REGISTRATION NO. 333-78373
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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AMENDMENT NO. 1 TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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PENNSYLVANIA PHYSICIAN HEALTHCARE PLAN, INC.
(Exact Name of Registrant as Specified in its Charter)
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<TABLE>
<S> <C> <C>
PENNSYLVANIA 6324 23-2795795
(State or Other Jurisdiction of (Primary Standard Industrial (I.R.S. Employer Identification No.)
Incorporation or Organization) Classification Code Number)
</TABLE>
651 EAST PARK DRIVE
HARRISBURG, PENNSYLVANIA 17111
(717) 561-7890
(Address, Including Zip Code, and Telephone Number, Including Area Code, of
Registrant's Principal Executive Offices)
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RICHARD A. FELICE, PRESIDENT AND CHIEF EXECUTIVE OFFICER
PENNSYLVANIA PHYSICIAN HEALTHCARE PLAN, INC.
651 EAST PARK DRIVE
HARRISBURG, PENNSYLVANIA 17111
(717) 561-7890
(Name, Address, Including Zip Code, and Telephone Number, Including Area Code,
of Agent for Service)
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Copies to:
RICHARD N. WEINER, ESQUIRE JOHN M. COOGAN, JR., ESQUIRE
PELINO & LENTZ, P.C. WOLF, BLOCK, SCHORR AND SOLIS-COHEN LLP
ONE LIBERTY PLACE, 32ND FLOOR TWELFTH FLOOR PACKARD BUILDING
1650 MARKET STREET 111 SOUTH 15TH STREET
PHILADELPHIA, PA 19103 PHILADELPHIA, PA 19102
(215) 246-3135 (215) 977-2012
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this Registration Statement.
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. /x/
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. / / ____________
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / / ____________
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / / ____________
If delivery of the Prospectus is expected to be made pursuant to Rule 434,
check the following box. / /
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CALCULATION OF REGISTRATION FEE
<TABLE>
<S> <C> <C> <C> <C>
| | PROPOSED | PROPOSED |
| AMOUNT | MAXIMUM | MAXIMUM | AMOUNT OF
TITLE OF EACH CLASS OF | TO BE | OFFERING PRICE | AGGREGATE | REGISTRATION
SECURITIES TO BE REGISTERED | REGISTERED | PER UNIT | OFFERING PRICE (1)| FEE
Units, each consisting of one share | | | |
of Common Stock, par value $.01 | | | |
per share, and one Warrant to | | | |
purchase one share of Common | | | |
Stock............................ | 250,000 Units | $20.00 | $5,000,000 | $1,390
Common Stock included in the | | | |
Units............................ | 250,000 Shares | (2) | (2) | (2)
Warrants to purchase Common Stock | | | |
included in the Units............ | 250,000 Warrants | (2) | (2) | (2)
Common Stock, par value $.01 per | 2,000,000 Shares | | |
share............................ | (3) | $20.00 | $40,000,000 | $9,730
</TABLE>
(1) Estimated solely for the purpose of calculating the registration fee in
accordance with Rule 457 under the Securities Act of 1933.
(2) Included in the Units. No additional registration fee is required.
(3) Includes up to 250,000 shares which are included in the Units.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THIS REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SUCH
SECTION 8(A), MAY DETERMINE.
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<PAGE>
SUBJECT TO COMPLETION, DATED MAY 28, 1999
PROSPECTUS
[LOGO]
PENNSYLVANIA PHYSICIAN HEALTHCARE PLAN, INC.
250,000 UNITS
CONSISTING OF ONE SHARE OF COMMON STOCK, $.01 PAR VALUE, AND
ONE WARRANT TO PURCHASE ONE SHARE OF COMMON STOCK, $.01 PAR VALUE
AND
A MAXIMUM OF 2,000,000 SHARES OF COMMON STOCK, $.01 PAR VALUE
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We are offering 250,000 units to our existing shareholders, our employees
and certain other persons who contributed toward the cost of our initial
feasibility study. Each unit consists of one share of common stock and one
warrant to purchase one share of common stock at an exercise price of $20,
exercisable at any time on or after January 1, 2002 through December 31, 2002.
We are also offering up to 2,000,000 shares of common stock to certain licensed
"health professionals" and our employees. The exact number of shares of common
stock we are offering depends upon the number of units we sell, but we will not
sell more than a total of 2,000,000 shares of common stock. This 2,000,000 share
limit includes those shares of common stock constituting a part of the units,
but not those shares of common stock issuable upon exercise of the warrants.
Prior to this offering there has been no public market for our units or common
stock. The share of common stock and warrant comprising each unit are not
detachable from one another and, prior to the exercise of the warrant, are
transferable only together. We anticipate that the units and common stock will
be listed in the National Quotation Bureau "pink sheets." The units and the
shares of common stock sold in this offering may not be transferred until
January 1, 2000 except in limited circumstances arising by operation of law.
After January 1, 2000, our units and shares of common stock can only be sold to
health professionals, our employees and certain other persons.
We operate a managed care organization that offers a preferred provider
organization plan in 21 counties in Pennsylvania and is licensed to offer a
health maintenance organization plan in three of these counties. We hope to
expand our service area throughout Pennsylvania and possibly into other states.
We are only offering the units and shares of common stock in certain
states.
We are offering the units and the shares of common stock on a
"best-efforts" basis. The minimum investment per purchaser is 125 units or 125
shares of common stock and the maximum investment per purchaser is an aggregate
of 5,000 units and shares of common stock. Certain persons who contributed
towards our initial feasibility study in 1995 will receive a credit towards the
purchase of units in a dollar amount equal to their respective contributions. We
are not required to sell any minimum number of units or shares of common stock.
We may offer the units until September 10, 1999 and the shares of common stock
until November 13, 1999, unless we sell all 2,000,000 shares of common stock,
including shares of common stock constituting a part of the units, prior to
then. However, we reserve the right to extend the offering for the shares of
common stock.
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INVESTING IN THE UNITS OR THE SHARES OF COMMON STOCK INVOLVES A HIGH DEGREE
OF RISK AND IMMEDIATE SUBSTANTIAL DILUTION. YOU SHOULD PURCHASE THE UNITS OR THE
SHARES OF COMMON STOCK ONLY IF YOU CAN AFFORD A COMPLETE LOSS OF YOUR
INVESTMENT. SEE "RISK FACTORS," BEGINNING ON PAGE 9.
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NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED THESE SECURITIES OR DETERMINED IF THIS
PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
<TABLE>
<S> <C> <C> <C>
| PER UNIT | PER SHARE | TOTAL
Public Offering Price................. | $20.00 | $20.00 | $40,000,000
Underwriting Discounts and | | |
Commissions......................... | $.60 | $.60 | $1,200,000
Maximum Proceeds to Us................ | $19.40 | $19.40 | $38,800,000*
</TABLE>
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* Or approximately $38,488,000 if all of those persons who contributed toward
the cost of our initial feasibility study apply their credits towards the
purchase of units.
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HOPPER SOLIDAY
A DIVISION OF TUCKER ANTHONY INCORPORATED
The date of this Prospectus is ______________, 1999
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY
NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER
TO SELL THESE SECURITIES AND IT IS NOT SOLICITING AN OFFER TO BUY THESE
SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
<PAGE>
TABLE OF CONTENTS
PAGE
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Prospectus Summary.......................................... 4
Risk Factors................................................ 9
Forward-Looking Statements.................................. 14
Use of Proceeds............................................. 14
Dilution.................................................... 15
Capitalization.............................................. 16
Selected Historical Financial Data.......................... 17
Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 18
Business.................................................... 23
Management.................................................. 36
Security Ownership of Certain Beneficial Owners and
Management................................................ 42
The Recapitalization........................................ 43
Description of the Units.................................... 43
Description of Common Stock................................. 44
Description of the Warrants................................. 46
Dividend Policy............................................. 47
Shares Eligible for Future Sale............................. 48
The Offering; How to Subscribe.............................. 49
Plan of Distribution........................................ 51
Legal Matters............................................... 53
Experts..................................................... 53
Where You May Find More Information......................... 53
Index to Financial Statements............................... F-1
2
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Q: WHAT IS THE PURPOSE OF THIS OFFERING?
A: This offering gives you the opportunity to become a shareholder of, or add
to your investment in, our company, Pennsylvania Physician Healthcare Plan,
Inc. This offering will increase our capital and allow us greater
flexibility for operations and expansion.
Q: HOW DO I PURCHASE THE UNITS?
A: You must complete and return the order form to us together with your
payment no later than 12:00 p.m. (noon), Eastern Time, September 10, 1999.
Q: HOW DO I PURCHASE SHARES OF COMMON STOCK?
A: You must complete and return the order form to us together with your
payment no later than 12:00 p.m. (noon), Eastern Time, November 13, 1999,
unless we extend this offering of the shares of common stock.
Q: HOW MANY UNITS OR SHARES OF COMMON STOCK MAY I PURCHASE?
A: The minimum purchase per investor is at least 125 units or 125 shares of
common stock (or $2,500). The maximum purchase per investor is an aggregate
of 5,000 units or shares of common stock (or $100,000). We may decrease or
increase the maximum purchase limitation without notifying you.
Q: WHO IS ENTITLED TO PURCHASE UNITS AND SHARES OF COMMON STOCK?
A: Our current shareholders and our employees can buy either units or shares
of common stock. Certain people, including some current shareholders, who
contributed toward the cost of our initial feasibility study and will
receive a credit toward the purchase of units in the amount of their
contributions, can also buy either units or shares of common stock.
All "health professionals," who are essentially licensed providers of
medical care, can buy shares of common stock.
We have the right to reject any order for units or shares of common stock.
Q: WHAT PARTICULAR FACTORS SHOULD I CONSIDER WHEN DECIDING WHETHER TO BUY THE
UNITS OR SHARES OF COMMON STOCK?
A: Before you decide to purchase units or shares of common stock, you should
read this entire prospectus, including the Risk Factors section beginning
on page 9.
Q: IF I AM A CURRENT SHAREHOLDER OF PENNSYLVANIA PHYSICIAN HEALTHCARE PLAN,
INC., AM I REQUIRED TO PURCHASE ANY UNITS OR SHARES OF COMMON STOCK?
A: You are not required to purchase any units or shares of common stock.
Q: WHAT HAPPENS IF THERE ARE NOT ENOUGH UNITS OR SHARES OF COMMON STOCK
AVAILABLE TO FILL ALL ORDERS?
