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FORM 10-KSB
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended: December 31, 1996
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission File Number 0-28390
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PENNSYLVANIA PHYSICIAN HEALTHCARE PLAN, INC.
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(Name of small business issuer in its charter)
Pennsylvania 23-2795795
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(State or other jurisdiction of (I.R.S. Employer Identification number)
incorporation or organization)
651 East Park Drive, Harrisburg, PA 17111
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(Address of principal executive offices) (Zip Code)
Issuer's telephone number (800) 671-7747
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Securities registered under Section 12(b) of the Exchange Act: NONE
Securities registered under Section 12(g) of the Exchange Act:
Class A common stock, $.01 par value per share
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(Title of Class)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 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
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Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy of
information statements incorporated by reference in Part III of Form 10- KSB.
[ ]
State issuer's revenues for its most recent fiscal year. $962,258
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State the aggregate market value of the voting stock held by non-affiliates
computed by reference to the price at which the stock was sold, or the average
bid and asked prices of such stock, as of a specified date within the past 60
days. NO TRANSACTIONS WITHIN PAST 60 DAYS.
(APPLICABLE ONLY TO CORPORATE REGISTRANTS)
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date:
4,087 shares of Class A common stock, $.01 par value per share
1,074 shares of Class B common stock, $.01 par value per share
(as of March 11, 1997)
Transitional Small Business Disclosure Format (check one): Yes X No
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Part I
[Alternative 2 (Items 6-11 of Model B of Form 1-A)]
Item 6. Description of Business
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Pennsylvania Physician Healthcare Plan, Inc. was organized in February,
1995 by Pennsylvania practicing physicians to establish a physician-controlled
managed care organization in Pennsylvania. (In this Item 6, "Registrant" refers
to Pennsylvania Physician Healthcare Plan, Inc. and its wholly-owned
subsidiaries.)
Registrant is in the development phase, and has not yet begun its
business or generated operating revenues.
Registrant proposes to establish and operate a managed care
organization that will offer prepaid health care plans eventually throughout
Pennsylvania to employers and other group purchasers of health care plans such
as unions, trusts, governments and trade associations, as well as to
individuals. In the future, Registrant may also attempt to have its programs
federally qualified to provide services under and receive payments from the
federal Medicare and/or Medicaid Programs.
Registrant is controlled by physicians, who elect the entire Board of
Directors. All directors must be shareholders of the Registrant and Pennsylvania
physicians, podiatrists or oral surgeons. The goal of registrant is to have the
required policy decisions, including but not limited to quality assurance, cost
containment, utilization, treatment policies and practice guidelines decided
upon by the physician directors and committee members of Registrant.
Registrant's directors believe that physician control of such policies will
produce better quality care for subscribers and attract well-qualified
physicians and other providers.
On May 9, 1996 Registrant's subsidiary filed an application with the
Pennsylvania Department of Health and Department of Insurance (the
"Departments") for a license to operate a risk-assuming preferred provider
organization ("PPO"). Registrant also completed an application for a health
maintenance organization ("HMO") and that application was filed with the
Departments on November 27, 1996. The PPO or HMO may not solicit subscribers
until the applicable license is granted.
The PPO and HMO applications propose that Registrant's subsidiaries
operate initially in a contiguous 16 county area in Pennsylvania. This area
includes the following counties:
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Southcentral Pennsylvania
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Franklin Lebanon
Adams Lancaster
Cumberland Berks
Dauphin Schuylkill
York
Lehigh Valley
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Lehigh Carbon
Northampton
Northeastern Pennsylvania
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Lackawanna Monroe
Luzerne Wyoming
A PPO enters into agreements with health care providers to provide
medical care services for its subscribers, who may be individuals or employer
groups. A risk-assuming PPO may be responsible for all covered medical care for
the subscriber in exchange for a fixed premium. Under Pennsylvania law the PPO
may not place its providers at financial risk, such as through capitation
payments (as discussed below in the case of an HMO). The provider contracts for
a PPO are generally on a discounted fee for service basis. Generally, a PPO does
not require the subscriber's care to be managed by a pre-selected primary care
physician (i.e. a gatekeeper).
Pending regulatory approval, Registrant expects to begin enrollment of
employer groups for its initial PPO product in the spring of 1997, with coverage
available May 1, 1997.
An HMO is responsible for all covered medical care for its subscribers
in exchange for a fixed premium. HMOs typically contract directly with
physicians, hospitals and other health care providers to administer medical care
to HMO subscribers. These contracts provide for payment to the provider on
either a discounted fee-for-service or per diem basis, or through fixed monthly
payments ("capitation payments") based on the number of members covered,
regardless of the amount of necessary medical care required within the covered
benefits. Specialty care physician services, in-patient hospitalization and
certain other services are often managed by primary care physicians
("gatekeepers") and are subject to pre-authorization requirements. Contracts
with health care providers may include shared-risk arrangements and other
financial incentives designed to encourage the provision of high-quality and
cost-effective health care.
From July, 1995 through March, 1996 Registrant sold 4,061 shares of its
Class A voting common stock at $5,000 per share and 1,074 shares of its Class B
non-voting common stock at $1,000 per
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share, exclusively to practicing physicians residing in Pennsylvania. The
offering was conducted by Registrant without an underwriter. Registrant raised
$21,379,000 from investment by almost 4,000 physicians in Pennsylvania. Under
the terms of the offering, the net proceeds of approximately $20,432,000 are
allocated as follows:
Preparing and processing
application for certificate
of authority to operate an
HMO $ 3,696,575
Prelicensure development
of business and operations 4,463,480
Contingency fund of (1) 2,500,000
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Total allocated to
pre-licensure activities $10,659,055
Net worth requirement 1,500,000
Deposit requirement 100,000
Working capital, including
funding of initial operating
deficits after licensure 8,172,945
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Total allocated to
post-licensure activities $ 9,772,945
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TOTAL NET PROCEEDS $20,432,000
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(1) To be allocated to any of the first two items as
needed; otherwise, will be allocated to working capital.
The Managed Health Care Industry
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Managed Care Organizations
Medical services traditionally have been provided on a fee-for-service
basis with insurance companies assuming responsibility for paying all or a
portion of such fees.
As a result of escalating health care costs, employers, insurers and
governmental entities have all sought cost-effective approaches to the delivery
of and payment for quality health care services. HMOs and other managed health
care organizations have emerged as integral components in this effort. Like
traditional indemnity health care plans, HMOs and other managed health care
organizations typically assume most of the financial risk for the delivery of
medical care. Unlike traditional indemnity health
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care plans, however, managed care organizations seek to reduce the cost of
medical services through volume discounts from their provider networks and
through the reduction of unnecessary medical services by implementing intensive
utilization review and quality assurance programs.
The goal of managed care organizations is to provide subscribers with
access to quality health care, while employing a business strategy and
management systems designed to encourage more cost-effective use of health care
delivery systems. Such cost-containment strategies include providing access to
primary physician care and other services on a fixed, pre-paid basis, monitoring
hospital admissions and length of stay, using a system of specialist referrals,
using non-hospital based medical services, and emphasizing preventive care.
Plan of Operation
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Registrant's plan of operation entails selecting its initial market
areas, securing a license to operate as a PPO and an HMO, developing its
provider network, substantially completing its managerial and operational
structure and, as each license is obtained, commencing operations by marketing
its products, initially as a PPO and then also as an HMO.
In order to operate a PPO or an HMO, Registrant will develop systems to
deal with: (1) management information; (2) eligibility and premium billing; (3)
claims and capitation administration, (4) utilization management, (5) case
management, (6) quality assurance; (7) physician credentialing and recruitment;
and (8) grievance procedures. Registrant may decide to engage outside vendors to
provide certain of these services, such as claims administration and
credentialing.
Registrant took the following steps during 1996 to implement its plan
of operations:
1. Prepared and filed its applications with the
Departments for a PPO product and an HMO product, and worked with
the Departments to process the applications.
2. Selected, with the advice of marketing
consultants, the tradename "Pennsylvania Physicians Care" for its
managed care products.
3. Designated an initial marketing area of 16
contiguous counties in Pennsylvania.
4. Engaged full-time executive officers, including
Richard A. Felice, President and Chief Executive Officer, T.
Clark Phillip, Treasurer and Chief Financial Officer, and Wendy
C. Bass, Secretary, and other key employees.
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5. Moved to its own leased office space in
Harrisburg, PA. See Item 7 below.
6. Contracted with 11 hospital providers and over 2,500
physician providers for its initial PPO product (and is in the process of
credentialing the physician providers), and engaged providers for other
services, such as vision, mental health, pharmacy, laboratory and home health.
7. Installed data processing systems for claims
processing, eligibility, billing and medical management.
Registrant's operations are dependent in part upon the creation,
continued development and enhancement of data processing and analysis
capabilities. The information processed by the systems will enable Registrant to
price its services, monitor utilization and other cost factors, and process
provider payments. There can be no assurance that Registrant will be able to
develop a management information system which can economically and adequately
serve its needs.
Substantial funds will be required to implement Registrant's plan of
operations prior to the time Registrant will first receive revenues. It is
typical for a new managed care organization to experience substantial operating
losses for its first several years of operations. It is anticipated that
Registrant will incur such operating losses and will have a substantial cash
flow deficit following the commencement of its operations until it obtains
sufficient subscribers in its market area to meet its administrative costs and
its medical and hospital costs. Registrant believes that its funds, which
consists of the $20,432,000 net proceeds of its initial public offering of
shares, are adequate to fund Registrant's operations until such time as it
ceases to incur operating deficits. If this should not prove to be the case,
then additional financing may be required, and there is no assurance that such
financing will be available on terms acceptable to Registrant. In addition,
since the Departments require managed care organizations to maintain reserves
based on premium revenues, Registrant's limited capital will restrain expansion
of its business.
Arrangements with the Physician Providers
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Registrant has recruited primary care and specialist physicians for its
PPO product. When authorized by the Departments to do so, it will seek physician
providers for its HMO product. An important factor in the success of
Registrant's business will be the development of a network of physician
providers in the appropriate numbers in Registrant's geographic markets and the
appropriate mix of primary care physicians and specialists.
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The selection of physicians includes a review of licensure, hospital
admitting privileges, demonstrated proficiency, written references, patient
access, office standards, after-hours coverage, a personal interview and many
other factors.
Arrangements with Other Health Care Providers
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Registrant will deliver necessary preventive, diagnostic, therapeutic,
and rehabilitation health care services to subscribers, in part, by contracting
with qualified non-physician providers who meet the participation criteria of
Registrant. Registrant is negotiating contracts with hospitals and other
providers as part of the application process for the licenses to operate as a
PPO and as an HMO. Generally, these contracts will provide that the
participating hospitals and other providers will accept as patients subscribers
in the Registrant's HMO or PPO, provide to those subscribers all medically
necessary services that are ordered or supervised by a participating physician
that are covered services under the applicable managed care plan, and bill
Registrant according to the parameters set forth in their participation
agreement with Registrant. The services provided by hospitals and other
providers will be reviewed for quality improvement, utilization and risk
management by appropriate committees of the Registrant.
