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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, 1997
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from----------------- to -----------------------------
Commission File Number 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)
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651 East Park Drive, Harrisburg, PA 17111 (Address of principal executive offices)
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(Zip Code)
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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 ___
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. [X]
State issuer's revenues for its most recent fiscal year. $ 1,019,672
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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
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1,074 shares of Class B common stock, $.01 par value per share
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(as of December 31, 1997)
Transitional Small Business Disclosure Format (check one): Yes _X_ No___
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Part I
[Alternative 2 (Items 6-12 of Model B of Form 1-A)]
Item 6. Description of Business
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 operates a managed care organization that offers a
preferred provider organization plan ("PPO") in 17 contiguous counties in
Pennsylvania to employers and other group purchasers of health care plans,
such as unions, trusts, governments and trade associations, as well as to
individuals. These counties are:
Southcentral Pennsylvania
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Franklin Lebanon
Adams Lancaster
Cumberland Berks
Dauphin Schuylkill
York Perry
Lehigh Valley
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Lehigh Carbon
Northampton
Northeastern Pennsylvania
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Lackawanna Monroe
Luzerne Wyoming
The PPO covered 2,916 subscribers as of March 3, 1998. In the future, Registrant
proposes to extend the operating area of the PPO to all of Pennsylvania and to
establish and operate a health maintenance organization plan ("HMO"), first in a
few of the 17 counties in Pennsylvania in which the PPO operates, then to all
such counties, and eventually throughout Pennsylvania. 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 also provides third party administrator services ("TPA") to
its own managed care organization. It is prepared to offer such services to
Pennsylvania self-funded plans, independent practice associations, physician
organizations, integrated delivery systems, and other provider sponsored
organizations engaged in, or affected by, managed care systems; however, to
date, it
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has not done so. Furthermore, Registrant offers consulting services, including
feasibility studies and business plan development, to provider sponsored managed
care organizations, or persons seeking to establish such organizations, in other
states and has entered into one contract to render such services.
Under the terms of Registrant's Articles of Incorporation, all of the
voting stock of Registrant is held by physicians, who, consequently, are able to
elect the entire Board of Directors. All directors must be shareholders of the
Registrant and Pennsylvania-licensed physicians, podiatrists or oral surgeons.
One of the motivating factors in organizing and operating the Registrant was,
and continues to be, to have the required policy decisions, including, but not
limited to, quality improvement, cost containment, utilization management,
treatment policies and practice guidelines, decided upon by the physician
directors and committee members of Registrant. Registrant's directors believe
that the establishment of such policies by physicians will produce better
quality care for subscribers and attract well-qualified physicians and other
providers to its provider network.
On May 9, 1996 Registrant filed an application with the Pennsylvania
Department of Health and the Pennsylvania Insurance Department (the
"Departments") for a license to operate a risk-assuming PPO. On November 27,
1996 Registrant filed an application with the Departments for a license to
operate an HMO. On February 12, 1997, Registrant filed an application with the
Insurance Department for a TPA license.
Registrant's TPA license was granted in March 1997. Registrant's
license for the risk-assuming PPO was granted in April 1997. Although Registrant
has received approval for HMO forms and procedures, including subscriber
agreements, provider agreements, and utilization management and quality
improvement policies, Registrant is still in the process of assembling an
adequate provider network and, therefore, has not yet been granted an HMO
license. Registrant presently intends to submit its provider network for
approval and to undergo final site visits between late spring and early summer
1998 and, consequently, expects to receive its HMO license between summer and
fall 1998, although Registrant is unable to predict when such license actually
will be granted. The HMO may not solicit subscribers until an HMO license is
granted.
Preferred Provider Organizations
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 subscribers 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 subscribers' care to be managed by a pre-selected primary care
physician (i.e., a gatekeeper). Registrant began enrollment of employer groups
for its initial PPO product in April 1997, with coverage beginning July 1, 1997.
As of March 3, 1998, the PPO had enrolled 2,916 subscribers in 73 groups.
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Health Maintenance Organizations
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 covered medical care provided during that month.
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.
Third Party Administrators
A third party administrator manages the operations of a managed care
organization or other insurance company, including charging of premiums or
settling of claims, on an independent contractor basis for a fee.
1995-1996 Offering
From July 1995 through March 1996, Registrant sold 4,087 shares of its
Class A Voting Common Stock at $5,000 per share and sold 1,074 shares of its
Class B Non-Voting Common Stock at $1,000 per share, exclusively to practicing
physicians residing in Pennsylvania. The offering was conducted by Registrant
without an underwriter. Registrant raised $21,509,000 from investments by almost
4,000 physicians in Pennsylvania. Expenses associated with the offering totaled
$288,171, resulting in net proceeds of $21,220,829. Approximately $9,646,000 of
the net procceds have been reserved for post HMO licensure activities.
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The Managed Health Care Industry
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 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 management and quality
improvement 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
resources. Such cost-containment strategies include: (1) emphasizing preventive
care, (2) controlling utilization of specialty care through mandatory primary
care physician referrals, (3) reviewing proposed treatment for appropriateness,
(4) encouraging use of the lowest cost medical treatment setting, and (5)
monitoring hospital admissions and length of stay.
Plan of Operation
Registrant's plan of operation entails: (1) marketing its licensed PPO
in its initial market areas, (2) securing a license to operate as an HMO and
commencing such operations, (3) developing its provider network, (4) marketing
its consulting services nationwide, (5) making its licensed TPA services
available to persons and medical entities, and (6) substantially completing its
managerial and operational structure.
In order to operate the PPO or an HMO, Registrant will continue to
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
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improvement, (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 1997 to implement its plan
of operation:
(1) Worked with the Departments to process the applications
for a PPO product and an HMO product.