A: You might not receive any or all of the units or shares of common stock
that you want to purchase. If there is an oversubscription in the offering,
the units and shares of common stock will be allocated in the manner that
we determine in our discretion.
Q: WILL THE STOCK BE TRADED ON A MARKET?
A: It is not anticipated that the units or shares of common stock will be
traded on any market.
Q: WHO CAN HELP ANSWER ANY OTHER QUESTIONS I MAY HAVE ABOUT THE STOCK
OFFERING?
A: In order to make an informed investment decision, you should read this
entire prospectus. In addition, you may contact:
STOCK INFORMATION CENTER
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3
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PROSPECTUS SUMMARY
This is only a summary and does not contain all the information that may be
important to you. You should read the entire prospectus, especially the "Risk
Factors" section and the financial statements and the notes to those statements,
before deciding to invest in the units or the shares of common stock.
OUR BUSINESS:
We are a physician-controlled managed care organization that operates a
preferred provider organization ("PPO") plan and is licensed to operate a health
maintenance organization ("HMO") plan in Pennsylvania. Our customers are
Pennsylvania employers and other group purchasers of health care plans, such as
unions, trusts, governments and trade associations, whose employees or members
are members in our plans.
We are seeking to enlarge our operations in our existing service area and
to expand the service area for our PPO and HMO. Our ability to expand depends
primarily upon our access to capital and our ability to assemble an adequate
provider network in each area we wish to serve.
We also provide third party administrator ("TPA") services to our own
managed care organization, and may in the future offer these services to third
parties. To date, however, we have concentrated on developing the growth of our
PPO membership base and have no current plans to actively pursue the sale of our
TPA services. We also offer consulting services to provider-sponsored managed
care organizations and persons seeking to establish such organizations. Although
we have only performed one contract for consulting services, we are actively
seeking additional engagements and will evaluate these opportunities as they
arise.
The shaded region in the following map shows our existing service area in
Pennsylvania:
[GRAPHIC]
In the printed version of the document, a map appears.
4
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OUR HEALTH CARE PHILOSOPHY:
We believe in containing medical costs by allowing our members' physicians
and other health care providers a meaningful voice in decisions related to the
treatment of particular individuals and in the creation of the general medical
care policy standards to which the physicians are held. We believe that this
approach will allow us to realize greater operating efficiencies in the long
term, while at the same time providing our members with a high level of care.
OUR MEMBERSHIP BASE:
As of May 1, 1999, our PPO had approximately 16,000 members. We only
recently received our HMO license and are currently developing our provider
network for this plan. We anticipate that we will begin actively marketing our
HMO in the fall of 1999.
OUR STRATEGY:
In order to promote our business philosophy, we have adopted a strategy of
growth and expansion which entails:
o increasing membership in our PPO in our current service area of 21
counties;
o operating our HMO in the entire service area of our PPO;
o expanding our provider network within our existing service area and into
other Pennsylvania counties in which we wish to operate;
o expanding our PPO and HMO service territory ultimately throughout
Pennsylvania;
o evaluating and acting upon opportunities to offer our PPO or HMO plans in
other states;
o marketing our consulting services nationwide; and
o making our licensed TPA services available to individual medical
practitioners and other health care providers and organizations, although
to date we have concentrated these services on increasing our PPO
membership base.
OUR EXPANSION PLANS:
We are seeking to raise funds through this offering to support our ongoing
operations and growth within our current service area and to expand our service
area. Our rate of expansion and our ability to enter a specific geographic area
will depend principally upon:
o the amount of funds raised in this offering;
o our ability to develop a satisfactory network of physicians, hospitals
and other health care providers in the targeted geographic area;
o competition in that area, which increases the costs of recruiting
members;
o the proximity of the targeted area to our existing service area; and
o the economics, demographics and population density of the targeted area.
Our expansion plans are generally focused on Pennsylvania, but we will
evaluate the merits of expanding our business beyond Pennsylvania as
opportunities arise.
OUR RECAPITALIZATION:
We used to have several classes of common stock. However, our shareholders
recently approved a recapitalization which eliminated these classes and provides
for just one class of common stock. Under the recapitalization, on December 31,
1999, all of our currently outstanding shares of Class A voting common stock and
Class B non-voting common stock will automatically be converted into shares of
common stock, if not sooner converted at the option of the individual
shareholders prior to that date. Each Class A share will be converted into 400
shares of common stock and each Class B share will be converted into 100 shares
of common stock.
OUR OFFICES:
Our principal executive offices are located at 651 East Park Drive,
Harrisburg, Pennsylvania 17111 and our telephone number at that address is (717)
561-7890. We maintain a web site at "www.ppccares.com."
5
<PAGE>
THE OFFERING
Units offered..................... We are offering 250,000 units to our
existing shareholders, our employees and
certain other persons who contributed toward
the cost of our initial feasibility study.
Each unit consists of one share of common
stock and one common stock purchase warrant.
The warrant entitles the holder to purchase
one share of common stock at any time on or
after January 1, 2002 through December 31,
2002 at an exercise price of $20 per share.
The minimum purchase per investor is 125
units (or $2,500).
Common stock offered.............. We are also offering up to 2,000,000 shares
of our common stock to certain licensed
"health professionals" and our employees.
The minimum purchase per investor is 125
shares of common stock and the maximum
purchase per investor is 5,000 shares of
common stock, including unit purchases (or
$100,000).
Restrictions on transfer of unit
and shares of common stock........ The units and the shares of common stock
sold in this offering may not be transferred
until January 1, 2000 except in limited
circumstances arising by operation of law.
On and after January 1, 2000, holders of the
units and the shares of common stock sold in
this offering will be permitted to transfer
their units or shares of common stock only
to certain licensed "health professionals"
and our present and former employees. They
may also make transfers by gift or operation
of law, but the transferee might not be able
to vote the shares of common stock, as
described below under "Voting rights."
Common stock to be outstanding
after the offering (assuming
all shares of common stock and
units are sold)................... 3,742,200 shares
Warrants to be outstanding after
the offering (assuming all units
are sold)......................... 250,000 warrants
As of May 21, 1999 there were 4,087 outstanding shares of Class A voting
common stock and 1,074 outstanding shares of Class B non-voting common stock.
Under our recent recapitalization, these shares will be converted into a total
of 1,742,200 shares of common stock and are included in the number of shares of
common stock listed above in "Common stock to be outstanding after the
offering."
In addition to the 3,742,200 shares of common stock to be outstanding after
the offering, we may issue:
o up to 98,300 shares of common stock upon the exercise of options granted
under our stock option plan, none of which options are presently
exercisable, at an exercise price equal to $20 per share;
6
<PAGE>
o up to 101,700 shares of common stock which are available for future
grants of options under our stock option plan;
o options for the purchase of up to 1,000 shares of common stock to each of
our directors in a calendar year. These options will be issued at an
exercise price equal to the fair market value of the common stock at the
time of grant, as determined by our Board of Directors in the absence of
an active trading market; and
o up to 250,000 shares of common stock issuable upon exercise of the
warrants included in the units being sold in this offering. The warrants
are exercisable at a price equal to $20 per share at any time on or after
January 1, 2002 through December 31, 2002.
Use of proceeds................... We estimate that if all the units and shares
of common stock being offered are sold, we
will receive net proceeds of approximately
$38,217,880 (or approximately $37,905,880 if
all of those persons who contributed toward
the cost of our initial feasibility study
apply their credits towards the purchase of
units). We intend to use the first $3
million of net proceeds from this offering
to support our ongoing operations and growth
within our current service area. We intend
to use proceeds in excess of $3 million to
finance our expansion beyond our current
service area. See "Use of Proceeds."
Risk factors...................... You should carefully consider the factors
set forth in the "Risk Factors" section of
this prospectus, beginning on page 9, as
well as the other information and cautionary
statements throughout this prospectus,
before investing in the units or shares of
common stock.
Voting rights..................... Holders of shares of common stock will have
one vote per share. Only persons who are
licensed "health professionals," a trustee
of a trust or plan eligible to hold shares
of common stock or a present or former
employee may vote their shares of common
stock. See "Description of Common Stock."
Dividend policy................... We currently intend to retain all future
earnings, if any, to fund the development
and growth of our business. Accordingly, we
do not expect to pay cash dividends for the
foreseeable future. See "Dividend Policy."
7
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SUMMARY CONSOLIDATED HISTORICAL FINANCIAL DATA
The summary consolidated historical financial data set forth below as of
and for the three month periods ended March 31, 1999 and 1998 has been derived
from our unaudited financial statements included elsewhere in this prospectus
and, in our opinion, includes all adjustments (consisting only of normal
recurring adjustments) necessary for a fair presentation thereof. The summary
consolidated historical financial data set forth below as of and for the years
ended December 31, 1998 and 1997 has been derived from our consolidated
financial statements included elsewhere in this prospectus, which have been
audited by Deloitte & Touche LLP, independent auditors. The results of
operations set forth below are not necessarily indicative of our expected
results for any future period. The information below should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the consolidated financial statements, including
the related notes, included elsewhere in this prospectus.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31, YEAR ENDED DECEMBER 31,
------------------------- -------------------------
1999 1998 1998 1997
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Premiums......................... $ 4,976,586 $ 928,238 $ 6,622,311 $ 183,222
Health care services expense..... 5,196,094 713,076 7,588,762 172,940
Net loss......................... (1,770,479) (861,765) (6,090,483) (3,059,086)
Net loss per common share........ (343.05) (166.98) (1,180.10) (592.73)
BALANCE SHEET DATA:
Cash and cash equivalents........ 3,728,215 13,556,875 2,608,269 14,250,640
Total current assets............. 4,820,434 13,740,221 3,600,348 14,442,082
Long-term investment
securities.................... 4,891,379 -- 6,860,624 --
Medical claims liabilities....... 2,579,762 215,440 1,945,722 63,458
Total stockholders' equity....... 7,073,983 14,084,820 8,861,178 14,946,585
</TABLE>
Net loss per common share amounts treat as equivalent the shares of Class A
voting common stock and Class B non-voting common stock. Assuming the conversion
as of January 1, 1997 of the Class A voting common stock and Class B non-voting
common stock into shares of common stock, net loss per share of common stock for
the three months ended March 31, 1999 and 1998 and for the twelve months ended
December 31 in 1998 and 1997 was $(1.02), $(.50), $(3.50) and $(1.76),
respectively.