Premium Rates
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Registrant's primary source of revenue will be the premiums paid by or
on behalf of subscribers in its PPO and its HMO. Registrant intends to design
its benefit plans and set its premium rates to be competitive with other health
insurance programs available in Pennsylvania. The premium rates and benefits
will be consistent with state and federal laws regulating PPOs and HMOs and, in
the case of the HMO, will be approved by the Departments as part of the
application process.
Employees
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As of March 20, 1997 Registrant employed 19 people in various
management or clerical positions. Most upper-level management positions have
been filled.
Registrant also intends eventually to hire individuals to fill lower
level positions, which may include, but are not be limited to, the following: a
controller, district managers, account executives, sales representatives,
membership services personnel, enrollment clerks, a computer programmer, a
utilization review manager, utilization supervisors, claims processors,
assistant medical directors, a provider relations manager, and provider
relations representatives.
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Management Agreement
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In April, 1995 Registrant engaged Infinity Management Services, Inc.
("Infinity"), a subsidiary of Pennsylvania Medical Society Liability Insurance
Company ("PMSLIC"), to provide administrative and management services to
Registrant. PMSLIC, which is owned by the Pennsylvania Medical Society, writes
medical professional liability insurance coverage in Pennsylvania. Infinity
provided management services to Registrant subject to the authority and control
of Registrant's Board of Directors.
In March, 1996 Registrant and Infinity entered into a new agreement
under which Infinity provides similar services until Registrant secures its
license from the Departments to operate its business. Until Registrant engaged
its own management team in late 1996, Infinity managed the development and
implementation of Registrant's business plan, including locating and
recommending appropriate third-party service providers. Infinity generally
oversaw the activities of Registrant's consultants associated with developing
its applications for licenses and the design and development of its start-up
operations. Infinity was paid on a fixed monthly retainer of $55,000 through
September, 1996. Registrant elected the alternative of an hourly fee basis
beginning in October, 1996, and Infinity continues to provide limited management
services. During the term of the agreement, Infinity may not provide similar
services to any organization offering a managed care insurance product in
Pennsylvania. Registrant has agreed not to solicit for employment any personnel
employed by Infinity during the term of the agreement and for one year
thereafter.
Marketing and Sales
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Registrant will hire direct sales representatives to offer Registrant's
services to purchasers of health care services, including private and
governmental employers and individuals, and will engage independent insurance
agents. Registrant's marketing efforts may also include media advertising and
direct mailings.
The overall objective of Registrant's marketing strategy is
twofold: 1) to enroll membership sufficient to attain financial
viability; and 2) to do so on a controlled growth basis so that
the necessary health resources are available to provide quality
services.
Subscribers will join Registrant's PPO or HMO primarily through
employer groups. In many instances, employers offer employees a choice of
coverage by a managed care company or an indemnity health insurer. Employees may
select their desired health coverage during a designated period (usually one
month annually). New employees make their selections at the time of employment.
Employers generally pay all or part of the monthly
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charges and make payroll deductions for any portion of the
premium not provided as an employee benefit.
Competition
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The managed care industry in Pennsylvania is characterized by vigorous
competition, and is currently dominated by U.S. Healthcare (now Aetna), Keystone
Health Plan East, Keystone Health Plan West, Geisinger Health Plan and
HealthAmerica.
Registrant will also compete with other managed care plans that are
operating, or may in the future operate, in Registrant's service area, as well
as traditional indemnity insurance companies. Based on filing with the
Departments, Registrant believes there are approximately 24 HMOs now operating
in Pennsylvania. Many of these competitors are significantly larger and better
capitalized than Registrant, provide a wider variety of services, have greater
experience in operating managed care organizations and have longer established
relationships with providers and subscriber groups than will the Registrant, and
have well-known names. In addition, larger HMOs may acquire a Pennsylvania HMO,
thereby entering the Pennsylvania marketplace and commencing business without
the delay of applying for an HMO or PPO license.
Competition in the highly competitive health care industry has
intensified in recent years, primarily due to more aggressive marketing, a
proliferation of competing products from new and existing competitors and
increased quality and price sensitivity. Employer groups have increasingly
demanded new benefit options, including HMOs and PPOs. In addition, some larger
employers have adopted self-funded health benefit plans, with plan
administration provided by a third-party.
Competition may also affect the availability to Registrant of the
services of health care providers, including primary care physicians and
hospitals.
Licenses
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Certificates of Authority
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Pennsylvania's PPO and HMO laws and regulations (the "Managed Care
Laws") require that a PPO and an HMO obtain a Certificate of Authority or
license from the Departments before commencing operations.
The PPO application includes, among other things, all appropriate
organizational documents, director and key personnel information, financial
statements, a description of the proposed service area, the form of provider
contracts, the form of subscriber contracts and enrollee/member documents and
information, and a business plan containing five-year projections. When
authorized by the Departments, a list of all
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preferred providers must be furnished. The Health Department focuses its review
to assure that the PPO will not operate in a manner which leads to
undertreatment or poor quality care and will review all provider agreements and
assess the adequacy of the network in relation to the PPO's market service area.
The Insurance Department's review is on the overall financial soundness of the
PPO, as well as a determination that adequate working capital and reserves are
in place. The Insurance Department will also review all enrollee literature and
subscriber contracts and documents. It will not, however, preapprove or review
the PPO's rates.
However, the Departments' review of an HMO application and its
submission documents is extremely comprehensive and requires a minimum of 10 to
12 months, but can extend from 18 months to 2 years or more for approval.
Before an HMO license can be issued, the Secretary of Health is
required to find that Registrant possesses the ability to assure the
availability and accessibility of adequate personnel and facilities, has
sufficient arrangements for on-going quality assurance programs and has adequate
arrangements for effective provision of basic health services on a pre-paid
basis. In addition, the Commissioner of Insurance is required to find that
Registrant has a reasonable plan to operate in a financially sound manner and
can meet its obligations to subscribers considering working capital and funding
sources, reinsurance and payment security, non-recourse against subscribers and
net worth requirements.
In general, the HMO application process commences with an initial
information and review meeting with various personnel at the Departments. The
application requirements include, among other things, the submission of
organizational documents and corporate governance documents such as bylaws, a
description of the proposed service area, proposed subscriber contracts and
literature, proposed provider contracts and detailed descriptions of (i) the
proposed rates and their underlying assumptions, (ii) the arrangements for
on-going quality assurance and utilization review, (iii) the credentialing
systems for physicians, (iv) incentives for cost control, (v) proposed
reinsurance contracts, (vi) insolvency protections and plan and (vii) grievance
resolution systems. In addition, the Insurance Department requires the
submission of a business plan providing a detailed analysis of the organization
and management structure, including identifying key personnel and their
respective health insurance experience, discussing, among other things, the
basis for the proposed rate structure, intended market and financial
projections, consisting of a balance sheet, income statements and statement of
cash flows for a minimum of five years.
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Although the Insurance Department reviews the entire HMO application,
its principal focus is on the proposed rates and their underlying assumptions,
subscriber contracts and literature, insolvency plan and subscriber protection
and the business plan. The Insurance Department will also conduct an on-site
visit of an applicant's office to ascertain that the applicant possesses the
minimum statutory net worth and otherwise complies with the Managed Care Laws.
As with the Insurance Department, the Health Department focuses on
certain elements of the HMO application on which it is principally concerned,
which includes quality assurance, committee structure and operations, quality
assurance work plan including the development of ten clinical standards of care,
credentialing system, forms and process, provider contracts and grievance
system. It will specifically approve an applicant's provider contracts and
credentialing forms, at which time the applicant will then be permitted to begin
soliciting and credentialing physicians.
The Health Department will also conduct a site visit. Prior to that
time, the applicant must send to the Health Department a list of providers and
their distribution by type, specialty and geographic location. At the site
visit, the Health Department will review random credentials files to ensure that
signed contracts and required credentialing activities have in fact taken place.
Registrant submitted a PPO license application on May 8, 1996 and an
HMO license application on November 27, 1996.
Federal Qualification
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Registrant may seek federal qualification as an HMO, but there is no
assurance that it will obtain such qualification. An advantage of federal
qualification is that employers who are subject to minimum wage laws and who
employ at least 25 employees must offer to their employees the option of
subscribing to a federally qualified HMO plan as an alternative to traditional
health insurance. Moreover, failure to obtain federal qualification will prevent
Registrant from, in the future, establishing a health care program directed to
the Medicare and Medicaid markets, and will place Registrant at a competitive
disadvantage with respect to those employers in Pennsylvania who perceive
federal qualification as indicative of a quality HMO. Disadvantages of federal
qualification include: the application procedure is expensive and time
consuming; in certain instances, the HMO may be required to deliver a higher
level of benefits than is required by state authorities; health services must be
priced in accordance with federal law; and detailed periodic reports must be
submitted to the United States Department of Health and Human Services.
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Government Regulation
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The laws and regulations concerning conduct of a PPO and an HMO
restrict how Registrant conducts its business and may result in additional
burdens and costs to the Registrant. Areas of governmental regulation include
mandated benefits for maternity stays, coverage of emergency services,
limitation and disclosures of incentives to physicians, licensure, premium
rates, benefits, service area expansion, quality assurance procedures, plan
design, eligibility requirements, provider contracts, subscriber contracts,
permissible investments, claims and grievance procedures and rates of payment,
underwriting, financial arrangements, financial condition (including reserves)
and corporate governance. Registrant will also be required to file quarterly and
annual reports with the Department of Insurance and Department of Health
containing financial statements and other information concerning the operation
of Registrant's business. Laws and regulations governing Registrant's business
are subject to amendments and changing interpretations from time to time.
Managed care insurers are the subject of a growing number of
legislative "patient protection" and other initiations on both the federal and
state level. Proposed state laws and regulations include restrictions on the
ability of managed care entities to negotiate payment rates with providers, "any
willing provider" statutes which would require Registrant to accept all
providers who agree to meet Registrant's terms, restrictions on Registrant's
discretion to make benefit determinations, and mandated benefits. A Quality
Healthcare Protection Act has been proposed in Pennsylvania. It proposes to ban
healthcare plan restrictions on physician discussions with patients concerning,
among other things, plan coverage and treatment options, permit emergency
medical treatment without prior HMO approval, mandate continued treatment
coverage for patients of physicians dropped by an HMO network and establish a
grievance procedure for patients denied coverage. Public hearings on the measure
are expected to be scheduled this summer. Various proposals are also pending in
the U.S. Congress which would impose similar and additional restrictions and
requirements. The most comprehensive of these proposals are the companion bills
sponsored by Senator Edward M. Kennedy and Representative John D. Dingell. These
proposals would require, among other things, that health plans pay for emergency
care based on a prudent layperson standard, prohibit arbitrary limits on
medically necessary services and require health plans to provide access to
specialists.
