-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, FNWSRNKgWG82w9x1MG3J8xK99cMCT5/GBEQDmHdBErcI6ly6tdeoxAKIkxyIqmdT 17pndOy4ZYYWn7WrVJVNWw== 0000927016-98-003625.txt : 19981014 0000927016-98-003625.hdr.sgml : 19981014 ACCESSION NUMBER: 0000927016-98-003625 CONFORMED SUBMISSION TYPE: 10-K/A PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19981013 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: PHYSICIANS QUALITY CARE INC CENTRAL INDEX KEY: 0000947569 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-OFFICES & CLINICS OF DOCTORS OF MEDICINE [8011] IRS NUMBER: 043267297 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K/A SEC ACT: SEC FILE NUMBER: 333-26137 FILM NUMBER: 98724975 BUSINESS ADDRESS: STREET 1: 950 WINTER STREET CITY: WALTHAM STATE: MA ZIP: 02154 BUSINESS PHONE: 6178905560 10-K/A 1 FORM 10-K/A SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ____________ FORM 10-K/A AMENDMENT NO. 1 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 ------------------------------------ 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 --------- Physicians Quality Care, Inc. ------------------------------- (Exact Name of Registrant as Specified in its Charter) Delaware 04-3267297 ---------- ------------ (State or Other Jurisdiction of (I.R.S. Employer Incorporation or Organization) Identification No.) 950 Winter Street, Suite 2410, Waltham, MA 02154 -------------------------------------------- ------- (Address of Principal Executive Offices) (Zip Code) Registrant's telephone number, including area code: (781) 890-5560 ---------------- 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. The Company's Annual Report on Form 10-K was filed with the Commission on March 31, 1998. This Amendment No. 1 to the Annual Report on Form 10-K/A is being filed to supplementally provide the Company's proxy materials which were furnished to the security holders on September 12, 1998. 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. /s/ Eugene M. Bullis ---------------------------- Chief Financial Officer and Senior Vice President PHYSICIANS QUALITY CARE, INC. September 12, 1998 RE: NOTICE OF ANNUAL MEETING OF PHYSICIANS QUALITY CARE, INC. Dear Stockholder: You are cordially invited to attend the 1998 Annual Meeting of Stockholders (the "Meeting") of Physicians Quality Care, Inc. (the "Company") to be held on September 23, 1998, 10:00 a.m., at 1100 Winter Street, Waltham, MA 02159 (use center entrance). This year, thirteen directors are nominated for election to the Board, including one new director. Of these thirteen directors, two are to be elected by the holders of the shares of Class A Common Stock of the Company. In addition, seven directors, each of whom must be a physician, are to be elected by the holders of the Class A, Class B-1, Class B-2, Class C and Class L Common Stock, voting together as a single class. One of the remaining four directors shall be elected by the holders of the Class B-1 Common Stock, one by the holders of the Class B-2 Common Stock, and two by the holders of the Class C Common Stock. At the meeting, you will be asked to elect the directors for whom you are eligible to vote to serve until the next annual meeting. Signatories to the Stockholders Agreement (the "Stockholders Agreement") of the Company, dated as ----------------------- of August 30, 1996, as amended, who hold shares of Class A Common Stock are contractually obligated to vote their shares for the election of individuals nominated to serve on the Board by the Chief Executive Officer of the Company. All of the stockholders of the Company (other than the 32 physicians who affiliated with Medical Care Partners in August 1996) are signatories to the Stockholders Agreement. The nominees of the Chief Executive Officer are described in the accompanying proxy statement. The accompanying Proxy Statement provides a detailed description of these proposals. We recommend that you read the accompanying materials so that you may be informed about the business to come before the meeting. Enclosed please find the following materials: 1. Notice of Annual Meeting of Shareholders; 2. Proxy Statement for the Company ("Proxy Statement"); 3. Quarterly Report on Form 10-Q for the period ended June 30, 1998; 4. Proxy Card to be returned to the Company; and 5. Stamped envelope addressed to the Company for return of proxy card. Copies of the Company's Annual Report on Form 10-K for the year ended December 31, 1997 have previously been distributed to shareholders. Additional copies are available upon request. We look forward to seeing you at the meeting. Sincerely, /s/ Jerilyn P. Asher Jerilyn P. Asher, Chair and Chief Executive Office Enclosures PHYSICIANS QUALITY CARE, INC. ----------------------------- 950 WINTER STREET, SUITE 2410 WALTHAM, MA 02154 NOTICE OF ANNUAL MEETING OF STOCKHOLDERS To Be Held September 23, 1998 The 1998 annual meeting of the stockholders of Physicians Quality Care, Inc. (the "Company") will be held at 1100 Winter Street, Waltham, MA 02159 (use center entrance), on September 23, 1998, at 10:00 a.m., local time, for the transaction of the following business: . To present the annual reports of the officers of the Company; . For the holders of Class A Common Stock to elect the following persons designated by the Chief Executive Officer of the Company to serve on the Board of Directors until the next annual meeting and until their successors have been duly elected and qualified: Jerilyn P. Asher Eugene M. Bullis . For the holders of Class B-1 Common Stock to elect the following person to the Board of Directors, to serve until the next annual meeting and until their successors have been duly elected and qualified: Stephen G. Pagliuca . For the holders of Class B-2 Common Stock to elect the following person to the Board of Directors, to serve until the next annual meeting and until their successors have been duly elected and qualified: Marc Wolpow . For the holders of Class C Common Stock to elect the following persons to the Board of Directors, to serve until the next annual meeting and until their successors have been duly elected and qualified: Timothy T. Weglicki John Stobo . For the holders of all the classes of the Common Stock voting as a single class to elect the following persons designated by the Chief Executive Officer to serve on the Board of Directors until the next annual meeting and until their successors have been duly elected and qualified: Ira T. Fine, M.D. Arlan F. Fuller, Jr., M.D. Leslie S.T. Fang, M.D. Alphonse F. Calvanese, M.D. Paul Z. Bodnar, M.D. Richard Maffezzoli, M.D. Dana H. Frank, M.D. . To transact such other business as may properly come before the meeting, or any adjournment or postponement thereof. The Board of Directors has fixed September 4, 1998, at the close of business, for the determination of shareholders entitled to notice of and to vote at the meeting, or any adjournment or postponement thereof. Transferees after such date shall not be entitled to vote at such meeting. YOUR VOTE IS IMPORTANT. IF YOU CANNOT BE PRESENT IN PERSON, PLEASE SIGN AND DATE THE ENCLOSED SHAREHOLDER'S PROXY CARD AND FORWARD SAME AT ONCE IN THE ENCLOSED ENVELOPE TO PHYSICIANS QUALITY CARE, INC., 950 WINTER STREET, SUITE 2410, WALTHAM, MA 02154. NO POSTAGE IS REQUIRED IF MAILED WITHIN THE UNITED STATES. BY ORDER OF THE BOARD OF DIRECTORS /s/ Jerilyn P. Asher Jerilyn P. Asher Secretary PROXY FOR SHAREHOLDERS' MEETING PHYSICIANS QUALITY CARE, INC. ANNUAL MEETING OF SHAREHOLDERS TO BE HELD ON SEPTEMBER 23, 1998 THE ENCLOSED PROXY IS BEING SOLICITED ON BEHALF OF THE MANAGEMENT OF THE COMPANY The undersigned shareholder of Class A Common Stock, $0.01 par value per share, of PHYSICIANS QUALITY CARE, INC. (the "Company") acknowledges receipt of ------- the Notice of Annual Meeting of the Company to be held on September 23, 1998, and attached proxy statement, and does hereby constitute and appoint Jerilyn P. Asher and Eugene M. Bullis, or either one of them, the true and lawful substitute, attorney and proxy, with full power of substitution and revocation, of the undersigned, for, and in the name, place and stead of the undersigned, to vote, according to the number of votes which the undersigned would then be entitled to cast, and with all the powers which the undersigned would be entitled to exercise, if personally present, at the meeting of the shareholders of the Company, to be held on September 23, 1998, or at any adjournment or postponement of such meeting, upon any matter coming before such meeting or adjournment or postponement, and does hereby revoke all proxies heretofore given by the undersigned as a shareholder in said Company. Please check one box --------------------
- ---------------------------------------------------------------------------- NAME OF NOMINATED VOTE MY VOTE MY I WITHHOLD DIRECTOR SHARES FOR: SHARES AGAINST: AUTHORITY TO VOTE MY SHARES: - ---------------------------------------------------------------------------- Jerilyn P. Asher * * - ---------------------------------------------------------------------------- Eugene M. Bullis * * - ---------------------------------------------------------------------------- Ira T. Fine, M.D. * * - ---------------------------------------------------------------------------- Arlan F. Fuller, M.D. * * - ---------------------------------------------------------------------------- Leslie S.T. Fang, * * M.D. - ---------------------------------------------------------------------------- Alphonse F. * * Calvanese, M.D. - ---------------------------------------------------------------------------- Paul Z. Bodnar, * * M.D. - ---------------------------------------------------------------------------- Richard Maffezzoli, * * M.D. - ---------------------------------------------------------------------------- Dana H. Frank, * * M.D. - ----------------------------------------------------------------------------
* IF YOU ARE A SIGNATORY TO THE STOCKHOLDERS AGREEMENT DATED AS OF AUGUST 30, 1996, AS AMENDED, AMONG THE COMPANY AND THE SHAREHOLDERS WHO ARE A PARTY THERETO, YOU ARE CONTRACTUALLY OBLIGATED TO VOTE IN FAVOR OF THE NOMINEES AND MAY NOT MARK A BOX WITH AN ASTERISK. OTHER PROPOSALS Your above-named proxies shall vote in respect of any other business properly to come before the meeting (the Board of Directors knowing of no such other business) as such proxies may in their discretion determine appropriate, it being the intention of such proxies to vote in such a manner as will be in harmony with the policies of the management of the Company. THE MANAGEMENT RECOMMENDS A VOTE FOR EACH DIRECTOR NOMINATED. UNLESS OTHERWISE INDICATED, YOUR ABOVE-NAMED PROXIES SHALL VOTE FOR THE ELECTION OF THE INDIVIDUALS NOMINATED AS DIRECTORS NAMED IN THE ATTACHED PROXY STATEMENT. PLEASE SIGN, DATE AND RETURN IN THE ENCLOSED STAMPED ENVELOPE ADDRESSED TO THE COMPANY. ------------------------------ Dated: ------------------ ----- Please sign proxy exactly as your name appears on the share certificate. When signing as attorney, executor, administrator, trustee or guardian, give full title as such. If signer is a corporation, sign full corporate name by duly authorized officer. If shares are held in the name of two or more persons, all should sign. PROXY FOR SHAREHOLDERS' MEETING PHYSICIANS QUALITY CARE, INC. ANNUAL MEETING OF SHAREHOLDERS TO BE HELD ON SEPTEMBER 23, 1998 THE ENCLOSED PROXY IS BEING SOLICITED ON BEHALF OF THE MANAGEMENT OF THE COMPANY The undersigned shareholder of Class B, C or L Common Stock, $0.01 par value per share, of PHYSICIANS QUALITY CARE, INC. (the "Company") acknowledges ------- receipt of the Notice of Annual Meeting of the Company to be held on September 23, 1998, and attached proxy statement, and does hereby constitute and appoint Jerilyn P. Asher and Eugene M. Bullis, or either one of them, the true and lawful substitute, attorney and proxy, with full power of substitution and revocation, of the undersigned, for, and in the name, place and stead of the undersigned, to vote, according to the number of votes which the undersigned would then be entitled to cast, and with all the powers which the undersigned would be entitled to exercise, if personally present, at the meeting of the shareholders of the Company, to be held on September 23, 1998, or at any adjournment or postponement of such meeting, upon any matter coming before such meeting or adjournment or postponement, and does hereby revoke all proxies heretofore given by the undersigned as a shareholder in said Company. Please check one box --------------------
Name of Classes of VOTE VOTE MY I WITHHOLD Nominated Common Stock MY SHARES AUTHORITY Director Eligible to Vote SHARES AGAINST: TO VOTE MY for Director FOR: SHARES: - ---------------------------------------------------------------------------- Stephen G. Pagliuca Class B-1 Common Stock - ---------------------------------------------------------------------------- Marc Wolpow Class B-2 Common Stock - ---------------------------------------------------------------------------- Timothy T. Weglicki Class C Common * * Stock - ---------------------------------------------------------------------------- John Stobo Class C Common * * Stock - ---------------------------------------------------------------------------- Ira T. Fine, M.D. All classes * * - ---------------------------------------------------------------------------- Arlan F. Fuller, M.D. All classes * * - ---------------------------------------------------------------------------- Leslie S.T. Fang, M.D. All classes * * - ---------------------------------------------------------------------------- Alphonse F. All classes * * Calvanese, M.D. - ---------------------------------------------------------------------------- Paul Z. Bodnar, M.D. All classes * * - ---------------------------------------------------------------------------- Richard Maffezzoli, All classes * * M.D. - ---------------------------------------------------------------------------- Dana H. Frank, M.D. All classes * * - ----------------------------------------------------------------------------
* IF YOU ARE A SIGNATORY TO THE STOCKHOLDERS AGREEMENT DATED AS OF AUGUST 30, 1996, AS AMENDED, AMONG THE COMPANY AND THE SHAREHOLDERS WHO ARE A PARTY THERETO, YOU ARE CONTRACTUALLY OBLIGATED TO VOTE IN FAVOR OF THE NOMINEES AND MAY NOT MARK A BOX WITH AN ASTERISK. OTHER PROPOSALS Your above-named proxies shall vote in respect of any other business properly to come before the meeting (the Board of Directors knowing of no such other business) as such proxies may in their discretion determine appropriate, it being the intention of such proxies to vote in such a manner as will be in harmony with the policies of the management of the Company. THE MANAGEMENT RECOMMENDS A VOTE FOR EACH DIRECTOR NOMINATED. UNLESS OTHERWISE INDICATED, YOUR ABOVE-NAMED PROXIES SHALL VOTE FOR THE ELECTION OF THE INDIVIDUALS NOMINATED AS DIRECTORS NAMED IN THE ATTACHED PROXY STATEMENT. PLEASE SIGN, DATE AND RETURN IN THE ENCLOSED STAMPED ENVELOPE ADDRESSED TO THE COMPANY. ------------------------------ Dated: ------------------ ----- Please sign proxy exactly as your name appears on the share certificate. When signing as attorney, executor, administrator, trustee or guardian, give full title as such. If signer is a corporation, sign full corporate name by duly authorized officer. If shares are held in the name of two or more persons, all should sign. ANNUAL MEETING OF SHAREHOLDERS TO BE HELD ON SEPTEMBER 23, 1998 PROXY STATEMENT PHYSICIANS QUALITY CARE, INC. INTRODUCTION ------------ THE ENCLOSED PROXY IS BEING SOLICITED BY THE MANAGEMENT OF PHYSICIANS QUALITY CARE, INC., A DELAWARE CORPORATION (THE "COMPANY"). Any shareholder ------- giving a proxy has the power to revoke it by giving notice to the Company in writing, or in open meeting before the vote is taken. The shares represented by the enclosed proxy shall be voted if it is properly signed and received by the Company prior to the time of meeting. The expense of making the solicitation will consist of preparing and mailing the proxies and the proxy statements and the charges and expenses of forwarding documents to security owners. These are the only contemplated expenses of solicitation and will be paid by the Company. This Proxy Statement is being furnished to stockholders of the Company, in connection with the solicitation of proxies by the Board of Directors of the Company for use at the Annual Meeting of Stockholders to be held on September 23, 1998, at 10:00 a.m., local time, at 1100 Winter Street, Waltham, MA 02154 (use center entrance), and any adjournment or postponement thereof (the "Meeting"). ------- At the Meeting, stockholders will be asked to consider and vote upon the election of directors to serve as Class A, Class B, Class C and Common Directors of the Company until the 1999 Annual Meeting. This Proxy Statement is dated September 11, 1998 and is first being mailed to stockholders along with the related form of proxy on or about September 11, 1998. If a proxy in the accompanying form is properly