8
<PAGE>
RISK FACTORS
Investing in the units or shares of common stock is very risky. You should
purchase units or shares of common stock only if you can afford a complete loss
of your investment. You should consider carefully the following risk factors, as
well as the other information set forth in this prospectus, before deciding to
invest in the units or the shares of common stock.
WE HAVE A HISTORY OF OPERATING LOSSES AND WE ANTICIPATE WE WILL CONTINUE TO
INCUR OPERATING LOSSES FOR THE FORESEEABLE FUTURE.
We have never generated profits and do not expect to generate profits in
1999 or 2000 and cannot assure you that we will be able to operate profitably at
any time.
We anticipate that we will continue to incur operating losses until we
obtain sufficient members in our service area so that the premiums we collect
will meet our medical, hospital and administrative costs. Even if we obtain
enough members to pay premiums to cover these costs, we cannot assure you that
we would be able to maintain profitable operations thereafter.
WE HAVE SUBSTANTIAL NEEDS FOR CAPITAL TO ENABLE US TO PURSUE OUR GROWTH AND
STRATEGY. BECAUSE WE HAVE NOT ESTABLISHED A MINIMUM OFFERING SIZE, THE NET
PROCEEDS WE RECEIVE MAY NOT PROVIDE US WITH SUFFICIENT FUNDS TO MEET OUR CAPITAL
NEEDS.
Because we have not established a minimum offering size, we will receive
the net proceeds from all subscriptions that we accept. If we sell substantially
fewer units and shares of common stock than we are offering, we will have to
alter our strategies to achieve our short and long term goals of applying $3
million to support our ongoing operations and growth within our current service
area and having additional funds available to finance the expansion of our PPO
and HMO into areas where we do not currently operate. Currently, our premium
revenues do not support our medical and administrative costs, and may not do so
in the future. Without sufficient proceeds from this offering, or other
additional financing, we may be unable to support our growth in our current
markets and will be unable to carry out our planned expansion. If we are unable
to grow, we may not be able to achieve profitability, and you could suffer a
loss of your investment.
IF WE DO NOT OBTAIN SUFFICIENT PROCEEDS FROM THIS OFFERING, WE MAY NEED
ADDITIONAL FINANCING AND MAY NOT BE ABLE TO OBTAIN IT.
We have made no arrangements for alternative financing and may not be able
to do so on satisfactory terms. Additional financing could be in the form of
debt or equity. If we obtain debt financing, we likely would become subject to
restrictions on our operations and finances. Our ability to sell additional
equity may be hindered by restrictions on the ownership of our common stock. See
"-- There are substantial restrictions on the transfer and ownership of units
and shares of common stock" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Liquidity and Capital
Resources." If we require, but cannot identify and obtain, additional financing,
you could suffer a loss of your investment.
WE MAY BE UNABLE TO EXPAND INTO SOME AREAS.
Marketing and advertising expenses will make it significantly more
expensive for us to enter the Philadelphia or Pittsburgh metropolitan areas. We
are also likely to incur additional costs if we enter into counties not close to
areas where we currently operate. Our rate of expansion into targeted geographic
areas may also be inhibited by:
o our inability to develop a network of physicians, hospitals and other
health care providers which meets our requirements and those of
government regulators;
o competition, which increases the costs of recruiting members;
o the amount of premiums we can charge and the cost of providing health
care services in that area; and
o demographics and population density.
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<PAGE>
We have not yet determined the timing or sequence of our expansion into new
areas. Accordingly, we cannot assure you that we will ever enter the
Philadelphia or Pittsburgh metropolitan areas, or any other specific area or
county.
WE MAY HAVE DIFFICULTY IN CONTROLLING OUR HEALTH CARE COSTS AND KEEPING
THEM BELOW OUR PREMIUM REVENUE.
Medical expenditures are the largest cost component of our business. If we
do not develop operative systems and procedures to monitor utilization
effectively, achieve favorable rates from providers and maintain adequate
reinsurance to cover catastrophic losses, we will be unable to operate
profitably.
Some of our members will seek levels of medical care they do not require
and some physicians may cooperate with these efforts. Our inability to minimize
significant amounts of unnecessary utilization could have a material adverse
effect on our operations.
OUR REVENUES ARE DERIVED FROM PREMIUMS AND THE AMOUNT THAT WE CHARGE FOR
PREMIUMS IS LIMITED BY MARKET PRESSURES.
We generate substantially all of our revenues by collecting fixed premiums
from our members. The amount of the fixed premiums we charge is a function of
our anticipated costs of providing our members with health care, including
administrative and operating costs. The amount of premiums we charge is limited
by market pressures. We bear the risk that the actual costs of providing health
care services and our indirect costs may exceed the amount of the premiums
charged. If our revenues do not increase at the rate we anticipate, the ratio of
our total health care services expense to our premium revenue is likely to
remain high and our financial condition and operating results would be
materially adversely affected.
WE ARE CURRENTLY A SMALL FACTOR IN A HIGHLY COMPETITIVE MANAGED CARE
INDUSTRY.
The managed care industry in general, and the managed care industry in
Pennsylvania in particular, is highly competitive. We compete with other
national and regional managed care providers. In addition, some larger employers
have adopted self-funded health benefit plans with plan administration provided
by a third party. We face market pressure to contain our premium prices. We only
began insuring our first outside employer group in July, 1997 and many of our
competitors are more established and possess substantially greater financial,
personnel, marketing and other resources than do we. They may, therefore, be
better able to withstand competition. See "Business -- Competition."
OUR REINSURANCE ARRANGEMENTS MAY NOT FULLY PROTECT US FROM LARGE LOSSES.
Although we maintain reinsurance coverage to limit in part the risk of
catastrophic losses, coverage plans may vary and be subject to certain
restrictions and limitations. Reinsurance does not legally discharge us from our
primary liability to our members. See "Business -- Risk Management and
Reinsurance."
OUR BUSINESS IS DEPENDENT UPON OUR ABILITY TO DEVELOP AND MAINTAIN AN
ADEQUATE PROVIDER NETWORK.
If we are unable to develop and maintain a network of physician, hospital
and other providers in appropriate numbers in our geographic markets and at
convenient locations for our members, it will be difficult for us to penetrate a
particular market in a manner sufficient for us to compete effectively. We will
not be able to operate in certain geographic regions unless we have sufficient
opportunity to build a provider network. We could lose membership due to erosion
of our provider network.
10
<PAGE>
WE DO NOT COVER ALL METHODS OF HEALTH CARE AND OUR DECISIONS TO DENY
CERTAIN COVERAGE MAY RESULT IN CLAIMS AGAINST US, INCLUDING POSSIBLY CLAIMS FOR
PUNITIVE DAMAGES.
Our PPO and HMO do not cover certain health care services. In the ordinary
course of our business, we are subject to claims by our members relating to our
decisions to restrict or refuse coverage for certain treatments. The loss of
even one such claim, if it were to result in a significant punitive damage award
against us, could have a material adverse effect on our financial condition and
results of operations. Punitive damage claims are not covered by our reinsurance
arrangements.
OUR HEALTH CARE PHILOSOPHY MAY CAUSE US TO BE LESS PROFITABLE THAN OUR
COMPETITORS.
Our philosophy of providing health care to our members is premised upon
allowing the physicians and other providers of health care services a meaningful
role in the creation of the medical care policy standards to which they are
held. The recommended treatment strategies might lead to smaller profit margins
or require us to charge higher premiums than our competitors. See "Business --
Our Business Philosophy."
YOU WILL INCUR IMMEDIATE AND SUBSTANTIAL DILUTION IN THE VALUE OF YOUR
SHARES OF COMMON STOCK.
Assuming the sale of all units and shares of common stock being offered at
an offering price of $20 per unit or share of common stock and no allocation of
value to the warrant included in a unit, you will experience immediate and
substantial dilution of $7.83 per share in the net tangible book value of your
shares of common stock after giving effect to the conversion of all of our Class
A voting common stock and Class B non-voting common stock and the payment of our
estimated offering expenses. The dilution will be greater if we sell fewer
shares of common stock in the offering. Future issuances of common stock,
including shares of common stock to be issued upon exercise of the warrants and
shares of common stock that may be issued upon exercise of stock options, may
cause you to experience further dilution. See "Dilution."
THERE ARE SUBSTANTIAL RESTRICTIONS ON THE TRANSFER AND OWNERSHIP OF UNITS
AND SHARES OF COMMON STOCK.
There are a number of factors that may make it difficult for you to sell or
transfer your units or shares of common stock. The shares of common stock and
the warrants comprising the units are not detachable from one another. This
means that prior to the exercise of a warrant, a unit may only be transferred as
a whole. In addition, the units and shares of common stock sold in this offering
may not be transferred until January 1, 2000, except in limited circumstances
arising by operation of law. Such circumstances include, for example, the
holder's death, bankruptcy or insolvency. Because of our desire to maintain the
direction and control of our company in the hands of health care professionals,
we have limited the transferability of our shares. On and after January 1, 2000,
the shares of common stock and the units will be transferrable only to present
or formerly licensed "health professionals" and our current and former
employees, and only those persons may vote the shares of common stock. These
restrictions may materially adversely affect the liquidity of any trading market
for the units or shares of common stock. See "Description of Common Stock --
Shareholder Eligibility Requirements; Stock Transfer Restrictions."
THE OFFERING PRICE HAS BEEN DETERMINED ARBITRARILY BY US AND YOU MAY NOT BE
ABLE TO RESELL YOUR UNITS OR SHARES OF COMMON STOCK AT THE PRICE YOU PAY FOR
THEM OR AT ALL.
The offering price of the units and the shares of common stock has been
determined by our Board of Directors in consultation with our financial advisor
and sales agent, Hopper Soliday. The offering price may not bear any
relationship to our assets, financial performance, business prospects, book
value or other generally accepted criteria of value. There can be no trading of
our units or common stock prior to January 1, 2000. Prior to this offering,
there has been no public trading market for the units or shares of common stock.
We do not know the extent to which a trading market might develop or how liquid
that market might be. We anticipate that trading of the units and the shares of
common stock after January 1, 2000 will be reported in the National
11
<PAGE>
Quotation Bureau "pink sheets." Nevertheless, a regular trading market for the
securities may not develop after January 1, 2000 or, even if it develops, be
sustained. Trading which is reported only in the National Quotation Bureau "pink
sheets" is likely to provide significantly less liquidity than would trading
that takes place on a national securities exchange or Nasdaq stock market.