Net Worth Requirements
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The Managed Care Laws govern the licensing and operation of PPOs and
HMOs in the Commonwealth of Pennsylvania. They require that Registrant maintain
a minimum net worth (the Registrant's assets minus its liabilities) of
$1,500,000 to operate an HMO and an additional $1,175,000 for a risk-assuming
PPO. In practice
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the Department of Insurance requires higher initial amounts equal to one
fifteenth of projected fifth year premium revenue. In addition to the net worth
requirements, the Managed Care Laws require that Registrant, before commencing
the operations of its HMO or PPO, deposit with the Department of Insurance cash
or securities in a minimum amount of $100,000 to insure against the insolvency
of Registrant. This deposit requirement is reviewed by the Department at least
annually. If Registrant becomes unable to meet the foregoing deposit and net
worth requirements, or any more stringent requirements that may be imposed,
Registrant's Certificate of Authority may be revoked.
Registrant is unable to predict how existing federal or state laws and
regulations may be changed or interpreted, what additional laws or regulations
affecting its business may be enacted or proposed, when and which of the
proposed laws will be adopted and what affect the new laws and regulations will
have on its business.
Health Care Industry Reform
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There can be no assurance that the regulatory environment in which
Registrant operates will not change significantly in the future. Generally,
regulation of health care companies is increasing. Various proposals affecting
federal and state regulation of the health care industry, including limitations
on Medicare and Medicaid payments, have been introduced, including provisions in
legislation currently pending which would reduce funds available for the
Medicare and Medicaid programs.
State health care reform legislation under the administration of
Governor Tom E. Ridge will likely impact on the business and operations of the
Registrant. The precise shape of any such legislation is presently unknown.
Registrant cannot assess the impact any of these proposals, if enacted,
would have on Registrant's business.
Antitrust Considerations
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Antitrust concerns have become central issues in the new managed care
environment of the health care industry. Whenever physicians or other health
care providers join together to form ventures for the delivery of health care
services, antitrust issues may be present. These issues primarily concern
conspiracies, combinations and agreements in restraint of competition, price
fixing, boycotts, exclusive dealing arrangements, and concerted refusals to
deal. Antitrust violations may be asserted and judicial relief may be sought by
the United States Department of Justice, the Federal Trade Commission or private
litigants. Adverse consequences that can result from legal action include the
imposition of treble damages, injunctions, restricting the way Registrant
operates, civil or criminal fines and substantial expenses in the form of
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attorneys' fees and costs. Registrant intends to analyze carefully its business
activities against the applicable antitrust laws. However, such analysis will
inherently be fact-sensitive and be based upon the comparative pro-competitive
and anti-competitive effects of the Registrant's proposed operations. Even with
such analysis, there can be no assurance that Registrant's operations will not
be challenged on the basis of antitrust violations at some time in the future.
In addition, antitrust law in this area is unsettled and any agency guidelines
affecting Registrant could require substantial changes in its method of doing
business which could negatively impact the profitability of Registrant.
Moreover, if antitrust lawsuits were to be filed against Registrant, it would be
forced to incur substantial legal expenses, and if any challenge were
successful, Registrant could suffer additional material adverse consequences.
Medicare "Fraud and Abuse" and "Anti-Referral" Concerns
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Under the Medicare and Medicaid Fraud and Abuse law, also known as the
Anti-Kickback Statute, a physician is prohibited from (a) soliciting or
receiving any remuneration in return for referring a patient to another health
care provider; and (b) offering or paying any remuneration to induce the
referral of patients to the physician. In addition, the federal anti-referral
law, known as "Stark", prohibits a physician from referring patients to an
entity in which the physician, or an immediate family member, has a "financial
relationship" for the provision of certain designated health services. These
designated health services include, among other things, laboratory, physical
therapy, inpatient and outpatient hospital services and radiology services. The
present scope of the Anti-Kickback Statute and the Stark Law are limited to the
Medicare (including the Medicare Secondary Payor Program) and Medicaid programs
and other federal programs or grants, but bills have been introduced in Congress
to extend these laws to all payors. Registrant does not presently anticipate
that its initial operations will include contracting with the federal or state
government to provide services to patients enrolled in Medicare or Medicaid.
However, at the time Registrant does participate in Medicare or Medicaid, or
otherwise become subject to these laws, its business, operations and provider
relationship may not fully comply with these or comparable laws then in effect.
Registrant cannot predict the scope and requirements of these laws or the impact
on the business operations and provider relationships of Registrant. However,
any required restructuring of its business and operations could have a material
adverse effect on Registrant.
Pennsylvania's Workers' Compensation Act prohibits a "provider" from
referring a person for, among other services, laboratory, physical therapy,
rehabilitation and diagnostic imaging services payable under workers'
compensation if that provider has a "financial interest" with the person or in
the entity which receives the referral. Registrant may, in the
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<PAGE>
future, contract to provide workers' compensation insurance coverage and
services. However, the Pennsylvania Workers' Compensation Act has incorporated
by reference as exceptions to its anti-referral prohibition all present and
future "safe harbor regulations" promulgated under the Anti-Kickback Statute and
present and future exceptions to Stark. In addition, an exception to the
Workers' Compensation Act anti-referral prohibition exists for "coordinated care
organizations." Should Registrant enter into contracts for workers' compensation
coverage and services, thereby bringing it within the purview of this law,
Registrant will be required to comply with the then applicable exceptions and
"safe harbors" or qualify as a coordinated care organization.
Item 7. Description of Property.
- ---------------------------------
Registrant leases approximately 8,300 square feet of office space in
Harrisburg, Pennsylvania under a lease expiring in October, 2001.
Item 8. Directors, Executive Officers and Significant Employees.
- -----------------------------------------------------------------
The current directors and officers of the Registrant, and the term of
office of each director, are as follows:
Name, Age, Present Officer
Position with Registrant and
Principal Occupation during
Last Five Years
----------------------------
DIRECTORS WHOSE TERMS EXPIRE AT 1999
ANNUAL MEETING OF CLASS A SHAREHOLDERS
Gary C. Brown, M.D., 47, Chairman,
of Flourtown, PA, is a Professor of Ophthalmology at Thomas
Jefferson University School of Medicine and has conducted a
medical practice in ophthalmology in the Philadelphia area
since 1976. Dr. Brown, a Board certified ophthalmologist,
is the Director of the Retinal Vascular Unit at Wills Eye
Hospital and an instructor at the American Academy of
Ophthalmology. Dr. Brown served as President of Registrant
from March, 1995 to November, 1996.
Darlene Ann M. Dunay, D.O., 39,
of Old Forge, PA, since 1987, has maintained a solo general practice in
Old Forge specializing in primary care. She is a diplomate of the
National Board of Medical Examiners and is Board certified in family
medical practice.
Edward W. Gerner, M.D., 56,
of Ardmore, PA, has conducted a medical practice in
ophthalmology and neuro-ophthalmology in Philadelphia,
Pennsylvania since 1976. He is a Clinical Associate
Professor for the Departments of Ophthalmology and Neurology
-15-
<PAGE>
at Thomas Jefferson University School of Medicine and Board
Certified in Neurology and Ophthalmology.
Lila Stein Kroser, M.D., 64,
of Philadelphia, PA, has conducted a family medical practice
in Philadelphia, PA since 1960. She is a Clinical Associate
Professor of Family Medicine at Medical College of
Pennsylvania.
Alice McCormick, D.O., 50,
of Canadensis, PA, has been practicing medicine since 1980. She has
maintained a practice in internal medicine in Tafton, PA with Mercy
Physician Network since July, 1995. She is certified by the National
Board of Osteopathic Medicine Examiners.
Herbert C. Perlman, M.D., F.A.C.R., M.P.A., 60,
of Carlisle, PA, has conducted a medical practice in radiology in
Carlisle, Pennsylvania since 1973. He is a Board certified diagnostic
radiologist. Dr. Perlman is certified by the American Board of Quality
Assurance and Utilization Review Physicians. He is a Clinical Associate
Professor of Radiology at Thomas Jefferson University School of
Medicine and, also, a Clinical Associate Professor of Radiology at the
Hershey Medical Center, Pennsylvania State University. Dr. Perlman is
the President of CMS, Inc., a Carlisle physician corporation. He is a
Trustee of the Pennsylvania Medical Society and is a member of the
Board of Directors of Penn Med, Inc., and of Penn Med's subsidiary,
Keystone Peer Review Organization (KePRO).
Jay H. Shah, M.D., 50,
of Richboro, PA, maintains his family medical practice in
Richboro, Pennsylvania. Dr. Shah is certified by the
American Board of Family Practice and by the American Board
of Quality Assurance and Utilization Review Physicians. Dr.
Shah served as Vice President-Medical Affairs of Registrant
from April, 1995 to November, 1996.
DIRECTORS WHOSE TERMS EXPIRE AT 1998
ANNUAL MEETING OF CLASS A SHAREHOLDERS
Gay D. Dunne, M.D., 56,
of State College, PA, has conducted a medical practice in
dermatology since 1976. Dr. Dunne is a member of the
Executive Committee of the American Academy of Dermatology
Advisory Board and the Executive Committee of the
Pennsylvania Academy of Dermatology.
Leonard P. Harman, D.O., 53,
of Philadelphia, PA, has conducted a family medical practice
in Philadelphia, Pennsylvania since 1974. He is Board
certified in family practice by the American Osteopathic
Board of General Practice.
-16-
<PAGE>
George R. Homa, D.O., 46,
of North Wales, PA, has conducted a family medical practice in
Bridgeport, Pennsylvania since 1979. He is Board certified by the
American College of Osteopathic General Practitioners and a Clinical
Instructor of General Practice at the Philadelphia College of
Osteopathic Medicine.
Marvin T. Hunter, M.D., 54,
of Doylestown, PA, has conducted a medical practice in
Plastic Surgery in Bucks and Montgomery counties since 1975.
Dr. Hunter is President-elect of the Bucks County Medical
Society. Dr. Hunter is a Fellow of the International
College of Surgeons and is a diplomate of the American Board
of Plastic Surgery.
Mark A. Piasio, M.D., 41,
of Clearfield, PA, has been an orthopaedic surgeon since 1989. He is a
diplomate of the American Board of Orthopaedic Surgery and the National
Board of Medical Examiners and is a fellow of the American Academy of
Orthopaedic Surgery and the American College of Surgeons. He is the
President of the Clearfield County Medical Society, and Vice Chairman
of the Young Physicians Section of the Pennsylvania Medical Society.
James G. Pitcavage, M.D., 63,
of Edgeworth, PA, has conducted a medical practice in pediatrics since
1965. Dr. Pitcavage is a member of the Board of Directors of the
Pennsylvania American Academy of Pediatrics and a member of the Board
of Directors of Managed Care Associates, PHO - Sewickley Valley
Hospital. He is also the Assistant Clinical Instructor, Department of
Pediatrics, University of Pittsburgh Medical School.