(2) Adopted, with the advice of marketing consultants, the
trade name "Pennsylvania Physicians Care" for its managed care
products.
(3) Obtained a PPO license, began marketing in an initial
marketing area of 17 contiguous counties in Pennsylvania, and
enrolled 2,916 subscribers as of March 3, 1998.
(4) Obtained a TPA license for Pennsylvania.
(5) Began marketing its consulting services nationwide.
(6) Engaged key employees.
(7) Contracted with 31 hospital providers and over 2,822
physician providers for its initial PPO product as of March 9, 1998
(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.
(8) Contracted with 10 hospital providers and over 358
physician providers for its initial HMO product as of March 9, 1998
(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.
(9) Contracted for data processing systems for claims
processing, eligibility, billing and medical management which is year
2000 compliant.
Registrant's operations are dependent in part upon efficient and
effective 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 and maintain 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 revenue in excess of
expenses. 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
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sufficient subscribers in its market area to meet its administrative costs and
its medical and hospital costs. Registrant believes that its current funds are
adequate to support its operations as a PPO and the future operations as an HMO,
both, in limited areas of Pennsylvania, once it obtains the necessary licensure
and approvals until such time as it ceases to incur operating deficits. If this
should not prove to be the case, additional financing may be required, and there
is no assurance that such financing will be available, if at all, 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
Registrant has recruited primary care and specialist physicians for its
PPO product. Registrant is negotiating contracts with hospitals and other
providers as part of the application process for the license to operate as an
HMO. 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, the appropriate mix of primary care physicians
and specialists and satisfactory financial arrangements between Registrant and
its providers.
The selection of physicians includes a review of licensure, hospital
admitting privileges, demonstrated proficiency, written references, patient
access, office standards, after-hours coverage, and many other factors, as well
as a personal interview.
Arrangements with Other Health Care Providers
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 license to operate 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,
will provide to those subscribers all medically necessary services that are
ordered by a participating physician that are covered services under the
applicable managed care plan, and will 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 management, and risk management by appropriate
committees of the Registrant, which are still in the process of organization.
Premium Rates
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.
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Employees
As of March 10, 1998 Registrant employed 47 people in various
management or clerical positions. Most upper-level management positions have
been filled.
Registrant intends to continue to hire individuals to fill
operational positions, which may include, but are not limited to, the
following: sales managers, account executives, service representatives,
membership services personnel, utilization review personnel, claims
processors, medical director, and provider relations personnel.
Management Agreement
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 continued to provide limited management
services to Registrant throughout 1997. During the term of the agreement,
Infinity could not provide similar services to any organization offering a
managed care insurance product in Pennsylvania. Registrant agreed not to solicit
for employment any personnel employed by Infinity during the term of the
agreement and for one year thereafter. This agreeement expired by its terms on
December 31, 1997. In January 1998, Registrant's subsidiary, Pennsylvania
Physicians Care Service Corp., entered into a services agreement with PMSLIC for
limited payroll, accounting and information systems services on an hourly fee
basis.
Marketing and Sales
Registrant has hired direct sales representatives to offer membership
in Registrant's PPO (or HMO after licensure) to purchasers of health care
services, including private and governmental employers and individuals, and will
engage independent insurance agents. Registrant's marketing efforts 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.
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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 charges and make payroll
deductions for any portion of the premium not provided as an employee benefit.
Competition
The managed care industry in Pennsylvania is characterized by vigorous
competition, and is currently dominated by Aetna-U.S. Healthcare, 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 32 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 does 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 largely is based upon
product features and price and, in the case of managed health care plans, upon
the quality of services provided, the geographic scope and prestige of the
provider network, and the medical specialties available.
Competition may also affect the availability to Registrant of the
services of health care providers, including primary care physicians and
hospitals.
Licenses
Certificates of Authority
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.
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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 improvement 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 and income statements for a minimum
of five years.
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 Department of Health focuses on
certain elements of the HMO application in which it is principally concerned,
which includes quality improvement, committee structure and operations, quality
improvement 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 Department of Health will also conduct a site visit. Prior to that
time, the applicant must send to the Department of Health a list of providers
and their distribution by type, specialty and geographic location. At the site
visit, the Department of Health will review random credentials files to ensure
that signed contracts and required credentialing activities have in fact taken
place.
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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.
Registrant submitted an HMO license application on November 27, 1996.
Although Registrant has received approval for HMO forms and procedures,
including subscriber agreements, provider agreements, and utilization management
and quality improvement policies, Registrant is in the process of assembling an
adequate provider network and, therefore, has not yet been granted an HMO
license. Registrant presently intends to submit its provider network for
approval and to undergo final site visits between late spring and early summer
1998 and, consequently, expects to receive its HMO license between summer and
fall 1998, although Registrant is unable to predict when such license actually
will be granted. The HMO may not solicit subscribers until an HMO license is
granted.
Federal Qualification
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 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.
Until passage of the federal Balanced Budget Act of 1997 ("BBA"),
federal qualification was the primary method of establishing the eligibility of
an HMO to contract with the Medicare program. BBA, however, created the
Medicare+Choices program, which, after January 1, 1999, will be the primary
program through which a Medicare beneficiary may elect Medicare coverage through
an HMO. Eligibility requirements for HMO participation in Medicare+Choices arise
both from new provisions contained in BBA as well as eligibility regulations to
be promulgated by the Secretary of the Department of Health and Human Services
by June 1, 1998. Although such regulations will be based on the pre-existing
requirements for federal qualification, Registrant in unable to predict the
substance of such regulations, which could adversely affect Registrant's ability
to enter the Medicare market.
