to any fiscal year shall be equal to (i) 45% of the Shortfall for such
fiscal year less the Laboratory Allocation. The Laboratory Allocation with
respect to each fiscal year shall be equal to the Net Margin from Laboratory
Services allocated to Pod R under the Services Agreement. The amount of any
Shortfall, Laboratory Allocation and Adjustment Amount shall be calculated as
soon as practicable after the end of each fiscal year. Any reallocation on the
basis of an Adjustment Amount shall be made on or prior to the date that the
Additional Pod Medical Group Account is to be distributed to the physicians in
the Additional Pods under the Services Agreement.
4. Option to Sell Shares to PQC. In the event that on the fourth
----------------------------
anniversary of the Effective Date PQC has not completed an underwritten initial
public offering, each Stockholder shall have the right to require PQC to
repurchase the Common Stock issued to such Stockholder pursuant to the Merger
Agreement at a purchase price of $3.00 per share (subject to adjustment for
-2-
<PAGE>
stock splits and combination). PQC shall have the right to pay the purchase
price in the form of a five (5) year non-interest bearing note. The principal
payable with respect to each such note issued to a Stockholder shall be reduced
each year that the note is outstanding by the amount, if any, that such
Stockholder=s compensation from Flagship during such year exceeds the
Stockholders' Physician Draw for such year. The election to have PQC repurchase
the Common Stock must be made within 45 days of the fourth anniversary of the
Effective Date.
5. Board Representation. PQC agrees that it will use its best efforts to
--------------------
cause two physicians nominated by the Stockholders to be elected to PQC's Board
of Directors. In addition, the Stockholders shall be entitled until such time
as PQC completes an initial public offering to appoint a representative who will
have the right to notice of and to be present at regularly scheduled meetings of
the PQC Board.
6. Management Services for Pod R. PQC and Flagship agree that neither PQC
-----------------------------
nor Flagship shall materially change the billing methodology used on the
Effective Date with respect to Pod R or replace any senior level supervisory
personnel used on the Effective Date by Pod R in billing and collections without
the approval of a majority of the Members of the Management Committee. PQC and
Flagship also agree not to replace the Flagship Chief Operating Officer or the
Medical Director without the approval of a majority of the members of the Pod R
Management Committee.
7. Operating Policies. PQC and Flagship intend that the operating policies
-------------------
set forth on Annex A to this Agreement will be adopted by the Joint Policy Board
as soon as practicable after the Effective Date. PQC agrees that the PQC
Representatives to the Joint Policy Board will vote in favor of the adoption of
such policies.
8. Publicity Budget. PQC and Flagship agree that the Flagship publicity
--------------
budget for the first twelve months after the Effective Date shall be at least
$1,000,000, $250,000 of which shall be a Practice Expense of Pod R.
9. Pod R Management Committee. The Stockholders agree that Pod R shall
--------------------------
establish a Management Committee that shall primarily be responsible for
overseeing the relationship between PQC, Flagship and the Medical Group
Physicians assigned to Pod R and for taking the actions expressly contemplated
by this Agreement. The membership and rules governing the Management Committee
will be determined from time to time by the Medical Group Physicians assigned to
Pod R. PQC and Flagship agree to work with Pod R in establishing the Management
Committee.
10. Certain Changes in Control. PQC agrees that neither PQC nor Flagship
-------------------------
will (i) merge or consolidate with or into, (ii) joint venture with, (iii) sell
or lease all or substantially all of their assets to, (iv) grant governance
participation to, (v) become managed by, or (vi) sell a controlling interest in
the stock of Flagship or PQC to, a Baltimore Health Care Entity without the
approval of a majority of the members of the Management Committee. A Baltimore
-3-
<PAGE>
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, but shall not include any physician group
that enters into an affiliation transaction with PQC.
11. No Third Party Beneficiaries. This Agreement shall not confer any
----------------------------
rights or remedies upon any person other than PQC, Flagship and the Stockholders
and their respective successors and permitted assigns.
12. Entire Agreement. This Agreement (including the documents referred to
----------------
herein) constitutes the entire agreement among the parties and supersedes any
prior understandings, agreements, or representations by or among the parties,
written or oral, with respect to the subject matter hereof.
13. Counterparts. This Agreement may be executed in two (2) or more
------------
counterparts, each of which shall be deemed an original but all of which
together shall constitute one (1) and the same instrument.
14. Headings. The section headings contained in this Agreement are
--------
inserted for convenience only and shall not affect in any way the meaning or
interpretation of this Agreement.
15. Notices. All notices, requests, demands, claims, and other
-------
communications hereunder shall be in writing. Any notice, request, demand,
claim, or other communication hereunder shall be deemed duly delivered two (2)
business days after it is sent by registered or certified mail, return receipt
requested, postage prepaid, or one (1) business day after it is sent via a
reputable nationwide overnight courier service, in each case to the intended
recipient as set forth below:
If to the Stockholders:
- -----------------------
To the last known home address of each Stockholder as maintained in the records
of Flagship with a copy to:
Epstein, Becker & Green, P.C.
1227 25th Street, N.W.
Washington, DC 20037-1156
Attention: Mark Lutes, Esq.
-4-
<PAGE>
If to PQC or Flagship:
- ----------------------
Physicians Quality Care, Inc.
950 Winter Street
Suite 2410
Waltham, MA 02154
Attention: Jerilyn Asher
With a copy to:
David C. Phelan, Esq.
Hale and Dorr
60 State Street
Boston, MA 02109
Any party may give any notice, request, demand, claim, or other communication
hereunder using any other means (including personal delivery, expedited courier,
messenger service, telecopy, telex, ordinary mail, or electronic mail), but no
such notice, request, demand, claim, or other communication shall be deemed to
have been duly given unless and until it actually is received by the party for
whom it is intended. Any party may change the address to which notices,
requests, demands, claims, and other communications hereunder are to be
delivered by giving the other Parties notice in the manner herein set forth.
16. Governing Law. This Agreement shall be governed by and construed in
-------------
accordance with the internal laws (and not the law of conflicts) of the State of
Maryland.
17. Amendments and Waivers. No amendment of any provision of this
----------------------
Agreement shall be valid unless the same shall be in writing and signed by PQC,
Flagship and two-thirds of the Stockholders. No waiver by any party of any
default, misrepresentation, or breach of warranty or covenant hereunder, whether
intentional or not, shall be deemed to extend to any prior or subsequent
default, misrepresentation, or breach of warranty or covenant hereunder or
affect in any way any rights arising by virtue of any prior or subsequent such
occurrence.
18. Severability. If any term, provision, covenant or restriction of this
------------
Agreement is held by a court of competent jurisdiction to be invalid, void or
unenforceable, the remainder of the terms, provisions, covenants and
restrictions of this Agreement shall remain in full force and effect and shall
in no way be affected, impaired or invalidated.
19. Expenses. Except as otherwise expressly provided herein, each party to
--------
this Agreement shall pay its own costs and expenses in connection with the
transactions contemplated hereby.
-5-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the date first above written.
PHYSICIANS QUALITY CARE, INC.
/s/ Samantha J. Trotman
------------------------------------------
By: Samantha J. Trotman
Title: Chief Financial Officer and
Vice President
FLAGSHIP HEALTH, P.A.
/s/ Dana Frank, M.D.
-----------------------------------------
By: Dana Frank, M.D.
Title: President
FLAGSHIP HEALTH II, P.A.
/s/ Dana Frank, M.D.
-----------------------------------------
By: Dana Frank, M.D.
Title: President
-6-
<PAGE>
CLINICAL ASSOCIATES STOCKHOLDERS:
/s/ Mohammed Ahmed
-----------------------------------
/s/ Samuel Akman
--------------------------------------
/s/ Mahmood Alikhan
-------------------
/s/ Robert S. Baxt
------------------
/s/ George Bedon
----------------
/s/ Paul Z. Bodnar
------------------
/s/ William Bouchelle
---------------------
/s/ James M. Corkum
-------------------
/s/ Albert F. DeLoskey
----------------------
/s/ James F. Dunlay
-------------------
/s/ Paul J. Edgar
-----------------
/s/ Clara E. Escuder
--------------------
/s/ Carl S. Friedman
--------------------
-7-
<PAGE>
/s/ Miquel A. Frontera
----------------------
/s/ John Gambrill
-----------------
/s/ Carlton Greene
------------------
/s/ Gregory Hall
----------------
/s/ Michael Jacobs
------------------
/s/ Kenneth P. Judd
-------------------
/s/ Virginia Kranz
------------------
/s/ Michael Lifson
------------------
/s/ Richard H. Mack
-------------------
/s/ Richard Maffezzoli
----------------------
/s/ Gary A. Manko
-----------------
/s/ Steven Miller
-----------------
/s/ Judah A. Minkove
--------------------
/s/ Keiffer J. Mitchell
-----------------------
-8-
<PAGE>
/s/ Charlotte E. Modly
----------------------
/s/ Rose Mary Mulaikal
----------------------
/s/ Bindu Noor
--------------
/s/ Bonnie Orzech-Nixon
-----------------------
/s/ James Paskert
-----------------
/s/ Radha Pathak
----------------
/s/ Robert Peques
-----------------
/s/ Toby Ritterhoff
-------------------
/s/ Bruce Rosenberg
-------------------
/s/ Duncan Salmon
-----------------
/s/ David Saltzberg
-------------------
/s/ Lise K. Satterfield
-----------------------
/s/ Richard T. Scholz
---------------------
/s/ Sidney Seidman
------------------
-9-
<PAGE>
/s/ Linda Sevier
----------------
/s/ David S. Shear
------------------
/s/ Ronald Sher
---------------
/s/ Alan M. Shorofsky
---------------------
/s/ Stephen M. Siegel
---------------------
/s/ Stuart B. Silver
--------------------
/s/ Edward Souweine
-------------------
/s/ Jonathan E. Surell
----------------------
/s/ Anthony Vazzano
-------------------
/s/ Barry Vogelstein
--------------------
/s/ Richard Weisman
-------------------
/s/ Julie Winston
-----------------
/s/ Wayland Wong
----------------
/s/ Robert E. Zadek
-------------------
-10-
<PAGE>
CLINICAL ASSOCIATES
OPTIONHOLDERS:
/s/ William Bartholomay
-----------------------
/s/ Sarah Bodnar
----------------
/s/ Marla Caplan
----------------
-11-
<PAGE>
ANNEX A
-------
Operational Policies.
The approval of the Joint Policy Board or the Management Committee of Pod R
will be required prior to PQC authorizing expenditures in excess of budgeted
amounts.
-12-
<PAGE>
Exhibit 10.24
-------------
MERGER AGREEMENT
Agreement entered into as of July 31, 1997 by and among Physicians Quality
Care, Inc., a Delaware corporation ("PQC"), Flagship Health II, P.A., a Maryland
professional association ("Flagship"), Clinical Associates, P.A., a Maryland
professional association (the "Company"), and the Stockholders ("the
Stockholders") and Optionholders (the "Optionholders") of the Company listed on
Schedule I hereto. Flagship, PQC, the Company, the Stockholders and the
Optionholders are referred to collectively herein as the "Parties."
This Agreement contemplates a merger of Flagship into the Company. In such
merger, the Stockholders will receive cash and/or shares of PQC Class A Common
Stock, par value $0.01 per share (the "Common Stock"), in exchange for their
capital stock of the Company.
Now, therefore, in consideration of the representations, warranties and
covenants herein contained, the Parties agree as follows.
ARTICLE I
THE MERGER
1.1 The Merger. Upon and subject to the terms and conditions of this
----------
Agreement, Flagship shall merge with and into the Company (with such merger
referred to herein as the "Merger") at the Effective Time (as defined below).
From and after the Effective Time, the separate corporate existence of Flagship
shall cease, and the Company shall continue as the surviving corporation in the
Merger (the "Surviving Corporation"). The "Effective Time" shall be the time at
which the Company and Flagship file the Articles of Merger or other appropriate
documents prepared and executed in accordance with the relevant provisions of
the Maryland General Corporation Law (the "Articles of Merger") with the
Department of Assessments of Taxation of the State of Maryland. The Merger
shall have the effects set forth in '3-114 of the Maryland General Corporation
Law. The Articles of Merger shall be filed promptly following the Closing.
1.2 The Closing. The closing of the transactions contemplated by this
-----------
Agreement (the "Closing") shall take place at the offices of PQC in Baltimore,
Maryland, commencing at 9:00 a.m. local time on July 31, 1997 or on such
mutually agreeable date as soon as practicable after the satisfaction or waiver
of all conditions to the obligations of the Parties to consummate the
transactions contemplated hereby (the "Closing Date").