executed and returned to the Company in time for the Meeting and is not revoked prior to the time it is exercised, the shares represented by the proxy will be voted in accordance with the directions specified therein for the matters listed on the proxy card (unless, in the case of the election of Directors, such vote is contrary to the terms of the Stockholders Agreement of the Company (the "Stockholders ------------ Agreement") dated as of August 30, 1996, as amended, among the Company and the - --------- stockholders who are a party thereto). Unless the proxy specifies that it is to be voted against or is an abstention on a listed matter, proxies will be voted FOR each of the nominated directors, and otherwise in the discretion of the proxy holders as to any other matter that may come before the Meeting. Revocability of Proxy. Any stockholder of the Company who has given a --------------------- proxy has the power to revoke such proxy at any time before it is voted either (i) by filing a written revocation or a duly executed proxy bearing a later date with Jerilyn P. Asher, Chief Executive Officer of the Company, at 950 Winter Street, Suite 2410, Waltham, MA 02154, or (ii) by appearing at the Meeting and voting in person. Attendance at the Meeting will not in and of itself constitute the revocation of a proxy. Voting by those present during the conduct of the Meeting will be by ballot. Record Date and Outstanding Securities and Votes Required. The Board of --------------------------------------------------------- Directors of the Company has fixed the close of business on September 4, 1998 as the record date (the "Record Date") for determining holders of outstanding ----------- shares who are entitled to notice of and to vote at the Meeting. As of the Record Date, there were 176 registered holders of shares of Class A Common Stock and 26,146,844 issued and outstanding shares of Class A Common Stock. In addition, there were 4 registered holders of Class B-1 Common Stock and 2,809,296 issued and outstanding shares of such stock; 4 registered holders of shares of Class B-2 Common Stock and 1,790,704 issued and outstanding shares of such stock; 21 registered holder of Class C Common Stock and 7,692,309 issued and outstanding shares of such stock; and 21 registered holder of Class L Common Stock and 2,461,538 issued and outstanding shares of such stock. There were no issued and outstanding shares of Preferred Stock. As provided in the Amended and Restated Certificate of Incorporation ("Certificate"), each common share is ----------- entitled to one vote, except that certain directors must be elected by class voting, and certain actions require the approval of certain classes of common shares. The elections of the Class A Directors requires the affirmative vote of a majority of the shares of Class A Common Stock which are entitled to vote for the election of Class A Directors. The election of the of the Class B-1 Director requires the affirmative vote of a majority of shares of Class B-1 Common Stock which are entitled to vote for the election of Class B-1 Director. The election of the of the Class B-2 Director requires the affirmative vote of a majority of shares of Class B-2 Common Stock which are entitled to vote for the election of the Class B-2 Director. The election of the of the Class C Directors requires the affirmative vote of a majority of shares of Class C Common Stock which are entitled to vote for the election of the Class Directors. The election of the Common Director requires the affirmative vote of a majority of the shares of Class A, B, C and L Common Stock which are which are entitled to vote for the election of the Common Director. Certain risk factors in connection with an investment in the Company, as well as the Company's financial statements and a description of its business are included in the Company's Annual Report on Form 10-K, which has previously been distributed to shareholders, and quarterly report on Form 10-Q which accompanies this Proxy Statement. Shareholders should carefully review such Reports. -1- ELECTION OF DIRECTORS --------------------- The Company's Certificate provides for a Board of Directors of thirteen members divided into four classes, including two directors elected by the holders of the Class A Common Stock, one Director elected by the holders of the Class B-1 Common Stock, two Directors elected by the holders of the Class C Common Stock and seven directors who are physicians elected by the holders of all of the classes of common stock of the Company voting together as a single class. Each Director is elected for a term of one year except in the case of elections to fill vacancies or newly created directorships. Jerilyn P. Asher and Eugene M. Bullis are the nominees for Class A Directors. Ira T. Fine, M.D., Arlan Fuller, M.D., Leslie S. T. Fang, M.D., Alphonse F. Calvanese, M.D., Paul Z. Bodnar, M.D., Richard Maffezzoli, M.D. and Dana H. Frank, M.D. are the nominees for Common Directors. Stephen G. Pagliuca is the nominee for Class B-1 Director. Marc Wolpow is the nominee for Class B-2 Director. Timothy T. Weglicki and John D. Stobo, Jr. are the nominees for the Class C Director. If elected, each will hold authority until the election and qualification of his or her successor. Unless a stockholder votes AGAINST a nominated director or WITHHOLDS AUTHORITY from the proxy to vote for a nominated director (i) the holders of proxies representing shares of Class A Common Stock will vote FOR the election of Jerilyn P. Asher and Eugene M. Bullis as Class A Directors; (ii) the holders of proxies representing shares of Class B-1 Common Stock will vote FOR the election of Stephen G. Pagliuca as the Class B-1 Director; (iii) the holders of proxies representing shares of Class B-2 Common Stock will vote FOR the election of Marc Wolpow as the Class B-2 Director; (iii) the holders of proxies representing shares of Class C Common Stock will vote FOR the election of Timothy T. Weglicki and John D. Stobo, Jr. as the Class C Directors; and the holders of proxies representing shares of the Class A, Class B-1, Class B-2, Class C or Class L Common Stock will vote FOR the election of Ira T. Fine, M.D., Arlan Fuller, M.D., Leslie S. T. Fang, M.D., Alphonse F. Calvanese, M.D., Paul Z. Bodnar, M.D., Richard Maffezzoli, M.D. and Dana H. Frank, M.D. as the Common Directors. THE CLASS A STOCKHOLDERS OF THE COMPANY WHO ARE PARTIES TO THE STOCKHOLDERS AGREEMENT ARE CONTRACTUALLY OBLIGATED TO VOTE IN FAVOR OF THE NOMINEES FOR DIRECTOR. The Board of Directors has no reason to believe that any nominee will decline or be unable to serve as a Director of the Company. However, if a nominee shall be unavailable for any reason, then the proxies may be voted for the election of such person as may be recommended by the Board of Directors. Table of Directors and Executives. The following table sets forth the age --------------------------------- and title of each nominee director followed by descriptions of such person's additional business experience during the past five years. -2- DIRECTORS AND OFFICERS
NOMINEE NAME AGE POSITION - ------------------------------------------------------------------------------------------------- Jerilyn P. Asher 55 Chief Executive Officer and Chairman of the Board - ------------------------------------------------------------------------------------------------- Eugene M. Bullis 53 Senior Vice President and Chief Financial Officer - ------------------------------------------------------------------------------------------------- Stephen G. Pagliuca 42 Director - ------------------------------------------------------------------------------------------------- Marc Wolpow 39 Director - ------------------------------------------------------------------------------------------------- Timothy T. Weglicki 46 Director - ------------------------------------------------------------------------------------------------- John D. Stobo, Jr. 32 Director - ------------------------------------------------------------------------------------------------- Ira T. Fine, M.D. 49 Director - ------------------------------------------------------------------------------------------------- Arlan F. Fuller, M.D. 52 Director - ------------------------------------------------------------------------------------------------- Leslie S.T. Fang, M.D. 49 Director - ------------------------------------------------------------------------------------------------- Alphonse F. Calvanese, M.D. 46 Director - ------------------------------------------------------------------------------------------------- Paul Z. Bodnar, M.D. 48 Director - ------------------------------------------------------------------------------------------------- Richard Maffezzoli, M.D. 56 Director - ------------------------------------------------------------------------------------------------- Dana H. Frank, M.D. 47 Director and President - -------------------------------------------------------------------------------------------------
Jerilyn P. Asher is a founder of the Company and has served as Chief Executive Officer and as Chairman of the Board since its inception. She has over eighteen years of experience as a healthcare executive in both the public and private sectors, with broad-based responsibilities for all aspects of constituency building with physicians and payors, business development, finance, operations, sales, marketing and federal and state healthcare regulation. From 1994 to 1995, Ms. Asher served as President and a member of the Board of Directors of Abbey Healthcare Group Incorporated ("Abbey"), a home healthcare provider. Ms. Asher was a founder and served as President, Chief Executive Officer and Chairman of the Board of Directors from 1988 to 1995 and Executive Vice President from 1985 to 1988 of Protocare, Inc., a leading regional provider of home healthcare products and services. From 1978 to 1984, Ms. Asher -3- 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. Eugene M. Bullis has served as Executive Vice President and Chief Financial Officer since March, 1998. He is responsible for all financial and information system functions for the Company. Mr. Bullis joined the Company after serving as an independent business consultant and interim executive with a number of technology companies, including Computervision, NYNEX and Eastman Kodak. From 1979 through 1989, he served as a senior executive at Wang Laboratories, the final two years as Chief Financial Officer and Treasurer. Prior to joining Wang Laboratories, Mr. Bullis was a partner in the public accounting firm, Ernst and Young. He holds a Bachelor of Arts Degree in Business Administration from Colby College and is a Certified Public Accountant. 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 Lambert, 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. ("Alex. Brown"), where he established and headed its Capital Markets Group and prior thereto headed the Firm's Equity Division, Corporate Finance Department, and Health Care Investment Banking Group. Mr. Weglicki holds an M.B.A. from the Wharton Graduate School of Business and a B.A. from the John Hopkins University. He is a director of Eldertrust, VitalCom, Inc. and several privately held companies. John D. Stobo, Jr. is a nominee director of the Company. Since July 1996, Mr. Stobo has been a principal of ABS Partners II, L.L.C., the general partner of ABS Capital Partners II, L.P. Mr. Stobo has also been a principal of the general partner of ABS Capital Partners, L.P. since 1993. From 1991 to 1993, Mr. Stobo was a member of Alex. Browns's health care corporate finance group. Mr. Stobo is a graduate of the University of California, San Diego and Johnson School of Management at Cornell University. -4- Ira T. 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. Arlan F. Fuller, Jr., M.D. has served as a member of the Board of Directors of the Company since its inception. 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. Dr. Fuller has been 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. Leslie S. T. 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. Alphonse F. 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. Paul Bodnar, M.D., serves as Senior Vice President for Managed Care and Medical Director. He also serves as Medical Director of the Mid-Atlantic Region. Prior to joining PQC, Dr. Bodnar served for ten years as the Medical Director of Clinical Associates, a 90-member -5- multi-specialty group practice, of which he has been a practicing pediatrician since 1980. Dr. Bodnar received his Bachelor of Arts Degree from Johns Hopkins University and his M.D. from Columbia University. He completed his internship and residency at Johns Hopkins Hospital and Sinai Hospital in Baltimore. Richard Maffezzoli, M.D. is the Senior Vice President for Development and Analysis for PQC and Chief Operating Officer of the Company's affiliates Flagship Health, P.A. and Flagship Health II, P.A. He was founder and President of Clinical Associates, which at the time of the merger with PQC was a successful 90-member health-professional group servicing approximately 60,000 pre-paid lives and 200,000 fee-for-service lives from 16 locations, and operated the company profitably for 25 years with high patient satisfaction and low overhead. He is a graduate of the Johns Hopkins School of Medicine and received his A.B. from Johns Hopkins University. He remains active in the practice of internal medicine and endocrinology. Dana H. Frank, M.D. has been President of the Company since March 1997 and the Flagship Affiliated Group since December 1996 and has served as a member of the Board of Directors of the Company since November 1996. He has been in the private practice of medicine since 1981 and is President of Park Medical Associates, P.A. He is an Assistant Professor at the Johns Hopkins University School of Medicine and has been a Consulting Internist and Headache Specialist at the Johns Hopkins University School of Medicine since 1981. He has also served on the Johns Hopkins Hospital Medical Board. He received his A.B. from Brown University and his M.D. from George Washington University. He completed his internship and residency at Johns Hopkins Hospital. Committees of the Board of Directors. The Board of Directors have ------------------------------------ established a Compensation Committee which generally consists of two non- employee directors. Dr. Fang and Mr. Weglicki are currently the only members. The Compensation Committee makes recommendations to the Board of Directors concerning salaries and incentive compensation for employees of and consultants to the Company. No interlocking relationships exist between any member of the Compensation Committee and any member of any other company's Board of Directors or compensation committee. Directors' Compensation. Historically, members of the Board of Directors ----------------------- of the Company have not been received any cash compensation for their services as members of the Board, although they are reimbursed for reasonable travel expenses while attending Board and Committee meetings. The Board of Directors has the authority to establish the compensation of its members. Executive Compensation - Summary Compensation Table. The following table --------------------------------------------------- sets forth the cash compensation of Jerilyn P. Asher, the Chief Executive Officer and Chairman of the Board of the Company, and the two most highly compensated executives of the Company in 1997 (who earned more than $100,000 during 1997) (the "Named Executive Officers"). ------------------------ -6- SALARY COMPENSATION TABLE
NAME AND YEAR SALARY BONUSES OTHER OPTIONS AND POSITION REMUNERATION WARRANTS/1/ - ------------------------------------------------------------------------------------------------------- Jerilyn P. Asher, CEO 1997 $250,000 -- 7,996/2/ -- and Chair 1996 $250,000 -- 9,647/3/ -- - ---------------------------------------------------------------------------------------------------- Dana H. Frank, M.D., 1997 $220,235/4/ -- -- 300,000 President 1996 $118.057 -- -- -- - ---------------------------------------------------------------------------------------------------- Samantha Trotman, 1997 $125,000 -- -- 400,000 Chief 1996 $ 4,808/5/ -- -- -- Financial Officer/6/ - ----------------------------------------------------------------------------------------------------