Government Regulation and Health Care Industry Reform
The laws and regulations concerning conduct of a PPO and an HMO
restrict how Registrant conducts its business, resulting in additional burdens
and costs to the Registrant.
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Areas of governmental regulation include mandated benefits, limitation and
disclosures of incentives to physicians, licensure, premium rate approval,
benefits, service area expansion, quality improvement 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 Insurance Department and Department of Health containing
financial statements and other information concerning the operation of
Registrant's business.
There can be no assurance that the regulatory environment in which
Registrant operates will not change significantly in the future. Legislative
efforts to change the health insurance system have received increased attention
in recent years at both the state and national levels. Material changes in
applicable federal and state laws and regulations could adversely affect
Registrant's business operations. Specifically, managed care insurers are the
subject of a growing number of initiatives intended to protect the interests of
consumers. Proposed federal and state laws and regulations include, but are not
limited to:
(1) Mandated benefits, including, but not limited to,
minimum stays for childbirth, minimum stays for mastectomies, and
direct access to obstetrical/gynecological services without a
referral;
(2) Emergency room coverage defining "emergency" by what a
prudent layperson would believe is an emergency;
(3) Expansion of the definition of primary care provider;
(4) Open enrollment;
(5) Freedom of physicians to discuss all treatment options
with their patients;
(6) Patient and provider grievance and appeal rights;
(7) Elimination of the ERISA preemption of state law causes
of action, permitting managed care organizations to be sued for
negligence, malpractice, and other torts, thus increasing risk of
liability and legal expenses;
(8) Requirements that a managed care entity accept any
provider willing to accept its payment rates and contracting terms
("any willing provider" statutes), which reduce a managed care
entity's ability to control the quality of its provider network.
On March 16, 1998, the Pennsylvania Senate passed S.B. 100, entitled
the Quality Health Care Act, which, if enacted, would impose additional
requirements on Registrant that could adversely impact Registrant's business.
Such additional requirement include:
(1) Prudent layperson standard for determining what
constitutes an emergency;
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(2) In the case of certain illness and conditions, enrollees
are entitled to "standing referrals" for specialty care without
requiring visits to, and referrals from, the primary care physician;
(3) In the case of certain illnesses and conditions,
specialists must coordinate the care of an enrollee, not a primary
care physician;
(4) No financial incentives for "less than appropriate
care;"
(5) Restrictions on the ability to terminate a provider from
the provider network;
(6) Enrollees being treated by a provider terminated from
the provider network are entitled to continue care for 60 days
despite the termination;
(7) New enrollees are entitled to continue care with their
previous physicians for 60 days, whether or not such physicians are
in the provider network;
(8) Extensive, mandatory disclosures to enrollees and
prospective enrollees as a matter of course and upon request;
(9) Penalties for violation of the Act include: injunction,
$10,000 fine per occurrence, prohibition of new enrollment,
imposition of plan of correction, and restrictions or prohibition on
marketing for a second violation;
(10) Access to pharmaceuticals not contained in the plan's
formulary.
A similar bill is pending in the Pennsylvania House of Representatives.
Registrant is unable to predict whether any such changes will be
implemented or what impact such implementation would have.
Net Worth Requirements
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 (generally, 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 the Insurance Department 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 operation of its HMO, deposit with the Insurance Department cash
or securities in a minimum amount of $100,000 to insure against the insolvency
of Registrant. This deposit requirement is reviewed by the Insurance 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.
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Registrant is unable to predict (i) how existing federal or state laws
and regulations may be changed or interpreted, (ii) what additional laws or
regulations affecting its business may be enacted or proposed, (iii) when any of
the proposed laws will be adopted and (iv) what effect any new laws and
regulations will have on its business.
Antitrust Considerations
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, including activities conducted by Registrant, 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 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 future developments 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. Registrant is unable to predict (i) how existing federal or state
antitrust laws, regulations, and policies may be changed or interpreted, (ii)
what additional antitrust laws, regulations, or policies affecting its business
may be enacted or proposed, (iii) when any of the proposed laws, regulations, or
policies will be adopted and (iv) what effect any new laws, regulations, or
policies will have on its business.
Medicare "Fraud and Abuse" and "Anti-Referral" Concerns
Under the Medicare and Medicaid Fraud and Abuse law, also known as the
Anti-Kickback Statute, a physician is prohibited from (1) soliciting or
receiving any remuneration in return for referring a patient to another health
care provider; and (2) offering or paying any remuneration to induce the
referral of patients to the health care provider. In addition, the federal
self-referral law, known as "Stark," prohibits a physician from referring
patients for the provision of certain designated health services to an entity in
which the physician, or an immediate family member, has a "financial
relationship." These designated health services first were restricted to
laboratory services ("Stark I"), then were expanded to include, among other
things, physical therapy, inpatient and outpatient hospital services and
radiology services ("Stark II").
-14-
<PAGE>
The prohibitions of the Anti-Kickback and Stark statutes are not
absolute. The Stark statute is subject to certain statutory exceptions, as
further interpreted by regulation. The Anti-Kickback statute is subject to
limited statutory exceptions and regulatory "safe harbors," although it is not
necessary that an arrangement comply with a safe harbor in order to withstand
Anti-Kickback scrutiny. One of the Stark exceptions which could have a direct
impact on Registrant and its participating physicians relates to prepaid plans,
including federally qualified HMOs. In addition, the Health Insurance
Portability and Accessibility Act of 1996 mandated the addition of an
Anti-Kickback safe harbor for risk sharing arrangements. Although the foregoing
exception and safe harbor are intended, in part, to permit the activities of
HMOs, such as Registrant, and its provider network, Registrant is unable to
predict (i) how the existing Anti-Kickback and Stark statutes, regulations, and
policies may be changed or interpreted, (ii) what additional Anti-Kickback and
Stark statutes, regulations, or policies affecting its business may be enacted
or proposed, and (iii) what effect any new laws, regulations, or policies will
have on its business.