Quotes for securities included in the National Quotation Bureau "pink sheets"
are not listed in the financial sections of newspapers and there is no mechanism
for you to obtain "real time" quotes on any automated system. Therefore, prices
for securities traded solely in the National Quotation Bureau "pink sheets" may
be more difficult to obtain. Absent an active trading market, you may not be
able to resell your units or common stock at or above the offering price, or at
all, regardless of our performance. The common stock is not appropriate as a
short-term investment.
WE HAVE BROAD DISCRETION AS TO USE OF PROCEEDS.
We expect to use the first $3 million of proceeds of this offering to
support our current operations and growth within our current service area,
including for use in complying with certain governmental reserve requirements,
investments and general corporate purposes. We expect to use additional proceeds
to finance our expansion into areas where we do not currently operate, which
areas we have not yet identified. Accordingly, management will have broad
discretion with respect to the expenditure of the net proceeds of this offering.
Purchasers of units and shares of common stock will necessarily depend upon the
judgment of management. See "Use of Proceeds."
ANTI-TAKEOVER PROVISIONS IN OUR ORGANIZATIONAL DOCUMENTS AND UNDER
PENNSYLVANIA LAW, AS WELL AS OUR RIGHT TO ISSUE PREFERRED STOCK, COULD MAKE A
THIRD PARTY ACQUISITION OF US DIFFICULT.
Anti-takeover provisions of Pennsylvania corporate law, which apply only to
registered corporations, such as our company, could make it more difficult for a
third party to acquire control of us, even if the change in control would be
financially beneficial to our shareholders, and may even deter offers to acquire
us. Our articles of incorporation allow us to issue preferred stock with terms
and conditions set by our Board of Directors without shareholder approval. Our
articles also limit voting to those eligible to hold shares of common stock. Our
bylaws provide for a classified board, with directors serving three-year terms
on a staggered basis and also require a 90% vote of the shareholders to approve
the sale or takeover of our company. All of these provisions were designed to
retain control of our company in health care professionals and make it more
difficult for a third party to acquire us. There are also significant
restrictions on a holder's ability to sell or otherwise transfer our units and
shares of common stock. These provisions, as well as the share ownership
restrictions, may even deter offers from interested third parties which our
shareholders may find attractive and may also have the effect of delaying or
preventing changes in control or management even if a substantial number of
shareholders believe a change would be desirable.
THERE MAY BE CONFLICTS OF INTEREST BETWEEN US AND OUR SHAREHOLDERS,
DIRECTORS AND OFFICERS.
We may have a conflict with our officers, directors and shareholders who
also provide services to us and who, in their capacities as service providers,
may seek to increase fees and member access to physicians.
WE MIGHT NOT ENGAGE PHYSICIAN SHAREHOLDERS IN OUR PROVIDER NETWORKS.
If you are a physician or other health care provider, investing in our
securities does not guarantee that you will be afforded an opportunity to
provide services to our members. We may not be licensed to operate in your area
or, even if licensed, may not choose to operate in your market. Further, as part
of our quality assurance program, we may not be able to, or elect to, enroll all
physicians or other health care providers who wish to participate in our plans.
LOSS OF KEY PERSONNEL COULD ADVERSELY AFFECT OUR BUSINESS.
Our success depends to a large degree upon the efforts of Richard A.
Felice, our President and Chief Executive Officer, and T. Clark Phillip, our
Treasurer and Chief Financial Officer. The loss
12
<PAGE>
of the services of either could have a material adverse effect on our business
and prospects. We have an employment agreement with Mr. Felice but not with Mr.
Phillip.
FUTURE LEGISLATION COULD IMPACT EFFICIENCY AND QUALITY WITHIN OUR PROVIDER
NETWORKS.
Laws may be enacted on a federal or state level which have a material
adverse impact on our operations. For example, "any willing provider" laws which
might compel us to accept non-contracted providers into our HMO, laws mandating
benefits, laws and regulations restricting physician referral practices, or laws
dealing with fraud and abuse or kickbacks by physicians, may be enacted or
extended in such a way as to restrict our operations in a materially adverse
manner. See "Business -- Government Regulation and Health Care Industry Reform."
WE ARE SUBJECT TO EXTENSIVE GOVERNMENT REGULATION AND LEGAL UNCERTAINTIES.
If we fail to comply with current and future governmental regulations,
including those affecting our ability to expand into new markets, contract with
providers and manage utilization of benefits, we could suffer consequences that
would have a material adverse effect on our operations and our financial
condition. We may face governmental sanctions if we fail to correct deficiencies
identified in periodic audits by government regulators. See "Business --
Government Regulation and Health Care Industry Reform."
If we fail to meet certain net worth requirements, operation of our PPO and
HMO could be suspended and our licenses to operate a PPO and an HMO could be
revoked. See "Business -- Net Worth Requirements."
OUR SYSTEMS MAY NOT BE YEAR 2000 COMPLIANT.
The "Year 2000 issue" refers generally to the problems that some software
may have in determining the correct century for the year. For example, software
with date-sensitive functions that is not Year 2000 compliant may not be able to
distinguish whether "00" means 1900 or 2000, which may result in failures or the
creation of erroneous results.
Our financial and operational computer systems utilize software developed
by an outside computer software supplier. If our software consultants fail to
address this issue adequately or one or more of our suppliers encounter errors
and system failures arising from the transition of dates from 1999 to 2000, our
business and operations could be materially adversely affected. Year 2000
considerations may also have an effect on some third parties with whom we do
business and, thus, indirectly affect us. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Year 2000."
13
<PAGE>
FORWARD-LOOKING STATEMENTS
This prospectus contains certain forward-looking statements which, among
other things, relate to:
o operations;
o technical capabilities;
o funding needs;
o our need for, and possible inability to obtain, additional financing;
o pricing of the units and shares of common stock and the future market for
these securities;
o capital expenditures;
o regulatory matters affecting the managed care industry;
o competitive factors;
o general economic conditions; and
o other statements contained herein that are not historical facts.
When used in this prospectus, the words "anticipate," "believe," "estimate"
and similar expressions are generally intended to identify forward-looking
statements. Because forward-looking statements involve risks and uncertainties,
our actual results could differ materially from those expressed or implied by
such forward-looking statements due to a number of factors, including those
discussed under "Risk Factors."
USE OF PROCEEDS
Assuming we sell all of the units and shares of common stock available in
this offering for $20 per unit or share of common stock, we will receive net
proceeds (after deducting printing, accounting and legal fees, the fee of Hopper
Soliday and other estimated offering expenses) of approximately $38,217,880 (or
approximately $37,905,880, if all of those persons who contributed toward the
cost of our initial feasibility study apply their credits towards the purchase
of units).
We expect to use up to the first $3 million of the net proceeds from this
offering to support our ongoing operations and growth within our current
operating area.
We expect to apply all net proceeds in excess of $3 million toward the
financing of the expansion of our PPO and HMO service areas beyond our current
operating areas. See "Business -- Proposed Expansion."
We anticipate that our costs will approximate $3-5 million to expand our
operations into each targeted suburban or rural market, which will increase to
$10-15 million for each of the Philadelphia or Pittsburgh metropolitan areas.
The specific areas into which we expand will depend upon the amount of net
proceeds we receive and the criteria set forth under "Business -- Proposed
Expansion." Of the total cost of expansion into a new area, personnel costs are
expected to constitute approximately 43%, and sales and marketing costs are
expected to constitute approximately 26%. The remainder of the cost is expected
to consist of the allocation of corporate overhead to the expansion.
We may not expend all of the net proceeds immediately following the
offering, but from time to time as needed. Pending their use, we will invest the
net proceeds in short-term, interest bearing investment grade securities.
Depending upon how many units or shares of common stock we sell, proceeds from
the offering may not be sufficient to fund our expansion plans. See "Risk
Factors."
14
<PAGE>
DILUTION
Our net tangible book value at March 31, 1999 was $6.75 million or $3.87
per share of common stock assuming the conversion of Class A voting and Class B
non-voting common stock into common stock as of such date. The net tangible book
value per share represents the amount by which our tangible assets exceed total
liabilities, divided by the number of shares of common stock then outstanding.
After giving effect to (1) the sale of all 250,000 units and 1,750,000 shares of
common stock in the offering at an assumed public offering price of $20 per unit
or share of common stock and deduction of the estimated expenses associated with
the offering and (2) the assumed conversion into shares of common stock of the
Class A voting common stock and Class B non-voting common stock, our net
tangible book value at March 31, 1999 would have been approximately $45.6
million or $12.17 per share. (We are unable to predict the number of shares of
common stock that we will issue in connection with the exercise of the warrants
and, therefore, the information below excludes these shares of common stock.)
This represents an immediate increase in net tangible book value of $8.30 per
share to existing shareholders and an immediate dilution of $7.83 per share to
purchasers of units and shares of common stock in the offering. The following
table illustrates this pro forma dilution:
<TABLE>
<S> <C>
Assumed initial public offering price per share............. $20.00
Net tangible book value per share before the offering....... 3.87
Increase in net tangible book value per share attributable
to new investors.......................................... 8.30
Net tangible book value per share after the offering........ 12.17
Dilution per share to new investors......................... $ 7.83
</TABLE>
Using the process described above, if only half of the shares of common
stock offered are sold, the dilution per share to the new investors would be
$10.46, and if only one-fourth of the shares of common stock offered are sold,
the dilution per share to the new investors would be $12.66.
15
<PAGE>
CAPITALIZATION
The following table shows our capitalization before and after the offering.
The first column reflects our capitalization as of March 31, 1999. The second
column reflects our capitalization as of March 31, 1999 assuming the conversion
of all shares of Class A voting common stock and Class B non-voting common stock
into shares of common stock as of such date. The third column shows the
additional equity that will be raised assuming that the offering has been
completed and that we sell all 250,000 units and 1,750,000 shares of common
stock in the offering. The final column shows what our capitalization will be
(assuming the conversion of all Class A voting common stock and Class B
non-voting common stock) after we have completed the offering and issued all
250,000 units and 1,750,000 shares of common stock in the offering. The third
and fourth columns assume the application of all credits used by persons who
contributed toward the cost of our initial feasibility study. The columns assume
no exercise of the warrants.