Robert S. Pyatt, Jr., M.D., 46,
of Chambersburg, PA, has conducted a medical practice in radiology
since 1982. Since January, 1996 he has also served as Acting Medical
Director of Cumberland Valley Health Network, a physician-hospital
organization. He is a Board certified radiologist and Fellow of the
American College of Radiology. He has been Medical Director of the
Radiology Department of Chambersburg Hospital since 1982, and is
currently President-Elect of its Medical Staff. Dr. Pyatt is also
Clinical Professor of Radiology at the George Washington University
School of Medicine, Washington D.C.
Milton D. Soiferman, D.O., 55,
of Wynnewood, PA, has conducted a medical practice in
Philadelphia, Pennsylvania since 1979. He is certified in
family practice by the American Osteopathic Board of Family
Practice. Dr. Soiferman is a Fellow of the American College
of Legal Medicine and a diplomate of the American Academy of
Pain Management.
-17-
<PAGE>
DIRECTORS WHOSE TERMS EXPIRE AT 1997
ANNUAL MEETING OF CLASS A SHAREHOLDERS
Alan A. Axelson, M.D., 56,
of Pittsburgh, PA, has been the Medical Director of
InterCare Psychiatric Services, Inc. since 1979.
Dennis P. DiRenzo, M.D., 43,
of Wyomissing, PA, has conducted a medical practice in
pediatrics since 1983. Dr. DiRenzo is Board certified in
pediatrics and is a Fellow of the American Academy of
Pediatrics.
Michael J. Gallagher, M.D., 48,
of Scranton, PA, is a member of the Department of Radiation Oncology of
Mercy Hospital in Scranton, PA. He is Board certified in therapeutic
radiology, medical oncology, internal medicine, and anatomic pathology.
He is President of the Lackawanna County Medical Society.
Larry E. Goldstein, M.D., 49,
of Wynnewood, PA, has conducted a medical practice in
urology since 1978. He practices in Philadelphia,
Pennsylvania and Turnersville, New Jersey. Dr. Goldstein is
a Board certified urologist and a Fellow of the American
College of Surgeons. He is an instructor in urology at
Thomas Jefferson University School of Medicine and serves on
the Board of Directors of the Keystone Kidney Lithotripsy
Center. Dr. Goldstein served as Secretary of Registrant
from March, 1995 to November, 1996.
Frank H. Guinn, D.O., 61,
of Philadelphia, PA, has conducted an internal medical practice in
Philadelphia, Pennsylvania since 1980. He is the Chief of Staff of
Graduate Health System - Parkview Hospital, Philadelphia, PA and the
Medical Director of Green Acres Nursing Home.
Richard J. Minehart, M.D., 46,
of Lansdale, PA, has conducted a medical practice in General
Surgery since 1983. An Associate Fellow of the American
College of Surgeons, Dr. Minehart is presently the Chairman
of the Credentials Committee and Vice President of the
Medical Staff at North Penn Hospital. Dr. Minehart served
as Treasurer of Registrant from March, 1995 to November,
1996.
John J. Nevulis, M.D., 46,
of Gwynedd Valley, PA, has conducted a medical practice in orthopaedic
surgery in the Philadelphia area since 1977. He is the managing partner
of Norristown Orthopaedic Associates, Inc. He is also president of
Pennsylvania Orthopedic Network, an independent practice association of
orthopedists. He is a Board certified orthopaedic surgeon
-18-
<PAGE>
and Fellow of the American Academy of Orthopaedic Surgeons.
Dr. Nevulis served as Executive Vice President of Registrant
from March, 1995 to November, 1996.
Saad Sakkal, M.D., 50,
of Greenville, PA, has been the Medical Director of the Metabolic Care
Center of Greenville since 1981 and of the Regional Diabetes Center in
Greenville, PA since 1991. He is certified by the American Board in
Medicine, Endocrinology and Metabolism, and Geriatric Medicine. Since
1993 he has been Secretary-Treasurer of Physicians Independent Practice
Association of Mercer County.
Jay Anthony Townsend, M.D., 61,
of Newville, PA, has maintained a family practice in
Newville, PA since 1972. Dr. Townsend is president of
Carlisle Healthcare Alternatives, Inc.
OTHER EXECUTIVE OFFICERS
------------------------
Richard A. Felice, 42, President and Chief Executive Officer, has been
President of Registrant since November, 1996. Prior thereto, since
July, 1994 he was President of Doctors Health Plan, a Durham, North
Carolina HMO. From 1993 to July, 1994 he was Senior Vice President of
Wellmark Healthcare Services, Inc., Wellesley, Massachusetts. From 1985
to 1993, he served as Sales Manager and Regional Vice President of U.S.
Healthcare in Blue Bell, Pennsylvania and Waltham, Massachusetts.
T. Clark Phillip, 46, Treasurer and Chief Financial Officer,
has served in his present position since November, 1996.
Prior thereto he was Treasurer of Doctors Health Plan, Inc.,
a Durham, North Carolina HMO, since February, 1995. Prior
thereto, he was Vice President, Finance of HMO Rhode Island,
Inc. since 1986.
Wendy C. Bass, 28, Secretary,
has been Director of Health Plan Development for Registrant's
subsidiaries since September, 1996 and served as Secretary since
November, 1996. Prior thereto she held managerial positions with
Doctors Health Plan, a Durham, North Carolina HMO, since June, 1993.
Prior thereto she obtained a Masters of Health Administration from
Medical College of Virginia.
All directors were first elected in July, 1995, except Dr. Kroser, who
was first elected in July 1996, and Dr. Axelson, who was first elected in
November, 1996. Registrant's bylaws state that only practicing Pennsylvania
physicians, podiatrists or oral surgeons are eligible to serve as directors.
Dr. Brown has served as Chairman since March, 1995. All other officers
were elected in November, 1996 and serve until the
-19-
<PAGE>
election of their successors, or their earlier resignation or
removal.
Item 9. Remuneration of Directors and Officers
- -----------------------------------------------
The following table shows the aggregate annual remuneration from
Registrant and its subsidiaries of each of the three highest paid persons who
were officers or directors of Registrant during 1996, and for all officers and
directors as a group. Each officer commenced employment in September, 1996.
Name and Principal Aggregate
Position Remuneration
------------------ ------------
Richard A. Felice, President $146,417
T. Clark Phillip, Treasurer $ 32,992
Wendy C. Bass, Secretary $ 25,683
All officers and directors as a group (27) $205,092(1)
- --------------------
(1) In addition, directors are reimbursed for reasonable travel
expenses to director and committee meetings.
Mr. Felice is employed under an Agreement ending September 2, 1997, at
an annual salary of $200,000. The term automatically renews for additional
periods of one year, unless terminated by either party at least 60 days prior to
the end of the term. The Agreement provides for an initial bonus of $5,000 and
reimbursement of moving expenses. Mr. Felice is also entitled annually to a
bonus of up to 15% of base compensation, based on mutually agreed performance
criteria. Mr. Felice is entitled to one year's compensation if Registrant fails
to renew the Agreement during the first five years. In the event Registrant is
restructured so that Mr. Felice is no longer Chief Executive Officer, or if he
declines to accept such position under such circumstances, he has the right to
terminate the Agreement and receive severance of $400,000. Under the Agreement
he will not, for a period of one year after termination, regardless of the cause
of termination, compete with Registrant in any geographic area in which
Registrant is then doing business, is licensed, or has a license application
pending.
Item 10. Security Ownership of Management and Certain Securityholders.
- ----------------------------------------------------------------------
The following table lists certain information with respect to the Class
A voting common stock and Class B non-voting common stock beneficially owned by
each current officer and director of
-20-
<PAGE>
the Registrant as of January 10, 1997, as well as the number of shares
beneficially owned by all officers and directors as a group on such date. This
information has been furnished by such persons.
Class A Class B
Officers/Directors Shares %(1) Shares %(2)
------------------ ------------ ------------
Alan A. Axelson, M.D. 1
Gary C. Brown, M.D.(5) 2 5
Dennis P. DiRenzo, M.D. 1
Darlene Ann M. Dunay, D.O. 1
Gay D. Dunne, M.D. 1
Michael J. Gallagher, M.D. 1
Edward W. Gerner, M.D. 1 3
Larry E. Goldstein, M.D. 1 3
Frank H. Guinn, D.O. 1
Leonard P. Harman, D.O. 1
George R. Homa, D.O. 1
Marvin T. Hunter, M.D. 1 5
Lila Stein Kroser, M.D. 1
Alice McCormick, D.O. 1
Richard J. Minehart, M.D. 1
John J. Nevulis, M.D. 2 2
Herbert C. Perlman, M.D. 1
Mark A. Piasio, M.D. 4
James G. Pitcavage, M.D. 1
Robert S. Pyatt, Jr., M.D.(3) 3 4
Saad Sakkal, M.D. 1
Jay H. Shah, M.D. 2 1
Milton D. Soiferman, D.O. 1 3
Jay Anthony Townsend, M.D. 1
Richard A. Felice 0 0
T. Clark Phillip 0 0
Wendy C. Bass 0 0
All directors and officers
as a group 31 (4) 26 2.4%
(1) Less than 1% for each person.
(2) Less than 1% for each person.
(3) Including shared voting and investment power as co-trustee
as to 2 Class A shares and 4 Class B shares.
(4) Less than 1%.
(5) In addition, he may be deemed to share indirectly the
power to vote and to invest 2 Class A shares and 5 Class B shares held by his
spouse; however, he disclaims beneficial ownership of such shares.
The addresses of the directors are as follows:
-21-
<PAGE>
Alan A. Axelson, M.D. Marvin T. Hunter, M.D.
InterCare Behavioral Health 301 S. Main St.
2575 Boyce Plaza Road Ste. 2-3 South
Pittsburgh, PA 15241 Doylestown, PA 18901
Gary C. Brown, M.D. Lila Stein Kroser, M.D.
910 E. Willow Grove Avenue 2855 Welsh Road
Wyndmoor, PA 19038 Philadelphia, PA 19152
Dennis P. DiRenzo, M.D. Alice McCormick, D.O.
Reading Pediatrics RR #2, Box 9C
40 Berkshire Court Greentown, PA 18426
Wyomissing, PA 19610
Richard J. Minehart, M.D.
Darlene Ann M. Dunay, D.O. 2100 N. Broad Street, Ste. 100
314 Oak Street Lansdale, PA 19446
Old Forge, PA 18518
John J. Nevulis, M.D.
Gay D. Dunne, M.D. 1308 DeKalb Street
137 South Pugh Street Norristown, PA 19401
State College, PA 16801
Herbert C. Perlman, M.D.
Michael J. Gallagher, M.D. Department of Radiology
Dept. of Radiation/Oncology Carlisle Imaging Associates
Mercy Hospital 246 Parker Street, Box 310
746 Jefferson Avenue Carlisle, PA 17013-0310
Scranton, PA 18510
Mark A. Piasio, M.D.