1.3 Actions at the Closing. At the Closing: (a) the Company, the
----------------------
Stockholders and the Optionholders shall deliver to Flagship and PQC the various
<PAGE>
certificates, instruments and documents referred to in Article V; (b) Flagship
and PQC shall deliver to the Company, the Stockholders and the Optionholders the
various certificates, instruments and documents referred to in Article VI; (c)
the Company and Flagship shall file with the Department of Assessments of
Taxation of the State of Maryland the Articles of Merger; (d) each Stockholder
shall deliver to Flagship for cancellation the certificates representing his
Shares (as defined in Section 1.5(a) below); (e) each Optionholder shall
deliver to Flagship for cancellation the Options (as defined in Section 1.5(a)
below); and (f) each Stockholder and Optionholder shall receive the amount of
cash (by check) and/or the number of shares of Common Stock with an assumed
value, as determined and provided in Section 1.12, as set forth opposite such
Stockholder's or Optionholder's name on Schedule 1.3 attached hereto (the
------------
"Merger Consideration"). PQC shall not be required to deliver the Merger
Consideration to a Stockholder or Optionholder until such Stockholder or
Optionholder has executed and delivered: (i) an instrument of joinder the
Stockholder Agreement attached as Exhibit A hereto, (ii) the Letter Agreement
attached as Exhibit D hereto, (iii) a cross indemnity and release agreement
previously delivered by the Company to the Stockholder and Optionholder and (iv)
the stock certificates of the Company or options held by such Stockholder or
Optionholder endorsed in favor of Flagship II.
1.4 Additional Action. The Surviving Corporation may, at any time after
-----------------
the Effective Time, take any action, including executing and delivering any
document, in the name and on behalf of either the Company or Flagship, in order
to consummate the transactions contemplated by this Agreement.
1.5 Conversion of Securities. At the Effective Time, by virtue of the
------------------------
Merger and without any action on the part of any Party or the holder of any of
the following securities:
(a) Each share of common stock of the Company (collectively, the
"Shares") held by the Stockholders or held in the Company's treasury immediately
prior to the Effective Time and each outstanding option to acquire common stock
of the Company (the "Options") held by the Optionholder shall be canceled and
retired without payment of any consideration therefor, other than the payment of
the Merger Consideration to the Stockholders as set forth in Section 1.3;
(b) Each share of common stock, $5.00 par value per share, of Flagship
issued and outstanding immediately prior to the Effective Time shall be
cancelled and retired without payment of consideration therefor; and
(c) The Stockholder of Flagship shall receive 1,000 shares of the
Common Stock, par value $1.00 per share of the Company, which shall constitute
all of the issued and outstanding capital stock of the Surviving Corporation as
of and after the Effective Time.
-2-
<PAGE>
1.6 Dissenting Stockholder. Each Stockholder represents that such
----------------------
Stockholder has voted the Shares owned beneficially or of record by such
Stockholder in favor of the adoption of this Agreement and the Merger and,
consequently, shall not be entitled to, and shall not, demand and perfect
appraisal rights in accordance with '3-201, et. seq. of the Maryland General
Corporation Law.
1.7 Articles of Incorporation. The Articles of Incorporation of the
-------------------------
Surviving Corporation shall be the same as the Articles of Incorporation of
Flagship immediately prior to the Effective Time.
1.8 Bylaws. The bylaws of the Surviving Corporation shall be the same as
------
the bylaws of Flagship immediately prior to the Effective Time.
1.9 Directors and Officers. The directors and officers of the Surviving
----------------------
Corporation as of the Effective Time shall be those officers and directors
specified on Schedule 1.9.
------------
1.10 No Further Rights. From and after the Effective Time, except as
-----------------
provided in Section 1.5(c), no Shares of the Company or Flagship shall be deemed
to be outstanding, and holders of certificates formerly representing Shares
shall cease to have any rights with respect thereto except as provided herein or
by law.
1.11 Closing of Transfer Books. At the Effective Time, the stock transfer
-------------------------
books of the Company and Flagship shall be closed and no transfer of Shares
shall thereafter be made. If, after the Effective Time, certificates formerly
representing Shares are presented to the Surviving Corporation, they shall be
canceled and exchanged for the Merger Consideration as set forth in Section 1.3.
1.12 PQC Common Stock.
----------------
(a) The parties agree that the per share fair market value of the
Common Stock to be included in the Merger Consideration shall be Three Dollars
($3.00).
(b) The Stockholders agree to enter into, and the shares of Common
Stock shall be subject to, the Stockholders Agreement dated as of August 30,
1996, by and among PQC and certain of its Stockholders, as amended and in effect
from time to time (the "Stockholders Agreement") attached hereto as Exhibit A.
---------
(c) Each Stockholder represents, warrants and covenants to
PQC as follows:
(i) The Stockholder has received a copy of the Preliminary
Prospectus, dated as of July 7, 1997, with respect to PQC and the Common Stock
and
-3-
<PAGE>
has had such opportunity as the Stockholder has deemed adequate to obtain from
representatives of PQC such information as is necessary to permit the
Stockholder to evaluate the merits and risks of the Stockholder's investment in
PQC.
(ii) The Stockholder has sufficient experience in business,
financial and investment matters to be able to evaluate the risks involved in
the acquisition of the shares of Common Stock and to make an informed investment
decision with respect to such acquisition or has relied upon professional
business, legal and investment advisers and consultants that the Stockholder
reasonably believes have the necessary skills and experience to evaluate the
investment on behalf of the Stockholder.
(iii) The Stockholder can afford a complete loss of the value
of the shares of Common Stock and is able to bear the economic risk of holding
such Common Stock for an indefinite period.
(iv) The Stockholder understands that: (A) the Common Stock
have not been registered under the Securities Exchange Act of 1934 and is not
listed on any national securities exchange, (B) no public trading market in the
Common Stock currently exists or is expected to develop, (C) the Common Stock is
subject to restrictions upon transfer under the Stockholders Agreement and (D)
PQC shall not be subject to the information reporting requirements of the
Securities Exchange Act of 1934 and, consequently, financial and other
information regarding PQC may not be available.
(v) A legend substantially in the following form will be
placed on the certificate representing the Common Stock:
"The shares of stock represented by this certificate are subject
to restrictions on transfer and requirements of sale set forth in
the Stockholders Agreement dated as of August 30, 1996, as
amended and in effect from time to time. The Company will
furnish a copy of such agreement to the holder of this
certificate without charge upon written request. The shares of
stock represented by this certificate were originally issued to,
or issued with respect to shares originally issued to the
following Physician Stockholder: _________"
(d) PQC's Registration Statement on Form S-1 with respect to the
Common Stock filed with the Securities and Exchange Commission has been declared
-4-
<PAGE>
effective under the Securities Act of 1933. PQC has made all necessary filings
with the Securities Division of the State of Maryland with respect to the Common
Stock.
1.13 Certain Tax Agreements. The Parties intend to adopt this Agreement
----------------------
and Merger as a tax-free reorganization under Section 368(a) of the Internal
Revenue Code of 1986, as amended, (the "Code"). The Parties shall not take a
position on any tax return or engage in any activities inconsistent with this
Section 1.13. Without limiting the foregoing each Stockholder agrees that:
(a) Such Stockholder has not sold, exchanged, transferred or disposed
of or received any shares of the Company's capital stock in contemplation of the
Merger except as disclosed on Schedule 1.13 attached hereto, and such
-------- ----
Stockholder has no present intent to sell, exchange, transfer, dispose of or
receive the Company's capital stock in contemplation of the Merger, nor has such
Stockholder entered into any discussions or negotiations with regard to the
possible sale, exchange, transfer or other disposition of such capital stock.
(b) Such Stockholder is not subject to any obligation to sell,
exchange, transfer or otherwise dispose of all or any of the Common Stock of PQC
to be received by such Stockholder in the Merger. Such Stockholder has not
entered into any discussions or negotiations with regard to the possible sale,
exchange, transfer or other disposition of all or any of the Common Stock. Such
Stockholder has no plan or intent to engage in any transaction or arrangement
that would reduce such Stockholder's risk of ownership in any way, including
without limitation a short sale, hedging transaction or otherwise, with respect
to all or any of such Common Stock.
1.14 Adjustments to Merger Consideration.
------------------------------------
(a) The Merger Consideration shall be reduced on a dollar for dollar
basis to the extent that the Net Assets (as defined in Section 5.15) of the
Company as of the Closing Date is less than $2,314,519.
(b) The Merger Consideration shall be reduced in the event that less
than all of the Stockholders enter into Employment Agreements with Flagship on
the Closing Date in the form attached hereto as Exhibit B. The amount of such
reduction with respect to each physician who does not enter into such Employment
Agreement shall equal 50% of the Merger Consideration set forth on Schedule 1.3
-5-
<PAGE>
ARTICLE II
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
The Company, the Stockholders and the Optionholders, who join herein
individually (not jointly) and subject to the limitations contained in Section
7.5, represent and warrant to Flagship and PQC that the statements contained in
this Article II are true and correct, except as set forth in the disclosure
schedule attached hereto (the "Disclosure Schedule"), as of the date hereof and
as of the Effective Time. Each representation or warranty made by a Stockholder
or Optionholder herein regarding the Stockholders or Optionholder of the Company
shall be deemed to have been made only with respect to the Stockholder or
Optionholder making the representation or warranty and not with respect to any
other Stockholder or Optionholder. The Disclosure Schedule shall be arranged in
paragraphs corresponding to the numbered and lettered paragraphs contained in
this Article II, and the disclosures in any paragraph of the Disclosure Schedule
shall qualify only the corresponding paragraph in this Article II.
2.1 Organization, Qualification and Corporate Power. The Company is a
-----------------------------------------------
professional association duly organized, validly existing and in corporate and
tax good standing under the laws of the State of Maryland and has all power and
authority to carry on the businesses in which it is engaged and to own and use
the properties owned and used by it. The Company has furnished to PQC true and
complete copies of its Articles of Incorporation and Bylaws, each as amended and
as in effect on the date hereof. The Company is not in default under or in
violation of any provision of its Articles of Incorporation or Bylaws. Except
as set forth in Schedule 2.1 hereto, the Company has no subsidiaries or any
------------
equity interest in any corporation, partnership, joint venture or other entity.
2.2 Capitalization. Schedule 2.2 accurately sets forth (i) the authorized
-------------- ------------
and outstanding capital stock of the Company and (ii) all outstanding Options.
Schedule 2.2 sets forth a complete and accurate list of all Stockholders and
- ------------
Optionholders of the Company, indicating the numbers of Shares and Options held
by each Stockholder and Optionholder. Other than the Stockholders and the
Optionholders, no person or entity owns or has the right to acquire any capital
stock, options, or other securities of the Company. The Shares are all of the
issued and outstanding shares of capital stock of the Company and each Share is
duly authorized, validly issued, fully paid, nonassessable and free of all
preemptive rights. Other than the Options, there are no outstanding or
authorized options, warrants, rights, agreements or commitments to which the
Company is a party or which are binding upon the Company providing for the
issuance, disposition or acquisition of any of its capital stock. There are no
outstanding or authorized stock appreciation, phantom stock or similar rights
with respect to the Company. There are no agreements, voting trusts, proxies or
understandings with respect to the voting, or registration under the
-6-
<PAGE>
Securities Act of 1933, of any Shares. All of the issued and outstanding Shares
and Options were issued in compliance with applicable federal and state
securities laws.
2.3 Authorization. This Agreement and the other agreements, documents and
-------------
instruments to be executed and delivered by the Company pursuant hereto and the
consummation by the Company of the transactions contemplated hereby and thereby
have been approved by all required corporate action, including approval by the
Board of Directors of the Company and all of the Stockholders. No further
corporate or other proceedings on the part of Company are necessary to authorize
this Agreement or the other agreements, documents and instruments to be executed
and delivered by the Company pursuant hereto or the transactions contemplated
hereby or thereby.
2.4 Valid and Binding Agreement. The Company and each Stockholder and
---------------------------
Optionholders have the necessary power and authority to enter into this
Agreement and the other agreements, documents and instruments to be executed and
delivered by the Company or any Stockholder and Optionholder pursuant hereto,
and to carry out the transactions contemplated hereby and thereby. Assuming due
authorization, execution and delivery thereof by Flagship and PQC, this
Agreement and each of the other agreements, documents and instruments to be
executed and delivered by the Company, the Stockholders or Optionholders
pursuant hereto will constitute valid and binding agreements of the Company, the
Stockholders and/or Optionholders enforceable against the Company and/or the
Stockholders and/or Optionholders as the case may be, in accordance with their
terms, except to the extent that enforceablitity is limited by bankruptcy or
similar laws or by general principles of equity.
2.5 No Violation. Except as set forth in Schedule 2.5 hereto, neither the
------------ ------------
execution and delivery of this Agreement or the other agreements, documents and
instruments to be executed and delivered by the Company , the Stockholders or
the Optionholders pursuant hereto nor the consummation by the Company or the
Stockholders of the transactions contemplated hereby or thereby: (a) will
violate any provision of the charter documents or Bylaws of the Company, each as
currently in effect; (b) subject to obtaining the required consents and
approvals described in Schedule 2.6, will violate or conflict with any
------------
applicable statute, law, ordinance, rule, regulation, order, judgment or decree
except that no representation or warranty is made under this section with regard
to laws referred to in Section 2.22; or (c) subject to obtaining the required
consents and approvals described in Schedule 2.6, will violate or conflict with
------------
or constitute a default (or an event which, with notice or lapse of time, or
both, would constitute a default) under, or will result in the termination of,
or accelerate the performance required by, or result in the creation of any
Security Interest (as defined in Section 2.12) upon any of the properties of the
Company under, any contract, commitment, understanding, arrangement, agreement
or restriction of any kind by which the properties of the Company are bound or
-7-
<PAGE>
affected, or to which the Company or any Stockholder is a party except for any
such violation, conflict or default that would not have a Material Adverse
Effect. The term "Material Adverse Effect" as used in this Agreement shall mean
any change or effect or any prospective change or effect that, individually or
when taken together with other changes or effects, is or is reasonably likely
(whether now or after the Effective Time) to be materially adverse to the
medical practice conducted by the Stockholders (the "Practice"), the financial
condition or results of operation of the Company, Flagship or PQC, the financial
arrangements contemplated by the Employment Agreements (as defined in Section
5.16(a)), the value to Flagship or PQC of their affiliation with the Company and
the Stockholders or any Party's ability to consummate the transactions
contemplated herein.