The present scope of the Anti-Kickback and Stark statutes are limited
to the Medicare (including the Medicare Secondary Payor Program) and Medicaid
programs and other federal programs or grants, but legislative action could
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.
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 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 leased approximately 8,300 square feet of office space in
Harrisburg, Pennsylvania under a lease expiring in October, 2001. In July, 1997
the office space was increased to 11,200 square feet. In February, 1998 the
lease was amended to increase the office space to 13,123 and extended the term
of the lease to February, 2003.
-15-
<PAGE>
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:
DIRECTORS WHOSE TERMS EXPIRE AT 1999
ANNUAL MEETING OF CLASS A SHAREHOLDERS
Gary C. Brown, M.D., 48, 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. He is also a member of Registrant's Executive
Committee.
Darlene Ann M. Dunay, D.O., 40,
of Old Forge, PA, since 1987, has maintained a solo general practice in
Old Forge specializing in primary care. She is a diplomat of the
National Board of Medical Examiners and is Board certified in family
medical practice.
Edward W. Gerner, M.D., 57,
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 at Thomas Jefferson University School of Medicine and Board
Certified in Neurology and Ophthalmology. He is also a member of
Registrant's Executive Committee.
Lila Stein Kroser, M.D., 65,
of Philadelphia, PA, has conducted a family medical practice in
Philadelphia, PA since 1960. She is a Clinical Associate Professor of
Family Medicine at Allegheny MCP.
Alice McCormick, D.O., 51,
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., 61,
of Carlisle, PA, conducted a medical practice in radiology in Carlisle,
Pennsylvania from 1973 to 1997. 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
-16-
<PAGE>
Center, Pennsylvania State University. Dr. Perlman is a member of the
Board of Trustees of Carlisle Hospital and Carlisle Hospital and
Health Services. He is Chairman of the Board of Alliance for Health
PrimeSource. He is also a member of Registrant's Executive Committee.
Jay H. Shah, M.D., 53,
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. He is also a member of
Registrant's Executive Committee.
DIRECTORS WHOSE TERMS EXPIRE AT 1998
ANNUAL MEETING OF CLASS A SHAREHOLDERS
Gay D. Dunne, M.D., 57,
of Bellefonte, PA, has conducted a medical practice in dermatology
since 1976 and is a Board certified dermatologist. Dr. Dunne is a
member of the Executive Committee of the Pennsylvania Academy of
Dermatology and the Membership and Manpower Committees of the American
Academy of Dermatology.
Leonard P. Harman, D.O., 54,
of Huntingdon Valley, 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. He is
also a member of Registrant's Executive Committee.
George R. Homa, D.O., 47,
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.
Mark A. Piasio, M.D., 42,
of DuBois, PA, has been an orthopaedic surgeon since 1989. He is a
diplomat 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. He is also a member
of Registrant's Executive Committee.
-17-
<PAGE>
James G. Pitcavage, M.D., 64,
of Edgeworth, PA, has conducted a medical practice in pediatrics since
1965. Dr. Pitcavage is on the Board of Trustees of VHS (a merger of
Sewickley Valley Hospital and the Medical Center, Beaver), and Chairman
of Children's Health Network (a PHO involving Children's Hospital of
Pittsburgh and community physicians). He is also Clinical Associate
Professor in the Department of Pediatrics for the University of
Pittsburgh School of Medicine.
Robert S. Pyatt, Jr., M.D., 46,
of Chambersburg, PA, has conducted a medical practice in radiology
since 1982. Since January, 1993 he has served as President of
Chambersburg Imaging Associates. 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 diplomat of the
American Academy of Pain Management. He is also a member of
Registrant's Executive Committee.
DIRECTORS WHOSE TERMS EXPIRE AT 2000
ANNUAL MEETING OF CLASS A SHAREHOLDERS
Larry E. Goldstein, M.D., 50,
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.
He is also a member of Registrant's Executive Committee.
Frank H. Guinn, D.O., 61,
of Huntingdon Valley, PA, has conducted an internal medical practice in
Philadelphia, Pennsylvania since 1980. He is the Corporate Medical
Director of Green Acres System.
-18-
<PAGE>
Richard J. Minehart, M.D., 47, Vice Chairman,
of Lansdale, PA, has conducted a medical practice in General Surgery
since 1983. Dr. Minehart is presently the Chairman of the Medical
Executive Committee and President of the Medical Staff at North Penn
Hospital. Dr. Minehart served as Treasurer of Registrant from March,
1995 to November, 1996. He is also a member of Registrant's Executive
Committee.
John J. Nevulis, M.D., 47,
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 and Fellow of
the American Academy of Orthopaedic Surgeons. Dr. Nevulis served as
Executive Vice President of Registrant from March, 1995 to November,
1996. He is also a member of Registrant's Executive Committee.
Saad Sakkal, M.D., 51,
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. From
1993 until 1997, Dr. Sakkal was Secretary-Treasurer of Physicians
Independent Practice Association of Mercer County.
Jay Anthony Townsend, M.D., 61,
of Carlisle, 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, 43, President and Chief Executive Officer,
has been employed by Registrant since September, 1996 and served as
President and Chief Executive Officer of Registrant since November,
1996. From July 1994 to September 1996 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, 47, Treasurer and Chief Financial Officer,
has been employed by Registrant since September, 1996 and served as
Treasurer, Chief Financial Officer and Assistant Secretary of
Registrant since November, 1996. From February 1995 until his present
position he was Treasurer of Doctors Health Plan, Inc., a Durham, North
Carolina HMO. From November 1986 until February 1995, he was Vice
President, Finance of HMO Rhode Island, Inc.