Edward W. Gerner, M.D. Suite 140
834 Chestnut Street, Ste. T160 807 Turnpike Avenue
Philadelphia, PA 19107 Clearfield, PA 16830-1238
Larry E. Goldstein, M.D. James G. Pitcavage, M.D.
2501 S. Broad Street 701 Broad Street
Philadelphia, PA 19148 Sewickley, PA 15143
Frank H. Guinn, D.O. Robert S. Pyatt, Jr., M.D.
1331 E. Wyoming Avenue Department of Radiology
Philadelphia, PA 19124 Chambersburg Hospital
112 N. Seventh Street
Leonard P. Harman, D.O. Chambersburg, PA 17201
4857 C Street
Philadelphia, PA 19120 Saad Sakkal, M.D.
81 North Main Street
George R. Homa, D.O. Greenville, PA 16125
700 DeKalb Street
Bridgeport, PA 19405 Jay H. Shah, M.D.
862 Second Street Pike
Richboro, PA 18954
-22-
<PAGE>
Milton D. Soiferman, D.O. Jay Anthony Townsend, M.D.
724 Porter Street 100 S. High Street
Philadelphia, PA 19148 Newville, PA 17241
To the knowledge of management, no person beneficially owns more than
10% of any class of the Registrant's securities. Registrant has not granted any
options, warrants or rights to purchase any of its securities. The directors of
Registrant may be regarded as the "parents" of the Registrant, as that term is
defined under the Securities Act of 1933.
Item 11. Interest of Management and Others in Certain Transactions.
- -------------------------------------------------------------------
In April, 1995 Registrant engaged Infinity to provide management
services. See "Management Agreement" in Item 6 above. Infinity is an affiliate
of the Pennsylvania Medical Society. Herbert C. Perlman, M.D., a director of
Registrant, is a trustee of the Pennsylvania Medical Society.
Part II
Item 1. Market Price of and Dividends on the Registrant's Common Equity and
Other Shareholder Matters.
-----------------------------------------------------------------------
Registrant's initial public offering was concluded in early 1996, and
no public trading market has yet developed.
Registrant was organized in February, 1995 and no cash dividends were
declared or paid in 1995 or 1996.
As of March 11, 1997, there were 3965 record holders of Class A common
stock and 354 record holders of Class B common stock.
Item 2. Legal Proceedings.
- ---------------------------
None.
Item 3. Changes in and Disagreements with Accountants.
- -------------------------------------------------------
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders.
- -------------------------------------------------------------
Not applicable.
Item 5. Compliance with Section 16(a) of the Exchange Act.
- ----------------------------------------------------------
To the Registrant's knowledge, during the fiscal year ended December
31, 1996, Gary C. Brown, M.D., Chairman (and in June, 1996 also President), due
to inadvertent oversight, failed to timely report on his Form 3, filed in June,
1996, the holding of two Class A shares and five Class B shares by his spouse.
Dr. Brown amended his Form 3 in March, 1997 to report the holding.
-23-
<PAGE>
Item 6. Reports on Form 8-K.
- -----------------------------
No reports on Form 8-K were filed by Registrant during the last quarter
of 1996.
-24-
<PAGE>
PENNSYLVANIA PHYSICIAN HEALTHCARE PLAN, INC.
(A Development Stage Company)
Consolidated Financial Statements for the Year Ended December 31, 1996, for the
Period February 15, 1995 (Date of Inception) to December 31, 1995, and for the
Cumulative Period from February 15, 1995 (Date of inception) to December 31,
1996 and Independent Auditors' Report.
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders
Pennsylvania Physicians Healthcare Plan, Inc.
Harrisburg, PA
We have audited the accompanying consolidated balance sheet of
Pennsylvania Physicians' Healthcare Plan, Inc. and its subsidiaries (a
development stage company) as of December 31, 1996, and the related statements
of operations, stockholders' equity, and cash flows for the year then ended, and
for the period from February 15, 1995 (date of inception) to December 31, 1996.
These consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audit. The Company's consolidated financial
statements as of and for the year ended December 31, 1995, and for the period
from February 15, 1995 (date of inception) through December 31, 1995, were
audited by other auditors whose report, dated April 23, 1996 (except for Note 8,
as to which the date is August 8, 1996), expressed an unqualified opinion on
those consolidated statements. The consolidated financial statements for the
period from February 15, 1995 (date of inception) to December 31, 1995, reflect
total revenues and net loss of $200,457 and ($666,830), respectively, of the
related totals. The other auditors' report has been furnished to us, and our
opinion, insofar as it relates to the amounts included for such prior period, is
based solely on the report of such other auditors.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit and the report of other auditors provide a reasonable
basis for our opinion.
In our opinion, based on our audit and the report of other auditors, such
consolidated financial statements present fairly, in all material respects, the
financial position of the Company as of December 31, 1996, and the results of
its operations and its cash flows for the year then ended, and for the period
from February 15, 1995 (date of inception) to December 31, 1996, in conformity
with generally accepted accounting principles.
Deloitte & Touche LLP
February 28, 1997
25
<PAGE>
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors and Shareholders
Pennsylvania Physician Healthcare Plan, Inc.
651 East Park Drive
Harrisburg, PA 17105
We have audited the accompanying balance sheet of Pennsylvania Physician
Healthcare Plan, Inc. (a development stage corporation) as of December 31, 1995,
and the accompanying statements of operations, changes in stockholders' equity,
and cash flows for the period February 15, 1995 (Date of Inception) to December
31, 1995. These financial statements are the responsibility of the Corporation's
management and their Board of Directors. Our responsibility is to express an
opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Pennsylvania Physician
Healthcare Plan, Inc. as of December 31, 1995, and the results of its operations
and its cash flows for the period February 15, 1995 (Date of Inception) to
December 31, 1995, in conformity with generally accepted accounting principles.
Dreslin and Company, Inc.
April 23, 1996 (except for Note 8, as to which the date is August 8, 1996)
26
<PAGE>
PENNSYLVANIA PHYSICIAN HEALTHCARE PLAN, INC.
(A Development Stage Company)
Consolidated Balance Sheets
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Assets 1996 1995
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 17,381,607 $ 18,142,948
Due from related entity -- 18,531
Accrued interest income 77,641 76,571
Prepaid expenses 45,816 30,147
Income taxes receivable 166,000 --
Other assets 44,000 --
- ------------------------------------------------------------------------------------------------------------------------------------
Total current assets 17,715,064 18,268,197
- ------------------------------------------------------------------------------------------------------------------------------------
Equipment 647,771 --
Deferred offering costs -- 227,341
Deferred income tax benefit -- 28,571
- ------------------------------------------------------------------------------------------------------------------------------------
Total assets 18,362,835 18,524,109
====================================================================================================================================
Liabilities and Stockholders' Equity
- ------------------------------------------------------------------------------------------------------------------------------------
Current liabilities:
Accounts payable 335,106 134,402
Accrued income taxes payable -- 28,571
Other liabilities 22,058 44,966
- ------------------------------------------------------------------------------------------------------------------------------------
Total current liabilities 357,164 207,939
- ------------------------------------------------------------------------------------------------------------------------------------
Stockholders' Equity:
Class A common voting stock, $.01 par value, 40,000 shares authorized; 4,087 and 3,613 shares 41 36
issued and outstanding at December 31, 1996 and 1995, respectively
Class B common non-voting stock, $.01 par value, 100,000 shares authorized; 1,074 and 918 shares 11 9
issued and outstanding at December 31, 1996 and 1995, respectively
Additional paid in capital 21,220,777 18,982,955
Deficit accumulated during the development stage (3,215,158) (666,830)
- ------------------------------------------------------------------------------------------------------------------------------------
Total stockholders' equity 18,005,671 18,316,170
- ------------------------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $ 18,362,835 $ 18,524,109
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
27
<PAGE>
PENNSYLVANIA PHYSICIAN HEALTHCARE PLAN, INC.
(A Development Stage Company)
Consolidated Statements of Operations
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
Cumulative Period
Period From February From February
Year Ended 15, 1995 (date 15, 1995 (date
December 31, of inception) to of inception) to
1996 December 31, 1995 December 31, 1996
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenues:
Interest income $ 962,258 166,045 1,128,303
Other income -- 34,412 34,412
- -------------------------------------------------------------------------------------------------------------------
Total Revenue 962,258 200,457 1,162,715
- -------------------------------------------------------------------------------------------------------------------
Expenses:
Legal fees 285,171 114,738 399,909
Consulting services 2,100,575 311,994 2,412,569
Operating expenses 619,503 319,149 938,652
Salary and benefits 534,967 31,568 566,535
Interest expense -- 49,838 49,838
Other taxes (29,630) 40,000 10,370
- -------------------------------------------------------------------------------------------------------------------
Total expenses 3,510,586 867,287 4,377,873
- -------------------------------------------------------------------------------------------------------------------
Loss before income taxes (2,548,328) (666,830) (3,215,158)
- -------------------------------------------------------------------------------------------------------------------
Income taxes (benefit):
Current (28,571) 28,571 --
Deferred 28,571 (28,571) --
- -------------------------------------------------------------------------------------------------------------------
Net loss $(2,548,328) $ (666,830) $(3,215,158)
- -------------------------------------------------------------------------------------------------------------------
Weighted average common shares 5,084 972
Weighted average loss per outstanding ommon share $ (501.24) $ (686.04)
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
28
<PAGE>
PENNSYLVANIA PHYSICIAN HEALTHCARE PLAN, INC.
(A Development Stage Company)
Consolidated Statements of Changes Stockholders' Equity
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------
Common Stock Shares Common Stock Par Value
Class A Class B Class C Class A Class B Class C
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance, February 15, 1995
(date of inception) -- -- -- $ -- $ -- $ --
Issuance of Class C common
stock in June, 1995 25 1
Redemption of Class C common
stock and liquidation of
subordinated notes payable
in December, 1995 (25) (1)
Issuance of Class A common
stock in December, 1995 25 1
Issuance of Class A common
stock in December, 1995 3,588 35
Issuance of Class B common
stock in December, 1995 918 9
Net loss
- -----------------------------------------------------------------------------------------------------------
Balance, December 31, 1995 3,613 918 -- 36 9 --
Issuance of class A common
stock January - March, 1996 474 5
Issuance of class B common
stock January - March, 1996 156 2
Charge-off of deferred offering
costs - March 1, 1996
Net loss
- -----------------------------------------------------------------------------------------------------------
Balance, December 31, 1996 4,087 1,074 $ -- $ 41 $ 11 $ --
- -----------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
[RESTUBBED FROM TABLE ABOVE]
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------
Additional Accumulated
Paid In Deficit During The
Capital Development Stage Total
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance, February 15, 1995
(date of inception) $ -- $ -- $ --
Issuance of Class C common
stock in June, 1995 2,499 2,500
Redemption of Class C common
stock and liquidation of
subordinated notes payable
in December, 1995 (2,499) (2,500)
Issuance of Class A common
stock in December, 1995 124,999 125,000
Issuance of Class A common
stock in December, 1995 17,939,965 17,940,000
Issuance of Class B common
stock in December, 1995 917,991 918,000
Net loss (666,830) (666,830)
- ------------------------------------------------------------------------------------------
Balance, December 31, 1995 18,982,955 (666,830) 18,316,170
Issuance of class A common
stock January - March, 1996 2,369,995 2,370,000
Issuance of class B common
stock January - March, 1996 155,998 156,000
Charge-off of deferred offering
costs - March 1, 1996 (288,171) (288,171)
Net loss (2,548,328) (2,548,328)
- ------------------------------------------------------------------------------------------
Balance, December 31, 1996 $21,220,777 $(3,215,158) $ 18,005,671
- ------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
29
<PAGE>
PENNSYLVANIA PHYSICIAN HEALTHCARE PLAN, INC.