<TABLE>
<CAPTION>
AS OF MARCH 31, 1999
-------------------------------------------------------
ACTUAL PER PRO FORMA
FINANCIAL CONVERSION OF PRO FORMA
STATEMENTS CLASS A&B ADJUSTMENTS AS ADJUSTED
----------- ------------- ----------- -----------
<S> <C> <C> <C> <C>
Long term debt..................... $ -- $ -- $ -- $ --
Total debt (including current
maturities)................... -- -- -- --
Shareholders' equity............... -- -- -- --
Preferred stock, $0.01 par value
2,000,000 shares authorized;
none issued................... -- -- -- --
Class A voting common stock,
$0.01 par value, 40,000 shares
authorized; 4,087 shares
issued and outstanding........ 41 -- -- --
Class B non-voting common stock,
$0.01 par value, 100,000
shares authorized; 1,074
shares issued and outstanding. 11 -- -- --
Common Stock, $0.01 par value,
20,000,000 shares authorized;
1,742,000 outstanding after
conversion, 3,742,200 shares
outstanding after conversion
and offering.................. -- 17,422 20,000 37,422
Additional paid-in capital......... 21,220,777 21,203,407 38,468,000 59,671,407
Accumulated deficit................ (14,135,206) (14,135,206) -- (14,135,206)
Accumulated other comprehensive
income, net of tax............... (11,640) (11,640) (11,640)
Total shareholders' equity.... 7,073,983 7,073,983 38,488,000 45,561,983
----------- ----------- ----------- -----------
Total capitalization.......... $ 7,073,983 $ 7,073,983 $38,488,000 $45,561,983
=========== =========== =========== ===========
</TABLE>
16
<PAGE>
SELECTED HISTORICAL FINANCIAL DATA
The selected historical financial data set forth below as of and for the
three month periods ended March 31, 1999 and 1998 has been derived from our
unaudited financial statements included elsewhere in this prospectus and, in our
opinion, includes all adjustments (consisting only of normal recurring
adjustments) necessary for a fair presentation thereof. The selected historical
financial data set forth below as of and for the fiscal year ended December 31,
1995 has been derived from our consolidated financial statements. The selected
historical financial data set forth below as of and for the fiscal years ended
December 31, 1998, 1997 and 1996 have been derived from our consolidated
financial statements included elsewhere in this prospectus, which have been
audited by Deloitte & Touche LLP. The results of operations set forth below are
not necessarily indicative of our expected results for any future period. The
information below should be read in conjunction with "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and the
consolidated financial statements included elsewhere in this prospectus.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31, YEAR ENDED DECEMBER 31,
--------------------------- ---------------------------------------------------------
1999 1998 1998 1997 1996 1995
------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT
DATA:
Premiums............. $ 4,976,586 $ 928,238 $ 6,622,311 $ 183,222 $ -- $ --
Total revenue........ 5,095,266 1,108,926 7,335,663 1,019,672 962,258 200,457
Health care services
expense............ 5,196,094 713,076 7,588,762 172,940 -- --
Total expenses....... 6,865,745 1,970,691 13,426,146 4,078,758 3,510,586 867,287
Net loss............. (1,770,479) (861,765) (6,090,483) (3,059,086) (2,548,328) (666,830)
Net loss per common
share.............. (343.05) (166.98) (1,180.10) (592.73) (501.24) (686.04)
BALANCE SHEET DATA:
Cash and cash
equivalents........ 3,728,215 13,556,875 2,608,269 14,250,640 17,381,607 18,142,948
Total current
assets............. 4,820,434 13,740,221 3,600,348 14,442,082 17,715,064 18,268,197
Long-term investment
securities......... 4,891,379 -- 6,860,624 -- -- --
Total assets......... 10,311,189 14,493,828 11,032,883 15,231,671 18,362,835 18,524,109
Medical claims
liabilities........ 2,579,762 215,440 1,945,722 63,458 -- --
Total current
liabilities........ 3,237,206 409,008 2,171,705 285,086 357,164 207,939
Accumulated deficit.. (14,135,206) (7,136,009) (12,364,727) (6,274,244) (3,215,158) (666,830)
Total stockholders'
equity............. 7,073,983 14,084,820 8,861,178 14,946,585 18,005,671 18,316,170
</TABLE>
Net loss per common share amounts treat as equivalent the shares of Class A
voting common stock and Class B non-voting common stock. Assuming the conversion
as of January 1, 1995 of the Class A voting common stock and Class B non-voting
common stock into shares of common stock, net loss per share of common stock for
the three months ended March 31, 1999 and 1998 and for the twelve months ended
December 31, 1998, 1997, 1996 and 1995, was $(1.02), $(.50), $(3.50), $(1.76),
$(1.46) and $(.38), respectively.
17
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion about us and our subsidiaries is presented on a
consolidated basis and relates to the three month periods ended March 31, 1999
and 1998 and the three fiscal years ended December 31, 1998, 1997 and 1996.
Where in the judgment of management a discussion of segment information would be
appropriate to an understanding of our business, the discussion focuses on each
relevant segment of the business and on us as a whole. We were organized in 1995
and were in our development stage through June, 1997. We began insuring our
first outside employer group in July, 1997 and grew to approximately 16,000
members at May 1, 1999. We do not expect to reach the anticipated number of
members necessary to break even in this year or the following year and there is
no assurance that we will ever be able to operate profitably.
RESULTS OF OPERATIONS
The following table contains certain statement of operations data expressed
as a percentage of revenue and other statistical data for the years and periods
indicated:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31, YEAR ENDED DECEMBER 31,
------------------- ---------------------------------
1999 1998 1998 1997 1996
------ ------ ------- ------ ------
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Revenue:
Premiums......................... 97.7% 83.7% 90.3% 18.0% 0.0%
Consulting....................... 0.0 0.0 0.9 0.0 0.0
Investment income, net........... 2.3 16.3 8.8 82.0 100.0
------ ------ ------- ------ ------
Total revenue................. 100.0% 100.0% 100.0% 100.0% 100.0%
Expenses:
Health care services............. 102.0% 64.3% 103.5% 17.0% 0.0%
Salary and benefits.............. 19.2 62.0 40.9 204.9 55.6
Operating expenses............... 10.5 35.2 26.6 110.3 64.4
Professional services............ 1.7 7.0 5.9 38.6 247.9
Other taxes...................... 0.2 0.2 0.5 2.5 (3.1)
Depreciation..................... 1.1 9.0 5.6 26.7 0.0
------ ------ ------- ------ ------
Total expenses................ 134.7% 177.7% 183.0 400.0 364.8
Loss before income taxes........... (34.7) (77.7) (83.0) (300.0) (264.8)
Income tax benefit................. 0.0 0.0 0.0 0.0 0.0
------ ------ ------- ------ ------
Net loss........................... (34.7)% (77.7)% (83.0)% (300.0)% (264.8)%
Statistical data:
PPO member months enrollment....... 40,824 7,958 58,310 1,707 0
Medical loss ratio................. 104.4% 76.8% 114.6% 94.4% 0.0%
Administrative expense ratio....... 32.8% 113.4% 79.6% 383.0% 364.8%
</TABLE>
The "medical loss ratio" represents our total health care services expense
as a percentage of our premium revenue. The "administrative expense ratio"
represents our administrative expenses (excluding health care services) as a
percentage of our total revenue.
Comparison of Three Months Ended March 31, 1999 to March 31, 1998. Our
loss increased from $862,000 in the quarter ended March 31, 1998 to $1.8 million
in the quarter ended March 31, 1999 primarily due to the increase in health care
service expenses and an increase in administrative expenses needed to service
our growth in enrollment. Enrollment increased from 2,874 at March 31, 1998 to
14,538 at March 31, 1999. The related aggregate member months (the number of
months of each period that an individual is enrolled in a health care plan)
increased from 7,958 in the quarter ended March 31, 1998 to 40,824 in the
quarter ended March 31, 1999.
Premium revenue increased from $928,000 in the quarter ended March 31, 1998
to $5.0 million in the quarter ended March 31, 1999, primarily due to the growth
in member months. However, per member per month premium revenue also increased
from $116.64 in the quarter ended March 31, 1998 to $121.90 in the quarter ended
March 31, 1999. We expect our per member per month premium revenue to increase
over the remainder of 1999 because of significant increases in premiums charged
by our competitors which will allow us to increase the premiums we charge.
18
<PAGE>
Investment income decreased from $181,000 in the quarter ended March 31,
1998 to $119,000 in the quarter ended March 31, 1999 due to a lesser amount of
cash available for investment.
Our charges for health care services expense increased from $713,000 in the
quarter ended March 31, 1998 to $5.2 million in the quarter ended March 31,
1999, which was greater than the rate of increase in our premium revenues during
that period. Part of the reason for the difference in growth rates was the
competitive pressures which, particularly in 1998, restricted opportunities for
premium increases. Health care services expense for each current period is an
estimate which takes account of a rolling average of those expenses from the
prior six months. Although the growth in our enrollment was the most significant
factor in the expense increase in dollar terms, three very large cases which
began in the third quarter of 1998 and required coverage that carried over into
the first quarter of 1999 also had a significant impact during that period.
Because both our actual charges for health care services expense and our
estimates included those three cases, our estimate of per member per month
expense increased significantly for this period as well, exceeding the rate of
growth in revenue per member per month. The actual health care service expense
for the first quarter of 1999 will not be known until the end of the second or
the beginning of the third quarter of 1999. We expect our health care services
expense category to remain volatile so long as we are a relatively small health
care plan, because of the effect which a small number of very large cases can
have on such expense item.
Administrative expenses (consisting of salary and benefits, operating
expenses, professional services, other taxes and depreciation) increased
approximately 33%, from $1.3 million in the quarter ended March 31, 1998 to $1.7
million in the quarter ended March 31, 1999. Although administrative expenses
increased, administrative expenses as a percentage of total revenue decreased
from 113.4% in the first quarter of 1998 to 32.8% in the comparable quarter of
1999. The large percentage decrease was the result of a 359% increase in total
revenue from the first quarter in 1998 to the same period in 1999. Substantially
all of the increase in our administrative expenses can be accounted for by the
increases in salary and benefits and operating expenses need to support our
growth. Salary and benefits increased $300,000 as a result of hiring more
employees to service the increased enrollment. Operating expenses increased
$140,000, primarily due to additional printing expenses and broker commissions
associated with enrollment growth.