2.6 Consents; Filings. Except as set forth in Schedule 2.6 hereto, no
----------------- ------------
registration or filing with, or consent, approval, permit, authorization or
action by, any third-party (including, without limitation, any federal, state,
local, foreign or other governmental agency, instrumentality, commission,
authority, board or body or other person or entity (a "Governmental Entity") is
required in connection with the execution and delivery by the Company, any
Stockholder or any Optionholder of this Agreement or the other agreements,
documents and instruments to be executed and delivered by Company, any
Stockholder or Optionholder pursuant hereto or the consummation by the Company,
the Stockholders or the Optionholders of the transactions contemplated hereby or
thereby.
2.7 Financial Statements. The Company has delivered to Flagship and PQC
--------------------
the balance sheets and statements of income of the Company for and as at the
fiscal years ended June 30, 1994, 1995 and 1996 (the "Financial Statements") and
the fiscal period ended March 31, 1997 (the "Interim Financial Statements"), and
such balance sheets and statements of income have been prepared in accordance
with generally accepted accounting principles consistently applied, are true,
complete and accurate and fairly present the financial condition and results of
operations for and as at the end of the periods therein referred to on a stand-
alone basis.
2.8 Undisclosed Liabilities. To the best knowledge of the Company, the
-----------------------
Stockholders and the Optionholders, the Company has no liabilities or
obligations (whether known or unknown, whether absolute or contingent, whether
liquidated or unliquidated and whether due or to become due), except for (a)
liabilities shown on the balance sheet referred to in Section 2.7 for the period
ended March 31, 1997, (the "Most Recent Balance Sheet") or otherwise listed on
Schedule 2.8(a) as being assumed by Flagship as part of the Merger, or (b)
- ---------------
liabilities which have arisen since the most recent Financial Statements in the
Ordinary Course of Business (as defined in Section 2.12).
2.9 No Material Adverse Change. Except as set forth in Schedule 2.9
-------------------------- ------------
hereto, to the best knowledge of the Company, no event with respect to the
Company
-8-
<PAGE>
or the Practice involving a Material Adverse Effect has occurred since
the date of the Financial Statements.
2.10 Compliance with Law. To the best knowledge of the Company, the
-------------------
Stockholders and the Optionholders, the Company has complied with, and the
Practice has been conducted in compliance with, all applicable laws, regulations
and other requirements of all national governmental authorities, of all states,
municipalities and other political subdivisions and agencies thereof, having
jurisdiction over the Company, the Stockholders or the Optionholders, including
without limitation, all such laws, regulations and requirements relating to
antitrust, consumer protection, employee benefit, equal opportunity, health,
occupational safety, pension, pollution or environmental protection matters,
except for such noncompliance as would not have a Material Adverse Effect.
Neither the Company, any Stockholder nor any Optionholder has received any
notification of any asserted present or past failure to comply with such laws,
rules or regulations.
2.11 Tax Matters.
-----------
(a) The Company has filed in a timely manner all Tax Returns (as
defined below) that it was required to file and all such Tax Returns were
correct and complete in all material respects. The Company has timely paid all
Taxes (as defined below) that are shown to be due on any such Tax Returns. The
unpaid Taxes of the Company for tax periods through the date of the Most Recent
Balance Sheet do not exceed the accruals and reserves for Taxes set forth on the
Most Recent Balance Sheet (excluding any accruals and reserves for deferred
Taxes established to reflect timing difference between book and Tax income).
The Company does not have any actual or potential liability for any Tax
obligation of any taxpayer (including without limitation any affiliated group of
corporations or other entities that included the Company during a prior period)
other than the Company. All Taxes that the Company is or was required by law to
withhold or collect have been duly withheld or collected and, to the extent
required, have been paid to the proper Governmental Entity. For purposes of
this Agreement, "Taxes" means all taxes, charges, fees, levies or other similar
assessments or liabilities, including without limitation income, gross receipts,
ad valorem, premium, value-added, excise, real property, personal property,
sales, use, transfer, withholding, employment, payroll and franchise taxes
imposed by the United States of America or any state, local or foreign
government, or any agency thereof, or other political subdivision of the United
States or any such government, and any interest, fines, penalties, assessments
or additions to tax resulting from, attributable to or incurred in connection
with any tax or any contest or dispute thereof. For purposes of this Agreement,
"Tax Returns" means all reports, returns, declarations, statements or other
information required to be supplied to a taxing authority in connection with
Taxes.
-9-
<PAGE>
(b) The Company has delivered to PQC correct and complete copies of
all federal income Tax Returns, examination reports and statements of
deficiencies assessed against or agreed to by the Company during the past five
years. Except as disclosed on Schedule 2.11, no examination or audit of any Tax
-------- ----
Returns of the Company by any Governmental Entity is currently in progress or,
to the knowledge of the Company, threatened or contemplated. The Company has
not waived any statute of limitations with respect to Taxes or agreed to an
extension of time with respect to a Tax assessment or deficiency.
(c) The Company is not a "consenting corporation" within the meaning
of Section 341(f) of the Code, and none of the assets of the Company are subject
to an election under Section 341(f) of the Code. The Company has not been a
United States real property holding corporation within the meaning of Section
897(c)(2) of the Code during the applicable period specified in Section
897(c)(1)(A)(ii) of the Code. The Company is not a party to any Tax allocation
or sharing agreement.
(d) The Company is not nor has ever been a member of an "affiliated
group" of corporations (within the meaning of Section 1504 of the Code).
(e) The Company is not a party to any agreement, contract, arrangement
or plan that has resulted or would result, separately or in the aggregate, in
the payment of any "parachute payments" within the meaning of Section 280G of
the Code.
2.12 Assets. The Company owns or leases all tangible assets necessary for
------
the conduct of the Practice. Each such tangible asset is free from material
defects, has been maintained in accordance with normal industry practice, is in
good operating condition and repair (subject to normal wear and tear) and is
suitable for the purposes for which it presently is used. Except as disclosed
on Schedule 2.12, no asset of the Company (tangible or intangible) is subject to
-------------
any Security Interest. The term "Security Interest" means any mortgage, pledge,
security interest, encumbrance, charge or other lien (whether arising by
contract or by operation of law), other than (i) mechanics', materialmen's and
similar liens, (ii) liens arising under worker's compensation, unemployment
insurance, social security, retirement and similar legislation and (iii) liens
on goods in transit incurred pursuant to documentary letters of credit, in each
case arising in the ordinary course of business consistent with past practice
(including with respect to frequency and amount) (the "Ordinary Course of
Business").
2.13 Leases.
------
(a) Schedule 2.13 contains a complete and accurate listing of all
-------------
leases (the "Leases") pursuant to which the Company leases real or personal
property, which listing sets forth a general description of the leased property
or items, the
-10-
<PAGE>
term, the annual rent, any and all renewal options, and any requirements for the
consent of third parties to assignments thereof. To the knowledge of the
Company, all such Leases are valid, binding and enforceable in accordance with
their terms and are in full force and effect; no event of default has occurred
which (whether with or without notice, lapse of time or both or the happening or
occurrence of any other event) would constitute a default thereunder on the part
of the Company; and the Company has no knowledge of the occurrence of any event
of default which (whether with or without notice, lapse of time or both or the
happening or occurrence of any other event) would constitute a default
thereunder by any other party.
(b) Except for Leases listed on Schedule 2.13, there are no leases,
-------------
subleases, licenses, occupancy agreements, options, rights, concessions or other
agreements or arrangements, written or oral, granting to any person the right to
purchase, use or occupy any facility occupied by the Company.
(c) With respect to each Lease, the Company has and will transfer to
Flagship at the Closing an unencumbered interest in the leasehold interest
covered thereby. The Company enjoys peaceful and undisturbed possession of all
the leased real property, and the Company has in all material respects performed
all the obligations required to be performed by it through the date hereof.
2.14 Contracts and Commitments.
-------------------------
(a) Schedule 2.14 sets forth a complete and accurate list of all
-------------
contracts known to the Company, the Stockholders or the Optionholders after
reasonable investigation which have been entered into by the Company or any
Stockholder relating to the Practice and still in effect as of the date hereof
(the "Contracts"), of the following categories:
(i) Managed care contracts and other contracts with third-party
payors;
(ii) Employment or similar contracts and severance agreements;
(iii) Contracts (other than Leases set forth on Schedule 2.13)
-------------
relating to the Company or the Practice which are not cancelable without
liability on thirty (30) calendar days (or less) notice;
(iv) Options with respect to any property, real or personal,
whether the Company is the grantor or grantee thereunder;
-11-
<PAGE>
(v) Contracts involving expenditures or liabilities, actual or
potential, in excess of one thousand dollars ($1,000) or otherwise material to
the Practice or the Company;
(vi) Promissory notes, loans, agreements, indentures, evidences
of indebtedness, letters of credit, guarantees, or other instruments relating to
an obligation to pay money, individually in excess of or in the aggregate in
excess of one thousand dollars ($1,000), whether the Company shall be the
borrower, lender or guarantor thereunder or whereby any properties of the
Company are pledged;
(vii) Contracts containing covenants limiting the freedom of the
Company or any officer, director, employee, or Stockholder of the Company, to
engage in any line of business or compete with any person; and
(viii) Any Contract with the United States, state or local
government or any agency or department thereof.
The Company has made available to PQC true, correct and complete copies within
the Company's, a Stockholder's or an Optionholder's possession of, and all
records relating to, all of the Contracts listed on Schedule 2.14, including all
-------------
amendments and supplements thereto.
(b) Absence of Breaches or Defaults. To the knowledge of the Company
-------------------------------
or any Stockholder or Optionholder, all of the Contracts are valid and in full
force and effect. To the knowledge of the Company, or any Stockholder or
Optionholder, the Company and the Stockholders have duly performed all of its or
their obligations under the Contracts, and no violation of, or default or
breach, under any Contracts by the Company or any other party has occurred
except for any violations, defaults, or breaches that would not have a Material
Adverse Effect and neither Company nor any other party, to the best of Company's
or any Stockholder's knowledge after due inquiry, has repudiated any provisions
thereof.
2.15 Permits. The Company, the Stockholders and any other physicians
-------
employed by the Company have all licenses, permits, franchises, approvals,
authorizations, consents or orders of, or filings with ("Permits") any
Governmental Entity or any other person, necessary or desirable to conduct the
Practice as now being conducted, except where the failure to obtain such Permits
would not have a Material Adverse Effect. All Permits of the Company, each
Stockholder and any other physicians employed by the Company are valid and in
full force and effect and are listed on Schedule 2.15. Except as disclosed on
-------------
Schedule 2.15, 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
Stockholder in connection with the execution, delivery or performance of this
Agreement and the consummation of the transactions
-12-
<PAGE>
contemplated hereby, except as set forth on Schedule 2.15. No Stockholder has
-------------
suffered any loss, revocation, suspension, expiration without renewal or other
failure to keep in full force and effect and good standing the Stockholder's
membership on the medical staff of the hospitals listed for such Stockholder on
Schedule 2.23, or any material license, certification, accreditation, clinical
- -------------
privilege or other right or authorization necessary for the unrestricted
practice of medicine by the Stockholder or for the conduct of the Practice as
previously conducted.
2.16 Books and Records. The Company has made and kept (and given Flagship
-----------------
and PQC access to) books and records (including patient lists) and accounts,
which, in reasonable detail, accurately and fairly reflect the activities of the
Company.
2.17 Litigation. Except as set forth on Schedule 2.17, there is not, and
---------- -------------
during the past three (3) years there has not been any, action, order, writ,
injunction, judgment or decree outstanding or any claim, suit, litigation,
proceeding, labor dispute, arbitral action, governmental audit or investigation
(collectively, "Actions") pending or, to the best of the Company's, any
Stockholder's or any Optionholder's knowledge threatened (a) against, related to
or affecting (i) the Company, any of the Stockholders, any of the Optionholders,
the Practice or the assets of the Company, (ii) any officers, directors or
employees of the Company as such, or (iii) any Stockholder of the Company in
such Stockholder's capacity as a Stockholder of the Company; (b) seeking to
delay, limit or enjoin the transactions contemplated by this Agreement; (c) that
involves the risk of criminal liability (other than minor traffic violations);
or (d) in which the Company is a plaintiff. Neither the Company, any
Stockholder or any Optionholder is in default with respect to or subject to any
judgment, order, writ, injunction or decree of any court or governmental agency,
and there are no unsatisfied judgments against the Company, any of the
Stockholders, any of the Optionholders, the Practice or the Company's assets.