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. Amount 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. 6. Ms. Trotman's employment with the Company terminated on June 30, 1998. 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 -7- individual and Company performance. Pursuant to an amendment to the employment agreement dated August 30, 1996, Ms. Asher waived the right to receive any unpaid amounts of base salary and bonus to which she was entitled and had not received as of August 1, 1996. Ms. Asher is also entitled to receive other benefits available to the Company's senior management generally. Pursuant to a stock restriction agreement executed as of the date of the employment agreement, the Company issued 4,162,500 shares of Series A Common Stock to Ms. Asher at a purchase price of $.01 per share, 346,875 of which remain subject to forfeiture if Ms. Asher does not maintain her employment with the Company until June 1998, unless 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 -8- cause and upon 60 days' notice without cause. Dr. Fuller may terminate his employment for any reason upon 60 days' written notice. During the term of the agreement, the Company must nominate Dr. Fuller to and Dr. Fuller will be eligible to serve on the Board of Directors. Dr. Fuller also agreed to standard non-competition and non-disclosure terms with the Company. The Company has entered into employment agreements with Dr. Calvanese and Dr. Frank. These agreements have initial terms, commencing in 1998, of four years, and are renewable thereafter by agreement between the parties. In the event that the agreements are not extended for at least a one year period, the company is obligated to make a severance payment of up to $175,000, in the case of Dr. Frank, up to $200,000 in the case of Dr. Calvanese. The Agreement with Dr. Frank provides for a base salary of $100,000 per annum, provided that his minimum compensation from the Company or its affiliates must not be less than $220,000 per year. The Agreement with Dr. Calvanese provides for a base salary of $50,000 per annum, provided that his minimum compensation from the Company or its affiliates must not be less than $430,000 per year. The employment agreements provide for the following grant of options:
------------------------------------------------------------------------------------------------- TOTAL GRANT VESTED VESTING EACH YEAR EXERCISE PRICE THEREAFTER - -------------------------------------------------------------------------------------------------- Dr. Frank 500,000 Class A* 300,000 100,000 $2.25 - -------------------------------------------------------------------------------------------------- Dr. Calvanese 500,000 Class A* 300,000 100,000 $2.25 - --------------------------------------------------------------------------------------------------
*Dr. Frank and Dr. Calvanese each also hold options to purchase 300,000 shares at $2.50, of which 100,000 shares are vested, 100,000 shares vest September 1998 and 100,000 shares vest on January 1, 1999. -9- In the event that the employment agreements are terminated by the Company without cause or by the employee for good reason, the employee is entitled to severance payments for a period of at least two years. The Company may terminate the employment agreements for cause, which means (i) material failure to perform duties to the Company, (ii) intentional misconduct or (iii) conviction of a felony or for fraud, provided that in the event of a termination pursuant to clause (i) the employee is entitled to severance payment equal to one years salary or two years if the termination is following a change in control. The Company also has entered into an employment agreement with Eugene M. Bullis pursuant to which he acts as senior vice president and chief financial officer of the Company. The agreement has an initial term of 24 months commencing in March 1998, which is automatically extended for one year in the event of a change of control of the Company occurring during the last 12 months of the term of the agreement. The agreement provides for a base salary payable in equal monthly installments of $24,740.00 beginning September 1, 1998 and through December 31, 1998 and a base salary of $225,000 per year thereafter. On the first anniversary date of the agreement, if Mr. Bullis has remained in the continuous employment of the Company, he shall receive a bonus in the amount of $100,000. From and after December 31, 1999, Mr. Bullis will be eligible to receive annual bonus payments of up to 100% of base salary based upon the achievement of certain performance targets. The Company has issued Mr. Bullis options for 750,000 shares of Class A Common Stock at an exercise price of $3.00) which shall vest in equal annual installments of 187,500 shares commencing on April 1, 1999. In addition, Mr. Bullis is entitled to receive an additional grant of options for 150,000 shares of Class A Common Stock at an exercise price of $3.00 per share on April 1, 1999 if certain performance targets are met. In the event that Mr. Bullis is terminated without cause, he is entitled to severance payments equal to one years salary. "Cause" means (i) the material failure to perform his duties with the Company or (ii) misconduct materially injurious to the Company. In the event that Mr. Bullis is terminated within one year after a change in control, he is entitled to receive one years salary and the $100,000 bonus referred to above (unless already paid by the Company, and all options granted shall be vested. -10- Options Granted in 1997- Table. The following sets forth, as to each of ------------------------------ the Named Executive Officers, information concerning stock options granted in the year ended December 31, 1997.
OPTION GRANTS FOR LAST FISCAL YEAR - ----------------------------------------------------------------------------------------------------------- NUMBER OF % OF TOTAL POTENTIAL REALIZABLE VALUE SECURITIES OPTIONS AT ASSUMED ANNUAL RATES NAME AND POSITION UNDERLYING GRANTED TO EXPIRATION EXERCISE OF STOCK PRICE OPTION GRANTED EMPLOYEES IN DATE/1/ PRICE/2/ APPRECIATION FOR FISCAL YEAR OPTION TERM/3/ 5% 10% - ----------------------------------------------------------------------------------------------------------- 5 Jerilyn P. Asher -- -- -- -- - ----------------------------------------------------------------------------------------------------------- Dana H. Frank, M.D. 300,000/4/ 13.8% 4/23/07 $2.50 $471,671 $1,195,307 - ----------------------------------------------------------------------------------------------------------- Samantha Trotman, Chief Financial 400,000/5/ 18.3% 1/1/07 $2.50 $628,895 $1,593,742 Officer - -----------------------------------------------------------------------------------------------------------
1. The expiration date of an option is the tenth anniversary of the date on which the option is granted. 2. The exercise price is equal to the fair market value of the Company's Class A Common Stock on the date of the grant. 3. 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. 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 -11- 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. Security Ownership of Certain Beneficial Owners and Managers. The ------------------------------------------------------------ following tables set 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. -12-
POC TABLE OF COMMON STOCK -- CLASS A AND CLASS B SHARES -------------------------------------------------------- Class A Common Stock/1/ Class B Common Stock/2/ Class C Common Stock/2/ Class L Common Stock/2/ - ---------------------------------------------------------------------------------------------------------------------------------- Percentage Percentage Percentage Percentage Name and Address of Number of of Class Number of of Class Number of of Class Number of of Class Beneficial Owner Shares Outstanding Shares Outstanding Shares Outstanding Shares Outstanding - ---------------------------------------------------------------------------------------------------------------------------------- Bain Capital Funds c/o - - 11,015,000/3/ 100.0% 3.076,924/4,5/ 33.3% 615,385 25.0% Bain Capital, Inc. Two Copley Plaza Boston, MA 02116 - ---------------------------------------------------------------------------------------------------------------------------------- Goldman Sachs Funds - - - - 3,076,924/4,5/ 33.3% 461,538 18.75% c/o Goldman Sachs & Co. 85 Broad Street New York, MA 10004 - ---------------------------------------------------------------------------------------------------------------------------------- ABS Capital Partners, - - - - 9,160,004/6/ 74.6% 1,374,487 55.83% 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 02110 - ---------------------------------------------------------------------------------------------------------------------------------- Jerilyn P. Asher 3,849,832/8/ 14.6% - - - - - - - ---------------------------------------------------------------------------------------------------------------------------------- Arlan F. Fuller, Jr., 618,750 2.4% - - - - - - M.D. - ---------------------------------------------------------------------------------------------------------------------------------- Samantha J. Trotman 150,000/9/ " 1,729,016/10/ 15.7% - - - - - ---------------------------------------------------------------------------------------------------------------------------------- Alphonese F. Calvanese, 313,007/11/ " - - - - - - M.D. - ---------------------------------------------------------------------------------------------------------------------------------- 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% 3.076,924/4,5/ 33.3% - - - ---------------------------------------------------------------------------------------------------------------------------------- Marc Wolpow/13/ - - 11,015,000/3/ 100.0% 3,076,924/4,5/ 33.3% - - - ---------------------------------------------------------------------------------------------------------------------------------- Timothy T. Weglicki - - - - 9,160,004/14/ 74.6% 1,374,487 55.83% - ---------------------------------------------------------------------------------------------------------------------------------- John D. Stobo, Jr. - - - - 9,160,004/14/ 74.6% 1,374,487 55.83% - ---------------------------------------------------------------------------------------------------------------------------------- Richard Maffezzoli, M.D. 94,585 - - - - - - - - ---------------------------------------------------------------------------------------------------------------------------------- Paul Bodnar, M.D. 94,585 - - - - - - - - ---------------------------------------------------------------------------------------------------------------------------------- All directors and 5,317,809 19.8% - - - - - - executive officers as a group (10 persons) (31,594,579/15/ shares or 83.9% assuming conversion of Class B, Class C and Class L Common Stock into Class A Common Stock) "Less than 1% - ----------------------------------------------------------------------------------------------------------------------------------
Total Common Stock Assuming Conversion to Class A/1,2,16/ - --------------------------------------------------- Number of Percentage Name and Address of Common of Common Beneficial Owner Stock Stock - --------------------------------------------------- Bain Capital Funds c/o 15,322,694 30.0% Bain Capital, Inc. Two Copley Plaza Boston, MA 02116 - --------------------------------------------------- Goldman Sachs Funds 4,000,000 8.3% c/o Goldman Sachs & Co. 85 Broad Street New York, MA 10004 - --------------------------------------------------- ABS Capital Partners, 11,908,978 23.1% II, L.P. Funds One South Street Baltimore, MD 21201 - --------------------------------------------------- Offshore Health Industries, Inc. 1,582,500 3.8% Two Park Plaza Boston, MA 02110 - --------------------------------------------------- Jerilyn P. Asher 3,849,832 9.4% - --------------------------------------------------- Arlan F. Fuller, Jr., 618,750 1.6% M.D. - --------------------------------------------------- Samantha J. Trotman 1,879,016 4.8% - --------------------------------------------------- Alphonese F. Calvanese, 313,007 " M.D. - --------------------------------------------------- Leslie Fang, M.D. - " - --------------------------------------------------- Ira Fine, M.D. 113,316 " - --------------------------------------------------- Dana Frank, M.D. 272,904 " - --------------------------------------------------- Stephen G. Pagliuca/13/ 15,322,694 30.0% - --------------------------------------------------- Marc Wolpow/13/ 15,322,694 30.0% - --------------------------------------------------- Timothy T. Weglicki 11,908,978 23.1% - --------------------------------------------------- John D. Stobo, Jr. 11,908,978 23.1% - --------------------------------------------------- Richard Maffezzoli, M.D. 94,585 " - --------------------------------------------------- Paul Bodnar, M.D. 94,585 " - --------------------------------------------------- All directors and executive officers as a group (10 persons) (31,594,57915 shares or 83.9% assuming conversion of Class B, Class C and Class L Common Stock into Class A Common Stock) "Less than 1% - ---------------------------------------------------
-13- 1. Reflects the percentage of shares of Class A, Class B, Class C and Class L Common Stock. The Class B, Class C and Class L 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 December 31, 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), 1,538,426 shares of Class C Common Stock and 615,385 shares of Class L Common Stock (1,230,777 on a fully diluted basis (assuming a 2-to-1 conversion rate on the Class L Common Stock)). 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, and 1,374,487 shares of Class L Common Stock (2,748,974 shares of Class C Common Stock on a fully diluted basis (assuming a 2-to-1 conversion rate on the Class L Common Stock)) 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. Mr. Stobo is a vice president of ABS Capital Partners II, L.L.C. As such Mr. Weglicki and Mr. Stobo 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 through 14 above. 16. The conversion rate is determined pursuant to a formula and amounts reflected in the table assume all accrued dividends have been paid and that no Class L adjustment is necessary. If the full Class L adjustment is required, the conversion rate would be 5.12 rather than the 2 to 1 as reflected in the table. -14- Certain Relationships and Related Transactions. Through June 20, 1997, ---------------------------------------------- pursuant to an agreement between the Company and its institutional investors (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 affiliated with Bain Capital, Goldman Sachs & Co., ABS Capital Partners (the "Institutional Investors") for an aggregate consideration of $25 million. On July 14, 1998, the Institutional Investors acquired 2,461,538 shares of Class L Common Stock for aggregate consideration of $8 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. Effective June 30, 1998, the Company's obligation to pay a fee under the Management Contract was terminated, provided that, in the event of a merger or public offering, the Company is obligated to pay from the proceeds of such sale accrued but unpaid management fees. 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 F. 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 total consideration paid to the physicians who transferred their practices to the Springfield Affiliated Group. Ira T. Fine, M.D., Dana H. Frank, M.D., Paul Z. Bodnar, M.D. and Richard Maffezzoli, M.D., each a Director of the Company, are members of medical practice groups which transferred their practice assets to the Flagship Affiliated Group for which they received the allocated part of the total consideration paid to physicians who transferred their practices to the Flagship Affiliated Group. Each of Drs. Calvanese, Fine, Frank, Maffezzoli and Bodnar are also officers of the Company and receives compensation for the Company and its affiliates. Each of Drs. Calvanese, Fine, Frank, Maffezzoli and Bodnar have also been granted options to purchase shares of the Company's Class A Common Stock. -15- OTHER BUSINESS -------------- Independent Accountants. Ernst & Young, LLP is the Company's independent ----------------------- public accounting firm and has been since 1985. Representatives of Ernst & Young, LLP are not expected to be present at the Meeting. Solicitation. The Company does not intend to solicit proxies. If the ------------ Company undertakes any solicitation, all costs and expenses associated with its soliciting proxies will be borne by the Company. In addition to the use of the mails, proxies may be solicited by the directors, officers and employees of the Company by personal interview, telephone or telegram. Such directors, officers and employees will not be additionally compensated for such solicitation but may be reimbursed for out-of-pocket expenses incurred in connection therewith. Arrangements will also be made with custodians, nominees and fiduciaries for the forwarding of solicitation material to the beneficial owners of Common Stock held of record by such persons, and the Company will reimburse such custodians, nominees and fiduciaries for their reasonable out-of-pocket expenses incurred in connection therewith. Other Matters. As of the date of this Proxy Statement, the Board of ------------- Directors is not aware of any other business or matters to be presented for consideration at the Meeting other than as set forth in the Notice of Meeting attached to this Proxy Statement. However, if any other business shall come before the Meeting or any adjournment or postponement thereof and be voted upon, the enclosed proxy shall be deemed to confer discretionary authority on the individuals named to vote the shares represented by such proxy as to any such matters. -16- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (Mark One) [ ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. For the quarterly period ended June 30, 1998 ----------------------- OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. For the transition period from _________________ to _________________ Commission file number 333-26137 --------------------------- Physicians Quality Care, Inc. - -------------------------------------------------------------------------------- (Exact Name of Registrant as Specified in its Charter) Delaware 04-3267297 - -------------------------------------------------------------------------------- (State or Other Jurisdiction of (I.R.S. Employer Identification No.) Incorporation or Organization) 950 Winter Street, Suite 2410, Waltham, Massachusetts 02154 - ------------------------------------------------------------------------------- (Address of Principal Executive Offices) (Zip Code) Registrant's Telephone Number, Including Area Code (617) 890-5560 -------------------------- Not Applicable - -------------------------------------------------------------------------------- (Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report) Indicate by check X 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 ----- ----- APPLICABLE ONLY TO CORPORATE ISSUERS: The number of shares outstanding of issuer's common stock, as of August 12, 1998 was: 26,106,780 shares of Class A Common Stock, $.01 par value, 2,809,296 shares of Class B-1, $.01 par value, 1,790,704 shares of Class B-2 Common Stock, $.01 par value, 7,692,309 shares of Class C Common Stock, $.01 par value, and 2,461,538 shares of Class L Common Stock, $.01 par value. PHYSICIANS QUALITY CARE, INC. FORM 10-Q TABLE OF CONTENTS