-19-
<PAGE>
Wendy C. Bass, 29, Secretary,
has been Director of Health Plan Development for Registrant's
subsidiaries since September, 1996 and served as Secretary since
November, 1996. From June 1994 until her present position she held
managerial positions with Doctors Health Plan, a Durham, North Carolina
HMO. From June 1993 to June 1994, she was an administrative resident
with Coastal Healthcare Group, Inc. Prior thereto she obtained a
Masters of Health Administration from Medical College of Virginia.
All directors were first elected in July, 1995. 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. Dr. Minehart has
served as Vice Chairman since March, 1997. All other officers were elected in
November, 1996 and serve until the 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 1997, 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 $251,079
T. Clark Phillip, Treasurer $122,292
Wendy C. Bass, Secretary $ 66,144
All officers and directors as a group (27) $439,515(2)
Mr. Felice is employed under an agreement dated as September 3, 1996,
as amended as of September 2, 1997 (the "Agreement"), at an annual salary of
$235,000. After the initial contract term, the Agreement automatically renews
for additional periods of one year, unless terminated by either party at least
60 days prior to the end of the then term. The Agreement provides for an initial
bonus of $5,000 and reimbursement of moving expenses. The Agreement also
provides for an annual bonus of up to 20% 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
- -----------------------
(2) In addition, directors are reimbursed for reasonable travel
expenses to director and committee meetings.
-20-
<PAGE>
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 Security Holders
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 of the three highest paid persons who are current officers of the
Registrant as of February 6, 1998, 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 Shares % Shares %
-------- -------- --------
Richard A. Felice 0 0
651 East Park Drive
Harrisburg, PA 17111
T. Clark Phillip 0 0
651 East Park Drive
Harrisburg, PA 17111
Wendy C. Bass 0 0
651 East Park Drive
Harrisburg, PA 17111
All directors and officers
as a group 28 less than 1% 21 2%
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
None.
-21-
<PAGE>
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, 1996 or 1997.
As of December 31, 1997, there were 3968 record holders of Class A
common stock and 356 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
Not applicable.
Item 6. Reports on Form 8-K
No reports on Form 8-K were filed by Registrant during the last quarter
of 1997.
-22-
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders
Pennsylvania Physician Healthcare Plan, Inc.
Harrisburg, PA
We have audited the accompanying consolidated balance sheets of Pennsylvania
Physician Healthcare Plan, Inc. and its subsidiaries (the "Company") as of
December 31, 1997 and 1996, and the related consolidated statements of
operations, changes in stockholders' equity, and cash flows for the years then
ended. 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 audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements present fairly, in all
material respects, the financial position of the Company at December 31, 1997
and 1996, and the results of its operations and its cash flows for the years
then ended, in conformity with generally accepted accounting principles.
Deloitte & Touche LLP
/S/ Deloitte & Touche LLP
Philadelphia, Pennsylvania
February 13, 1998
<PAGE>
PENNSYLVANIA PHYSICIAN HEALTHCARE PLAN, INC.
Consolidated Balance Sheets
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
December 31, December 31,
Assets 1997 1996
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 14,250,640 $ 17,381,607
Accrued interest income 65,611 77,641
Premiums receivable 25,393 -
Prepaid expenses 33,485 45,816
Income taxes receivable 28,853 166,000
Other assets 38,100 44,000
- -------------------------------------------------------------------------------------------------------------------
Total current assets 14,442,082 17,715,064
- -------------------------------------------------------------------------------------------------------------------
Equipment (net of accumulated depreciation of $272,859
and $0, respectively) 789,589 647,771
- -------------------------------------------------------------------------------------------------------------------
Total assets 15,231,671 18,362,835
- -------------------------------------------------------------------------------------------------------------------
Liabilities and Stockholders' Equity
- -------------------------------------------------------------------------------------------------------------------
Current liabilities:
Medical claims liabilities 63,458 -
Accounts payable 113,128 335,106
Accrued expenses 43,500 -
Other liabilities 65,000 22,058
- -------------------------------------------------------------------------------------------------------------------
Total current liabilities 285,086 357,164
- -------------------------------------------------------------------------------------------------------------------
Stockholders' Equity:
Class A common voting stock, $.01 par value, 40,000 shares
authorized; 4,087 shares issued and outstanding 41 41
Class B common non-voting stock, $.01 par value, 100,000 shares
authorized; 1,074 shares issued and outstanding 11 11
Additional paid in capital 21,220,777 21,220,777
Accumulated deficit (6,274,244) (3,215,158)
- -------------------------------------------------------------------------------------------------------------------
Total stockholders' equity 14,946,585 18,005,671
- -------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $ 15,231,671 $ 18,362,835
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
2
<PAGE>
PENNSYLVANIA PHYSICIAN HEALTHCARE PLAN, INC.