2.18 Transactions with Certain Persons. Except as set forth on Schedule
--------------------------------- --------
2.18, no officer, director or employee of the Company nor any member of any such
- ----
person's immediate family is presently, or within the past two (2) years has
been a party to any transaction with the Company relating to the Practice with
an aggregate annual value of more than twenty thousand dollars ($20,000)
(provide that all transactions in an amount less than $20,000 that are not set
forth on Schedule 2.18 were at fair market value) to the Company or the other
-------------
parties thereto, including, without limitation, any contract, agreement or other
arrangement (a) providing for the furnishing of services by, (b) providing for
the rental of real or personal property from, or (c) otherwise requiring
payments to (other than for services as officers, directors or employees of the
Company) any such person or corporation, partnership, trust or other entity in
which any such person has an interest as a Stockholder, officer, director,
trustee or partner, except that the Company provides certain medical services to
employees and family members as set forth on Schedule 2.18.
-------------
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<PAGE>
2.19 Insurance. Schedule 2.19 contains a complete and accurate list of
--------- -------------
all policies or binders of fire, liability, title, worker's compensation,
malpractice 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) maintained by the
Company on any of its assets, the Stockholders, the Practice or the Company's
employees. Such insurance provides, and during such period provided, coverage
to the extent and in the manner as may be required by applicable law and by any
and all Contracts known to the Company or any Stockholder to which the Company,
or any of its physicians or other employees is a party. The Company is not in
default under any of such policies or binders, and the Company has not failed to
give any notice or to present any claim under any such policy or binder in a due
and timely fashion. No insurer has advised the Company that it intends to
reduce coverage, increase premiums or fail to renew an existing policy or
binder. Except as disclosed in Schedule 2.19, there are no outstanding unpaid
-------- ----
claims under any such policies or binders. All policies and binders are in full
force and effect on the date hereof and shall be kept in full force and effect
through the Closing Date.
2.20 Brokers. The Company is not obligated to pay, nor has the Company
-------
retained any broker or finder or other person who is entitled to, any broker's
or finder's fee or any other commission or financial advisory fee based on any
agreement or understanding made by the Company in connection with the
transactions contemplated hereby.
2.21 Benefit Plans.
-------------
(a) Except as set forth in Schedule 2.21, the Company is not a party
-------------
to any pension, retirement, profit sharing, savings, bonus, incentive, deferred
compensation, group health insurance or group life insurance plan or any similar
obligation (an "Employee Benefit Plan"), or to any collective bargaining
agreement or other contract, written or oral, with any trade or labor union,
employees; association or similar organization. Except as set forth in Schedule
--------
2.21, the Company does not have any obligations to provide to its active
- -----
employees or current retirees any post-retirement non-pension benefits. No
Stockholder has any present intention of discontinuing the Stockholder's medical
practice with the Company except to become an employee of Flagship.
(b) To the knowledge of the Company or any Stockholder or
Optionholder, the Company (i) is and has been in compliance in all material
respects with all applicable laws respecting employment and employment
practices, terms and conditions of employment, and wages and hours, (ii) has
made all contributions required to be made under any state unemployment or
disability laws or regulations and has accrued the amount of any such
contribution required for any period prior to the Closing Date which is not yet
due and payable and (iii) is not engaged in any
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<PAGE>
unfair labor practice, and there are no arrears in the payment of wages or taxes
with respect to employees.
(c) Except as set forth in Schedule 2.21, no employee has any claims
-------------
pending against Company (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, (ii) wages or salary (excluding bonuses and amounts
accruing under pension and profit sharing plans) for any period other than the
current payroll period, (iii) vacation, time off or pay in lieu of vacation or
time off, other than that earned in respect of the current fiscal year, (iv) any
violation of any statute, ordinance or regulation relating to minimum wages or
maximum hours of work or (v) the Employee Retirement Income Security Act of
1974, as amended ("ERISA").
(d) Except as set forth on Schedule 2.21 (which liabilities will be
-------------
discharged on or prior to the Closing Date) the Company is not, and neither PQC
nor Flagship shall be, pursuant to any employment agreement, employee benefit
plan or other law, arrangement or understanding, obligated to pay or be liable
for the payment of any compensation (including accrued vacation), severance pay
or other benefit (including any disability benefit or payment or any unfunded
liabilities relating to pension benefits) by reason of the voluntary or
involuntary termination at or prior to the Effective Time of employment of any
employee, or the consummation of the transactions contemplated by this
Agreement.
(e) To the knowledge of the Company and any Stockholder or
Optionholder, each employee benefit plan of the Company intended to be qualified
under Section 401(a) of the Code has received a favorable determination letter
and the Company or any entity which, within the last five (5) years, has been
under common control or affiliated with Company (an "ERISA Affiliate") within
the meaning of Section 414(b), (c) or (m) of the Code, and each employee benefit
plan of the Company 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 the Company is in compliance
in all material respects with its obligations under the terms of such plans.
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.
2.22 Fraud and Abuse; Stark Law. Except as set forth in Schedule 2.22
-------------------------- -------------
hereto, to the knowledge of the Company or any Stockholder or Optionholder,
neither the Company, any of the Stockholders, any of the Optionholders, nor any
other persons or entities providing professional services for the Practice, have
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<PAGE>
engaged in any activities which are prohibited under 42 U.S.C. (S)1320a-7b or 42
U.S.C. (S)1395nn et seq., or the regulations promulgated thereunder pursuant to
-- ---
such statutes, or related state or local statutes or regulations, 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; (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
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;
and (v) referring a patient for Designated Health Services (within the meaning
of 42 U.S.C. (S)1395nn) when the referring physician has a financial
relationship with the entity to which the referral is made in the absence of an
applicable exception under 42 U.S.C. (S)1395nn.
2.23 Hospital Privileges. Schedule 2.23 hereto lists all of the hospitals
------------------- -------------
at which each Stockholder is a member of the medical staff.
2.24 Employment Agreements. No event permitting termination under the
---------------------
Employment Agreements, if they were in effect at such time of such event, shall
have occurred at any time prior to the Closing Date. Except as set forth on
Schedule 2.24, no Stockholder has any current intention of terminating an
- -------------
Employment Agreement with Flagship prior to the termination of its initial five
(5) year term (provided, that, the foregoing shall in no way limit any
Stockholder's rights pursuant to Section 3 of the letter agreement among PQC,
Flagship and the Stockholder dated as of the Closing Date).
2.25 Powers of Attorney. Except as set forth in Schedule 2.25, there are
------------------
no outstanding powers of attorney executed on behalf of the Company.
2.26 Employees. Schedule 2.26 contains a list of all employees of the
--------- -------------
Company, other than the Stockholders, along with the position and the rate of
compensation of each such person. To the knowledge of the Company, any of the
Stockholders, or any of the Optionholders, no employee or group of employees has
any plans to terminate employment with the Company or not to continue as an
employee of the Surviving Corporation after the Effective Time. The Company is
not
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<PAGE>
a party to or bound by any collective bargaining agreement, nor has it
experienced any strikes, grievances, claims of unfair labor practices or other
collective bargaining disputes.
2.27 Environmental Matters.
---------------------
(a) To the knowledge of the Company, or any Stockholder or
Optionholder, the Company has complied with all applicable Environmental Laws
(as defined below). There is no pending or, to the knowledge of the Company or
any Stockholder, threatened civil or criminal litigation, written notice of
violation, formal administrative proceeding, or investigation, inquiry or
information request by any Governmental Entity, relating to any Environmental
Law involving the Company. For purposes of this Agreement, "Environmental Law"
means any federal, state or local law, statute, rule or regulation or the common
law relating to the environment or occupational health and safety, including
without limitation any statute, regulation or order pertaining to (i) treatment,
storage, disposal, generation and transportation of industrial, toxic or
hazardous substances or solid or hazardous waste; (ii) air, water and noise
pollution; (iii) groundwater and soil contamination; (iv) the release or
threatened release into the environment of industrial, toxic or hazardous
substances, or solid or hazardous waste, including without limitation emissions,
discharges, injections, spills, escapes or dumping of pollutants, contaminants
or chemicals; (v) underground and other storage tanks or vessels, abandoned,
disposed or discarded barrels, containers and other closed receptacles; (vi)
health and safety of employees and other persons; and (vii) manufacture,
processing, use, distribution, treatment, storage, disposal, transportation or
handling of pollutants, contaminants, chemicals or industrial, toxic or
hazardous substances or oil or petroleum products or solid or hazardous waste.
As used above, the terms "release", and "environment" shall have the meaning set
forth in the federal Comprehensive Environmental Compensation, Liability and
Response Act of 1980 ("CERCLA").
(b) To the knowledge of the Company, or any Stockholder or
Optionholder, there have been no releases of any Materials of Environmental
Concern (as defined below) into the environment at any parcel of real property
or any facility formerly or currently owned, operated or controlled by the
Company. With respect to any such releases of Materials of Environmental
Concern, the Company has given all required notices to Governmental Entities
(copies of which have been provided to PQC in its due diligence process). The
Company is not aware of any releases of Materials of Environmental Concern at
parcels of real property or facilities other than those owned, operated or
controlled by the Company that could reasonably be expected to have an impact on
the real property or facilities owned, operated or controlled by the Company.
For purposes of this Agreement, "Materials of Environmental Concern" means any
chemicals, pollutants or contaminants, hazardous substances (as such term is
defined under CERCLA), solid wastes and hazardous
-17-
<PAGE>
wastes (as such terms are defined under the federal Resources Conservation and
Recovery Act), toxic materials, oil or petroleum and petroleum products.
(c) Set forth in Schedule 2.27 is a list of all environmental reports,
-------------
investigations and audits relating to premises currently or previously owned or
operated by the Company (whether conducted by or on behalf of the Company or a
third party, and whether done at the initiative of the Company or directed by a
Governmental Entity or other third party) which the Company has possession of or
access to.
2.28 Disclosure. No representation or warranty by the Company, the
----------
Stockholders or the Optionholders contained in this Agreement or in any other
document delivered to Flagship or PQC in connection with their due diligence
investigation of the Company, taken as a whole, contains or will contain any
untrue statement of a material fact or omits or will omit to state any material
fact necessary, in light of the circumstances under which it was or will be
made, in order to make the statements herein or therein not misleading. The
Company, the Stockholders and the Optionholders have disclosed to PQC all
material information relating to the Practice, the Company, the Stockholders and
the Optionholders and the transactions contemplated by this Agreement.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF PQC
AND FLAGSHIP
Each of Flagship and PQC jointly and severally represents and warrants to
the Company, the Stockholders and the Optionholders as of the date hereof and as
of the Effective Time as follows:
3.1 Organization. Each of Flagship and PQC is a corporation duly
------------
organized, validly existing and in good standing under the laws of the
jurisdictions of their incorporation, and each of Flagship and PQC has the power
and authority to carry on its business as presently being conducted. PQC has
provided the Company with complete and accurate copies of the Certificate of
Incorporation and bylaws of PQC and the Articles of Incorporation and bylaws of
Flagship. Flagship and PQC each is duly qualified and is in good standing as a
foreign corporation in each jurisdiction where the nature of its business,
properties or other activities requires it to be qualified.
3.2 Capitalization of Flagship and PQC. The authorized capital stock of
----------------------------------
PQC consists of 140,000,000 shares of Class A Common Stock, par value $0.01 per
share, of which 20,151,864 Class A shares are outstanding, 6,727,043 shares of
Class B-1 Common Stock, par value $0.01 per share of which 2,809,296 shares are
-18-
<PAGE>
outstanding, 4,287,957 shares of Class B-2 Common Stock, par value $0.01 per
share, of which 1,790,704 shares are outstanding, 27,692,309 shares of Class C
Common Stock of which 7,692,309 are outstanding and 10,000,000 shares of
Preferred Stock, par value $0.01 per share, of which no shares are outstanding.
Except for Physicians Quality Care of Massachusetts, Inc. and Physician Quality
Care of Maryland, Inc., PQC is not the owner of record of the equity securities
of any issuer. On the Closing Date, Flagship's authorized capital stock will
consist of 1,000 shares of common stock, $5.00 par value per share, of which
1,000 shares will be outstanding. Except as set forth in Schedule 3.2, there
------------
are not, and on the Closing Date there will not be, outstanding (i) any options,
warrants or other rights to purchase any capital stock of PQC or Flagship; (ii)
any securities convertible into or exchangeable for shares of such stock; or
(iii) any other commitments of any kind for the issuance of additional shares of
capital stock or options, warrants or other securities of PQC or Flagship.
Except as disclosed on Schedule 3.2, there are no agreements, voting trusts,
------------
proxies or understandings with respect to the voting, or registration under the
Securities Act of 1933 of any shares of PQC or Flagship except for the
Stockholders Agreement and the Shareholder Designation and Stock Transfer
Agreement by and among PQC, Flagship and the sole shareholder of Flagship dated
as of the date hereof (the "Designation Agreement").
3.3 Authorization. The execution and delivery of this Agreement and the
-------------
other agreements, documents and instruments to be executed and delivered by
Flagship and PQC pursuant hereto and the consummation by Flagship and PQC of the
transactions contemplated hereby and thereby will, on the Closing Date, have
been authorized by all necessary corporate action on the part of PQC and
Flagship.