PAGE ---- PART I FINANCIAL INFORMATION Item 1. Balance Sheets as of June 30, 1998 and December 31, 1997 ....................................... 1 Statements of Operations for the three and six months ended June 30, 1998 and 1997 ..................... 3 Statements of Cash Flows for the six months ended June 30, 1998 and 1997 ............................ 4 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations ..................... 7 PART II OTHER INFORMATION Item 1. Legal Proceedings ....................................... 23 Item 5. Other Information ....................................... 24 Item 6. Exhibits and Reports on Form 8-K ........................ 26 Signatures ....................................................... 27
PART I FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS. PHYSICIANS QUALITY CARE, INC. BALANCE SHEETS
(UNAUDITED) JUNE 30, 1998 DECEMBER 31, 1997 ------------- ---------------- ASSETS Current Assets: Cash and cash equivalents $ (257,817) $ 8,782,019 Restricted cash 1,106,290 - Prepaid expenses 46,811 35,175 Due from affiliated physician practices 14,011,793 5,719,421 Other current assets 17,656 69,868 ------------ ------------ Total current assets 14,924,733 14,606,483 Investment in long term affiliation agreements, less accumulated amortization of $1,879,778 and $1,394,987 in 1998 (unaudited) and 1997, respectively 54,044,322 57,340,059 Property and equipment, net 398,054 1,327,860 Other asset 386,300 136,181 ------------ ------------ Total assets $ 69,753,409 $ 73,410,583 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Accounts payable $ 639,299 $ 1,218,766 Accrued compensation 204,583 266,138 Accrued expenses 607,937 628,433 ------------ ------------ Total current liabilities 1,451,819 2,113,337 Deferred taxes 746,061 746,062 Commitments and contingencies Common stock, subject to put, 18,604,136 and 18,157,982 shares authorized, issued and outstanding at June 30, 1998 (unaudited) and December 31, 1997, respectively 60,463,943 54,473,947 Stockholders' equity: Class A common stock, $.01 par value, 75,000,000 shares authorized, 8,515,144 and 8,505,208 shares issued and 7,502,644 and 7,492,708 outstanding at June 30, 1998 (unaudited) and December 31, 1997, respectively 85,151 85,052 Class B-1 common stock, $.01 par value, 15,367,915 shares authorized, 2,809,296 shares issued and outstanding at June 30, 1998 (unaudited) and December 31, 1997 28,093 28,093 Class B-2 common stock, $.01 par value 9,732,085 shares authorized, 1,790,704 shares issued and outstanding at June 30, 1998 (unaudited) and December 31, 1997 17,907 17,907 Class C common stock, $.01 par value, 13,846,155 shares authorized, 7,692,309 shares issued and outstanding at June 30, 1998 (unaudited) and December 31, 1997 76,923 76,923 Additional paid-in capital 50,033,254 49,846,913 Accumulated deficit (43,139,617) (33,967,526) Less treasury stock, at cost, 1,012,500 shares (10,125) (10,125) ------------ ------------ Total stockholders' equity 7,091,586 16,077,237 ------------ ------------ Total liabilities and stockholders' equity $ 69,753,409 $ 73,410,583 ============ ============
See accompanying notes to unaudited financial statements and management's discussion and analysis of financial condition and results of operations. PHYSICIANS QUALITY CARE, INC. STATEMENTS OF OPERATIONS (Unaudited)
For the Three Months For the Six Months Ended June 30, Ended June 30, --------------------------- ------------------------- 1998 1997 1998 1997 -------------------------------------------------------- Net patient service revenue $20,636,578 $10,669,608 41,802,375 21,223,647 Less: amounts retained by physician groups (5,381,593) (3,757,811) (11,930,442) (7,467,445) ----------- ----------- ------------ ----------- Management fee revenue 15,254,985 6,911,797 29,871,933 13,756,202 Operating expenses: Nonphysician salaries and benefits 6,827,848 3,146,813 13,647,629 6,214,101 Other practice expenses 7,189,690 2,882,446 13,358,894 5,633,688 Corporate and regional expenses 2,136,833 1,310,224 4,296,657 2,781,347 Deprecation and amortization 842,632 616,831 1,505,377 958,363 Provision for bad debts 778,786 282,318 1,467,114 555,581 ----------- ----------- ------------ ----------- Total expenses 17,775,789 8,238,632 34,275,671 16,143,080 Operating Loss (2,520,804) (1,326,835) (4,403,738) (2,386,878) Other Income (expense): Interest income 47,344 32,838 151,558 36,793 Interest expense (18,813) (75,102) (57,127) (105,826) Loss of investment in subsidiary (190,445) (323,287) ----------- ----------- ------------ ----------- Net loss $(2,682,718) $(1,369,099) $ (4,632,594) $(2,455,911) =========== =========== ============ =========== Net loss available to common stock $(7,222,214) $(8,025,640) $ (9,172,090) $(9,112,452) =========== =========== ============ =========== Net loss per common share-basic $ (0.18) $ (0.30) $ (0.23) $ (0.35) =========== =========== ============ =========== Weighted average common shares outstanding 39,461,589 26,724,848 39,352,829 25,746,314 =========== =========== ============ ===========
See accompanying notes to unaudited financial statements and management's discussion and analysis of financial condition and results of operations. 2 PHYSICIANS QUALITY CARE, INC. STATEMENTS OF CASH FLOW (UNAUDITED)
For the Six Months Ended June 30, ---------------------------- 1998 1997 ------------- ------------- OPERATING ACTIVITIES Net Loss $ (4,632,594) $ (2,455,896) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization 1,505,377 958,363 Changes in operating assets and liabilities, net of effects of business acquisitions: Increase in due from affiliated physician practices (4,169,908) (3,605,340) Increase (Decrease) in prepaid expenses and other assets (159,543) (330,062) Decrease in accounts payable, accrued compensation and accrued expenses (497,597) (366,228) Decreases in income taxes payable (22,319) (92,000) ------------- ------------- Net cash used in operating activities (7,976,584) (5,891,163) INVESTING ACTIVITIES Purchase of property and equipment (93,402) (949,199) Cash paid for affiliations (50,000) (831,231) Cash paid for affiliation costs (406,097) Increase in restricted cash (1,106,290) Increase in deferred acquisition costs (657,632) ------------- ------------- Net cash used in investing activities (1,249,692) (2,844,159) FINANCING ACTIVITIES Proceeds from issuance of common stock, net of issuance costs 186,440 28,864,362 Proceeds from note payable 3,500,000 Decrease in deferred financing costs 18,196 Payments on note payable (3,500,000) Payments on capital lease obligations (207,705) Cash paid for debt issuance cost (331,148) ------------- ------------- Net cash provided by financing activities 186,440 28,343,705 Net decrease in cash and cash equivalents (9,039,835) (19,608,383) Cash and cash equivalents at beginning of period 8,782,019 136,926 ------------- ------------- Cash and cash equivalents at end of period $ (257,817) $ 19,745,309 ============= =============
See accompanying notes to unaudited financial statements and management's discussion and analysis of financial condition and results of operations. 3 Physicians Quality Care, Inc. Notes to Unaudited Financial Statements Six Months Ended June 30, 1998 and 1997 (1) Basis of Presentation --------------------- The accompanying unaudited financial statements of Physicians Quality Care, Inc., a Delaware corporation (the "Company"), have been prepared in accordance with generally accepted accounting principles and in accordance with Rule 10-01 of Regulation S-X. In the opinion of management, the unaudited interim financial statements contained in this report reflect all adjustments, consisting of only normal recurring accruals which are necessary for a fair presentation of the financial position as of June 30, 1998 and the results of operations for the three and six months ended June 30, 1998. The results of operations for the three and six month periods ended June 30, 1998 are not necessarily indicative of results for the full year. These unaudited financial statements, footnote disclosures and other information should be read in conjunction with the financial statements and notes thereto included in the Company's Registration Statement on Form S-1, as amended (No. 333-26137), and the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1997. The preparation of the financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that effect the amounts reported in the accompanying financial statements and notes. Actual results could differ from those estimates. (2) Net Loss Per Common Share ------------------------- Net loss per share of common stock is computed by dividing the net loss available to common stock by the weighted-average number of shares of common and common equivalent shares outstanding during each period presented. The net loss available to common stock for the three and six months ended June 30, 1998 and June 30, 1997 reflect the accretion of common stock subject to put to fair value at those respective balance sheet dates. The effect of options and warrants is not considered as it would be antidilutive. Fully diluted loss per share is not presented because the effect would be antidilutive. In February 1997, the Financial Accounting Standards Board (the "FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 128 "Earnings Per Share", which established standards for computing and presenting earnings per share ("EPS") and applies to entities with publicly held common stock or potential common stock. SFAS 128 is effective for financial statements issued for both interim and annual periods ending after December 31, 1997 and requires restatement of all prior period EPS data. Under the new requirements for calculating primary 4 earnings per share, the dilutive effect of stock options will be excluded. The Company has applied this standard in 1997 and 1998. (3) Pending Accounting Standards ---------------------------- In June 1997, the FASB 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 a 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. (4) 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 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 his Employment Agreement. The Company and Mr. Greenberg entered into a Settlement Agreement in April 1998 pursuant to which the Company confirmed Mr. Greenberg's ownership of 1,012,500 shares of Class A Common Stock and Mr. Greenberg granted the Company an option to purchase all of such shares. The purchase price is $1.3 million and increases (commencing October 1997) by $25,000 for each three month period thereafter. The Company's purchase option expires on the earlier of (i) October 14, 1999, (ii) upon a public offering of the capital stock of the Company, or (iii) a change in control. No damages were awarded and mutual releases were granted. (5) LETTER OF CREDIT ---------------- In connection with the October 1997 acquisition of a 50% interest in TLC Management Company, a medical management company ("TLC"), and a 50% interest in Total Quality Practice Management, Inc., a practice management company providing Medicare risk management services ("Total Quality"), the Company issued a $1.0 million letter of credit in April 1998. In connection with this letter of credit, the Company is required to maintain a cash balance of $1 million which is included under the caption "restricted cash" on the balance sheet. (6) Subsequent Event ----------------- On July 15, 1998, the Company issued 2,461,538 shares of Class L Common Stock to certain institutional investors pursuant to a Class L Common Stock Purchase Agreement. The purchase price was $3.25 for each share of Class L Common Stock for an aggregate purchase price of approximately $8,000,000. In connection with such transaction the rights of the Class B Common Stock in a liquidation were amended to rank prior to the Class A Common Stock and on an equal basis with the Class C Common Stock. The exercise price of the outstanding Class B and Class C Common Stock warrants were reduced by $2.00 per share to $0.50 and $1.25 per share respectively. No distribution, whether as a dividend, upon liquidation or otherwise, may be made on any other class of Common Stock until the holders of the Class L Common Stock have received dividends or distributions equal to the purchase price of the Class L Common Stock plus an additional 12% per annum. In connection with the Class L Common Stock financing, the Company's Shareholders approved a Restated Certificate of Incorporation. The Restated Certificate limits any distribution on capital stock that constitutes a taxable distribution. 5 The Class L Common Stock automatically converts into Class A Common Stock upon the occurrence of a public offering that satisfy certain criteria, upon a merger, consolidation, liquidation or winding up of the Company or a sale or other transfer of all or substantially all of the Company's assets, or certain other conditions brought about by partial redemption of Class L Common Stock. The Class L Common Stock is also convertible at any time at the option of the holder. The number of shares of Class A Common Stock into which the Class L Common Stock is convertible is determined according to a formula and is based on the value of Class A Common Stock issued pursuant to a realization event. The number of shares of Class A Common Stock issuable upon conversion (assuming no accrued and unpaid dividends) ranges between 4,923,007 and 12,603,077. The proceeds of the sale of Class L Common Stock will be used for working capital and other corporate purposes. 6 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. This Quarterly Report on Form 10-Q contains forward-looking statements that involve a number of risks and uncertainties. There are a number of important factors that could cause the Company's actual results to differ materially from those indicated by such forward-looking statements. Factors that might cause such a difference include, but are not limited to, those discussed under "Factors Affecting Future Operating Results." The following discussion should be read in conjunction with the Company's Unaudited Financial Statements and Notes thereto included elsewhere in this documents. OVERVIEW The Company is affiliated with and operates multi-specialty medical practice groups. The first physician affiliation was completed on August 30, 1996 with 32 physicians in the Springfield, Massachusetts area (the "Springfield Affiliated Group"). On December 11, 1996 the Company consummated the affiliation with Flagship Health, P.A., a Maryland professional association ("Flagship," and together with Flagship II, the "Flagship Affiliated Group"), which consisted of 59 physicians in the Baltimore, Maryland area. On December 1, 1997, the Company entered into a long term affiliation agreement with a physician practice consisting of 58 physicians in the Baltimore, Maryland area. Additional physicians have been subsequently added to the Springfield Affiliated Group and the Flagship Affiliated Group (the "Affiliated Groups") during 1997 and 1998. In connection with the affiliation transactions, the assets and liabilities of the physician practices were transferred to newly formed professional corporations ("PCs") or professional associations ("PAs") affiliated with the Company. The Company is working with these groups of physicians to improve operating practices and to obtain managed care contracts. On October 24, 1997, the Company acquired a 50% interest in Total Life Care, a medical management company based in Atlanta, Georgia. As of June 30, 1998, the Company had affiliations or independent provider association ("IPA") arrangements with the following physicians:
Maryland Massachusetts Georgia --------- -------------- -------- Affiliated Physicians: Primary Care 102 27 0 Specialist 50 13 0 --- --- --- Total: 152 40 0 IPA Physicians: 0 0 334*
* Reflects number of physicians in the IPA network in which the Company has a 50% interest. 7 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, through improved billing and operating efficiency, additional patient encounters, increased capitated revenues and controlling the expenses of Affiliated Groups. To the extent that patient revenue increases at a greater rate than practice expenses, the Company'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, the Company will earn no or only a limited management fee. Under the arrangements with the physicians formally associated with Clinical Associates, P.A. (which became effective on December 1, 1997) the Company 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 expense. While this structure causes the Company's management fee not to be as dependent upon controlling practice expenses, the Company believes that both increased revenues 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 and during the three month period ended June 30, 1998: Fee for Service Contracts 49% Medicare 22% Capitated Managed Care Contracts 27% Medicaid and Other 2% --- 100% ===
RESULTS OF OPERATIONS: Three Months ended June 30, 1998 and June 30, 1997 Net patient revenues of affiliated practices were $20.6 million for the three months ended June 30, 1998 compared to $10.7 million for the same period a year ago. The increase of $9.9 million in net revenues was primarily due to the Flagship II affiliation in December, 1997. Capitated managed care contracts were 27% of revenues for the three months ended June 30, 1998 compared to 9% for the three months ended June 30, 1997. Capitated contracts have increased as a source of revenue in 1998 due to the Flagship II affiliation. 8 Amounts retained by physician groups, which represents physician salaries and benefits, increased $1.6 million for the three months ended June 30, 1998 compared to the three months ended June 30, 1997. This is primarily due to the increase in affiliated physicians from 1997 to 1998. As a percentage of net patient service revenues, amounts retained by physician groups was 26% for the three months ended June 30, 1998 compared to 35% for the three months ended June 30, 1997. This was primarily due to the Flagship II affiliation which has a lower physician compensation ratio to net revenues than the prior affiliations. Nonphysician salaries and benefits, which represents salaries and benefits for physician practice staff increased by $3.7 million to $6.8 million for the three months ended June 30, 1998 from $3.1 for the three months ended June 30, 1997. As a percentage of net patient service revenues, Nonphysician salaries and benefits was 33% for the three months ended June 30, 1998 compared to 29% for the three months ended June 30, 1997. Other practice expenses, which represent all other physician practice expenses, increased $4.3 million and as a percentage of net revenue to 35% for the three months ended June 30, 1998 compared to 27% for the three months ended June 30, 1997. The increase in Nonphysician salaries and benefits and other practice expenses is primarily a result of the Flagship II affiliation which has higher infrastructure expenses. The infrastructure expenses include outside services and administrative costs associated with capitated managed care contracts. Corporate and regional expenses increased $827,000 for the three months ended June 30, 1998 compared to the three months ended June 30, 1997. This increase was due to the hiring of corporate and regional staff and related expenses to support the affiliated practices. Corporate and regional expenses were 10% of revenues for the three months ended June 30, 1998 compared to 12% for the three months ended June 30, 1997. Depreciation and amortization expense was $843,000 for the three months ended June 30, 1998 compared to $617,000 for the three months ended June 30, 1997. The increase was due to the Flagship II affiliation completed in December 1997 and is primarily related to the amortization of intangible assets from the affiliation transactions. Provisions for bad debt expense increased by $496,000 for the three months ended June 30, 1998 compared to the three months ended June 30, 1997 and increased as a percentage of net revenue to 4% from 3% for the same periods. The increases in provisions for bad debts is due to the provisions for Flagship II affiliation and patient mix compared to prior affiliations. Interest income increased for the three months ended June 30, 1998 compared to the three months ended June 30, 1997 due to a higher level of invested cash over the entire period. 9 Loss in investment for the three months ended June 30, 1998 was $190,000. The Company acquired a 50% interest in Total Life Care on October 24, 1997 and has accounted for the transaction using the equity method. Six Months ended June 30, 1998 and June 30, 1997 Net patient revenues of affiliated practices for the six months ended June 30, 1998 were $41.8 million compared to $21.2 million for the same period a year ago. The increase of $20.6 million in net revenues was primarily due to the Flagship II affiliation. Capitated managed care contracts were 27% of revenues for the six months ended June 30, 1998 compared to 9% for the six months ended June 30, 1997. Capitated contracts have increased as a source of revenue in 1998 due to the Flagship II affiliation. Amounts retained by physician groups, which represents physician salaries and benefits, increased $4.5 million for the six months ended June 30, 1998 compared to the six months ended June 30, 1997. This is primarily due to the increase in affiliated physicians from 1997 to 1998. As a percentage of net patient service revenues, amounts retained by physician groups was 29% for the six months ended June 30, 1998 compared to 35% for the six months ended June 30, 1997. This was primarily due to the Flagship II affiliation which has a lower physician compensation ratio to net revenues than the prior affiliations. Nonphysician salaries and benefits, which represent salaries and benefits for physician practice staff increased by $7.4 million to $13.6 million for the six months ended June 30, 1998 from $6.2 million for the six months ended June 30, 1997. As a percentage of net patient service revenues, Nonphysician salaries and benefits was 33% for the six months ended June 30, 1998 compared to 29% for the six months ended June 30, 1997. Other practice expenses, which represent all other physician practice expenses, increased $7.7 million and as a percentage of net revenue to 32% for the six months ended June 30, 1998 compared to 27% for the six months ended June 30, 1997. The increase in Nonphysician salaries and benefits and other practice expenses is primarily a result of the Flagship II affiliation which has higher infrastructure expenses. The infrastructure expenses include outside services and administrative costs associated with capitated managed care contracts. Corporate and regional expenses increased $1.5 million for the six months ended June 30, 1998 compared to the six months ended June 30, 1997. This increase was due to the hiring of corporate and regional staff and related expenses to support the affiliated practices. Corporate and regional expenses were 10% of revenues for the six months ended June 30, 1998 compared to 13% for the six months ended June 30, 1997. Depreciation and amortization expense was $1.5 million for the six months ended June 30, 1998 compared to $958,000 for the six months ended June 30, 1997. The increase was due to the Flagship II affiliation completed in December 1997 and is primarily related to the amortization of intangible assets from the affiliation transactions. 10 Provisions for bad debts increased by $911,000 for the six months ended June 30, 1998 compared to the six months ended June 30, 1997 and increased as a percentage of net revenue to 3.5% from 2.6% for the same periods. The increases in provisions for bad debts is due to the Flagship II affiliation and patient mix compared to prior affiliations. Interest income increased for the six months ended June 30, 1998 compared to the six months ended June 30, 1997 due to a higher level of invested cash over the entire period. Loss in investment for the six months ended June 30, 1998 was $323,000. The Company acquired a 50% interest in Total Life Care on October 24, 1997 and has accounted for the transaction using the equity method. LIQUIDITY AND CAPITAL RESOURCES: Principal capital requirements include payments for affiliation transactions, related transaction costs, working capital requirements, and the funding of operating losses. The Company anticipates that its liquidity and capital requirements will be the same for the short-term and long-term. The Company has incurred significant operating losses to date and does not have operating cash flow to fund further losses. The principal sources of capital have been the issuance of Class B, Class C, and Class L Common Stock to institutional investors, and the issuance of Class A Common Stock to private investors. Capital expenditures are expected to be $2 million for 1998. There can be no assurance that the institutional investors, who have previously been a source of capital, will continue to fund the operations through the purchase of additional equity. Working capital existing at the date of the affiliation transactions has been retained in the affiliated groups. Additional working capital is required to fund growth and manage accounts receivable fluctuations. The affiliated groups had net accounts receivable of $14.4 million at June 30, 1998 compared to $11.9 million at December 31, 1997. The $2.5 million increase in accounts receivable is due to billing delays caused by system conversions. Management believes that the increases are temporary and anticipates that the system conversions will be completed by December 31, 1998. During 1998 and 1997 the Company paid an aggregate consideration of $1.5 and $23.6 million, respectively, in connection with affiliation transactions. Of that amount $50,000 in 1998 and $7.8 million in 1997 was paid in cash and $1.5 million in 1998 and $15.8 million in 1997 was paid in Class A Common Stock. The majority of the consideration has been ascribed to intangible assets. As of June 30, 1998, intangible assets net of amortization costs, represented $54 million of the total assets of $70 million. The Company is amortizing the intangible assets over 25 years. Continuing operating losses, working capital requirements and other expenditures caused the company to experience a net reduction in cash and cash equivalents of $9 million during the six 11 months ended June 30, 1998. As a result of such reduction in working capital, the Company had a negative balance of unrestricted cash of ($258,000) at June 30, 1998 and its current assets at such date were principally composed of amounts due from affiliated physician practices. Delays in billings and collections at the affiliated practices due principally to systems conversions contributed to the decrease in cash and the increase in amounts due from affiliates. While the Company is addressing the billing and collection problems at the affiliated practice, the Company faced a serious shortfall in working capital. To address this problem and to fund its operations and growth, the Company issued 2,461,538 shares of Class L Common Stock to certain institutional investors pursuant to a Class L Common Stock Purchase Agreement. The purchase price was $3.25 for each share of Class L Common Stock for an aggregate purchase price of approximately $8 million. In connection with such transaction the rights of the Class B Common Stock in a liquidation were amended to rank prior to the Class A Common Stock and on an equal basis with the Class C Common Stock. The exercise price of the outstanding Class B and Class C Common Stock warrants were reduced by $2.00 per share to $0.50 and $1.25 per share respectively. While the Company believes that the proceeds from the Class L Common Stock financing will be sufficient to fund the Company's operations for the current year, the Company will continue periodically to experience shortfalls in working capital unless it is able to generate a positive cash follow from its operations. There can be no assurance that additional equity financing will be available in the future from the institutional investors in the Company or other sources. Of the common stock outstanding at June 30, 1998, 18,604,136 shares of Class A Common are subject to a put option which provided for the purchase of the shares at fair value upon the death of the holder. In addition, 1,029,749 shares are subject to a fair value put option back to the Company at the later of the physician shareholder's retirement or June 1998. These Class A Common Shares have been recorded at fair value on the accompanying balance sheet. Under the stockholder agreements as of December 31, 1997, the Company has the right to repurchase 15,471,063 shares of Class A Common Stock for fair value if the physician shareholder's termination of employment 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 provisions may not permit the Company to fully recover its physician affiliation payments or reflect the cost of affiliation transactions at the time of termination. To date, no physician shareholder has terminated an employment agreement or repurchased any practice assets. All of the put and call provisions expire on the completion of an initial public offering with net proceeds of $50 million and which meets certain other criteria. In addition, the Flagship II physicians have the right to require the Company to repurchase through a five year non-interest bearing note 4.8 million shares of Class A Common Stock at $3.00 per share if the Company has not completed an initial public offering prior to December 1, 2001. The Class A Common Stock is subject to a number of restrictions in the stockholder agreements and will not trade until the occurrence of an offering. The Company has not recorded a compensation expense for these puts and calls and believes it is a nonpublic entity for compensation accounting purposes. 12 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 erroneous 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 in 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 new version of the software which is 100% compliant as part of its 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, 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. 13 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 of 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 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. In July 1998, the Company issued 2,461,538 shares of Class L Common Stock for an aggregate consideration of $8 million to finance the Company's working capital shortfall and its ongoing operations. Because of the Company's working capital requirements and operating losses, as well as a general change in the market valuation of physician management companies, the terms of the Class L Common Stock financing were less favorable to the Company than its prior institutional offerings. If the Company is not able to eliminate its operating losses, the Company will need additional working capital in the future. Additional capital may also be needed to finance the expansion of the Company's operations. The Company may not be able to obtain such additional financing when needed or may not be able to do so on favorable terms. 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 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. 