Consolidated Statements of Operations
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------
Year Ended Year Ended
December 31, December 31,
1997 1996
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Revenues:
Premiums $ 183,222 $ -
Interest income 836,450 962,258
- ----------------------------------------------------------------------------------------------------------------
Total Revenue 1,019,672 962,258
- ----------------------------------------------------------------------------------------------------------------
Expenses:
Health care services 172,940 -
Salary and benefits 2,088,976 534,967
Operating expenses 1,124,602 619,503
Consulting services 259,258 2,100,575
Legal fees 134,867 285,171
Other taxes 25,256 (29,630)
Depreciation 272,859 -
- ----------------------------------------------------------------------------------------------------------------
Total expenses 4,078,758 3,510,586
- ----------------------------------------------------------------------------------------------------------------
Loss before income taxes (3,059,086) (2,548,328)
- ----------------------------------------------------------------------------------------------------------------
Income taxes (benefit):
Current - (28,571)
Deferred - 28,571
- ----------------------------------------------------------------------------------------------------------------
Net loss $ (3,059,086) $(2,548,328)
- ----------------------------------------------------------------------------------------------------------------
Weighted average common shares 5,161 5,084
Weighted average loss per outstanding common share
basic and diluted $ (592.73) $ (501.24)
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE>
PENNSYLVANIA PHYSICIAN HEALTHCARE PLAN, INC.
Consolidated Statements of Changes In Stockholders' Equity
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Common Common Stock Additional
Stock Shares Par Value Paid In Accumulated
Class A Class B Class A Class B Capital Deficit Total
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1996 3,613 918 $ 36 $ 9 $ 18,982,955 $ (666,830) $ 18,316,170
Issuance of class A common
stock January - March, 1996 474 5 2,369,995 2,370,000
Issuance of class B common
stock January - March, 1996 156 2 155,998 156,000
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 4,087 1,074 41 11 21,220,777 (3,215,158) 18,005,671
Net loss (3,059,086) (3,059,086)
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1997 4,087 1,074 $ 41 $ 11 $ 21,220,777 $ (6,274,244) $ 14,946,585
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE>
PENNSYLVANIA PHYSICIAN HEALTHCARE PLAN, INC.
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------
Year ended Year ended
December 31, December 31,
1997 1996
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (3,059,086) $ (2,548,328)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation 272,859 -
Change in assets and liabilities:
Due from related entity - 18,531
Accrued interest income 12,030 (1,070)
Premium receivable (25,393) -
Prepaid expenses 12,331 (15,669)
Income taxes receivable 137,147 (166,000)
Other assets 5,900 (44,000)
Deferred income tax benefit - 28,571
Medical claims liabilities 63,458 -
Accounts payable (221,978) 200,704
Accrued income taxes payable - (28,571)
Accrued expenses 43,500 -
Other liabilities 42,942 (22,908)
- ---------------------------------------------------------------------------------------------------------------
Net cash used in operating activities (2,716,290) (2,578,740)
- ---------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Purchases of equipment (414,677) (647,771)
- ---------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Proceeds from issuance of common stock - 2,526,000
Deferred offering costs - (60,830)
- ---------------------------------------------------------------------------------------------------------------
Net cash provided from financing activities - 2,465,170
- ---------------------------------------------------------------------------------------------------------------
Net decrease in cash and cash equivalents (3,130,967) (761,341)
Cash and cash equivalents, beginning of year 17,381,607 18,142,948
- ---------------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of year $ 14,250,640 $ 17,381,607
- ---------------------------------------------------------------------------------------------------------------
Supplemental disclosures:
Income Taxes Paid $ - $ 166,000
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE>
PENNSYLVANIA PHYSICIAN HEALTHCARE PLAN, INC.
Notes to Consolidated Financial Statements for the Years Ended December 31, 1997
and 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.
The Company received a third party administrator (TPA) license in
March 1997 and a license to operate a preferred provider organization
(PPO) in April 1997. The Company expects to receive a license to
operate a health maintenance organization (HMO) in the third quarter
of 1998.
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 (generally, 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, the Insurance
Department requires higher initial amounts equal to one fifteenth of
projected fifth year premium revenue. There were no differences in net
worth as of December 31, 1997 or net income for 1997 on a statuatory
basis as opposed to a GAAP basis.
Through June 30, 1997 the Company was in the developmental stage and
activities 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. In the third quarter of 1997 the Company became
operational and, accordingly, all developmental stage references in
the accompanying financial statements were removed.
(2) 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, Physicians Care HMO, Inc.,
Physicians Care 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, is carried at cost. Depreciation is calculated
on the accelerated cost recovery method for both financial reporting
and income taxes purposes over the estimated useful lives of the
assets. When changes in business circumstances warrant, the Company
reviews the the recoverability of long-lived assets to determine if
there has been any permanent impairment. This assessment is based on
estimated future undiscounted cash flows compared with the assets
carrying value. If impairment is indicated, a write-down to fair value
(normally measured by discounting estimated cash flows) would be taken.
6
<PAGE>
PENNSYLVANIA PHYSICIAN HEALTHCARE PLAN, INC.
Notes to Consolidated Financial Statements for the Years Ended December 31, 1997
and 1996
- --------------------------------------------------------------------------------
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.
Medical Claims Liability
Medical claims liabilities consist of actual claims reported but not
paid and estimates of health care services incurred but not reported.
The estimated claims incurred but not reported are based on
historical data, current enrollment, health service utilization
statistics, and other related information. These accruals are
continually monitored and reviewed, and as settlements are made or
accruals adjusted, differences are reflected in current operations.
Changes in assumptions for medical costs caused by changes in actual
experience could cause these estimates to change in the near term.
Revenue Recognition
Premium is recorded as revenue in the month in which members are
entitled to service. Premiums collected in advance are recorded as
deferred revenue. Interest income is recorded in the period it is
earned.
Reinsurance
Premiums paid to reinsurers are reported as health care services
expense and the related reinsurance recoveries, if any, are reported
as deductions from health care services expense.
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.
Effective January 1, 1997, the Company adopted Statement of Financial
Accounting Standards Number 128 "Earnings Per Share" (FASB No. 128).