3.4 Valid and Binding Agreement. Each of Flagship and PQC has the
---------------------------
necessary power and authority to enter into this Agreement and the other
agreements, documents and instruments to be executed and delivered by Flagship
and PQC pursuant hereto, and to carry out the transactions contemplated hereby
and thereby. When fully executed and delivered, this Agreement and each of the
other agreements, documents and instruments to be executed and delivered by
Flagship and PQC pursuant hereto will constitute valid and binding agreements of
Flagship and PQC, enforceable against them in accordance with their terms,
except to the extent that enforceability is limited pursuant to bankruptcy or
similar laws or by general principles of equity.
3.5 No Violation. Neither the execution and delivery of this Agreement or
------------
the other agreements, documents and instruments to be executed and delivered by
Flagship and PQC pursuant hereto nor the consummation by Flagship and PQC of the
transactions contemplated hereby or thereby (a) will violate any provision of
the Certificate of Incorporation or bylaws of PQC or the Articles of
Incorporation or bylaws of Flagship, each as currently in effect, (b) will
violate or conflict with any applicable statute, law, ordinance, rule,
regulation, order, judgment or decree, except
-19-
<PAGE>
that no representation or warranty is made under this Section with regard to the
laws referred to in Section 3.9, or (c) will violate any contract or commitment
which violation would have the effect of preventing PQC or Flagship from
performing its obligations hereunder or preventing PQC or Flagship or any of
their respective affiliates from consummating the transactions contemplated
herein and in the agreements and instruments to be executed and delivered by
Flagship and PQC and their respective affiliates in connection therewith.
3.6 Consents; Filings. Except as set forth in Schedule 3.6, no
-----------------
registration or filing with, or consent, approval, permit, authorization or
action by, any third party (including, without limitation, any federal, state,
local, foreign or other governmental agency, instrumentality, commission,
authority, board or body or other person or entity) is required to be made by
Flagship or PQC in connection with the execution and delivery by Flagship and
PQC of this Agreement or the other agreements, documents and instruments to be
executed and delivered by Flagship and PQC pursuant hereto or the consummation
by Flagship and PQC of the transactions contemplated hereby or thereby.
3.7 Capital Stock. All shares of Common Stock issued to any Stockholder
-------------
in connection with the transactions contemplated by this Agreement shall be duly
authorized, validly issued, fully paid and nonassessable and not subject to any
pre-emptive rights created by statute, PQC's Certificate of Incorporation or
bylaws, or any agreement (other than the Stockholders Agreement) to which PQC is
a party or by which PQC is bound. The shares of Common Stock included in the
Merger Consideration are being issued pursuant to PQC's Registration Statement
on Form S-1, which has been declared effective by the Securities and Exchange
Commission and the Securities Division of the State of Maryland.
3.8 Brokers. Neither PQC nor Flagship is obligated to pay, nor has PQC or
-------
Flagship retained any broker or finder or other person who is entitled to, any
broker's or finder's fee or any other commission or financial advisory fee based
on any agreement or understanding made by PQC or Flagship in connection with the
transactions contemplated hereby.
3.9 Fraud and Abuse; Stark Law. Neither Flagship nor PQC has engaged in
--------------------------
any activities which are prohibited under 42 U.S.C. (S)1320a-7b or 42 U.S.C.
(S)1395nn et seq., or the regulations promulgated thereunder pursuant to such
-- ---
statutes, or related state or local statutes or regulations, 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
-20-
<PAGE>
benefit or payment on its own behalf or on behalf of another, with intent to
fraudulently secure such benefit of payment; (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
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 or item for
which payment may be made in whole or in part by Medicare or Medicaid; and (v)
referring a patient for Designated Health Services (within the meaning of 42
U.S.C. (S)1395nn) when the referring physician has a financial relationship with
the entity to which the referral is made in the absence of an applicable
exception under 42 U.S.C. (S)1395nn.
3.10 Litigation. Except as set forth on Schedule 3.10, there is not, and
---------- -------------
during the past five (5) years there have not been any Actions pending or, to
the best of Flagship and PQC's knowledge: (a) threatened against, related to or
affecting (i) PQC or Flagship, (ii) any officers, directors or employees of
Flagship or PQC as such, or (iii) any shareholder of Flagship or PQC in such
shareholder's capacity as a shareholder of Flagship or PQC; (b) seeking to
delay, limit or enjoin the transactions contemplated by this Agreement; (c) that
involves the risk of criminal liability; or (d) in which Flagship or PQC is a
plaintiff. Neither Flagship nor PQC is in default with respect to or subject to
any judgment, order, writ, injunction or decree of any court or governmental
agency, and there are no unsatisfied judgments against Flagship or PQC.
3.11 Disclosure. No representation or warranty by Flagship or PQC
----------
contained in this Agreement or in any other document delivered to the Company in
connection with its due diligence investigation of Flagship or PQC, including
the Preliminary Prospectus dated June 7, 1997, together with any amendment or
supplement thereto provided to the Company prior to the Class Date, taken as a
whole, contains or will contain any untrue statement of a material fact or omits
or will omit to state any material fact necessary, in light of the circumstances
under which it was or will be made, in order to make the statements herein or
therein not misleading.
ARTICLE IV
COVENANTS
4.1 Reasonable Efforts to Close. Each of Company, the Stockholders, the
---------------------------
Optionholders, Flagship and PQC shall use its or their respective reasonable
efforts to proceed to the closing of the transactions contemplated hereby and to
satisfy any of
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<PAGE>
the conditions precedent to the other Parties' obligations set forth in Articles
V and VI to the extent such conditions are within such Party's control.
4.2 Notices and Consents. The Company and each Stockholder shall use its
--------------------
best efforts to obtain, at its expense, all such waivers, permits, consents,
approvals or other authorizations from third parties and Governmental Entities,
and to effect all such registrations, filings and notices with or to third
parties and Governmental Entities, as may be required by or with respect to the
Company or any Stockholder in connection with the transactions contemplated by
this Agreement, including without limitation those listed in Schedule 2.6.
------------
4.3 Conduct of Business. Without the prior written consent of PQC (which
-------------------
consent shall not be unreasonably withheld), the Company shall not and the
Stockholders shall not permit the Company to:
(a) take any action to amend the Company's Articles of Incorporation
or bylaws or other organizational documents;
(b) issue any stock, bonds or other corporate securities or grant any
option or issue any warrant to purchase or subscribe to any of such securities
or issue any securities convertible into such securities or authorize the
transfer of any of its outstanding capital stock;
(c) split, combine or reclassify any shares of its capital stock;
declare, set aside or pay any dividend or other distribution (whether in cash,
stock or property or any combination thereof) in respect of its capital stock;
or make any payment under the Company's Stockholder Benefits Plan or similar
Plan if such payment would cause, or is reasonably expected to cause, the
Company to fail to satisfy any of the conditions to Closing in Article V of this
Agreement.
(d) incur any obligations or liabilities (absolute or contingent)
greater than one thousand dollars ($1,000) in the aggregate, except current
liabilities incurred and obligations under contracts entered into in the
Ordinary Course of Business;
(e) acquire, sell, lease, encumber or dispose of any assets or
property, corporation, partnership, association or other business, other than
purchases and sales of assets in the Ordinary Course of Business;
(f) discharge or satisfy any Security Interest or pay any obligation
or liability other than in the Ordinary Course of Business;
(g) mortgage or pledge any of its property or assets or subject any
such assets to any Security Interest;
-22-
<PAGE>
(h) take any action or fail to take any action within their respective
control and permitted by this Agreement with the knowledge that such action or
failure to take action would result in (i) any of the representations and
warranties of the Company and the Stockholders set forth in this Agreement
becoming untrue or (ii) any of the conditions to the Merger set forth in Article
V not being satisfied;
(i) merge or consolidate with or into any corporation or other entity;
(j) make, accrue or become liable for any bonus, profit sharing or
incentive payment, except for accruals under existing plans, if any, or increase
the rate of compensation payable or to become payable by it to any of its
officers, directors or employees, other than increases in the Ordinary Course of
Business consistent with past practice;
(k) make any election or give any consent under the Code or the tax
statutes of any state or other jurisdiction or make any termination, revocation
or cancellation of any such election or any consent or compromise or settle any
claim for past or present tax due;
(1) waive any rights of material value;
(m) modify, amend, alter or terminate any of its executory contracts
of a material value or which are material in amount;
(n) take any act or permit to occur any omission constituting a breach
or default under any contract, indenture or agreement by which it or its
properties are bound;
(o) fail to use its reasonable efforts to: (i) preserve the
possession and control of its assets and the Practice; (ii) keep in faithful
service its present officers and employees; (iii) preserve the goodwill of its
patients, suppliers, agents, brokers and others having business relations with
it; and (iv) keep and preserve its business existing on the date hereof until
after the Closing Date;
(p) fail to operate its business and maintain its books, accounts and
records in the customary manner and in the Ordinary Course of Business and
maintain in good repair its business premises, fixtures, machinery, furniture
and equipment;
(q) enter into any leases, contracts, agreements or understandings
which are required to be performed in whole or in material part after the
Closing Date;
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<PAGE>
(r) engage any new employee except in the Ordinary Course of Business;
(s) materially alter the terms, status or funding condition of any
Employee Benefit Plan; or
(t) commit or agree to do any of the foregoing in the future.
4.4 Access to Management, Properties and Records. From the date of this
--------------------------------------------
Agreement until the Closing Date, the Company shall afford the officers,
attorneys, accountants and other authorized representatives of PQC and Flagship
free and full access upon reasonable notice and during normal business hours to
all management personnel, offices, properties, books and records of the Company,
and all properties under the management of the Company and all records relating
thereto, so that PQC and Flagship may have full opportunity to make such
investigation as they shall desire to make of the management, business,
properties and affairs of the Company and the properties under the management of
the Company, and PQC shall be permitted to make abstracts from, or copies of,
all such books and records. The Company shall furnish to PQC such financial and
operating data and other information as to the business of the Company as PQC
shall reasonably request.
4.5 Taxes. The Company will, on a timely basis, file all Tax Returns for
-----
and pay any and all taxes which shall become due on or prior to the Closing
Date.
4.6 Compliance with Laws. The Company, the Stockholders and the
--------------------
Optionholders will comply in all material respects with all laws and regulations
which are applicable to it or each of them and the Practice or to the conduct of
its Practice and will perform and comply in all material respects with all
contracts, commitments and obligations by which it or each of them is bound.
4.7 Exclusive Dealing. None of the Company, the Stockholders or the
-----------------
Optionholders will not, directly or indirectly, through any officer, director,
agent or otherwise, (a) solicit, initiate or encourage submission of proposals
or offers from any person relating to any affiliation transaction between the
Company, the Stockholders or the Optionholders and any health care company or
practice management company or any acquisition or purchase of all or a material
portion of the assets of the Company, or any equity interest in the Company or
any equity investment, merger, consolidation or business combination with the
Company, or (b) participate in any discussions or negotiations regarding, or
furnish to any other person, any non-public information with respect to, or
otherwise cooperate in any way with, or assist or participate in, facilitate or
encourage, any effort or attempt by any other person to do or seek any of the
foregoing except to inform such person of the Company's obligations hereunder.
-24-
<PAGE>
4.8 Notice of Breaches. The Company, Stockholders and Optionholders shall
------------------
promptly deliver to PQC written notice of any event or development that would
(a) render any statement, representation or warranty of the Company in this
Agreement (including the Disclosure Schedule) inaccurate or incomplete in any
material respect, or (b) constitute or result in a breach by the Company,
Stockholders or Optionholders of, or a failure by the Company, Stockholders or
Optionholders to comply with, any agreement or covenant in this Agreement
applicable to such Party. PQC or Flagship shall promptly deliver to the Company
written notice of any event or development that would (i) render any statement,
representation or warranty of PQC or Flagship in this Agreement inaccurate or
incomplete in any material respect, or (ii) constitute or result in a breach by
PQC or Flagship of, or a failure by PQC or Flagship to comply with, any
agreement or covenant in this Agreement applicable to such Party. No such
disclosure shall be deemed to avoid or cure any such misrepresentation or
breach.
4.9 Severance Obligations. The Company shall satisfy all severance
---------------------
obligations related to each person employed by the Company prior to or at the
Closing Date who is, or as a consequence of the transactions contemplated by
this Agreement will be, entitled to any severance or compensation from the
Company, any Stockholder or any Optionholder.
4.10 Confidentiality. All information not previously disclosed to the
---------------
public or generally known to persons engaged in the respective businesses of the
Company, the Practice, Flagship or PQC which shall have been furnished by PQC or
the Company to the other Party in connection with the transactions contemplated
hereby or as provided pursuant to this Agreement shall not be disclosed to any
person other than their respective employees, directors, attorneys, accountants
or financial advisors or other than as expressly contemplated herein or as
required by law or legal process. In the event that the transactions
contemplated by this Agreement shall not be consummated, all such information
which shall be in writing shall upon request be returned to the Party furnishing
the same, including, to the extent reasonably practicable, all copies or
reproductions thereof which may have been prepared, and none of the Parties,
without the consent of PQC and the Company, shall at any time thereafter
disclose to third parties, or use, directly or indirectly, for its or their own
benefit, any such information, written or oral, about the business of the other
Party hereto.