14 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 of 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 affected 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 Affiliates with additional physicians. In the Springfield and Greater Baltimore-Annapolis areas and in other potential affiliation markets, the Company is integrating physician practice groups that have previously operated independently. The Company is still in the process of integrating its affiliated practices. The Company may encounter difficulties in integrating the operations of such physician practice groups and the benefits expected from such affiliations may not be realized. Any delays or unexpected cots 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 come respects. PQC's management faces a significant challenge in its efforts to integrate and 15 expand the business of the Affiliated Groups. Because of limited working capital and operating losses, the Company has recently reduced the size of its corporate staff. While intended to improve the efficiency and cost of its operations, such reduction may also make it more difficult for the Company to manage it operations and growth. 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 assurance 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 decrease in the patient base associated with the such affiliated physicians. There can be no assurance that PQC will be able to attract and retain a sufficient number of qualified physicians. If the Company were unable to affiliate with an 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. 16 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. Because of limited working capital and operating losses, the Company has recently reduced the size of its corporate staff. While intended to improve the efficiency and cost of its operations, such reduction may also make it more difficult for the Company to manage it operations and growth. 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 capitate 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 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"). 17 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. Except for a small amount of coverage maintained by Flagship, 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 become 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 the resource-based relative value scale schedule for physician compensation under Medicare, which may have a negative impact on PQC's revenue. Efforts to control the cost of healthcare services are increasing. PQC's Affiliated Groups contract with provider networks, managed care organization and other organized healthcare systems, which often provided fixed fee schedules or capitation payment arrangements which are lower than standard charges. Future profitability in the changing healthcare environment, with differing methods of payment for medical services, is likely to be affected significantly by management of healthcare 18 costs, pricing of services and agreements with payors. Because PQC derives its 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, 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 form the Internal Revenue Service or an opinion of counsel with respect to the tax treatment of the mergers of PCs or PAs into the Springfield or Flagship Affiliated Groups. The Company does not believe that the Internal Revenue Service is issuing rulings at this time on transactions using the Company's affiliation structure. If a merger were not to so qualify, the exchange of shares would be taxable to the stockholders of the PC or PA, and the consideration (net of asset basis) issued in connection with the merger would be taxable to the Affiliated Group into which such PC or PA was merged. Because of such tax liability, failure of a merger or mergers to qualify as tax-free reorganizations could have a material adverse effect on the applicable Affiliated Group and the Company. Also, the inability to structure future Affiliations on a tax-deferred basis may adversely affect the Company's ability to attract additional physicians. 19 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 its senior management team, including Jerilyn P. Asher, the Chief Executive Officer, and Eugene M. Bullis, Senior Vice President and Chief Financial Officer, and the PQC's ability to continue to attract, motivate and retain highly qualified senior management and employees. The Company has employment agreements with Ms. Asher and Mr. Bullis. The Company does not maintain key person life insurance with respect to Ms. Asher or Mr. Bullis. As a development stage company, PQC has experienced some turnover in staff, including two of the founding officers. 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 investors ("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 and the Class L Common Stock Purchase Agreement also restrict 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, as amended in connection with the Class L Common Stock financing, are exercisable at $.50 or $1.25 per share, which exercise price may be substantially below the fair market value of the Class A Common Stock at the time of exercise. In addition, the Class L Common Stock is convertible into Class A Common Stock on the basis of a formula, which would, as of July 15, 1998, result in conversion at least equal to two shares of Class A Common Stock for each share of Class L Common Stock. 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. 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 and arm's length private sale. In determining the fair market value, the Board is to consider recent arm's length sales by the Company and the stockholders, as well as other factors 20 considered relevant. While the Stockholders Agreement does not limit the Board's discretion, such other factors may include changes, since the last arm's 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 physicians 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 before December 1, 2001. 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. Amortization of intangible assets contributed approximately $1,292,000 to the Company's net loss of $5.7 million during the year ended December 31, 1997 and $957,000 to the Company's loss of $4.6 million during the six months ended June 30, 1998. 21 PART II OTHER INFORMATION ITEM 1. 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 Company and Mr. Greenberg entered into a Settlement Agreement in April 1998 pursuant to which the Company confirmed Mr. Greenberg granted the Company an option to purchase all of such shares. The purchase price is $1.3 million and increases (commencing effective October 1997) by $25,000 each three-month period. The option expires on the earlier of (i) October 14, 1999, (ii) upon a public offering of the capital stock of the Company, or (iii) a change in control. No damages were awarded and mutual releases were granted. 22 ITEM 5. OTHER INFORMATION To address its liquidity needs, the Company issued 2,461,538 shares of Class L Common Stock to the investors in Class C Common Stock. The purchase price was $3.25 for each share of Class L Common Stock for an aggregate purchase price of approximately $8,000,000. The terms of this round of financing are less favorable to the Company than the Class C Common Stock financing in June 1997 reflecting the Company's current operating deficits and a general downward valuation of physician practice management companies ("PPMs") in the marketplace. No distribution, whether as a dividend, upon liquidation or otherwise, may be made on any other class of Common Stock until the holders of the Class L Common Stock have received dividends or distributions equal to the purchase price of the Class L Common Stock plus an amount sufficient to generate an internal rate of return thereon equal to 12% per annum (compounded). The Restated Certificate also limits any distributions on capital stock that constituted a taxable distribution. The Class L Common Stock is a new class of Common Stock. The Class L Common Stock automatically converts into Class A Common Stock upon the occurrence of (i) a Qualified Public Offering (as defined in the Restated Certificate), (ii) upon a merger, consolidation, liquidation or winding up of the Company or a sale or other transfer of all or substantially all of the Company's assets, or (iii) if less than 30% of the shares of Class L Common Stock issued in the transaction remain outstanding, subject, in each case, to approval of two thirds of the Class B and C Directors, voting as a single class. The Class L Common Stock is also convertible a any time at the option of the holder. The number of shares of Class A Common Stock into which the Class L Common Stock is convertible is determined pursuant to the formula set forth below. Based on that formula and assuming no Class L Adjustment, each share of Class L Common Stock is initially convertible into two shares of Class A Common Stock. If the full Class L Adjustment is assumed, the Class L Common Stock is initially convertible into approximately 5 shares of Class A Common Stock. The Class L Adjustment is made if the Company's Common Stock does not achieve certain valuations upon a Public Offering or Realization Event. The Class L Conversion Factor (see the Restated Certificate for the meaning of capitalized terms) is determined as follows: [Class L Conversion Constant] + [the quotient obtained by dividing the Remaining Class L Minimum Payment Amount by the Applicable Price per share] + [the Class L Adjustment]. The Class L Conversion Constant is initially 1 and is adjusted in the event of a stock split or similar event. 23 The Remaining Class L Minimum Amount is equal to the Investors' initial investment in the Class L Common Stock plus an amount sufficient to generate an internal rate of return equal to 12% per annum (Compounded). Applicable Price per Share means, (a) upon the Public Offering, the Public Offering Price, (b) at the time of any Realization Event, a fraction, the numerator of which is the excess, if any, of (i) the aggregate value of all Common Stock of the Company over (ii) the aggregate Remaining Class L Minimum Payment Amount with respect to all shares of Class L Common Stock outstanding and the denominator of which is the aggregate number of shares of Common Stock, (c) at any other time after the Public Offering Time, the Public Trading Price, and (d) in connection with any optional conversion of Class L Common Stock, the Public Trading Price, if at such time the Class A Common Stock is listed on a national securities exchange or traded in the Nasdaq Stock Market, and, if the Class A Common Stock is not so listed or traded, the greater of $3.25 per share and the fair market value of each share of Class A Common Stock as determined in good faith by the Board of Directors. The Class L Adjustment is an adjustment to the Class L Conversion Factor upon the earlier to occur (but only upon the occurrence) of (x) a Realization Event (i.e., a merger, liquidation or winding up of the Company or a sale of all or substantially all of its assets) and (y) a public offering. In either such event, the Class L Conversion Factor is increased by a number equal to, (i) if the Public Offering Price or the amount distributed to the holders of Class L Common Stock in such liquidation (together with all prior distributions with respect to such Class L Common Stock) (the "Class L Value") is equal to or more than $6.75 per share, 0, (ii) if the Class L Value is equal to or less than $3.50 per share, 3.12, and (iii) if the Class L Value is less than $6.75 per share and equal to or greater than $3.50 per share, 0.0096 for each $0.01 that the Class L Value is less than $6.75. Certain provisions of the outstanding Class B Common Stock and Class B and C Common Stock Warrants were amended in connection with the Class L financing. The rights of the Class B Common Stock were amended so that the Class B Common Stock ranks in parity with the Class C Common Stock in the event of liquidation. Consequently, in the event of a liquidation, the assets of the Company would first be used to pay the holders of Class L Common Stock $3.25 per share plus a cumulative 12% return per annum; the remaining assets, if any, would be used to pay the holders of Class C Common Stock and Class B Common Stock the greater of $3.25 and $2.50, respectively, per share and the amount that those shares would receive if converted to Class A Common Stock. If any assets remain after those distributions, they would be available for distribution to the holders of Class A Common Stock and Class L Common Stock. The outstanding warrants to purchase Class C and B Common Stock were also repriced. The exercise price on the Class B Common Stock Warrants was reduced from $2.50 to $0.50. The exercise price on the Class C Common Stock Warrants was reduced from $3.25 to $1.25. 24 The By-laws of the Company provide that the Board of Directors consists of 13 members. Currently there is one vacancy on the Board and twelve Board members. Of those members, affiliates of Bain Capital have the right to appoint two members and ABS Capital Partners II had the right to appoint one member. The composition of the Board was amended to provide that ABS Capital Partners II has the right to appoint two members to the Board of Directors. The members of the Board appointed by affiliates of Bain Capital and ABS Capital Partners II have certain superior voting rights. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. (A) EXHIBITS Exhibit Index 3.1 Amended and Restated Articles of Incorporation 3.2 Amended and Restated By-Laws 10.1 Class L Common Stock Purchase Agreement 10.2 Employment Agreement between the Company and Dana Frank, M.D. 10.3 Employment Agreement between the Company and Alphonse Calvanese , M.D. 10.4 Employment Agreement between the Company and Eugene M. Bullis 10.5 Amendment No. 3 to Stockholders Agreement 27 Financial Data Schedule (B) REPORTS ON FORM 8-K: None 25 SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized. Date: August 14, 1998 PHYSICIANS QUALITY CARE, INC. By: /s/ Eugene M. Bullis --------------------------------- Eugene M. Bullis Chief Financial Officer and Senior Vice President 26 EXHIBIT INDEX Exhibits - -------- 3.1 Amended and Restated Articles of Incorporation 3.2 Amended and Restated By-Laws 10.1 Class L Common Stock Purchase Agreement 10.2 Employment Agreement between the Company and Dana Frank, M.D. 10.3 Employment Agreement between the Company and Alphonse Calvanese, M.D. 10.4 Employment Agreement between the Company and Eugene M. Bullis 10.5 Amendment No. 3 to Stockholders Agreement 27 Financial Data Schedule Physicians Quality Care, Inc. 950 Winter Street Waltham, MA 02154 Phone: 781-890-5560 Fax: 781-890-1796 PHYSICIANS QUALITY CARE, INC. CORPORATE OVERVIEW . . . . . . . . . . . . . . Prepared September, 1998 Physicians Quality Care, Inc. Building Sustainable Partnerships with Physicians I. INTRODUCTION Physicians Quality Care, Inc. is a second-generation physician practice management company with a uniquely constructed organization and structure that blends the talents of its business and physician leaders. Since its formation in 1995, PQC has followed a focused business development strategy that has resulted in relationships with more than 500 physicians in three markets. The Company anticipates achieving profitable operations by the end of 1999. The current annualized revenue level is approximately $90M. 