Comparison of Year Ended December 31, 1998 to Year Ended December 31,
1997. Our loss increased from $3.1 million in 1997 to $6.1 million in 1998 due
primarily to much higher than planned expenses related to health care services
and an increase in administrative expenses needed to service our growth in
enrollment. Enrollment increased from 612 members at December 31, 1997 to 9,286
members at December 31, 1998. The related aggregate member months increased from
1,707 in 1997 to 58,310 in 1998.
Premium revenue increased from $183,000 in 1997 to $6.6 million in 1998 due
primarily to the growth in member months. However, the per member per month
revenue also increased from $107.34 in 1997 to $113.57 in 1998. Per member per
month premium revenue was lower than expected in both 1997 and 1998 primarily
due to competitive premium pricing pressure. We expect our per member per month
premium revenue to increase in 1999 because of significant increases in premiums
charged by our competitors which will allow us to increase the premiums we
charge.
Consulting revenue in 1998 resulted from a feasibility study performed for
a group of physicians in Texas who wished to consider the establishment of a
managed care organization. We continue to possess the expertise to assist
providers in this manner. However, the demand for these services is difficult to
forecast since it is dependent on the level of interest of providers in forming
risk-bearing entities as well as on the regulatory and competitive environment
in which they operate. Investment income decreased from $836,000 in 1997 to
$648,000 in 1998 due to a lesser amount of cash available for investment.
Health care services expense increased dramatically from $172,000 in 1997
to $7.6 million in 1998. This increase was in large part due to the growth in
member months. However, the per member per month health care services expense
also increased from $101.31 in 1997 to $130.15 in 1998. A significant portion of
the increase was attributable to three very large cases requiring coverage in
the amounts of $200,922, $298,720 and $157,851, respectively. The remainder of
the increase resulted from more frequent utilization of health care services.
However, given the relatively small number of members in the our plan, it is
difficult to predict the amount of health
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care services that will be utilized in a given period. Therefore, because of our
size, we expect to be subject to a great degree of volatility in the utilization
of health care services from one period to the next, although any insurer can
experience one or more very large cases at one particular time.
Administrative expenses (consisting of salary and benefits, operating
expenses, professional services, other taxes and depreciation) increased from
$3.9 million in 1997 to $5.8 million in 1998. Administrative expenses as a
percentage of total revenue decreased from 383% in 1997 to approximately 80% in
1998. The large percentage decrease occurred because of the increase in total
revenue of 619% during the same period. Salary and benefits increased 44% from
1997 to 1998 as a function of the larger number of employees needed to
accommodate a greater enrollment. Operating expenses increased 74% as a result
of increased costs of advertising, printing, and broker commissions. These
figures reflect the inclusion of a full year's expense of operations in 1998 as
opposed to a partial year's operating expenses in 1997 since our first group
coverage began in July, 1997. Consulting expenses increased 22% from $259,000 in
1997 to $315,000 in 1998 due to our need for management information systems
expertise until we employed dedicated systems staff in early 1999. In addition,
we retained a human resources consultant in 1998 to perform higher level human
resources functions until such time as we are large enough to justify a full
time position for this function. The decrease in legal fees occurred as result
of our classifying a significant portion of the 1998 legal bills related to this
stock offering as deferred offering costs that appear on the balance sheet as a
component of other assets. Depreciation increased 51% from 1997 to 1998 due to
an increase in depreciable assets such as computers, telephone equipment,
workstations, and furniture needed to support the additional employees we hired
to accommodate the growth in our enrollment.
Comparison of Year Ended December 31, 1997 to Year Ended December 31,
1996. The increase in our net loss from $2.5 million in 1996 to $3.1 million in
1997 reflects our growth from a start-up organization in 1996 to an operating
managed care organization that began insuring its first outside employer group
in July, 1997. Accordingly, the increase in premium revenue and health care
services expense resulted entirely from the commencement of operations.
Investment income declined from 1996 to 1997 as a result of a decrease in cash
available for investment.
Administrative expenses (consisting of salary and benefits, operating
expenses, professional services, other taxes and depreciation) increased 11%
from $3.5 million in 1996 to $3.9 million in 1997. The increase in salary and
benefits of 290% relates to the hiring of our management team as well as other
employees during 1996. We hired a number of key employees in the latter half of
1996, resulting in our recording only a partial year's salary and benefits in
that year. Our operating expenses increased 82% from 1996 to 1997 as a result of
increases in advertising and printing expenses related to the commencement of
operations in 1997. Our hiring of a management team and other staff to perform
the duties previously assigned to outside consultants resulted in an 88%
decrease in consulting services expenses from $2.1 million in 1996 to $259,000
in 1997. We also reduced our legal fees over this same time period both because
we lessened our requirement for legal services and our staff was able to perform
some of the operational and regulatory work previously performed by our outside
attorneys. The increase in depreciation expense was related to our furnishing
our administrative offices and our implementation of the primary information
systems used for eligibility, billing and collections, and claims payment.
LIQUIDITY AND CAPITAL RESOURCES
In late 1995 and early 1996 we completed an initial offering of shares of
our Class A voting common stock and Class B non-voting common stock, which
yielded net proceeds to us of $21.2 million. The net proceeds from the offering
remain our principal source of cash.
Consolidated net cash used in operating activities for the quarter ended
March 31, 1999 was $744,000 compared to net cash used in operating activities of
$631,000 for the quarter ended March 31, 1998. The change in net cash used in
operating activities was primarily due to increased net losses from consolidated
operations. Our losses were due, in part, to higher than expected health care
services expense per member per month. We also experienced higher amounts of
premium receivables. These cash charges were partially offset by increases in
the amounts of both our medical claims liabilities and other liabilities. The
change in net cash used in investing activities of $63,000 in the first quarter
of 1998 to net cash received from investing activities of $1.9 million in the
first quarter of 1999 was due primarily to our receipt of $4.0 million in
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proceeds from maturities of investment securities. Cash in excess of anticipated
needs for daily operations is invested in obligations of the United States
government having various maturities up to three years. Of the proceeds we
received from the sale or maturity of investment securities, we reinvested $2.2
million.
At March 31, 1999, we had cash, cash equivalents and short-term investment
securities of $4.1 million.
We have used $12.2 million of the net proceeds from our 1995-1996 stock
offering to fund our startup expenses and operating losses through March 31,
1999, our seventh full operational quarter. Of this amount, we used $850,000 to
fund our first quarter 1999 net loss. We received our certificate of authority
to operate an HMO from the Commonwealth of Pennsylvania on March 22, 1999, which
eliminated certain restrictions on our use of cash proceeds from our 1995-1996
stock offering. Pennsylvania laws restrict our use of other amounts, as
described in the following paragraph.
Pennsylvania managed care laws and regulations govern the licensing and
operation of PPOs and HMOs in Pennsylvania. They require that a managed care
company possess an initial minimum net worth (generally, an entity'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 Pennsylvania Insurance
Department requires higher initial amounts, equal to one-fifteenth of the annual
premium revenue for each of our PPO subsidiary and HMO subsidiary. In addition
to the net worth requirements, these laws and regulations required us to deposit
with the Pennsylvania Insurance Department, before commencing the operation of
our HMO, cash or securities in a minimum amount of $100,000. This deposit
requirement is reviewed by the Insurance Department at least annually. Of our
cash and cash equivalents and investments totaling $9.0 million at March 31,
1999, $4.5 million and $1.5 million reside in the PPO and HMO, respectively, and
can only be used by the regulated subsidiary that retains the funds. Such
amounts are available for transfer to the parent company or other subsidiaries
from the PPO and HMO only to the extent that the funds can be remitted in
accordance with the terms of existing management agreements among our
subsidiaries or by the payment of dividends. We may receive dividends from our
regulated subsidiaries, but generally these dividends must be approved by the
Pennsylvania Insurance Department. Neither we nor any of our other subsidiaries
may receive dividends from our PPO or HMO subsidiaries which, if paid, would
cause a violation of statutory net worth and reserve requirements.
Our near-term uses of cash are expected to relate primarily to funding
future operating losses and capital expenditures. Both capital and operating
expenditures are anticipated to increase as the number of employees needed to
service our growing membership base increases. We have no plans to pay cash
dividends in the near term. We believe that costs associated with the software
upgrades required to accommodate the Year 2000 will not be material. See "--
Year 2000," below.
We believe we have sufficient cash flows from operations and cash on hand
to finance our business through 1999. However, we will need to increase our
aggregate membership base in our PPO and HMO significantly before we will be
able to generate a net profit, and at current growth rates, which may not be
sustainable, we will not achieve this membership base in the current or
following year and there is no assurance that we will ever be able to operate
profitably. To date, we have not sought or arranged for bank financing or any
other source of external funds. We are continuing to evaluate possible external
financing alternatives in order that we may be able to continue to fund our
projected operating losses and capital expenditure requirements beyond 1999 and
until such time as we become profitable.
INFLATION
Health care costs generally continue to rise at a rate faster than the
consumer price index. We use various strategies to mitigate the negative effects
of health care cost inflation, including setting commercial premiums based on
our anticipated health care costs, reinsurance, risk-sharing arrangements with
our various health care providers and other cost containment measures. However,
our ability to manage medical costs could be negatively impacted by items such
as technological advances, competitive pressures, applicable regulations,
increase in pharmacy costs, utilization increases and catastrophic items, which
could, in turn, result in medical cost increases equaling or exceeding premium
increases.
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YEAR 2000
The "Year 2000 Issue" refers generally to the problems that some software
may have in determining the correct century for the year. Many existing computer
programs use only two digits rather than four to identify a year in the date
field. Those computer programs that have date-sensitive software may recognize a
date using "00" as the year 1900 rather than the year 2000. To the extent that
computer programs are unable to interpret calendar dates properly beginning in
the Year 2000, computers, as well as other non-computer equipment using embedded
technology, could shut down, calculate dates or data based on dates incorrectly,
or report information inaccurately. Year 2000 issues affect virtually all
companies and organizations.
Our financial and operational computer systems utilize computer software
and hardware developed by outside vendors. We have, through communication with
our software and hardware vendors, determined which internal information
technology systems are Year 2000 compliant and which systems need updating. Most
systems, including our main system used to process enrollment, billing and
accounts receivable, authorizations, and claims payments and our local area
network, have been updated to process calendar dates correctly beginning in the
Year 2000. The remaining systems are scheduled to be updated by July, 1999.
Additionally, our telephone system has been updated to be Year 2000 compliant.