(A Development Stage Company)
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------------
Cumulative Period
Period From February From February
Year ended 15, 1995 (date 15, 1995 (date
December 31, of inception) to of inception) to
1996 December 31, 1995 December 31, 1996
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss $(2,548,32) $ (666,830) $ (3,215,158)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Change in assets and liabilities:
Due from related entity 18,531 (18,531) --
Accrued interest income (1,070) (76,571) (77,641)
Prepaid expenses (15,669) (30,147) (45,816)
Income taxes receivable (166,000) -- (166,000)
Other assets (44,000) -- (44,000)
Deferred income tax benefit 28,571 (28,571) --
Accounts payable 200,704 134,402 335,106
Accrued income taxes payable (28,571) 28,571 --
Other liabilities (22,908) 44,966 22,058
- -------------------------------------------------------------------------------------------------------------------------------
Net cash used in operating activities (2,578,740) (612,711) (3,191,451)
- -------------------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Purchases of equipment (647,771) -- (647,771)
- -------------------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Receipt of director cash advances -- 123,000 123,000
Return of director cash advances -- (123,000) (123,000)
Borrowings under line of credit -- 717,500 717,500
Payments under line of credit -- (717,500) (717,500)
Proceeds form issuance of subordinated notes payable -- 122,500 122,500
Proceeds from issuance of common stock 2,526,000 18,860,500 21,386,500
Deferred offering costs (60,830) (227,341) (288,171)
- -------------------------------------------------------------------------------------------------------------------------------
Net cash provided from financing activities 2,465,170 18,755,659 21,220,829
- -------------------------------------------------------------------------------------------------------------------------------
Net (decrease) increase in cash and cash equivalents (761,341) 18,142,948 17,381,607
Cash and cash equivalents, beginning of year 18,142,948 -- --
- -------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of year $ 17,381,607 $ 18,142,948 $ 17,381,607
- -------------------------------------------------------------------------------------------------------------------------------
Supplemental disclosures:
Interest Paid $ -- $ 9,838 49,838
Income Taxes Paid $ 166,$00 $ -- 166,000
Non-cash investing and financing activity:
In December, 1995 25 shares of Class C common stock for
a total of $2,500, together with each of 25
subordinated notes payable for a total of $122,500 were
redeemed in exchange for 25 shares of Class A common
stock
</TABLE>
See accompanying notes to consolidated financial statements.
30
<PAGE>
PENNSYLVANIA PHYSICIAN HEALTHCARE PLAN, INC.
(A Development Stage Company)
Notes to Consolidated Financial Statements for the Year Ended December 31, 1996,
for the Period February 15, 1995 (Date of Inception) to December 31, 1995, and
for the Cumulative Period from February 15, 1995 (date of inception) to December
31, 1996
================================================================================
(1) Description of Business
Pennsylvania Physician Healthcare Plan, Inc. (the Company) was formed
as a Pennsylvania for-profit corporation on February 15, 1995, under
the direction of private practicing physicians to develop a physician
owned and controlled managed care organization in Pennsylvania.
(2) Development Stage
The Company is in its developmental stage as of December 31, 1996, and
activities have consisted primarily of raising capital through a public
stock offering, hiring a management team, applying for the necessary
licenses to operate as a managed care organization and developing a
business plan. The Company expects to receive a license to operate a
preferred provider organization (PPO) in April 1997 and a license to
operate a health maintenance organization (HMO) in the second or third
quarter of 1997.
Successful completion of the Company's development program and,
ultimately, the attainment of profitable operations are dependent upon
future events, including achieving a level of revenues adequete to
support the Company's cost structure.
(3) Summary of Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements include the financial statements
of Pennsylvania Physician Healthcare Plan, Inc. and its three
wholly-owned subsidiaries, PPHP HMO, Inc., PPHP PPO, Inc., and
Pennsylvania Physicians Care Service Corp. All significant intercompany
balances and transactions have been eliminated in consolidation.
Cash and Cash Equivalents
Cash and cash equivalents include cash and investments with maturities
of less than three months when purchased. The cost of these investments
approximates fair market value.
Equipment
Equipment, consisting principally of office equipment, computer
equipment and software, was not placed into service as of December 31,
1996. Therefore, no depreciation expense was recorded for the year
ending December 31, 1996.
31
<PAGE>
(3) Continued
Deferred Offering Costs
Through December 31, 1995, the Company deferred certain direct costs of
$227,341 incurred in connection with its public stock offering. As of
March 1, 1996, the Company had deferred an additional $60,830 of
similar costs. Upon completion of the initial stock offering on March
1, 1996, the Company charged $288,171 of deferred offering costs to
additional paid-in capital as a direct reduction of the proceeds of
such offering.
Income Taxes
Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases and to operating loss and tax credit
carryforwards. Deferred tax assets and liabilities are measured using
enacted tax rates expected to apply to taxable income in the years in
which those temporary differences are expected to be recovered or
settled. The effect on deferred tax assets and liabilities of a change
in tax rates is recognized in income in the period that includes the
enactment date.
Earnings Per Common Share
Earnings per common share have been computed based upon the weighted
average number of common shares outstanding during each period.
Use of Estimates
Management has made a number of estimates and assumptions relating to
the reporting of assets and liabilities to prepare these consolidated
financial statements in conformity with generally accepted accounting
principles. Actual results could differ from those estimates.
Reclassifications
Certain prior period amounts have been reclassified to facilitate
comparison with current year reporting presentation.
32
<PAGE>
(4) Restrictions on Cash
As specified in the prospectus for the public stock offering,
approximately $9,691,000 of offering proceeds which are included in the
Company's cash and cash equivalents as of December 31, 1996 may only be
used after licensure of the managed care business is attained;
otherwise, such funds, less claims of creditors, must be distributed to
the shareholders, unless holders of a majority of the voting shares
elect otherwise.
(5) Line of Credit
During 1995, the Company established a line of credit with the
Pennsylvania Medical Society Liability Insurance Company in the amount
of $800,000. As of December 31, 1995, all advances had been repaid and
the line of credit was canceled.
(6) Common Stock
The Company's authorized common stock consists of 40,000 shares of
Class A, 100,000 shares of Class B, 100 shares of Class C, and
1,000,000 shares of Class D, each with a $.01 par value per share.
The holders of any shares of common stock of the Company have no
preemptive rights. The Company's Bylaws state that any vote of
shareholders having the effect of the acquisition of substantially the
entire business of the Company by any person, whether in a plan of
merger, sale or other disposition of all or substantially all of the
assets of the Company, shall require the affirmative vote of ninety
percent (90%) of all shareholders entitled to vote.
The following is a description of each class of common stock:
Class A
The holder of Class A shares is limited to one vote if and
only if the holder of the Class A shares is a practicing
physician. The Class A shares may be sold only to a practicing
physician or they may be transferred through gift or
involuntarily to others. In the event that Class A shares are
transferred to others, they become non-voting and such person
or persons would have the right to sell the shares only to a
practicing physician who then could exercise the right to
vote.
33
<PAGE>
(6) Continued
Class B
The Class B shares of common stock are non-voting and are only
offered to holders of voting Class A shares, and may only be
resold to holders of existing Class A shares, or they may be
transferred by gift or involuntarily to others.
Class C
The holders of Class C common stock and the voting holders of
Class A common stock shall vote as a class.
Class D
The Board of Directors may designate one or more subclasses or
series, or both of Class D common stock and reserves the right
to designate future preferences, limitations and special
rights, if any, except that Class D common stock shall not
have voting rights.
Prior to the public stock offering, members of the Board of Directors
of the Company subscribed to Class A common stock and paid the Company
$123,000. In May 1995, members of the Board of Directors rescinded
their decision to subscribe to stock and all the funds were returned by
the Company to the individual subscribers.
During 1995, one share of Class C common stock was issued to each of
the 25 members of the Board of Directors for a purchase price of $100
per share. In addition, a subordinated note in the amount of $4,900 was
issued to each of the 25 members in exchange for cash. The notes were
due in one year or less, without interest. Total cash received from the
issuance of the Class C common stock and the subordinated notes payable
was $125,000, as follows:
Issuance of 25 shares of Class C
common stock, at $100 per share $ 2,500
Issuance of 25 subordinated notes
payable, at $4,900 face value each 122,500
--------------
Total $ 125,000
34
<PAGE>
(6) Continued
The Company's Prospectus was effective on July 20, 1995. The minimum
offering was established at $16,500,000.
Once the minimum offering was achieved in December, 1995, each Class C
share of common stock, together with each subordinated note payable,
was redeemed in exchange for one share of Class A common stock.
As a result of the stock offering which ended in March, 1996, the
Company received gross proceeds of $21,509,000. Expenses associated
with the offering totaled $288,171, resulting in net capital additions
to the Company of $21,220,829. The Company recorded Class A and B
common stock at par of $41 and $11 and paid in capital of $20,207,304
and $1,013473, respectively, from the stock issuance.
(7) Leases
At December 31, 1996, the Company is obligated under non-cancelable
operating leases for office space and equipment expiring at various
dates through December 2001. Rental expense for office space and
equipment totaled $27,092 and $2,208 for 1996 and 1995, respectively
and $29,300 for the cumulative period from February 15, 1995 (date of
inception) to December 31, 1996.
Future minimum rental payments under the terms of the operating leases
at December 31, 1996 are as follows:
Years ending December 31,
1997 $ 170,637
1998 206,151
1999 210,919
2000 212,687
2001 163,050
------------
Total $ 963,444
35
<PAGE>
(8) Income Taxes
For federal and state income tax purposes, certain organizational
expenses incurred by the Company in its development stage are not
currently deductible as business expenses. Instead, these expenses
accumulate until the Company is actively in business, at which time the
expenses are deductible over a period of five years. For the period
February 15, 1995 (Date of Inception) to December 31, 1996, the Company
incurred expenses totaling $2,977,454 that will, for federal and state
income tax purposes, be deferred until future years. In order to
recognize the income tax benefit of deducting these expenses in the
future, the Company has recorded a deferred income tax benefit totaling
$1,202,846, which was reduced by a valuation allowance of $1,202,846.