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 includes the following central elements: . create a truly PHYSICIAN-DRIVEN ORGANIZATION in which practicing physicians are active participants in a highly collaborative operating environment . develop CRITICAL MASS AND MARKET DOMINANT GEOGRAPHIC PENETRATION in selected markets, by affiliating with large numbers of qualified physicians, who will in turn attract their colleagues due to strong professional AFFINITY RELATIONSHIPS . establish a sustainable business model which FULLY ALIGNS THE INCENTIVES of the Company and its affiliated physicians in terms of improved practice productivity and profitability, as well as the potential long term equity appreciation of PQC stock . build MULTI-SPECIALTY PHYSICIAN GROUPS that recognize primary care physicians as the coordinator of care for most patients and specialists as key resources for the treatment of complex medical problems and who frequently serve in a primary care capacity for patients with certain chronic conditions . emphasize SAME-STORE GROWTH ON A PHYSICIAN-BY-PHYSICIAN BASIS by maximizing the value of each patient encounter through improvement in practice productivity, appropriate utilization of ancillary services and intragroup referrals . develop and manage NEW PRODUCTS AND SERVICES, such as clinical research site management, that leverage the geographic density, multispecialty 1 composition, and fully aligned incentive compensation program present within PQC affiliated physician groups . extend care management competencies in order to accept and succeed in the administration of CAPITATED RISK contracts for AFFILIATED PHYSICIAN GROUPS AND BROADER PHYSICIAN NETWORKS The Company believes that this strategy will enable it to generate increased demand for the services and capabilities of its affiliated physicians, treat patients in lower cost settings and negotiate favorable managed care contracts. The Company intends to achieve growth through the recruitment of additional physicians, the expansion of managed care relationships, the development of ancillary services, and the optimization of physician-to-physician referrals. These efforts will result in the formation of a truly integrated healthcare delivery system. The core of PQC's integrated healthcare delivery system strategy is its affiliation with groups of physicians who enter into long-term management agreements with the Company. The Company assumes responsibility for non- medical aspects of an affiliated physician's practice and focuses its efforts on increasing revenues and improving operating margins, implementing management information systems and negotiating managed care contracts. The physicians remain responsible for, among other things, the medical, professional and ethical aspects of their practices. By affiliating with the Company, physicians have expanded access to 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. PQC has demonstrated the ability to grow both through the acquisition of physician practices and the successful implementation of regional profit initiatives, which leverage the power of its affiliated physicians in each local market. PQC HAS STRONG EQUITY PARTNERS, all of whom possess significant healthcare experience. Bain Capital made its initial investment of $15M in August of 1996. In June, 1997 Bain Capital was joined by ABS Capital Partners (an affiliate of BT Alex. Brown) and GS Capital (an affiliate of Goldman Sachs). Terms for an additional $8M were recently finalized. The total capital invested by these three organizations is $43M. In addition, the company has raised an additional $10M from other investors. Debt financing is also currently being evaluated as the Company matures and receivables increase in size. The DEVELOPMENT PIPELINE is large and active and is also consistent with the Company's focused strategy, in that the development activities are directed exclusively at growth in existing or contiguous markets. Recognizing that approximately 78% of practicing physicians are members of groups of fewer than 10, PQC has established unique expertise in the aggregation of small independent practices into cohesive, integrated medical groups. This capability gives the Company a competitive advantage in promoting rapid add-on affiliation transactions. This year, PQC is TRANSITIONING FROM A START-UP ORGANIZATION TO AN ESTABLISHED COMPANY able to provide sustainable operating performance for its shareholders and its physician partners. 2 II. INDUSTRY DYNAMICS BUSINESS PROPOSITION The rapid changes within the health care industry are bringing greater emphasis to the central role played by physicians in the delivery of healthcare services. Traditional clinical and financial relationships are changing rapidly. Physicians are presented with incentives to utilize healthcare services more efficiently. At the same time, patients and payors are setting higher standards for the quality of care provided. Because physicians, through their clinical decision-making, control or influence more than 80% of all health care expenditures, PQC believes that physicians are in the best position to create and sustain the changes demanded by the health care marketplace and thus create real and sustainable value. The healthcare industry continues to evolve rapidly. Hospitals, payors and physician organizations are working separately and collaboratively to improve the quality of healthcare, while lowering overall costs. The relationships take on the particular character of each specific market. "All Healthcare is Local" is an accurate way to describe the observed variations, driven by regulatory, professional and demographic trends. PQC believes it is critical to build broadly and deeply in a few attractive markets, to achieve market leverage. Physician Practice Management Companies (PPMC's) come in many forms and are evolving to adapt to the dynamic environment. PQC believes that, notwithstanding the diversity within the PPMC sector, success will come only to those organizations with the following characteristics: . Truly Physician-Driven . High Quality Physicians . Medical Cost Management Skills . Strong Regional Management (e.g. Operations and Contracting) . Flexible Portfolio of Relationships (e.g. Owned, Multi-Specialty, Single-Specialty, and Network) MAJOR TRENDS DEFINING RELATIONSHIPS WITH PHYSICIANS The growing significance of PPMC's in the consolidation of physicians parallels the inability of hospitals and payors to effectively control the physician - patient relationship. Hospitals have chosen two major strategies. Through the formation of Physician-Hospital Organizations (PHO's), hospitals have attempted to create regionally focused contracting networks. The performance of PHO's has been mixed, both in terms of their ability to secure contracts and in their management. Indeed, for many physicians PHO = pHO, an organization in which the physicians play secondary roles in governance and operations. Hospital-affiliated group practices have been formed as vehicles for the acquisition and management of physician practices. The premise is that ownership will secure long term referral sources for the sponsoring organization. However, the financial and operational performance of these organizations has been disappointing. Nationally, only one in six of such group practices are reported to breakeven. The average annual operating loss has been reported to be between $70 and $80K per physician. Many physicians are unhappy with the 3 institutional character of the management support. Physician compensation arrangements frequently remove the incentives present in traditional, private practice productivity-based compensation. Many large national and regional payors manage "captive" physician organizations. These staff model groups have frequently experienced operational and productivity performance deficits similar to hospital- affiliated groups. This can be attributed to the institutional nature of the relationship between the physicians and the sponsoring organization. Moreover, the reliance on a single source for all revenue has resulted in a high turnover of enrollees, when a subscriber's health plan coverage changes to another payor. This disruption of the physician-patient relationship is frustrating to clinicians and patients alike. Finally, the public is increasingly demanding expanded choice. Such market forces are contrary to tightly controlled, mandated provider networks that the payors have operated. As a result, a large number of payor-owned groups have been sold or restructured. The failure of physician groups owned by hospitals and payors creates substantial opportunities for well-managed physician organizations. This is true in two significant ways. First, there is a business opportunity to improve the financial and clinical performance of these owned practices. Second, the business opportunity can be accomplished in a manner, which promotes long term collaboration with the hospital and/or payor. When properly implemented, partnerships involving well-managed physician groups with hospitals and/or payors will support each party's strategic objectives. A number of initially well-respected PPMC's have lost credibility due to earnings disappointments. This has been attributable to the PPMC's reliance on the ability to arbitrage the revenues generated from practice acquisitions. Such emphasis has often resulted in a lack of attention to building real value on behalf of the affiliated physician groups. The decline in shareholder value of publicly traded PPMC's has been well documented by the financial media. In addition, the dissatisfaction of some physician groups with their PPMC business partners has been widely described. III. PQC BUSINESS MODEL PQC affiliates with physicians: . who are committed to improving the healthcare delivery process while ensuring cost-effective care; . whose reputation with their patients, peers and payors is that of a thought leader and excellent clinician; . who are intent on enhancing and expanding their practices; . who are primary and specialty care physicians with demonstrated success at meeting the needs of patients and payors according to the dynamics of their particular environments; and . who are committed to sharing / creating best-demonstrated practices with their colleagues. 4 Also, PQC affiliated physicians are high achievers and independent- minded. They are seeking to maintain significant autonomy, but are willing to exchange some of that autonomy in order to successfully affiliate with colleagues to create greater market leverage. PQC makes the following value proposition to its affiliates: . Physician-Driven . Aggregation / Market Power [ ] Multi-specialty Group Equity Affiliation Model [ ] Network Management . Contracting . Controlling Practice Overhead Costs . Ancillaries . Systems / Operations . Protocol Development Upon affiliation, PQC enters into a long-term administrative services agreement with group practices. Under the agreement, PQC assumes management of all business aspects of the practice and provides physicians with management expertise, sophisticated information systems and negotiation and comprehensive management of managed care contracts. As a true partner, PQC relies on the medical knowledge, expertise and skills of its physician partners to improve outcomes, utilization of resources and apply best practice protocols to the patient base they serve. Over the longer term, PQC intends to expand its relationships and services to cover a broad portion of the continuum of care required to treat patients, all centered around this physician base. Acquisitions, joint ventures, strategic partnerships and affiliations with traditional healthcare providers such as hospitals, skilled nursing and long-term care facilities will be employed to build an integrated system. The creation of local care networks will enable PQC to maintain high-quality care, promote efficient utilization of medical services and control costs, thereby positioning it to contract favorably with payors on a capitated basis. Under the PQC model, physicians are business partners, not salaried employees. The mechanism by which this relationship is formalized includes the execution, by each physician, of a contractual agreement between the physician and the medical group. The agreement describes the basis for physician compensation. Unlike fixed salary arrangements, physician compensation for PQC-affiliated physicians is dependent upon productivity. The compensation plan includes a profit-sharing mechanism, which recognizes financial gains generated by individual physicians and by the group as a whole. The objective is to diversify and grow total physician compensation. For many physicians, the alternative to a relationship with PQC will likely be a net reduction in their total compensation. The diagram on the following page graphically describes the basic elements of the equity affiliation model from the perspective of a participating physician. 5 From the Company's perspective, successful partnerships with physicians - that provide genuine value and return - will be achieved by execution of PQC's business model. PQC is confident that focused attention to the elements of its model will yield substantial returns to its shareholders. This includes a commitment to closing subsequent acquisitions within the defined deal parameters. Also, it includes a commitment to grow the company in existing and contiguous markets. Finally - and most importantly, it includes a resolute commitment to creating growth for each affiliated physician. The following table provides additional detail about the characteristics of PQC's business model. PQC Ecomomic Model Practice Affiliation: The Economic Equation
Physician Additional Physician Compensation Compensation - ------------------------------------------------------------------------------------------------------------------------------- Total Comp: 200* Previous Year - ------------------------------------------------------------------------------------------------------------------------------- Reduction of Administrative Baseline Comp: 160* [PQC] . PQC Stock Burden/Access to Capital Year 1 230* . One Time Cash Payment to Physicians - ------------------------------------------------------------------------------------------------------------------------------- Reduction of Administrative Total Comp: 160* 230* . Risk Pool Burden/Access to Capital Year 1 . Referrals . New M.D.'s . Ancillaries . Efficiencies - ------------------------------------------------------------------------------------------------------------------------------- Reduction of Total Comp: 160* 250* . Appreciation Potential Administrative Year 2 . Particularly Attractive Burden/Access to Capital For Pre-Public Holders. - ------------------------------------------------------------------------------------------------------------------------------- Reduction of Administrative Total Comp: 160* 270* Burden/Access to Capital Year 3 - ------------------------------------------------------------------------------------------------------------------------------- Year 3 ? ? Alternative - -------------------------------------------------------------------------------------------------------------------------------
*Number is an approximation based on the bar graph characterization in the PQC Economic Model. CHARACTERISTICS OF THE PQC BUSINESS MODEL - -------------------------------------------------------------------------------- Geography: [ ] Sustained Regional Focus for Optimal Market Leverage [ ] Currently in Three Markets: [ ] Western Massachusetts [ ] Mid-Atlantic [ ] Atlanta [ ] Same and Contiguous Market Growth [ ] Maintain East Coast Orientation - -------------------------------------------------------------------------------- Physician Types: [ ] Multi-Specialty (60% Primary Care) [ ] Broad Clinical Capabilities [ ] High Quality [ ] Affinity Relationships Support Additional Affiliations - -------------------------------------------------------------------------------- Types of Affiliations: [ ] Owned (80% Stock / 20% Cash On Average) [ ] Network Management (Lower Capital Requirement) [ ] Need Multiple Products to Offer Physicians at Different Stages of Career and Thinking - -------------------------------------------------------------------------------- Valuation Methodology: [ ] 6 - 8X EBITDA [ ] 30% IRR Investment Target [ ] Anticipated Reduction with Scale in Market - -------------------------------------------------------------------------------- PQC Revenue Structure: [ ] Owned: 15% of Historic Compensation + Profit Sharing [ ] Network: 10% Management Fee + Profit Sharing 6 IV. PPMC COMPETITOR ANALYSIS In its three markets, PQC sees competition from four PPMC's. Frequently, local hospital systems are also perceived to be competitors. The degree of competition varies significantly. Indeed, in some cases, the alternative to a PQC relationship is for the physicians to remain independent. The following table profiles PQC's key competitors:
TYPE HISTORICAL FUTURE - ---------------------------------------------------------------------------------------------------------------- . PPMC (PhyCor) . Own Large Clinics . Equity Model Where Available . Some Networks . Reduced Acquisition Cost . Intra-referrals, Ancillaries . Networks . Hospital Joint Ventures (Equity and Network) . More Capitation . Baltimore, Atlanta & CT Competitor to PQC - ---------------------------------------------------------------------------------------------------------------- . PPMC (MedPartners) . Own Staff Model . More of the same . Large Networks . Focus on Same Practice Value / Profitability . Capitation . Massachusetts Competitor to PQC - ---------------------------------------------------------------------------------------------------------------- . PPMC (ProMedco) . Large clinics in secondary . Massachusetts and Maryland competitor to PQC markets . Develop in immature managed care markets . Acquired network management capability - ---------------------------------------------------------------------------------------------------------------- . HOSPITAL . Virtually every hospital has . Competitor to PQC in all markets some ownership interest in a . Selling practices in all markets...potential physician group partner with PQC for both equity and network . Unprofitable and unproductive relationships relationships - ---------------------------------------------------------------------------------------------------------------- . PAYOR . Owned practices exclusively . Typically, practices will be sold or serve needs of covered population restructured to accept other payors . Business partner with PQC in all markets - ---------------------------------------------------------------------------------------------------------------- . INDEPENDENT . Determined physicians strive . Competitor to and partner with PQC in all PHYSICIAN GROUP to aggregate in manner which markets protects independence and . PQC's unique business expertise at combining autonomy small, independent practice presents sizable . Shortage of capital, potential for creating add-on equity and management expertise and network relationships, as well as entree physician time limit into new markets potential of most groups - ---------------------------------------------------------------------------------------------------------------- . DO NOTHING . Physicians fail to see value . Potential participant in network in aggregation, prefer to relationships, perhaps as a precursor to an remain independent equity relationship in the future - ----------------------------------------------------------------------------------------------------------------