Testing of the various systems to verify that dates beginning in the Year 2000
will be processed accurately began in May, 1999 and is expected to be completed
by October, 1999. Much of the cost of implementing new versions of software that
is Year 2000 compliant has been covered under the ongoing maintenance and
support agreements with our software vendors. We currently estimate that we will
experience less than $50,000 in incremental costs related to Year 2000
compliance work on our internal information technology systems and other
equipment. We anticipate expensing most of this amount in 1999.
We do not expect the costs associated with our Year 2000 upgrade to be
material to our consolidated financial condition, results of operations or cash
flows. However, we are currently unable to determine the potential impact, if
any, that could result from any of our vendors' failure to address this issue
adequately. If our vendors' work proves unsatisfactory, our system
infrastructure, software and hardware may still be materially adversely impacted
by the transition to Year 2000 which could have a material adverse effect on our
business, results of operations and financial condition.
Year 2000 considerations may also have an effect on some third parties with
whom we do business and, thus, indirectly adversely affect us. One or more of
our physician or other health care providers or other contractors or suppliers
may encounter errors and system failures arising from the transition of dates
from 1999 to 2000, which would be beyond our control. For example, a patient
insured by us could assert a claim against us if he or she suffered an injury
through the failure of a hospital system which did not adequately address its
Year 2000 issues. We have initiated contact with many of our providers,
contractors and suppliers to determine if these third parties are appropriately
responding to their Year 2000 issues. We also review regulatory filings or
audited financial statements for information on these third parties' state of
readiness as it relates to Year 2000 issues. It is not possible to quantify our
cost with respect to third parties with Year 2000 problems, although we do not
anticipate that this will have a material adverse effect on our business,
results of operations and financial condition. We also cannot measure the
potential adverse financial effect on us of such a third party failure or
non-compliance.
In addition, we have begun to develop a contingency/recovery plan aimed at
ensuring the continuity of critical business functions before December 31, 1999.
As part of that process, we have begun to develop reasonably likely failure
scenarios for our critical information technology systems and external
relationships. Once these scenarios are identified, we will develop plans that
are designed to reduce their impact on us and provide methods for returning to
normal operations if one or more of those scenarios occur.
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BUSINESS
We are a physician-controlled managed care organization. We operate a
managed care organization that offers a preferred provider organization ("PPO")
plan and is licensed to operate a health maintenance organization ("HMO") plan
in Pennsylvania. Our customers are Pennsylvania employers and other group
purchasers of health care plans, such as unions, trusts, governments and trade
associations, whose employees and members are members in our plans. We also
provide third party administrator ("TPA") services, though currently only to our
own managed care organization, and offer consulting services to
provider-sponsored managed care organizations and persons seeking to establish
such organizations.
INDUSTRY OVERVIEW
The growing role of managed health care providers represents a departure
from the traditional systems in which medical services were provided on an
indemnity basis, with insurance companies assuming responsibility for paying all
or a portion of each fee charged by each medical care provider. The traditional
indemnity system, however, was poor at controlling the cost of health care,
since providers could get more income by rendering more services, even if the
services were not necessary. As a result of the escalation of health care costs,
employers, insurers and governmental entities have all sought approaches to
deliver and pay for quality health care services more efficiently. Managed care
organizations have emerged as integral components in this effort. Managed care
has given rise to completely new forms of insurance, most notably insurance
provided by PPOs and HMOs.
A PPO is a an organization that contracts with physicians and/or other
health care providers who agree to render medical services to PPO members on a
discounted fee-for-service basis. Covered persons often are permitted to secure
medical services from non-PPO providers at an increased cost, usually imposed as
higher deductibles or co-payments. PPOs may lack any "managed care" feature
other than discounted physician fees, or they may have many of the same features
as a conventional HMO as discussed below. Typically, a PPO does not require the
members' care to be managed by a pre-selected primary care physician, commonly
known as a "gatekeeper," but so-called "gatekeeper" PPOs do exist. A PPO may
charge a fixed premium in exchange for which the PPO will be responsible for all
covered medical care for the members. Such PPOs are known as "risk-assuming"
PPOs. Under Pennsylvania law, PPOs, including risk-assuming PPOs, may not place
their providers at financial risk, such as through the kind of capitation (fixed
fee) payments used by HMOs, as discussed below.
An HMO is a prepaid health plan that provides comprehensive out-patient and
in-patient medical services to HMO members through networks of affiliated
physicians or physician groups and other affiliated medical service providers,
such as hospitals, ambulatory surgery facilities, laboratories and radiology
centers. An HMO is responsible for all covered medical care for its members in
exchange for a fixed premium. HMOs typically contract directly with physicians,
hospitals and other health care providers to administer medical care to HMO
members. These contracts provide for payment to the provider on either a
discounted fee-for-service or per diem basis, or through fixed monthly payments,
commonly known as "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 physician "gatekeepers" and are only
provided if authorized in advance by the "gatekeeper." Contracts with health
care providers may include certain financial incentives designed to encourage
the provision of high-quality and cost-effective health care. HMOs compensate
their affiliated providers for services under various payment methods, including
capitated payments and negotiated fee-for-service payments. Because these
provider services are provided to members on a prepaid basis, the financial risk
of medical costs in an HMO contract can be shifted from the premium payor and/or
HMO to the providers.
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PPOs, HMOs and other managed care organizations typically seek to limit the
financial risk of the delivery of medical care through volume discounts from
their provider networks and through cost-containment strategies including:
o emphasizing preventive care;
o controlling utilization of specialty care through mandatory primary care
physician referrals;
o reviewing proposed treatments for medical necessity;
o encouraging use of more cost-effective treatment settings; and
o monitoring hospital admissions and length of stay.
A TPA may provide or manage some or all of the operations of a self-funded
plan, managed care organization, or other insurance company, including the
charging of premiums or settling of claims. A TPA, acting in the capacity of an
independent contractor, earns a fee for these services, while the self-funded
plan, managed care organization, or other insurance company remains responsible
for the health care expenditures incurred by the beneficiaries of its policies.
PENNSYLVANIA PHYSICIAN HEALTHCARE PLAN, INC.
We were organized in February, 1995 by a group of Pennsylvania physicians
who sought to establish a physician-controlled managed care organization in
Pennsylvania. Pursuant to the licenses discussed below, we operate a managed
care organization that offers a PPO plan and will offer an HMO plan. Our
customers are Pennsylvania employers and other group purchasers of health care
plans, such as unions, trusts, governments and trade associations, whose
employees or members are members in our plans. We also provide TPA services to
our own managed care organization and offer consulting services to
provider-sponsored managed care organizations and persons seeking to establish
such organizations.
In Pennsylvania, a PPO can be either risk-assuming or non-risk-assuming. In
May, 1996 we filed an application with the Pennsylvania Department of Health for
a license to operate a risk-assuming PPO. Our license was granted in April,
1997. Pursuant to this license, we operate a PPO plan in 21 contiguous counties
in Pennsylvania.
We began marketing the initial PPO plan to employer groups in April, 1997,
with coverage of members beginning in July, 1997. The PPO covered approximately
16,000 members as of May 1, 1999. Revenues from our PPO accounted for 90.3%, 18%
and 0% of our total revenues for the years 1998, 1997 and 1996, respectively.
In November, 1996 we filed an application with the Pennsylvania Insurance
Department and the Department of Health for a license to operate an HMO. In
March, 1999 our HMO license was granted, permitting us to operate in three of
the counties in our PPO service area. We will continue to assemble an adequate
provider network for our HMO in the remaining 18 counties of our current PPO
service area. We are currently engaged in developing our provider network for
this plan. Our HMO was not able to solicit members or providers until the HMO
license was granted. We anticipate that we will begin actively marketing our HMO
in the fall of 1999.
In February, 1997, we filed an application with the Insurance Department
for a license to provide TPA services. Our license was granted in March, 1997.
Pursuant to this license, we provide TPA services to our PPO and HMO. In the
future, we may 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 we have chosen to concentrate on
membership growth and have no current plans to actively pursue the sale of our
TPA services.
In addition, we offer 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. Although we
have performed only one contract to render these
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services to date, we are actively seeking additional engagements and will
evaluate opportunities as they arise.
We believe in allowing our members' physicians and other health care
providers a meaningful voice in decisions related to the treatment of particular
individuals and in the creation of the general medical care policy standards to
which the physicians are held. One of the factors motivating our organizers was
to have the policy decisions that must be made by a managed care company,
including, but not limited to, those relating to quality improvement, cost
containment, utilization management, treatment policies and practice guidelines,
decided upon by physicians. In our case, these decisions are made by our
physician directors and committee members.
In order to promote these goals, during our initial stage of operations,
our governing documents required that all of our voting stock be held by
physicians, and that all of our directors be not only shareholders, but also
physicians, podiatrists or oral surgeons licensed to practice in Pennsylvania.
Recently, our organizational documents were amended. In place of the original
requirements, they now require that at least two-thirds of our directors be
actively practicing medical doctors or doctors of osteopathy.
Our shareholder eligibility requirements were also recently expanded to
include certain licensed "health professionals" and our present and former
employees. The changes in our director and shareholder eligibility requirements
were motivated by the considerable growth of our operations since our initial
stage of operation. We believe that expanding our director eligibility
requirements will enable us to attract to our board of directors well-qualified
individuals from other areas of business, as well as members of senior
management, and that expanding our shareholder eligibility requirements to
include other licensed "health professionals" and our employees will help us to
increase the transferability of our shares of common stock. At the same time,
the new requirements will allow us to continue to maintain physician control of
our stock and operations.
OUR BUSINESS PHILOSOPHY
We believe that we offer an alternative to the decision-making processes
found in most traditional managed care plans. Our philosophy of providing health
care to our members is premised upon allowing the physicians and other providers
of health care services to have significant input in decisions related to the
treatment of particular individuals and in the creation of the general medical
care policy standards to which they are held. Our medical care policy standards
are derived through extensive consultation with physician specialist committees
and other health care providers. Areas in which we rely upon physician
decision-making include:
o quality improvement;
o cost containment;
o utilization management;
o treatment policies;
o practice guidelines; and
o other medical-related policy decisions.