Management recorded the valuation allowance to reduce the deferred
income tax benefit to its estimated realizable value in light of
management's judgment about the Company's ability to realize the
deferred income tax benefit.
The Company has federal net operating loss carry forwards of $325,000
which will be available to offset future taxable income through
December 31, 2011.
The Company's consolidated financial statements for the period from
February 15, 1995 (date of inception) to December 31, 1995 were
restated to reflect a change in management's judgement as to the
realizability of the deferred income tax benefit arising from deferring
recognition, for income tax purposes, of expenses incurred in the
Company's development stage.
(9) Management Agreement
The Company has contracted with Infinity Management Services, Inc., a
wholly owned subsidiary of the Pennsylvania Medical Society Liability
Insurance Company, to provide various accounting and administrative
services.
(10) Concentrations of Credit Risk
The Company maintains cash accounts in excess of federally insured
limits. Money market funds are invested in United States Treasury
Securities that are guaranteed by the full faith and credit of the
United States Government.
36
<PAGE>
Part III
Item 1. Index to Exhibits.
2.1 Restated Articles of Incorporation
(Incorporated by reference to Exhibit
2.1 to Registrant's Form 10-SB filed
April 30, 1996)
2.2 Amended Bylaws
(Incorporated by reference to Exhibit
3(ii) to Registrant's Form 10-QSB filed
August 14, 1996)
6.1 Licensure/Business Development Phase Services
Agreement with Infinity Management Services,
Inc. dated March 6, 1996.
(Incorporated by reference to Exhibit
6.1 to Registrant's Form 10-SB filed
April 30, 1996)
6.2 Executive Employment Agreement dated
September 3, 1996, between PPHP Service Corp.
and Richard A. Felice 40
-37-
<PAGE>
S I G N A T U R E S
Pursuant to the requirements of Section 13 of the Securities
Exchange Act of 1934, Registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
PENNSYLVANIA PHYSICIAN HEALTHCARE
PLAN, INC.
------------------------------------
(Registrant)
Date: March 25, 1997 /S/ Richard A. Felice
------------------------------------
Richard A. Felice, President
(Chief Executive Officer)
Date: March 25, 1997 /S/ T. Clark Phillip
------------------------------------
T. Clark Phillip, Treasurer
(Chief Financial Officer)
Pursuant to the requirements of the Securities and Exchange
Act of 1934, this report has been signed below by the following persons on
behalf of Registrant and in the capacities and on the dates indicated.
The following persons constitute a majority of the Board of
Directors of Registrant.
Date: March 25, 1997 /S/ Alan A. Axelson, M.D.
------------------------------------
Director
Date: March 25, 1997 /S/ Dennis P. DiRenzo, M.D.
------------------------------------
Director
Date: March 25, 1997 /S/ Gay D. Dunne, M.D.
------------------------------------
Director
Date: March 25, 1997 /S/ Edward W. Gerner, M.D.
------------------------------------
Director
Date: March 25, 1997 /S/ Frank H. Guinn, D.O.
------------------------------------
Director
Date: March 25, 1997 /S/ George R. Homa, D.O.
------------------------------------
Director
Date: March 25, 1997 /S/ Marvin T. Hunter, M.D.
------------------------------------
Director
-38-
<PAGE>
Date: March 25, 1997 /S/ Alice McCormick, D.O.
------------------------------------
Director
Date: March 25, 1997 /S/ John J. Nevulis, M.D.
------------------------------------
Director
Date: March 25, 1997 /S/ Mark A. Piasio, M.D.
------------------------------------
Director
Date: March 25, 1997 /S/ Robert S. Pyatt, Jr., M.D.
------------------------------------
Director
Date: March 25, 1997 /S/ Saad Sakkal, M.D.
------------------------------------
Director
Date: March 25, 1997 /S/ Milton D. Soiferman, D.O.
------------------------------------
Director
Date: March 25, 1997 /S/ Jay Anthony Townsend, M.D.
------------------------------------
Director
-39-
<PAGE>
EXHIBIT 6.2
EXECUTIVE EMPLOYMENT AGREEMENT
AGREEMENT made this 3rd day of September, 1996, between PPHP
SERVICE CORP., a Pennsylvania corporation ("Employer") and RICHARD A. FELICE
("Executive").
The parties hereto, intending to be legally bound hereby,
agree upon the following terms of employment of Executive by Employer:
1. Employment and Term. Employer hereby employs Executive and
Executive hereby accepts employment for a term commencing September 3, 1996 and
ending September 2, 1997 (the "Initial Term"); subject to extension as provided
herein. (September 2, 1997, or the last day of any extended term as provided
herein is hereinafter called the "Termination Date.") This Agreement shall
automatically be extended for additional periods of one year ("Renewal Term"),
unless notification is given by one party to the other to the contrary by
providing written notice at least sixty (60) days prior to the Termination Date
in accordance with the procedures outlined in Section 12 regarding notice.
2. Duties. Employer is an affiliate of Pennsylvania Physician
Healthcare Plan, Inc. ("PPHP"). Executive shall perform the duties of Chief
Executive Officer for such managed care affiliates of PPHP as Employer shall
designate from time to time and such additional executive duties for Employer
and its affiliates as may be requested of Executive by Employer. Executive's
place of employment shall be at the principal offices of Employer, now
Harrisburg, Pennsylvania. Executive shall accept and perform the duties of such
offices and directorships of Employer and its affiliates to which Executive may
from time to time be elected or appointed.
3. Extent of Services. Executive shall devote his full time
and best efforts to the performance of his duties hereunder. He shall not engage
in any business or perform any services in any capacity whatsoever other than
for Employer and its affiliates.
4. Compensation.
a. Salary. For all duties to be performed by
Executive in any capacity hereunder, Executive shall receive an annual salary of
Two Hundred Thousand Dollars ($200,000) per year ("Annual Salary") payable in
installments twice per month, in accordance with Employer's regular practice for
executive employees. Upon renewal of this contract in accordance with Section 1
hereof, Executive's annual salary for such renewal term shall not be less than
the Annual Salary. A performance review and
<PAGE>
review of Executive's Annual Salary will be performed annually and shared with
Executive.
b. Vacation. Executive shall be entitled to four (4)
weeks paid vacation during each full year that this Agreement is in force. Up to
two weeks per contract year of such vacation may be cumulative but the time or
times during which it is taken shall first be approved by Employer.
c. Fringe Benefits. Executive shall be entitled to
receive (i) the insurance and pension benefits provided pursuant to the
provision of plans as established and revised by Employer from time to time and
generally made available to executives of Employer (it being understood that the
development of these plans for approval by Employer will be part of Executive's
responsibility as Chief Executive Officer); (ii) Executive may elect to continue
his current coverage for health care benefits through his former employer,
Doctors Health Plan, and, upon presentation of invoices, Employer will reimburse
Executive for the premiums therefor (The premium for such coverage is $448.80
effective to January 1, 1997.); (iii) an automobile expense allowance of $500
per month; and (iv) all other fringe benefits made available to salaried
employees generally from time to time by Employer.
d. Bonus. Executive shall be eligible for an annual
bonus of up to fifteen percent (15%) of Annual Salary, based on mutually agreed
performance criteria to be established within ninety (90) days of the
commencement of the term of this Agreement. The bonus in connection with the
Initial Term shall be guaranteed at fifteen percent (15%) of Annual Salary, and
shall be paid in full by Employer to Executive within ten (10) days of the
commencement of the Initial Term. Subsequent to the first Renewal Term, the
bonus shall be paid to Executive within forty-five (45) days after each
anniversary date of this Agreement. If Executive's employment terminates for
Good and Sufficient Cause, Executive shall forfeit all rights to the bonus
described in this Section 4d. A review of Executive's bonus and bonus criteria
will be performed annually and shared with Executive.
e. Signing Bonus. Executive shall be paid a signing
bonus of Five Thousand Dollars ($5,000) within ten (10) days of the execution of
this Agreement by Executive.
f. Expenses. It is understood that Executive will
from time to time incur reasonable expenses in conjunction with his employment.
Employer will reimburse him for any such expenses (including automobile expenses
of $.16 per mile) in accordance with Employer's regular practice for
reimbursement of its executive employees. Employer shall reimburse Executive,
for the term of this Agreement, for annual membership expense in connection with
a corporate expense credit card for the convenience of Executive in
- 2 -
<PAGE>
connection with this section. In addition, Employer shall reimburse Executive
for the following expenses:
(1) reasonable expenses for Executive and
his wife for the trip to Harrisburg on August 9, 1996 from Durham, North
Carolina for the purpose of, among other things, meeting other Employees of
Employer and reviewing the local housing market;
(2) reasonable expenses for two (2) round
trips to Harrisburg, Pennsylvania from Durham, North Carolina, for Executive and
his spouse for the purpose of identifying permanent housing opportunities;
(3) temporary living expenses in the amount
of $1,000 per month for the first three (3) months of the term of this
Agreement, and reasonable expenses for up to four (4) round-trips between
Harrisburg and Durham, North Carolina during such three month period, upon
presentment of appropriate receipts;
(4) reasonable expenses of relocation of
Executive's belongings from Durham, North Carolina to Harrisburg, up to $12,000,
upon presentation of appropriate receipts and proof of receipt of at least two
(2) competitive bids for incurrence of expenses in connection with this Section
4F(4);
(5) payment of the application fee, points
and 1% Pennsylvania real estate transfer tax, upon presentment of appropriate
documentation, in connection with the purchase of a permanent residence in
Harrisburg, Pennsylvania or its immediate vicinity;
(6) payment of reasonable realtor fees, upon
presentment of appropriate documentation, in connection with the sale of
Executive's current residence in Durham, North Carolina;
(7) use of a cellular phone, with
specifications and in an amount mutually agreed between Executive and Employer;
5. Termination.
a. Notwithstanding any other provisions hereof, this
Agreement shall be terminated immediately upon the death or Disability of
Executive or Executive's discharge by Employer upon Good and Sufficient Cause.
In such event, Employee shall not be entitled to any payment or benefit
hereunder or any other compensation other than the portion of the applicable
Annual Salary accrued to the date of termination. Termination of employment
under this Section 5, or otherwise, shall not diminish the obligations of
Executive pursuant to Sections 6 and 7 hereof, except as otherwise provided
herein.