FASB No. 128 requires the presentation of basic earnings per share
(EPS), calculated by dividing income available to common shareholders
by the weighted-average number of common shares outstanding during the
period, and diluted EPS, calculated the same as basic EPS except that
the denominator is increased to include the number of additional common
shares that would have been isued if all dilutive potential common
share had been issued. FASB No. 128 requires the restatement of EPS for
all periods presented. The adoption of FASB No. 128 had no effect on
the Company's calculation earnings per share in the accompanying
financial statements.
7
<PAGE>
PENNSYLVANIA PHYSICIAN HEALTHCARE PLAN, INC.
Notes to Consolidated Financial Statements for the Years Ended December 31, 1997
and 1996
- --------------------------------------------------------------------------------
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.
New Accounting Standard
In June, 1997 the Financial Accounting Standards Board (FASB) issued
FASB No. 130 "Reporting Comprehensive Income". This statement, which
establishes standards for reporting and disclosure of comprehensive
income, is effective for annual periods beginning December 15, 1997.
The Company currently has no additional items qualifying as other
comprehensive income under FASB No. 130 and, therefore, believes its
adoption will not have any impact on the Company's financial position
or results of operations
(3) Restrictions on Cash
As specified in the prospectus for the public stock offering,
approximately $9,646,000 of offering proceeds which are included in
the Company's cash and cash equivalents as of December 31, 1997 may
only be used after an HMO licensure 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.
(4) Equipment
Equipment owned at December 31, 1997 and 1996 consists of the
following:
Useful lives 1997 1996
--------------------------------------
Capitalized software 3 years $ 551,893 $460,004
Data processing equipment 5 years 216,947 92,338
Furniture and office equipment 5-7 years 280,235 95,429
Leasehold improvements 5 years 13,373 -
--------------------------------------
Total equipment 1,062,448 647,771
Accumulated depreciation (272,859) -
--------------------------------------
Equipment(net) $ 789,589 $647,771
Depreciation expense was $272,859 for the year ended December 31, 1997.
As of December 31, 1996, equipment was not placed into service.
Therefore, no depreciation expense was recorded for the year ending
December 31, 1996.
(5) 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 the votes cast by all shareholders entitled
to vote.
8
<PAGE>
PENNSYLVANIA PHYSICIAN HEALTHCARE PLAN, INC.
Notes to Consolidated Financial Statements for the Years Ended December 31, 1997
and 1996
- --------------------------------------------------------------------------------
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. The
transferee would have the right to sell the shares only to a
practicing physician who then could exercise the right to
vote.
Class B
The Class B shares of common stock are non-voting, were 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. As of
December 31, 1997 and 1996, there were no outstanding shares
of Class C common stock.
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. As of December 31, 1997 and
1996, there were no outstanding shares of Class D 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.
9
<PAGE>
PENNSYLVANIA PHYSICIAN HEALTHCARE PLAN, INC.
Notes to Consolidated Financial Statements for the Years Ended December 31, 1997
and 1996
- --------------------------------------------------------------------------------
(6) Reinsurance
The Company has a reinsurance agreement for portions of the risk it
has underwritten through its products. PPO risk was reinsured to
$2,000,000 per member per lifetime in excess of maximum loss
retention of $75,000 per member per year. Coinsurance ranges from 50%
to 90% depending on the type of service, age of the member, and
service facility.
There were no reinsurance recoveries for the years ended December 31,
1997 and 1996.
(7) Commitments
At December 31, 1997, 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 $171,699 and $27,092 for 1997 and 1996,
respectively.
Future minimum rental payments under the terms of the operating
leases at December 31, 1997 are as follows:
Years ending December 31,
1998 206,151
1999 210,919
2000 212,687
2001 163,050
------------
Total $ 792,807
The Company's subsidiary, Pennsylvania Physicians Care Service Corp.,
has entered into employment agreements with executive officers of the
Company and the Company's subsidiaries. With respect to these officers
agreements, the total minimum commitment level of the Company and its
subsidiaries over the next two years is approximately $561,000.
10
<PAGE>
PENNSYLVANIA PHYSICIAN HEALTHCARE PLAN, INC.
Notes to Consolidated Financial Statements for the Years Ended December 31, 1997
and 1996
- --------------------------------------------------------------------------------
(8) Income Taxes
The net deferred amounts reported by the Company at December 31, 1997
and 1996 are as follows:
1997 1996
----------- -----------
Deferred tax assets:
Start up costs 1,148,518 1,202,846
Amortization 18,580 -
Depreciation 968 -
Net operating loss carryforward 1,394,145 131,300
----------- ----------
Deferred tax asset 2,562,211 1,334,146
Valuation allowance (2,562,211) (1,334,146)
----------- ----------
Net deferred tax asset - -
----------- -----------
The Company has Federal net operating losses of approximately
$3,450,000 available to offset future income before taxes, which
expire in the period from 2011 to 2012. Management recorded the
valuation allowance to reduce the deferred income tax benefit to its
estimated realizable value in light of the Company's commencement of
operations and lack of operating history.
(9) Management Agreement
In March 1996 the Company engaged Infinity Management Services, Inc.
("Infinity"), a subsidiary of Pennsylvania Medical Society Liability
Insurance Company ("PMSLIC"), to provide administrative and management
services to the Company. PMSLIC, which is owned by the Pennsylvania
Medical Society, writes medical professional liability insurance
coverage in Pennsylvania. Until the Company engaged its own management
team in late 1996, Infinity managed the development and implementation
of the Company's business plan, including locating and recommending
appropriate third-party service providers. Infinity generally oversaw
the activities of the Company'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. The Company elected the alternative of
an hourly fee basis beginning in October 1996, and Infinity continued
to provide limited management services to the Company throughout 1997.