4.11 Provision of Certain Closing Date Financial Information. Two (2)
-------------------------------------------------------
days prior to the Closing Date, the Company shall deliver to Flagship and PQC a
certificate setting forth in detail to the best of the Company's knowledge; (i)
all liabilities of the Company, including liabilities for accrued vacation and
any Employee Benefit Plan (as defined in Section 2.21) that shall accrue on or
before the Closing Date but shall remain unpaid on the Closing Date; (ii) all
prepaid expenses of the Company that relate to a period subsequent to the
Closing Date; (iii) all cash,
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<PAGE>
cash equivalents and accounts receivables expected to be reflected in accordance
with generally accepted accounting principals on the Company's records on the
Closing Date; and (iv) the Net Worth (as defined in Section 5.15) of the Company
as of the Closing Date.
4.12 Continuing Obligation to Inform. From time to time prior to the
-------------------------------
Closing, the Parties shall deliver or cause to be delivered to the other Parties
supplemental information concerning events subsequent to the date hereof which
would render any statement, representation or warranty in this Agreement or any
information contained in any Schedule inaccurate or incomplete in any material
respect at any time after the date hereof until the Closing Date.
ARTICLE V
CONDITIONS TO FLAGSHIP'S AND PQC'S OBLIGATIONS
The obligation of each of Flagship and PQC to consummate the Merger is
subject to the satisfaction on the Closing Date of the following conditions
precedent, each of which may be waived in writing by Flagship and PQC:
5.1 Approval of Merger. This Agreement and the Merger shall have been
------------------
unanimously approved by the Board of Directors of the Company and the
Stockholders and no Stockholder shall be entitled to exercise appraisal rights.
5.2 Continued Truth of Representations and Warranties of The Company;
-----------------------------------------------------------------
Compliance with Covenants and Obligations. The representations and warranties
- -----------------------------------------
of the Company, the Stockholders and Optionholders shall be true on and as of
the Closing Date as though such representations and warranties were made on and
as of such date, except for any changes permitted by the terms hereof or
consented to in writing by Flagship and PQC. The Company and the Stockholders
shall have performed and complied with all terms, conditions, covenants,
obligations, agreements and restrictions required by this Agreement to be
performed or complied with by it prior to or at the Closing Date.
5.3 No Proceedings or Litigation. No action by any Governmental Entity or
----------------------------
other person shall have been instituted or threatened which questions the
validity or legality of the transactions contemplated hereby and which could
reasonably be expected to result in a Material Adverse Effect. There shall not
be any statute, rule or regulation that makes the Merger or the other
transactions contemplated hereby illegal or otherwise prohibited.
5.4 Material Changes. Between June 30, 1996 and the Closing, there shall
----------------
not have been any material adverse change in the business, prospects, operations
or conditions of the Company or the Practice.
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5.5 Stockholders Agreement. The Stockholders and Optionholders shall have
----------------------
become parties to and be in compliance with the Stockholders Agreement.
5.6 Due Diligence. The Company, the Stockholders and the Optionholders
-------------
shall have provided to PQC and Flagship access to all material and information
requested by PQC and Flagship to conduct a thorough due diligence review of all
aspects of the Company and the Practice. PQC and Flagship shall be satisfied
with such review, both in scope and substance.
5.7 Real Estate Arrangements. PQC shall have entered into leases,
------------------------
subleases or assignments of leases for each of the existing premises of the
Company, which leases shall be in form and on terms satisfactory to PQC.
5.8 Government and Third Party Approvals. The transactions contemplated
------------------------------------
by this Agreement shall have been approved by all government agencies and third
parties from whom such approval is required, including, but not limited to, Bain
Capital, Inc. and Bankers Trust Company.
5.9 Corporate Approvals. This Agreement and the transaction contemplated
-------------------
hereby shall have been approved by the Boards of Directors of PQC and Flagship,
the Joint Policy Board of Flagship, the Class B shareholders of PQC and, to the
extent required, by the physicians affiliated with Flagship.
5.10 Financing. PQC shall have obtained the financing equal to the cash
---------
included in the Merger Consideration from affiliates of Bain Capital, Inc. or
other sources acceptable to PQC.
5.11 S-1 Registration Statement. The Securities and Exchange Commission
--------------------------
and the Securities Division of the State of Maryland shall have declared
effective PQC's Registration Statement on Form S-1.
5.12 Employment Agreements. At least 80% of the Stockholders (and all of
---------------------
the Stockholders listed on a Schedule 5.12) shall have entered into Employment
-------------
Agreements with Flagship in the form attached hereto as Exhibit B.
5.13 Amendment to Services Agreement. Flagship and PQC shall have entered
-------------------------------
into an Amended and Restated Services Agreement in substantially the form
attached hereto as Exhibit C.
---------
5.14 Net Asset Test. On the Closing Date, the Company shall have cash,
---------------
cash equivalents and accounts receivable of at least $ and a Net Assets
(being total assets less total liabilities, in each case determined in
accordance with generally accepted accounting principals) equal to at least
$2,314,519. Since the date of the
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Interim Financial Statements, the Company shall not have incurred any
liabilities other than in the Ordinary Course of Business.
5.15 Closing Deliveries. Simultaneously with the Closing, the Company,
------------------
the Stockholders and the Optionholders shall deliver or cause to be delivered to
PQC the following:
(a) an Instrument of Joinder to Stockholders Agreement executed by
each of the Stockholders in a form reasonably acceptable to PQC;
(b) certificates of duly authorized officers of the Company, dated the
Closing Date, setting forth the resolutions of the Board of Directors and
Stockholders of the Company authorizing the execution and delivery by the
Company of this Agreement and the consummation of the transactions contemplated
hereby, and certifying that such resolutions were duly adopted and have not been
rescinded or amended;
(c) a report of a reputable lien search firm indicating that there are
no liens of record against any of the Company's assets (except for liens which
are (i) acceptable to Flagship and PQC in their sole discretion or (ii) arising
under equipment leases listed on Schedule 5.15);
---------------
(d) a release from any party with a mortgage or lien on any of the
assets of the Company, except for liens which, pursuant to subsection (c) of
this Section 5.16, are acceptable to Flagship and PQC;
(e) the consents of all parties necessary for the consummation of the
Merger and to consummate the other transactions contemplated by this Agreement;
(f) a tax lien waiver, if required, from the Comptroller of the
Treasury of the State of Maryland; and
(g) such other agreements, consents and documents as PQC and Flagship
shall reasonably request in connection with (i) their due diligence
investigation of the Company, (ii) the affiliation of the Stockholders with
Flagship and PQC, (iii) the transactions contemplated by this Agreement and the
Employment Agreements.
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ARTICLE VI
CONDITIONS TO OBLIGATIONS OF THE COMPANY,
THE STOCKHOLDERS AND THE OPTIONHOLDERS
The obligations of Company, the Stockholders and the Optionholders under
this Agreement are subject to the fulfillment, at the Closing Date, of the
following conditions precedent, each of which may be waived in writing in the
sole discretion of Company:
6.1 Continued Truth of Representations and Warranties of PQC and Flagship;
----------------------------------------------------------------------
Compliance with Covenants and Obligations. The representations and warranties
- -----------------------------------------
of Flagship and PQC shall be true on and as of the Closing Date as though such
representations and warranties were made on and as of such date, except for any
changes permitted by the terms hereof or consented to in writing by the Company.
Flagship and PQC shall have performed and complied with all terms, conditions,
covenants, obligations, agreements and restrictions required by this Agreement
to be performed or complied with by it prior to or at the Closing Date.
6.2 No Proceedings or Litigation. No action by any Governmental Entity or
----------------------------
other person shall have occurred or shall have been instituted or threatened
which questions the validity or legality of the transactions contemplated hereby
and which could reasonably be expected to result in a Material Adverse Effect.
There shall not be any statute, rule or regulation that makes the Merger or the
other transactions contemplated hereby illegal or otherwise prohibited.
6.3 Offers of Employment. Flagship shall have extended offers of
--------------------
employment upon the same financial terms as the employee received from the
Company on the date of execution hereof, subject to any subsequent changes
acceptable to the Company and PQC, to the persons listed on Schedule 6.3.
------------
6.4 Real Estate Arrangements. PQC shall have entered into leases,
------------------------
subleases or assignments of leases for each of the existing premises of the
Company, which leases shall be in form and on terms satisfactory to PQC.
6.5 Government and Third Party Approvals. The transactions contemplated
------------------------------------
by this Agreement shall have been approved by all government agencies and third
parties from whom such approval is required, including, but not limited to, the
Class B shareholders of PQC and Bankers Trust Company.
6.6 Corporate Approvals. This Agreement and the transaction contemplated
-------------------
hereby shall have been approved by the Boards of Directors of PQC and Flagship,
the Joint Policy Board of Flagship, the Class B shareholders of PQC and, to the
extent required, by the physicians affiliated with Flagship.
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<PAGE>
6.7 Financing. PQC shall have obtained the financing equal to the cash
---------
included in the Merger Consideration.
6.8 S-1 Registration Statement. The Securities and Exchange Commission
--------------------------
shall have declared effective PQC's Registration Statement on Form S-1.
6.9 Letter Agreement. PQC, Flagship and the Stockholders shall have
----------------
entered into the Letter Agreement ("Letter Agreement") attached hereto as
Exhibit D.
6.10 Amendment to Services Agreement. Flagship and PQC shall have entered
-------------------------------
into an Amended and Restated Services Agreement in substantially the form
attached hereto as Exhibit C.
----------
6.11 Material Changes. Between March 31, 1997, and the Closing, there
----------------
shall not have been any Material Adverse Change in the business, prospects,
operations or conditions of Flagship or PQC.
6.12 Due Diligence. PQC shall have provided to the Company access to all
-------------
material and information requested by the Company to conduct a thorough due
diligence review of all aspects of PQC. The Company shall be satisfied with
such review, both in scope and substance.
6.13 Physicians. Flagship shall have offered to enter into Employment
-----------
Agreements with each of the Stockholders in the form attached hereto as Exhibit
B.
6.14 Deliveries by PQC. Simultaneously with the Closing, PQC shall
-----------------
deliver or cause to be delivered to the Stockholders and Optionholders the
following:
(a) the Merger Consideration.
(b) certificates of duly authorized officers of Flagship and PQC,
dated the Closing Date, setting forth the resolutions of the Board of Directors
of Flagship and PQC authorizing the execution and delivery by Flagship and PQC
of this Agreement and the consummation of the transactions contemplated hereby,
and certifying that such resolutions were duly adopted and have not been
rescinded or amended;
(c) such other instruments, consents and documents as the Company
shall reasonably request in connection with (i) its due diligence investigation
of PQC and (ii) the transactions contemplated by this Agreement.
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<PAGE>
ARTICLE VII
INDEMNIFICATION
7.1 Indemnification.
---------------
(a) The Stockholders and Optionholders, severally and not jointly,
shall indemnify, defend, and hold harmless PQC, Flagship and their respective
subsidiaries and affiliates and their directors, officers, employees and agents
or the successor of any of the foregoing (collectively, the "PQC Indemnified
Parties"), and reimburse the PQC Indemnified Parties for, from and against all
payments, demands, claims, suits, judgments, liabilities, losses, costs, damages
and expenses, including, without limitation, interest, penalties and reasonable
attorneys' fees, disbursements and expenses (collectively, "Damages"), imposed
on or incurred by any PQC Indemnified Party which relate to or arise out of:
(i) breach of any representation and warranty of, or covenant or
agreement to be performed by, the Company, any Stockholder or any Optionholder,
in each case contained in this Agreement or the Stockholders Agreement;
(ii) failure of any Stockholder to have good, valid and marketable
title to the issued and outstanding Shares held by such Stockholder, free and
clear of all liens, claims, pledges, options, adverse claims or charges of any
nature whatsoever;
(iii) any claim by a Stockholder, an Optionholder or former
Stockholder or Optionholder of the Company, or any other person, firm,
corporation or entity, seeking to assert, or based upon: (A) ownership or rights
to ownership of any shares of stock of the Company; (B) any rights of a
Stockholder, including any options, preemptive rights or rights to notice or to
vote; (C) any rights under the Articles of Incorporation or bylaws of the
Company; or (D) any claim that such Stockholder's shares were wrongfully
repurchased by the Company;
(iv) any Tax liabilities arising out of the operation of the
Company prior to the Closing Date provided however, that with respect to any
Stockholder, there is excluded from Section 7.1 (a)(iv) any amounts actually
deducted as a Deductible Expense of such Stockholder under Section 10.4 of
Appendix A of the Services Agreement;
(v) the conduct of the Practice prior to the Closing Date, except
for liabilities described in Section 2.8(a);
-31-
<PAGE>
(vi) any liability of the Company incurred prior to the Closing
Date that is not described in Schedule 2.8(a); and
----------------
(vii) any liability incurred by PQC or Flagship relating to
agreements or obligations of the Company or any Stockholder, whether written or
oral, that are not specifically identified on the Disclosure Schedule.
(b) PQC and Flagship shall indemnify and hold harmless the Company and
the Stockholders and their respective agents or the successors of any of the
foregoing (collectively, the "Company Indemnified Parties") and together with
the PQC Indemnified Parties (the "Indemnified Parties"), and reimburse such
Company Indemnified Parties for, from, and against all Damages imposed on or
incurred by such Company Indemnified Parties which relate to or arise out of any
breach of any representation or warranty of, or covenant or agreement to be
performed by, PQC or Flagship, in each case contained in this Agreement.