- 3 -
<PAGE>
b. "Disability" shall mean inability of Executive due
to illness or accident to perform the duties required to be performed by him
pursuant hereto for a continuing period in excess of ninety (90) days.
c. "Good and Sufficient Cause" shall include but not
be limited to:
(1) any misconduct or dishonesty detrimental
to the best interests of Employer or any of its affiliates;
(2) willful disloyalty to Employer or any of
its affiliates;
(3) conviction of a felony;
(4) violation of any of the provisions of
Sections 3 and 6 hereunder.
d. If Employer terminates the Agreement prior to the
end of the Initial Term or any Renewal Term, except for Good and Sufficient
Cause, or if Employer provides notice, pursuant to Section 1 hereof, of its
election not to enter into any of the Renewal Terms commencing September 3,
1997, September 3, 1998, September 3, 1999 or September 3, 2000, then Employer
shall pay Executive, as Executive's sole remedy and in full satisfaction of any
and all payments or damages due under any agreement, $200,000. Such payment
shall be made in installments over one (1) year in accordance with Employer's
regular payroll schedule. In the event any restructuring as set forth in
subparagraph (e) hereof occurs, Restructured Corporation (as defined in such
subparagraph) shall be bound by the provisions of this Section 5d.
e. Change in Corporate Management.
(1) In the event Employer shall be re-
structured (herein "Restructured Corporation") by (i) merger or consolidation
with any "Other Entity," or by (ii) transfer of all or substantially all of its
assets to any Other Entity so that Executive is no longer Chief Executive
Officer by reason of Executive's not being offered to continue in such position
by such Restructured Corporation, or if so offered, Employee does not accept
such position, Executive shall have the right to terminate this Agreement within
thirty (30) days of the effective date of such restructuring and Corporation
shall then become obligated to pay Executive $200,000 as severance in addition
to the severance payable to Employee pursuant to Section 5d hereof; provided,
however, that such payments shall be reduced to the extent required so that such
payments shall not be a parachute payment within the meaning of Section 280G(b)
of the Internal Revenue Code of 1986, as amended, and the regulations
promulgated thereunder, or successor
- 4 -
<PAGE>
provisions of similar import, such determination to be made by the principal
independent accounting firm then servicing Corporation. Such payments shall be
payable in installments over one (1) year in accordance with Employer's regular
payroll schedule.
(2) For purposes of this section, "Other
Entity" shall mean an entity of which 80% or more of the combined voting power
of its outstanding voting securities entitled to vote generally in the election
of directors is held by persons who were not stockholders of Corporation
immediately prior to such event.
Anything to the contrary notwithstanding, this Section shall
not apply in the event Employer or any of its affiliates acquires by merger,
consolidation, purchase of assets or otherwise the licenses and business of
Doctors Health Plan, a health maintenance organization licensed to do business
in, among other jurisdictions, North Carolina, which is a wholly-owned
subsidiary of Coastal Physicians Group and which was Executive's former
Employer. In the event of such merger, consolidation, purchase of assets or
otherwise, the parties will negotiate in good faith, Executive's compensation
hereunder to reflect Executive's additional responsibilities and costs, if any,
in connection therewith.
6. Disclosure of Information. Executive will not, during the
term of this Agreement or during the period of non-competition defined in
Section 7 hereof or during the period in which Executive is receiving payments
under Sections 5d and/or 5e hereof, whichever is longer, without written
authorization of Employer, disclose to, or make use of for himself or for any
person, corporation, or other entity, any trade secret or other confidential or
proprietary information concerning the business, clients, methods, operations,
financing or services of Employer or its affiliates. Trade secrets and
confidential information shall mean information disclosed to Executive or known
by him as a consequence of his employment by Employer, whether or not pursuant
to this Agreement, and not generally known in the industry.
7. Covenant Not to Compete.
a. Executive agrees that he will not, for a period of
one year after the termination of his employment, regardless of the cause of
termination, within the Employer Territory, as defined below, engage in any
business or perform any service, directly or indirectly, in competition with or
proposed to be in competition with the Business of Employer, or have any
interest, whether as proprietor, partner, employee, principal, agent,
consultant, director, officer or in any other similar capacity or manner
whatsoever, in any enterprise which shall so engage or is proposing to so
engage. "Employer Territory" shall mean any Pennsylvania county or county of
other state in which, at the time of the termination of Executive's employment,
the Employer or its
- 5 -
<PAGE>
affiliates is doing business or is licensed or has a license application pending
with an agency of the Commonwealth of Pennsylvania or other state.
b. In furtherance of the foregoing, and not in
limitation thereof, Executive shall not, during the period of non-competition
and within the geographical area herein set forth, directly or indirectly:
(1) solicit or service in any way, on behalf
of himself or on behalf of or in conjunction with others, any client or
customer, or prospective client or customer, which has been solicited or
serviced by Employer or any affiliate of Employer within one year prior to the
termination of his employment; or
(2) solicit for employment, employ or engage
as an independent contractor, any person who was employed by Employer at the
date of termination of employment of Executive, or induce any such person to
leave the employ of Employer.
c. If Executive violates this restrictive covenant
and Employer brings legal action for injunctive or other relief, Employer shall
not, as a result of the time involved in obtaining such relief, be deprived of
the benefit of the full period of the restrictive covenant. Accordingly, the
restrictive covenant shall be deemed to have the duration specified in
subparagraph A hereof, computed from the date such relief is granted but reduced
by the time expired between the date the period of restriction began to run and
the date of the first violation of the covenant by Executive.
d. If any court shall determine that the duration or
geographical limits of any restriction contained in this paragraph are
unenforceable, it is the intention of the parties that the restrictive covenant
set forth herein shall not thereby be terminated, but shall be deemed amended to
the extent required to render it valid and enforceable, such amendment to apply
only with respect to the operation of this paragraph in the jurisdiction of the
court which has made such adjudication. The covenants on the part of Executive
in this Section 7 shall be construed as an agreement independent of any other
provision in this Agreement, and the existence of any claim or cause of action
of Executive against Employer, whether predicated on this Agreement or
otherwise, shall not constitute a defense to the enforcement by Employer of
these covenants.
8. Remedies of Employer. As an executive of Employer,
Executive may have access to customer lists, trade secrets and other
confidential information of Employer. Moreover, his continued employment will be
instrumental to the continuity and development of Employer's business.
Executive, therefore, acknowledges that the restrictions contained in Sections 6
and 7 of
- 6 -
<PAGE>
this Agreement are a reasonable and necessary protection of the legitimate
interests of Employer, that any violation of them would cause substantial injury
to Employer, and that Employer would not have entered into this Agreement with
Executive without receiving the additional consideration of Executive's binding
himself to said restrictions. In the event of any actual or threatened violation
of the said restrictions, Employer shall be entitled, in addition to any other
remedy, to preliminary and permanent injunctive relief.
9. Surrender of Books and Records. Executive acknowledges that
all lists, books, records, literature, products and any other materials owned by
Employer or its affiliates or used by them in connection with the conduct of
their business, shall at all times remain the property of Employer and its
affiliates and that upon termination of employment hereunder, irrespective of
the time, manner or cause of said termination, Executive will surrender to
Employer and its affiliates all such lists, books, records, literature, products
and other materials.
10. Business of Employer. "Business of Employer" referred to
in this Agreement shall mean all business of Employer and its affiliates,
whether presently conducted or hereafter engaged in by Employer or any affiliate
at any time during the term of this Agreement.
11. Severability. If any provision of this Agreement shall be
held invalid or unenforceable, the remainder of this Agreement shall,
nevertheless, remain in full force and effect. If any provision is held invalid
or unenforceable with respect to particular circumstances, it shall,
nevertheless, remain in full force and effect in all other circumstances.
12. Notice. All notices required to be given under the terms
of this Agreement shall be in writing, shall be effective upon receipt (except
that if delivery of certified mail is refused, delivery shall be deemed made
five (5) days after the date of mailing), and shall be delivered to the
addressee in person or mailed by certified mail, return receipt requested:
If to Employer, addressed to the Chairman of the
Board, at the principal office of Employer with a copy to Pelino & Lentz, P.C.,
One Liberty Place, 32nd Floor, 1650 Market Street, Philadelphia, Pennsylvania
19103-7393, Attention: Cristina G. Cavalieri, Esquire,; and if to Executive,
addressed to his last known address on the records of Employer; or to such other
address as a party shall have designated by notice given in accordance with this
paragraph.
13. Representations of Executive. Executive represents
covenants and warrants to Employer that as of the date hereof and during the
term of this Agreement:
- 7 -
<PAGE>
a. Neither the execution and delivery of this
Agreement nor the performance by Executive of his obligations under this
Agreement will constitute a default under any term or provision, including any
covenant-not-to-compete, of any agreement to which Executive is a party, nor any
statute, administrative interpretation, regulation or decision of any court,
administrative agency or tribunal to which Executive is subject.
b. Executive has retained and has the benefit of
counsel of Peggy Lozon Crook, Esquire, as his attorney, who has fully explained
to Executive the provisions of this Agreement. Executive acknowledges that he
has received independent legal advice from such counsel of his own selection and
has been fully informed as to his legal rights and obligations under this
Agreement.
14. Benefit. This Agreement shall inure to and shall be
binding upon the parties hereto, the successors and assigns of Employer and the
heirs and personal representatives of Executive.
15. Waiver. The waiver by either party of any breach or
violation of any provision of this Agreement shall not operate or be construed
as a waiver of any subsequent breach or violation hereof.
16. Governing Law. This Agreement has been negotiated and
executed in the Commonwealth of Pennsylvania and the law of that state shall
govern its construction and validity. Any legal actions concerning this
Agreement shall be brought in the Court of Common Pleas of Dauphin County,
Pennsylvania or the United States District Court for the Middle District of
Pennsylvania; the parties submit to the jurisdiction of such courts and waive
any right they may have to transfer or change the venue of any litigation
brought therein by either of them.
17. Entire Agreement. This Agreement contains the entire
agreement between the parties hereto. No change, addition, or amendment shall be
made except by written agreement signed by the parties hereto.
18. Definition of Affiliates. For purposes of this Agreement,
"affiliate" shall mean any entity controlling, controlled by, or under common
control with Employer.
- 8 -
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this
Agreement on the date and year first above written.
PPHP SERVICE CORP.
"Employer"
By: /S/ Gary C. Brown
-----------------------------------------------
President
By: /S/ Richard A. Felice
-----------------------------------------------
"Executive"
- 9 -
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION RXTRACTED FROM THE BALANCE
SHEET AND STATEMENT OF OPERATIONS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SAID FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 17,381,607
<SECURITIES> 0
<RECEIVABLES> 166,000
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 17,715,064
<PP&E> 647,771
<DEPRECIATION> 0
<TOTAL-ASSETS> 18,362,835
<CURRENT-LIABILITIES> 357,164
<BONDS> 0
0
0
<COMMON> 52
<OTHER-SE> 18,005,619
<TOTAL-LIABILITY-AND-EQUITY> 18,362,835
<SALES> 0
<TOTAL-REVENUES> 962,258
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 3,510,586
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (2,548,328)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,548,328)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,548,328)
<EPS-PRIMARY> (501.24)
<EPS-DILUTED> 0
</TABLE>