During the term of the agreement, Infinity could not provide similar
services to any organization offering a managed care insurance product
in Pennsylvania. The Company agreed not to solicit for employment any
personnel employed by Infinity during the term of the agreement and for
one year thereafter. This agreement expired by its terms on December
31, 1997. In January 1998, Company's subsidiary, Pennsylvania
Physicians Care Service Corp., entered into a services agreement with
PMSLIC for limited payroll, accounting and information systems services
on an hourly fee basis.
(10) Concentrations of Credit Risk
The Company maintains cash accounts in excess of federally insured
limits. These amount are not significant to the Company's financial
statements. Money market funds are invested in United States Treasury
Securities that are guaranteed by the full faith and credit of the
United States Government.
11
<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)
6.2 Executive Employment Agreement dated September 3, 1996, between PPHP
Service Corp. and Richard A. Felice (Incorporated by reference to
Exhibit 6.2 to Registrant's Form 10-KSB filed March 28, 1997
6.3 Amendment to Executive Employment Agreement dated as of
September 2, 1997, between Pennsylvania Physicians Care Service
Corp. and Richard A. Felice
-23-
<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, 1998 /S/ Richard A. Felice
----------------------
Richard A. Felice, President
(Chief Executive Officer)
Date: March 25, 1998 /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, 1998 /S/ Gary D. Brown, M.D.
------------------------------------
Director
Date: March 25, 1998 /S/ Darlene Ann M. Dunay, D.O.
------------------------------------
Director
Date: March 25, 1998 /S/ Gay D. Dunne, M.D.
------------------------------------
Director
Date: March 25, 1998 /S/ Larry E. Goldstein, M.D.
------------------------------------
Director
-24-
<PAGE>
Date: March 25, 1998 /S/ Frank H. Guinn, D.O.
------------------------------------
Director
Date: March 25, 1998 /S/ Leonard P. Harman, D.O.
------------------------------------
Director
Date: March 25, 1998 /S/ George R. Homa, D.O.
------------------------------------
Director
Date: March 25, 1998 /S/ Alice McCormick, D.O.
------------------------------------
Director
Date: March 25, 1998 /S/ Richard J. Minehart, M.D.
------------------------------------
Director
Date: March 25, 1998 /S/ John J. Nevulis, M.D.
------------------------------------
Director
Date: March 25, 1998 /S/ Mark A. Piasio, M.D.
------------------------------------
Director
Date: March 25, 1998 /S/ Robert S. Pyatt, Jr., M.D.
------------------------------------
Director
Date: March 25, 1998 /S/ Saad Sakkal, M.D.
------------------------------------
Director
Date: March 25, 1998 /S/ Milton D. Soiferman, D.O.
------------------------------------
Director
Date: March 25, 1998 /S/ Jay Anthony Townsend, M.D.
------------------------------------
Director
-25-
<PAGE>
EXHIBIT 6.3
AMENDMENT TO EXECUTIVE EMPLOYMENT AGREEMENT
This Amendment is made as of this 2nd day of September, 1997 between
Pennsylvania Physicians Care Service Corp., a Pennsylvania corporation
("Employer") and Richard A. Felice ("Executive").
Background
Pursuant to an Executive Employment Agreement dated September 3, 1996
(the "Employment Agreement"), Executive has been employed by Employer since
September 3, 1996.
Employer and Executive desire to amend the terms of the Employment
Agreement.
Agreement
In consideration of the foregoing, which is incorporated herein by
reference, and of the mutual covenants contained herein, the parties, intending
to be legally bound, hereby agree as follows:
1. Effective September 3, 1997, Executive's Annual Salary pursuant to
Section 4(a) of the Employment Agreement shall be increased from $200,000 to
$235,000 per year ("Annual Salary").
2. Effective September 3, 1997, Executive's eligibility for an annual
bonus pursuant to Section 4(d) of the Employment Agreement shall be increased
from an amount of up to fifteen percent (15%) of the Annual Salary to an amount
of up to twenty percent (20%) of the Annual Salary.
3. All other terms of the Employment Agreement shall remain in full
force and effect and shall be deemed unmodified and unchanged by reason of this
Agreement.
4. This Agreement shall be governed by the laws of the Commonwealth of
Pennsylvania, without giving effect to the conflict of law principles thereof.
5. This Agreement may be executed by each party upon a separate copy,
and in such case, one counterpart of this Agreement shall consist of enough of
such copies to reflect the signature of all parties. This Agreement may be
executed in two or more counterparts, each of which shall be an original and
each of which shall constitute one and the same agreement.
<PAGE>
EXHIBIT 6.3
IN WITNESS WHEREOF, the parties have caused this Agreement to be
executed and delivered as of the date first written above.
PENNSYLVANIA PHYSICIANS
CARE SERVICE CORP.
By: /S/ Gary C. Brown
---------------------------------
Gary C. Brown, Chairman of Board
/S/ Richard A. Felice
---------------------------------
Richard A. Felice
2
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE BALANCE
SHEET AND STATEMENT OF OPERTIONS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SAID FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 14,250,640
<SECURITIES> 0
<RECEIVABLES> 54,246
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 14,442,082
<PP&E> 1,062,448
<DEPRECIATION> 272,589
<TOTAL-ASSETS> 15,231,671
<CURRENT-LIABILITIES> 285,086
<BONDS> 0
0
0
<COMMON> 52
<OTHER-SE> 14,946,533
<TOTAL-LIABILITY-AND-EQUITY> 14,946,585
<SALES> 0
<TOTAL-REVENUES> 1,019,672
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 4,078,758
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (3,059,086)
<INCOME-TAX> 0
<INCOME-CONTINUING> (3,059,086)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,059,086)
<EPS-PRIMARY> (592.73)
<EPS-DILUTED> 0
</TABLE>