7.2 Method of Asserting Claims.
--------------------------
(a) An Indemnified Party shall give prompt written notice to an
indemnifying party (the "Indemnifying Party") of any payments, demands, claims,
suits, judgments, liabilities, losses, costs, damages or expenses (a "Claim") in
respect of which such Indemnifying Party has a duty to provide indemnity to such
Indemnified Party under this Article VII, except that any delay or failure so to
notify the Indemnifying Party only shall relieve the Indemnifying Party of its
obligations hereunder to the extent, if at all, that it is prejudiced by reason
of such delay or failure.
(b) If a Claim is brought or asserted by a third party (a "Third-Party
Claim"), the Indemnifying Party shall assume the defense thereof, including the
employment of counsel reasonably satisfactory to the Indemnified Party and the
payment of all expenses. The Indemnified Party shall have the right to employ
separate counsel in such Third-Party Claim and participate in the defense
thereof, but the fees and expenses of such counsel shall be at the expense of
the Indemnified Party. In the event that the Indemnifying Party, within twenty
(20) days after written notice of any Third-Party Claim, fails to assume the
defense thereof, or in the event the Indemnifying Party fails to demonstrate, to
the reasonable satisfaction of the Indemnified Party, that it has sufficient
assets to meet its indemnification obligations hereunder, the Indemnified Party
shall have the right to undertake the defense, compromise or settlement of such
Third-Party Claim for the account of the Indemnifying Party. Anything in this
Section 7.2(b) to the contrary notwithstanding, the Indemnifying Party shall
not, without the Indemnified Party's prior written consent, settle or compromise
any Third-Party Claim or consent to the entry of any judgment with respect to
any Third-Party Claim which would have any adverse effect on the Indemnified
Party, except as provided immediately below. The
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<PAGE>
Indemnifying Party may, without the Indemnified Party's prior written consent,
settle or compromise any such Third-Party Claim or consent to entry of any
judgment with respect to any Third-Party Claim which requires solely money
damages paid by the Indemnifying Party and which includes as an unconditional
term thereof the release by the claimant or the plaintiff of the Indemnified
Party from all liability in respect of such Third-Party Claim.
(c) With respect to any Claim other than a Third Party Claim, the
Indemnifying Party shall have thirty (30) days from receipt of written notice
from the Indemnified Party of such Claim within which to respond thereto. If
the Indemnifying Party does not respond within such thirty (30) day period, the
Indemnifying Party shall be deemed to have accepted responsibility to make
payment and shall have no further right to contest the validity of such Claim.
If the Indemnifying Party notifies the Indemnified Party within such thirty (30)
day period that it rejects such Claim in whole or in part, the Indemnified Party
shall be free to pursue such remedies as may be available to the Indemnified
Party under applicable law.
7.3 Survival. All representations, warranties, covenants and agreements
--------
made by the Parties herein or in any instrument or document furnished in
connection herewith shall survive the Closing and any investigation at any time
made by or on behalf of the Parties hereto. All such representations and
warranties and the Stockholders' obligations pursuant to Section 7.1(a)(i) and
the obligations of PQC and Flagship pursuant to Section 7.1(b) shall expire on
the third anniversary of the Closing Date, except for Claims, if any, asserted
in writing prior to such second anniversary, which shall survive until satisfied
in full or otherwise finally resolved. The obligation of the Stockholders
pursuant to Section 7-1(a)(ii), (iii), (iv), (v), (vi) and (vii) shall survive
until six (6) months after the expiration of the applicable statute of
limitations with respect thereto. All Claims and actions for indemnity pursuant
to this Article VII shall be asserted or maintained in writing by a Party hereto
on or prior to the expiration of such periods.
7.4 Set-off and Recoupment. Any amount or amounts due from any
----------------------
Indemnifying Party to PQC under this Article VII may be paid to PQC, at PQC's
option, by set-off or recoupment against any amounts due to the Indemnifying
Party pursuant to this Agreement or pursuant to any agreement between the
Indemnifying Party and PQC, Flagship or any of their respective affiliates. Any
such set-off will be without prejudice to PQC's right to pursue any other
remedies at law or in equity available to it.
7.5 Limitation on Indemnification.
-----------------------------
(a) Notwithstanding any other term or condition contained herein or
in any other agreement or instrument referred to herein, the indemnification
obligations
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<PAGE>
of each Stockholder under Section 7.1(a)(i) - (vii) shall be limited, in the
aggregate, to the dollar value on the Closing Date of the Merger Consideration
paid to such Stockholder reduced by any amount deducted as a Deductible Expense
of such Stockholder under Section 10.4 of Appendix A of the Services Agreement
resulting from any Tax Liabilities of the Company, if, but only if, the Company
has filed all tax returns based on the good faith determination of its
accountants and paid all taxes shown to be due thereon through the taxable year
ending on the date of the Merger.
(b) Notwithstanding any other term or condition contained herein, PQC
shall not be entitled to any indemnification pursuant to Section 7.1(a)(v), (vi)
or (vii) with respect to any Damages where the indenmitor (or in the case of the
Company, a member of the management committee) did not have knowledge of the
liability giving raise to such Damages prior to the Closing Date, if, and only
if, an amount equal to 100% of such Damages (subject to the limitation in
Section 7.5(a)) is included as a Practice Expense of Pod R pursuant to the
Services Agreement and PQC or Flagship, as in the case may be, is actually
reimbursed for 100% of such Damages (subject to the limitation in Section
7.5(a)) in accordance with terms of the Services Agreement. Notwithstanding any
other term or condition contained herein, PQC shall not be entitled to any
indemnification pursuant to Section 7.1(a) with respect to the tax liability set
forth on Schedule 7.5(b) provided that PQC is reimbursed for such tax liability
-------- ------
over a period of three years (or such longer period as the Internal Revenue
Service may agree) out of the Pod R Account as such term is defined in the
Services Agreement.
(c) No Indemnified Party shall be indemnified and held harmless under
this Article VII from and against any Damages unless the Damages exceed on a
cumulative basis an amount equal to $250,000, in which case an Indemnitor shall
be liable only for Damages in excess of $250,000. The foregoing limitation
shall apply to the Company, Stockholders, and Optionholders in the aggregate and
not individually.
ARTICLE VIII
TERMINATION
8.1 Optional Termination. This Agreement may be terminated and the
--------------------
transaction contemplated herein abandoned at any time prior to the Closing as
follows:
(a) by the mutual consent of the Company, PQC and Flagship;
(b) by the Company, upon a material breach of any representation,
warranty, covenant or agreement on the part of PQC or Flagship set forth in this
Agreement, or if any representation or warranty of PQC or Flagship has become
materially untrue, in either case such that any of the conditions set forth in
Article VI
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<PAGE>
would be incapable of being satisfied by July 31, 1997; provided, that in any
case, a willful breach will be deemed to cause such conditions to be incapable
of being satisfied for purposes of this paragraph (b). Any breach on the part of
PQC or Flagship of the representations and warranties contained in Article III
or the covenants contained in Article IV, which permits termination of this
Agreement shall permit the Company, the Stockholders and the Optionholders to
immediately terminate any other agreement between PQC or Flagship and the
Company, any of the Stockholders.
(c) by PQC and Flagship upon a material breach of any representation,
warranty, covenant or agreement on the part of the Company, the Stockholders or
the Optionholders set forth in this Agreement, or if any representation or
warranty of the Company has become materially untrue, in either case such that
any of the conditions set forth in Article V would be incapable of being
satisfied by July 31, 1997; provided, that in any case, a willful breach will be
deemed to cause such conditions to be incapable of being satisfied for purposes
of this paragraph (c). Any breach on the part of the Company, the Stockholders
or the Optionholders of the representations and warranties contained in Article
II or the covenants contained in Article IV, which permits termination of this
Agreement shall permit PQC and Flagship to immediately terminate any other
agreement between the Company, the Stockholder or the Optionholder and PQC or
Flagship; or
(d) by either Party if the Closing shall not have occurred by July 31,
1997, or such other date agreed to by the Parties.
8.2 Effect of Termination. In the event this Agreement is terminated as
---------------------
provided above, (a) each of PQC, Flagship, the Stockholders, the Optionholders
and the Company shall, upon another Party's request, deliver to such other Party
all documents previously delivered (and copies thereof in its possession)
concerning one another and the transactions contemplated hereby as required by
Section 4.10 above, and (b) none of the Parties nor any of their respective
Stockholders, directors, officers or agents shall have any liability to the
other Parties, except for any deliberate breach or deliberate omission resulting
in a material breach of any of the provisions of this Agreement. In such case,
the breaching Party shall be liable only for the expenses and costs of the non-
breaching Party, and in no event shall either Party be liable for anticipated
profits or consequential damages. After termination each Party shall keep
confidential all information provided by the others pursuant to this Agreement
which is not in the public domain, shall exercise the same degree of care in
handling such information as it would exercise with similar information of its
own, and shall return any such information upon another Party's request.
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<PAGE>
ARTICLE IX
MISCELLANEOUS
9.1 Press Releases and Announcements. No Party shall issue any press
--------------------------------
release or public disclosure relating to the subject matter of this Agreement
without the prior written approval of the other Parties; provided, however, that
-------- -------
any Party may make any public disclosure it believes in good faith is required
by law or regulation (in which case the disclosing Party shall advise the other
Parties and provide them with a copy of the proposed disclosure prior to making
the disclosure).
9.2 No Third Party Beneficiaries. This Agreement shall not confer any
----------------------------
rights or remedies upon any person other than the Parties and their respective
successors and permitted assigns; provided, however, that the provisions in
--------
Article I concerning payment of the Merger Consideration are intended for the
benefit of the Stockholders and Optionholder.
9.3 Entire Agreement. This Agreement (including the documents referred to
----------------
herein) constitutes the entire agreement among the Parties and supersedes any
prior understandings, agreements, or representations by or among the Parties,
written or oral, with respect to the subject matter hereof.
9.4 Succession and Assignment. This Agreement shall be binding upon and
-------------------------
inure to the benefit of the Parties named herein and their respective successors
and permitted assigns. No Party may assign either this Agreement or any of its
rights, interests, or obligations hereunder without the prior written approval
of each of the other Parties.
9.5 Counterparts. This Agreement may be executed in two (2) or more
------------
counterparts, each of which shall be deemed an original but all of which
together shall constitute one (1) and the same instrument.
9.6 Headings. The section headings contained in this Agreement are
--------
inserted for convenience only and shall not affect in any way the meaning or
interpretation of this Agreement.
9.7 Notices. All notices, requests, demands, claims, and other
-------
communications hereunder shall be in writing. Any notice, request, demand,
claim, or other communication hereunder shall be deemed duly delivered two (2)
business days after it is sent by registered or certified mail, return receipt
requested, postage prepaid, or one (1) business day after it is sent via a
reputable nationwide overnight courier service, in each case to the intended
recipient as set forth below:
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<PAGE>
If to the Company or the Stockholders:
- --------------------------------------
To the last known home address of each Stockholder as maintained in the records
of Flagship with a copy to:
Epstein, Becker & Green, P.C.
1227 25th Street, N.W.
Washington, DC 20037-1156
Attention: Mark Lutes, Esq.
If to PQC or Flagship:
- ----------------------
Physicians Quality Care, Inc.
950 Winter Street
Suite 2410
Waltham, MA 02154
Attention: Jerilyn Asher
With a copy to:
David C. Phelan, Esq.
Hale and Dorr
60 State Street
Boston, MA 02109
Any Party may give any notice, request, demand, claim, or other communication
hereunder using any other means (including personal delivery, expedited courier,
messenger service, telecopy, telex, ordinary mail, or electronic mail), but no
such notice, request, demand, claim, or other communication shall be deemed to
have been duly given unless and until it actually is received by the Party for
whom it is intended. Any Party may change the address to which notices,
requests, demands, claims, and other communications hereunder are to be
delivered by giving the other Parties notice in the manner herein set forth.
9.8 Governing Law. This Agreement shall be governed by and construed in
-------------
accordance with the internal laws (and not the law of conflicts) of the State of
Maryland.
9.9 Amendments and Waivers. The Parties may mutually amend any provision
----------------------
of this Agreement at any time prior to the Effective Time. No amendment of any
provision of this Agreement shall be valid unless the same shall be in writing
and signed by all of the Parties. No waiver by any Party of any default,
misrepresentation, or breach of warranty or covenant hereunder, whether
intentional or not, shall be deemed to extend to any prior or subsequent
default, misrepresentation, or breach of warranty or covenant hereunder or
affect in any way any rights arising by virtue of any prior or subsequent such
occurrence.
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<PAGE>
9.10 Severability. If any term, provision, covenant or restriction of this
------------
Agreement is held by a court of competent jurisdiction to be invalid, void or
unenforceable, the remainder of the terms, provisions, covenants and
restrictions of this Agreement shall remain in full force and effect and shall
in no way be affected, impaired or invalidated.
9.11 Expenses. Except as otherwise expressly provided herein, each Party
--------
to this Agreement shall pay its own costs and expenses in connection with the
trans actions contemplated hereby.