7 V. PQC'S CURRENT PHYSICIAN PARTNERSHIPS WESTERN MASSACHUSETTS Medical Care Partners, PC is the name of the multi-specialty group practice affiliated with Physicians Quality Care in Western Massachusetts. This group, the first to affiliate with PQC, consists of 45 physicians practicing at 11 different locations in the Springfield, MA and Northern Connecticut area who serve approximately 50,000 patients. The group has successfully managed a full-risk Medicare contract for two years (2,500 lives). PQC developed a group-owned laboratory, which is expected to generate more than $2M in revenue in 1998. Radiology, ultrasound and mammography services have been introduced. MID-ATLANTIC PQC's Mid-Atlantic relationship is with Flagship Health, PA. This multi- specialty group practice is comprised of approximately 160 physicians and other practitioners from the Baltimore and Annapolis, MD area who serve their patients from more than 35 different clinical sites. Flagship Health was formed by the combination of 17 separate practices. The group currently manages the care of about 180,000 patients, with over 50,000 on a capitated basis. As is the case with Medical Care Partners, PQC has introduced clinical laboratory and diagnostic imaging services to the group. Currently, Flagship Health physicians are participating in 11 different clinical research trials, which are expected to generate approximately $.5M in additional revenue in 1998. ATLANTA Physicians Quality Care is a 50% shareholder of TLC Management Company, Inc. (TLC). This network management company has an exclusive management contract with Total Life Care, PC, a 325-physician Independent Practice Association, whose members serve approximately 325,000 people. TLC currently manages approximately 9,000 covered lives. This number is expected to rise to 22,000 by year-end 1998. Effective July 1, 1998, TLC will participate in capitated relationships for commercial and Medicare populations with CIGNA, Kaiser and a number of smaller regional payors. Due to the structure of this relationship, PQC reports TLC's performance as investment income. VI. DEVELOPMENT STATUS Consistent with the its focused, regional strategy, PQC has a very active pipeline of development opportunities. Both equity and network management relationships are well represented. Some of the key development opportunities are: 8 . An established, 62-physician primary care group in a contiguous market; . An established 45-physician multi-specialty group in a contiguous market; . A network management relationship with a 250-member physician organization in a contiguous market and related equity affiliations with 25 physicians . A 20-physician hospital-affiliated group practice in an existing market These opportunities are at various stages of negotiation. There is no assurance than these or any other prospective transaction will be successfully completed. In July, PQC announced the signing of a major agreement with Johns Hopkins Medicine that provides for collaboration on contracting and physician development issues within the Mid-Atlantic Region. The parties have also agreed to explore the feasibility of creating a joint venture entity that will exclusively support medical management efforts for the two organizations. The Company believes that the relationship with Johns Hopkins validates the tenets of the PQC model. VII. SENIOR MANAGEMENT AND KEY EMPLOYEES PQC's management team includes professionals who have successfully organized, operated and financed private and publicly held healthcare growth companies during a period of broad market changes in the healthcare industry. JERILYN P. ASHER is a founder of the Company and serves as both Chief ---------------- Executive Officer and Chairman of the Board of Directors. She has over fifteen years of experience as a healthcare executive in both the public and private sectors, with broad-based responsibilities for all aspects of constituency building with physicians and payors, business development, finance, operations, sales, marketing and federal and state healthcare regulation. Ms. Asher served as President and a member of the Board of Directors of Abbey Healthcare Group Incorporated, which, since its merger with Homedco (now Apria Healthcare), is the nation's largest home healthcare provider with in excess of $1 billion in net revenues. Ms. Asher was a founder and served as President and Chief Executive Officer and Chairwoman 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. Protocare, Inc. provided a broad range of infusion and respiratory therapies, nursing care and home medical equipment through seven branches and fourteen satellite facilities located in twelve states along the East Coast through a network of 4,000 physicians. Protocare had revenues of $50 million and operating income of $2.7 million and its significant industry indicators, such as days sales outstanding and inventory turnover were among the most favorable in the industry. 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. While at United Cerebral Palsy, she pioneered comprehensive methods of delivering healthcare services to people with disabilities under the Medicare/Medicaid programs, which became a delivery system model replicated 9 throughout the country. Ms. Asher received numerous awards for this pioneering work in capitated care for dual-eligible populations. Ms. Asher also designed and implemented the first community-based, de- institutional model of medical care management for high-risk, non-verbal, ventilator-dependent quadriplegics in the country. Ms. Asher attended Smith College and received a Master of Education Degree from the Graduate School of Education at Harvard University. EUGENE M. BULLIS has served as Chief Financial Officer since March 1998. ---------------- He is responsible for all financial and information system functions for the Company. Mr. Bullis joined PQC after serving as an independent business consultant and interim business executive with a number of technology companies, including Computervision, NYNEX and Eastman Kodak. From 1979 through 1989, he served as a senior executive at Wang Laboratories, the final two years as Chief Financial Officer and Treasurer. Prior to joining Wang Laboratories, Mr. Bullis was a partner in the public accounting firm, Ernst and Young. He holds a Bachelor of Arts Degree in Business Administration from Colby College and is a Certified Public Accountant. DANA FRANK, M.D. is President and a member of the Board of Directors of ---------------- the Company. He also serves as President of the Mid-Atlantic Region. He has been in the private practice of medicine since 1981. Formerly, Dr. Frank was Chairman of the Board of The Physicians Group, Johns Hopkins at Green Spring Station in Lutherville, Maryland. He has also been an Assistant Professor, Consulting Internist and Headache Specialist at The Johns Hopkins School of Medicine since 1987, and is on the Medical Board of Johns Hopkins Hospital. He received his Bachelor of Arts Degree from Brown University and his M.D. from George Washington University. He completed his internship and residency at Johns Hopkins Hospital. DEBORAH I. REDD is Chief Operating Officer for the Mid-Atlantic Region. --------------- She joined the Company in March 1998. Previously, Ms. Redd served as President for three Health Maintenance Organizations owned by Coastal Physicians Group. From 1991 to 1995, she was Vice-President for Network Management for Blue Cross/Blue Shield of Maryland, as well as President of Potomac Physicians, a primary care physician group which serves BCBSMD patients. From 1977 to 1990, Ms. Redd served in a number of executive capacities for Chesapeake Physicians, a multi-specialty physician professional association affiliated with the Johns Hopkins School of Medicine, including Associate Executive Director. Ms. Redd holds a Bachelor of Science Degree from the University of Cincinnati. AL CALVANESE, MD is Chief Medical Officer and a member of the Board of ---------------- Directors of the Company. He also serves as President of the New England Region. He has been in the private practice of medicine since 1981. Formerly, Dr. Calvanese was President of Associated Community Physicians, a primary care physicians network in Springfield, MA. He received his Bachelor of Science Degree from the University of Massachusetts and his MD from Tufts University. He completed his internship and his residency at BayState Medical Center. MARK GOLBERG is Chief Operating Officer for the New England Region where ------------ he is responsible for practice growth, operations, and quality. Prior to joining PQC, he was COO of TravCorps Corporation, a healthcare temporary staffing company. Prior to this Mr. Golberg was the Director of APM, Inc.'s Clinic Operations Practice where he led complete business and clinical operations restructurings of many nationally recognized academic medical centers, for-profit hospitals, and multi-specialty clinics. From 1985 to 1990, Mr. Golberg was a consultant at two major consulting firms, Bain and Company and Arthur D. Little, on engagements encompassing cost and competitive strategy, marketing, and 10 customer retention strategy for Fortune 100 companies, as well as major hospital, long-term care, and pharmaceutical/medical product companies. Prior to 1985, he was the co-founder and vice-president of the hospital chain HRCA/Republic Health Corporation. Mr. Golberg holds Master of Business Administration and a Bachelor of Arts Degree from the University of Chicago, where he received the Hearst Prize for excellence in studies. PAUL BODNAR, MD serves as Senior Vice-President for Managed Care and --------------- Medical Director and is also a member of the Board of Directors of the Company. He also serves as Medical Director of the Mid-Atlantic Region. Prior to joining PQC, Dr. Bodnar served for ten years as the Medical Director of Clinical Associates, a 90-member multi-specialty group practice, of which he has been a practicing pediatrician since 1980. Dr. Bodnar received his Bachelor of Arts Degree from Johns Hopkins University and his M.D. from Columbia University. He completed his internship and residency at Johns Hopkins Hospital and Sinai Hospital in Baltimore. RICHARD MAFFEZZOLI, MD serves as Senior Vice-President for Development ---------------------- and Business Analysis and is also a member of the Board of Directors of the Company. He also serves as Director of Development for the Mid- Atlantic Region. Dr. Maffezzoli was founder and President of Clinical Associates, a 90-member multi-specialty group practice, which serves 60,000 capitated and 200,000 fee-for-service patients. Dr. Maffezzoli received his Bachelor of Arts and his M.D. from Degree from Johns Hopkins University. He completed his internship and residency at Johns Hopkins Hospital HARRY DODYK serves as Vice-President for Managed Care for the New England ----------- Region. He is responsible for the development and implementation of the company's regional managed care strategy. From 1988 to 1997, he worked for the Fallon Community Health Plan, a 190,000 member HMO in Central Massachusetts, with more than $400,000,000 in annual revenue. He served as its Director of Regional Development and Director of Operations. From 1987 to 1988, Mr. Dodyk served as the Chief Financial Officer of the Matthew Thornton Health Plan, an HMO in New Hampshire. From 1975 to 1987, Mr. Dodyk held a number of positions at Blue Cross Blue Shield of Massachusetts, including the position of Associate Executive Director at one of Blue Cross's IPA model HMOs. Mr. Dodyk holds a Bachelor of Arts Degree in Economics and English from Brandeis University and a Master of Business Administration Degree, with a concentration in Health Care Management, from Boston University. MARK E. MAZAK serves as Vice-President for Strategy and Development. He ------------- is responsible for the development and implementation of corporate and subsidiary strategic, business and marketing planning. From 1981 to 1995 he served as a senior executive at the Melrose-Wakefield Hospital Association, a $120M community healthcare system, in the capacities of Vice-President of Planning, Vice-President of Planning and Ancillary Services and finally as Vice-President of Administrative Services. From 1978-1981, he worked for the Commonwealth of Massachusetts Department of Public Health Determination of Need Program as both Chief Planner and then Assistant Director. During his tenure, Mr. Mazak performed feasibility analyses for $250M in healthcare projects and led policy- making efforts in the areas of managed care and mental health. From 1976 to 1978 he served as Assistant Director of the Medical Care Group, a Washington University affiliated health maintenance organization, in St. Louis, Missouri. He holds a Bachelor of Science Degree in Biology from the Massachusetts Institute of Technology, and a Master of Science Degree in Health Policy and Management from Harvard University School of Public Health. CHARLES L. POPKIN serves as Vice-President for Development. He is ----------------- responsible for the assessment and development of business opportunities in new or existing markets and 11 integrating these initiatives into the Company's existing operations. He was formerly the President of Medical Claims Management, a company he founded in 1993, which provides business management of medical practices for physicians by joining the best management technologies with superior business systems and procedures. From 1990 to 1993, Mr. Popkin served as a Senior Consultant in the Management Consulting Service Group of Price Waterhouse where he conducted financial and strategic analysis for companies in a variety of industries. From 1986 to 1988, Mr. Popkin served as a Senior Accountant in the Audit Department of Deloitte & Touche. He is a Certified Public Accountant and holds a Bachelor of Science Degree from Bentley College in Accountancy and Management and a Master of Business Administration Degree from the Kellogg School, Northwestern University. VIII. GOVERNANCE STRUCTURE OF AFFILIATION The PQC governance model is firmly built upon the importance of physician participation in the governance of the company. The relationship between the physician groups and PQC is illustrated in the accompanying diagram: SHAREHOLDERS (Physicians Largest Ownership Group) BOARD OF DIRECTORS (Physician Majority) OPERATING PQC NATIONAL MEDICAL COMMITTEE (Physician President) ADVISORY BOARD NEW ENGLAND MID-ATLANTIC ATLANTA (Physician-Led) (Physician-Led) (Physician-Led) PQC is a truly physician driven company: . Physicians are the largest shareholder group . Physicians hold the majority of Board seats 12 . Physicians hold key leadership positions (President, Chief Medical Officer, Senior Vice-Presidents) . Physicians serve as President and CEO in each region IX. PQC'S GOALS AND OBJECTIVES FOR 1998 PQC views 1998 as a critical year in the transition of the Company from a start-up organization into a fully functioning and profitable enterprise. The Company has implemented operating and development plans that it believes will result in achieving profitable operations by the end of 1999. Critical to the attainment of these goals is PQC's ability to deliver on the "value proposition" to its physician partners. Development will continue to be focused on expanding relationships in existing or contiguous markets. New equity transactions will only be conducted if they can be done within the Company's investment parameters. PQC will also continue to work on the development of its network management product. The Company anticipates introducing this product into existing and contiguous markets. During this year, PQC will continue to harness the aggregate power of the physicians by the continued development of group-operated ancillary services. Also, increased intragroup referrals are anticipated as physicians become more educated regarding the clinical capabilities of their new physician partners. Finally, the Company will continue to seek opportunities to assume risk under capitated managed care contracts, always recognizing the continued importance of bringing optimal value to all other payor contracting relationships. Successful execution along these dimensions is realistic. The Company is confident that a truly physician-driven organization can provide genuine and sustainable shareholder value and will enjoy market distinction from others in the PPM sector. 13 -----END PRIVACY-ENHANCED MESSAGE-----