9.12 Further Assurances. From time to time, at the request of any Party
------------------
hereto and without further consideration, the other Parties will execute and
deliver to such requesting Party such documents and take such other action (but
without incurring any material financial obligation) as such requesting Party
may reasonably request in order to consummate more effectively the transactions
contemplated hereby.
9.13 Specific Performance. Each of the Parties acknowledges and agrees
--------------------
that one (1) or more of the other Parties would be damaged irreparably in the
event any of the provisions of this Agreement are not performed in accordance
with their specific terms or otherwise are breached. Accordingly, each of the
Parties agrees that the other Parties shall be entitled to an injunction or
injunctions to prevent breaches of the provisions of this Agreement and to
enforce specifically this Agreement and the terms and provisions hereof in any
action instituted in any court of the United States or any state thereof having
jurisdiction over the Parties and the matter, in addition to any other remedy to
which it may be entitled, at law or in equity.
9.14 Construction. The language used in this Agreement shall be deemed to
------------
be the language chosen by the Parties hereto to express their mutual intent, and
no rule of strict construction shall be applied against any Party. Any
reference to any federal, state, local, or foreign statute or law shall be
deemed also to refer to all rules and regulations promulgated thereunder, unless
the context requires otherwise.
9.15 Incorporation of Exhibits and Schedules. The Exhibits and Schedules
---------------------------------------
identified in this Agreement are incorporated herein by reference and made a
part hereof.
9.16 Gender. All references herein to the masculine gender shall be deemed
------
to include the feminine or neuter gender as appropriate.
9.17 Table of Cross-References. The following defined terms have the
-------------------------
meaning set forth in the respective locations within this Agreement set forth
below:
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<PAGE>
"Actions" Section 2.17
"Affiliated Group" Section 2.11(d)
"Articles of Merger" Section 1.1
"CERCLA" Section 2.27(a)
"Claim" Section 7.2(a)
"Code" Section 1.13
"Closing" Section 1.2
"Closing Date" Section 1.2
"Common Stock" Preamble
"Company" Preamble
"Company Indemnified Parties" Section 7.1(b)
"Consenting Corporation" Section 2.11(c)
"Contracts" Section 2.14(a)
"Damages" Section 7.1(a)
"Disclosure Schedule" Article II
"ERISA" Section 2.21(c)
"ERISA Affiliate" Section 2.21(e)
"Effective Time" Section 1.1
"Employee Benefit Plan" Section 2.21(a)
"Employment Agreements" Section 5.12(a)
"Environment" Section 2.27(a)
"Environmental Law" Section 2.27(a)
"Financial Statements" Section 2.7
"Flagship" Preamble
"Governmental Entity" Section 2.6
"Indemnified Parties" Section 7.1(b)
"Indemnifying Party" Section 7.2(a)
"Interim Financial Statements" Section 2.7
"Leases" Section 2.13(a)
"Material Adverse Effect" Section 2.5
"Material of Environmental Concern" Section 2.27(b)
"Merger" Section 1.1
"Merger Consideration" Section 1.3
"Multi-Employer Plan" Section 2.21(e)
"Ordinary Course of Business" Section 2.12
Optionholders Preamble
"PQC" Preamble
"PQC Indemnified Parties" Section 7.1(a)
"Parachute Payments" Section 2.11(e)
"Parties" Preamble
"Permits" Section 2.15
"Practice" Section 2.5
"Release" Section 2.27(a)
"Security Interest" Section 2.12
-39-
<PAGE>
"Shares" Section 1.5(a)
"Stockholders" Preamble
"Surviving Corporation" Section 1.1
"Tax Returns" Section 2.11(a)
"Taxes" Section 2.11(a)
"Third Party Claim" Section 7.2(b)
[BALANCE OF THIS PAGE LEFT BLANK INTENTIONALLY]
-40-
<PAGE>
IN WITNESS WHEREOF, the Parties hereto have executed this Agreement as of
the date first above written.
PHYSICIANS QUALITY CARE, INC.
/s/ Samantha J. Trotman
------------------------------------
By: Samantha J. Trotman
Title: Chief Financial Officer and
Vice President
FLAGSHIP HEALTH, P.A.
/s/ Dana Frank, M.D.
------------------------------------
By: Dana Frank, M.D.
Title: President
CLINICAL ASSOCIATES, P.A.
By:
------------------------------------
By: Richard Maffezzoli
Its: President
CLINICAL ASSOCIATES STOCKHOLDERS:
/s/ Mohammed Ahmed
------------------------------------
/s/ Samuel Akman
------------------------------------
-41-
<PAGE>
/s/ Mahmood Alikhan
------------------------------------
/s/ Robert S. Baxt
------------------------------------
/s/ George Bedon
------------------------------------
/s/ Paul Z. Bodnar
------------------------------------
/s/ William Bouchelle
------------------------------------
/s/ James M. Corkum
------------------------------------
/s/ Albert F. DeLoskey
------------------------------------
/s/ James F. Dunlay
------------------------------------
/s/ Paul J. Edgar
------------------------------------
/s/ Clara E. Escuder
------------------------------------
/s/ Carl S. Friedman
------------------------------------
/s/ Miquel A. Frontera
------------------------------------
/s/ John Gambrill
------------------------------------
/s/ Carlton Greene
------------------------------------
-42-
<PAGE>
/s/ Gregory Hall
------------------------------------
/s/ Michael Jacobs
------------------------------------
/s/ Kenneth P. Judd
------------------------------------
/s/ Virginia Kranz
------------------------------------
/s/ Michael Lifson
------------------------------------
/s/ Richard H. Mack
------------------------------------
/s/ Richard Maffezzoli
------------------------------------
/s/ Gary A. Manko
------------------------------------
/s/ Steven Miller
------------------------------------
/s/ Judah A. Minkove
------------------------------------
/s/ Keiffer J. Mitchell
------------------------------------
/s/ Charlotte E. Modly
------------------------------------
/s/ Rose Mary Mulaikal
------------------------------------
/s/ Bindu Noor
------------------------------------
/s/ Bonnie Orzech-Nixon
------------------------------------
/s/ James Paskert
------------------------------------
-43-
<PAGE>
/s/ Radha Pathak
------------------------------------
/s/ Robert Peques
------------------------------------
/s/ Toby Ritterhoff
------------------------------------
/s/ Bruce Rosenberg
------------------------------------
/s/ Duncan Salmon
------------------------------------
/s/ David Saltzberg
------------------------------------
/s/ Lise K. Satterfield
------------------------------------
/s/ Richard T. Scholz
------------------------------------
/s/ Sidney Seidman
------------------------------------
/s/ Linda Sevier
------------------------------------
/s/ David S. Shear
------------------------------------
/s/ Ronald Sher
------------------------------------
/s/ Alan M. Shorofsky
------------------------------------
/s/ Stephen M. Siegel
------------------------------------
/s/ Stuart B. Silver
------------------------------------
-44-
<PAGE>
/s/ Edward Souweine
------------------------------------
/s/ Jonathan E. Surell
------------------------------------
/s/ Anthony Vazzano
------------------------------------
/s/ Barry Vogelstein
------------------------------------
/s/ Richard Weisman
------------------------------------
/s/ Julie Winston
------------------------------------
/s/ Wayland Wong
------------------------------------
/s/ Robert E. Zadek
------------------------------------
CLINICAL ASSOCIATES
OPTIONHOLDERS:
/s/ William Bartholomay
------------------------------------
/s/ Sarah Bodnar
------------------------------------
/s/ Marla Caplan
------------------------------------
-45-
<PAGE>
SCHEDULE 1.9
------------
Director Laura Mumford, M.D.
President Dana Frank, M.D.
Treasurer Warren Kosterman
Secretary Katherine Kaminski
-46-
<PAGE>
SCHEDULE 3.2
-------------
Options to purchase 2,450,766 shares of Class A Common Stock are outstanding
under the 1995 Equity Incentive Plan.
Options to purchase 72,500 shares of Class A Common Stock issued to Springfield
Physicians.
Options to purchase 10,000 shares of Class A Common Stock issued to Faust
Management Company.
Options to purchase 7,500 shares of Class A Common Stock issued to Zurich Davis.
Warrants to purchase 1,054,207 shares of Class A Common Stock are outstanding
Warrants to purchase 6,415,000 shares of Class B Common Stock are outstanding
Warrants to purchase 7,629,309 shares of Class C Common Stock are outstanding.
The Class C shareholders also have the right to purchase an additional 6,153,846
Class C shares and 6,153,846 Class C Warrants under the Class B and Class C
Common Stock Purchase Agreement.
The Merger Agreements among the Company, Medical Care Partners, PC and Chestnut
Medical Associates, Inc and the Company, Medical Care Partners, PC and
Springfield Medical Associates and the Affiliation Agreement among the Company,
Medical Care Partners, PC and Jay Ungar, MD provide for contingent payments if
certain performance criteria are met; however, such contingent obligations are
payable up to an additional 800,000 shares of Class A Common Stock.
There are transfer restrictions in the Stockholders Agreement attached as
Exhibit A.
There are transfer restrictions in the Stockholders Agreement, dated August 30,
1996, between the Company and the initial group of physicians affiliated with
Medical Care Partners, PC (MCP).
The Company and the initial group of physicians affiliated with Medical Care
Partners, PC are a parties to a registration rights agreement.
-47-
<PAGE>
SCHEDULE 3.6
------------
PQC is required to obtain the consent of the institutional investors under
the Class B and Class C Common Stock Purhase Agreement for the completion of the
transactions contemplated by the Merger Agreement.
PQC is required to obtain the approval of Bankers Trust Company to any
amendment to the Services Agreement before any borrowings are outstanding under
the Credit Agreement. No amount is currently outstanding under the Credit
Agreement.
-48-
<PAGE>
SCHEDULE 3.10
-------------
Jay Greenberg, a former Executive Vice President of the Company, has commenced a
civil action in Middlesex County, Massachusetts. Mr. Greenberg seeks certain
injunctive and equitable relief, $1.4 million in damages and a declaratory
judgement that he owns 843,750 shares of Class A Common Stock
-49-
<PAGE>
Schedule 1.13, 2.1-2.26, 5.12, 5.15 and 7.5(b) are available upon written
request to the Company.
-50-
<PAGE>
Exhibit 10.25
-------------
BAIN CAPITAL PARTNERS V, L.P.
TWO COPLEY PLACE, 7TH FLOOR
BOSTON, MASSACHUSETTS 02116
April 18, 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
<PAGE>
made under and laws of The Commonwealth of Massachusetts and shall be construed
under 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: s/s Jerilyn P. Asher
-------------------------------------
Title:
BAIN: BAIN CAPITAL PARTNERS V, L.P.
By: Bain Capital Investors V, Inc.,
Its general partner
By: /s/ Stephen G. Pagliuca
-----------------------------------
Title:
-2-
<PAGE>
EXHIBIT 21.1
List of Subsidiaries
--------------------
Name Jurisdiction of Incorporation
- ---- -----------------------------
Physicians Quality Care of Massachusetts, Inc. Massachusetts
Physicians Quality Care of Maryland, Inc. Maryland
1
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE AUDITED
FINANCIAL STATEMENTS OF THE COMPANY FOR THE YEARS ENDED DECEMBER 31, 1996 AND
1997, RESPECTIVELY, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS. AS MORE FULLY DESCRIBED IN NOTE 2 TO THE AUDITED FINANCIAL
STATEMENTS, THE COMPANY ADOPTED SFAS 128 "EARNINGS PER SHARE" IN 1997. THE
ADOPTION OF SFAS 128 DID NOT IMPACT THE EARNINGS PER SHARE CALCULATIONS FOR 1996
AND 1995.
</LEGEND>
<S> <C> <C>
<PERIOD-TYPE> YEAR YEAR
<FISCAL-YEAR-END> DEC-31-1996 DEC-31-1997
<PERIOD-START> JAN-01-1996 JAN-01-1997
<PERIOD-END> DEC-31-1996 DEC-31-1997
<CASH> 136,926 8,782,019
<SECURITIES> 0 0
<RECEIVABLES> 0 0
<ALLOWANCES> 0 0
<INVENTORY> 0 0
<CURRENT-ASSETS> 1,915,769 14,606,483
<PP&E> 271,782 1,548,068
<DEPRECIATION> 57,774 220,208
<TOTAL-ASSETS> 34,789,573 73,410,583
<CURRENT-LIABILITIES> 2,775,808 2,113,337
<BONDS> 271,552 0
31,851,473 54,473,947
0 0
<COMMON> 112,360 207,975
<OTHER-SE> (470,812) 15,869,262
<TOTAL-LIABILITY-AND-EQUITY> 34,789,573 73,410,583
<SALES> 6,026,452 46,037,234
<TOTAL-REVENUES> 6,117,556 46,535,329
<CGS> 0 0
<TOTAL-COSTS> 10,779,966 51,675,017
<OTHER-EXPENSES> 0 98,269
<LOSS-PROVISION> 214,404 1,105,616
<INTEREST-EXPENSE> 104,255 161,938
<INCOME-PRETAX> (4,981,069) (6,505,511)
<INCOME-TAX> 78,128 (795,281)
<INCOME-CONTINUING> (5,059,197) (5,710,230)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (5,059,197) (5,710,230)
<EPS-PRIMARY> (1.81) (0.41)
<EPS-DILUTED> 0 0
</TABLE>