We believe that by relying on physicians to make these decisions we
de-emphasize the more traditional decision-making processes used by many of our
managed care competitors. These traditional processes place a significant
portion of the responsibility of setting policy standards on their medical
directors or other non-physician personnel. Our system allows more input from
the people we believe to be most qualified to make coverage and other policy
decisions: physicians. In the short term, this approach may increase our costs
of coverage and can negatively impact our margins. However, we believe that
physician-approved treatments, while costly in the short term, will often prove
to be more health conscious and cost efficient in the long term.
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In order to support our business philosophy, the growth strategy
articulated by our Board of Directors entails:
o Continuing to market our licensed PPO in our current service area.
o Expanding our HMO into the entire service area served by our PPO. Our
HMO license for three counties was issued on March 22, 1999. We will need
to be approved by the Department of Health to operate in the other
counties into which we seek to expand our HMO.
o Expanding our provider network within our existing service area. As of
March 22, 1999, we had contracted with 47 hospital providers and over
4,832 physician providers through our PPO plan and 8 hospital providers
and over 517 physician providers through our HMO plan. We are in the
process of credentialing additional physician providers and engaging
providers for other services for both our PPO and HMO.
o Expanding our service area beyond our current market area of 21 counties
and ultimately throughout Pennsylvania. We will also consider
opportunities to expand our operations into other states as and if
opportunities present themselves.
o Marketing our consulting services. In the third quarter of 1998, we
completed a feasibility study for a physician organization located in
Texas. We are seeking additional engagements as opportunities arise.
o Making our licensed third party administrator services available to
individual practitioners and other health care providers and
organizations. We obtained a TPA license for Pennsylvania. To date,
however, we have concentrated on developing the growth of our membership
base and have no current plans to actively pursue the sale of our TPA
services.
We operate our PPO plan in 21 contiguous counties in Pennsylvania. These
counties are:
<TABLE>
Northeastern
South central Pennsylvania: Lehigh Valley: Pennsylvania:
- ----------------------------------------- -------------- ----------------------------
<S> <C> <C> <C> <C> <C>
o Adams o Franklin o Perry o Lehigh o Carbon o Pike
o Berks o Fulton o Schuylkill o Northampton o Lackawanna o Susquehanna
o Cumberland o Lancaster o York o Luzerne o Wayne
o Dauphin o Lebanon o Monroe o Wyoming
</TABLE>
We are licensed to operate our HMO in Berks, Cumberland and Dauphin
Counties.
PROPOSED EXPANSION
Our expansion strategy contemplates the expansion of our PPO and HMO
operations within and beyond our current service area and ultimately throughout
Pennsylvania. In addition, we may from time to time evaluate the merits of
expanding our business into areas beyond Pennsylvania. The decision whether to
expand our operations into geographic areas where we do not currently operate
will be based upon our analysis of the criteria set forth below in order of
importance:
o the amount of funds raised in this offering;
o our ability to develop a satisfactory network of physicians, hospitals
and other health care providers in the targeted geographic area;
o competition in that area, which increases the costs of recruiting
members;
o the proximity of the targeted area to our existing service area;
o the amount of premiums we can charge and the cost of providing health
care services in the targeted area; and
o the demographics and population density of the targeted area.
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Our consideration of expansion into areas contiguous with our current
service area will also be impacted by our judgment as to whether our existing
members would benefit by having more providers available to them, and whether
our existing providers also practice in the contiguous area considered for
expansion. In addition to the criteria above, expansion plans into areas that
are not contiguous to our current service areas, as well as other geographically
remote areas, could be impacted by the ability of providers in those areas to
demonstrate their ability to organize themselves into a cohesive provider
network.
Although we believe that significant subscriptions to this offering
received from physician investors in a particular market area is an indication
of physician interest in our business, other factors may prevent us from
developing a provider network in that area and we cannot guarantee that our
expansion plans will include that market area.
We anticipate that it will cost approximately $3-5 million to expand our
operations into each targeted suburban or rural market and approximately $10-15
million to expand our operations into each of the Philadelphia or Pittsburgh
metropolitan areas. We are also likely to incur additional costs in entering
into counties not within a reasonable proximity to areas where we currently
operate. Our principal cost components of expansion into a particular area are
sales and marketing expenses, hiring of additional sales representatives and
other personnel and corporate overhead expenses.
ARRANGEMENTS WITH PHYSICIAN PROVIDERS
An important factor in our success is the development of adequate physician
provider networks in each of our geographic markets. These networks must contain
the appropriate mix of primary care physicians and specialists, and must
represent satisfactory financial arrangements between our providers and us.
Our selection of physicians includes a review of licensure status, hospital
admitting privileges, demonstrated proficiency, patient access, office
standards, after-hours coverage and many other factors.
Our provider agreements with physicians for our PPO impose various
requirements and standards on participating physicians, many of which are
mandated by applicable federal and state law. As is common in the managed care
industry, our agreements typically provide for:
o the provision of health care services in accordance with a physician's
licensure and training and consistent with our medical care policy;
o physician participation in and compliance with our utilization management
and quality management programs;
o discounted fee-for-service arrangements;
o maintenance of records; and
o adherence to referral procedures and protocol.
We anticipate that our provider agreements with physicians for our HMO will
contain provisions for capitation, discounted fee-for-service arrangements and
other risk management arrangements we deem appropriate.
ARRANGEMENTS WITH OTHER HEALTH CARE PROVIDERS
We provide for the delivery of necessary preventive, diagnostic,
therapeutic and rehabilitation health care services to members by, in part,
contracting with qualified non-physician providers who meet our participation
criteria. We have negotiated and continue to negotiate contracts with hospitals
and other providers on behalf of our PPO and HMO. Generally, these contracts
provide that the participating hospitals and other providers must accept our PPO
and HMO members as patients, provide to those members all medically necessary
services that are ordered by a
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participating physician and that are covered services under the applicable
managed care plan, and bill us according to the parameters set forth in their
participation agreement with us. We continually review the services provided by
hospitals and other providers with respect to quality improvement, utilization
management, and risk management.
We have negotiated and continue to negotiate contracts with hospitals and
other providers for inclusion in our PPO and HMO provider networks. Generally,
these contracts are on a nonexclusive basis and specify fixed fee schedules that
are below a facility's published schedule of charges, and arrangements under our
HMO will contain provisions for capitation and other risk-sharing arrangements
as we deem appropriate.
SALES AND MARKETING
Members join our PPO or HMO primarily through their employer. 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.
The overall objective of our marketing strategy is to achieve prudent
growth. This consists of enrolling employee and member groups at rates that we
project as profitable while allowing us to maintain our service parameters.
We have contracts with independent insurance agents to make sales for us on
a commission basis. We have also hired direct sales representatives to offer
membership in our PPO and HMO to purchasers of health care services. Our
marketing efforts also include media advertising and direct mailings.
Our targeted membership base consists of all commercial and governmental
employers in our service area. We do not market our PPO and HMO to individuals,
nor do we contract with federal or state governments to provide services to
patients enrolled in Medicare, Medicaid or workers' compensation programs.
PREMIUM RATES AND BENEFITS
Our primary source of revenue is the premiums paid by or on behalf of
members in our PPO and, in the future, our HMO. Our offered benefits and premium
rates for our PPO and HMO are and will be intended to be competitive with other
health insurance programs available in the various markets in which we compete.
Factors impacting our premium rates include the age and gender of the group
members, the number of members to be covered under the contract being offered,
the mix of those to be covered and the amount of the employer contribution. The
premium rates and benefits must conform to state and federal laws regulating
PPOs and HMOs and, in the case of our HMO, must have been approved by the
Insurance Department and the Department of Health as part of the HMO license
application process.
BENEFITS PROVIDED TO MEMBERS
We are committed to offering high quality health care benefit plans at
competitive prices. We accept as fundamental the critical relationship between
the physician and the patient in the delivery of health care services. Our
benefit plans, to the extent permitted by law, are customized to the needs of
purchasers. The following are examples of the benefits that we offer under our
plans:
o physician office visits;
o specialist physician visits;
o hospital room and board, prescription drugs, and inpatient ancillary
services;
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o psychiatric inpatient and outpatient services;
o diagnostic and therapeutic ambulatory services;
o drug and alcohol addiction treatment services;
o emergency care;
o skilled nursing services; and
o therapy services.
Coverage of the health care services listed above is conditioned on medical
necessity and on the conditions of coverage applicable to the member's health
plan.
UNDERWRITING
In establishing premium rates for our PPO and our HMO, we use underwriting
criteria based on our accumulated actuarial data and data provided to us by a
nationally recognized provider of actuarial services to evaluate anticipated
health care costs, with adjustments, to the extent permitted by law, for factors
such as:
o demographic factors such as age, gender and family size;
o claims experience; and
o industry classification.
Our underwriting practices are subject to review by the Insurance
Department.
UTILIZATION MANAGEMENT
Our profitability will be influenced by our ability to manage health care
costs through utilization management and the negotiation of favorable provider
contracts. Our utilization management program is designed to educate, monitor
and evaluate the provision and cost of medical care and services accessed
through our health care plans.
Our objective is for our members to utilize available health care resources
efficiently in a way that ensures and provides for medically appropriate care,
and to monitor the quality of medical services accessed through our plans. The
essential elements of our utilization management program include:
o patient education programs (both during and after treatment);
o physician education programs (performance standards);
o inpatient review (both during and after treatment);
o outpatient review (both during and after treatment);
o care management; and
o outcomes analysis.
QUALITY MANAGEMENT
We have developed a quality management program for the credentialing of
health care providers and the continual improvement of the quality of health
care services provided. Our quality management program contains various
components, including the following:
o adverse event review;
o diagnosis review;
o medical record review;
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o quality measurement studies;
o complaints and grievance review;
o credentialing/recredentialing of physicians;
o risk management;
o member satisfaction surveys; and
o provider satisfaction studies.
We also conduct annual evaluations of our quality management program to
assess its overall effectiveness and to generate an annual work plan designed to
outline program goals and objectives and planned projects and activities for the
forthcoming year.
CLAIMS PROCESSING
We have hired, and, as our membership base grows, will continue to hire,
staff to support our claims processing operations adequately. We receive claims
for reimbursement of health care expenses and direct them to the appropriate
claims processor for review in accordance with our claims procedures. Claims are
reviewed for both the medical appropriateness of the treatment rendered and the
costs of such treatment. In the event that a claims processor finds the
treatment or costs on a particular claim to be inconsistent with our claims
procedures, that claim is forwarded to an internal claims review panel for
further review and consideration.
Claims that are determined by the processor to be consistent with our
claims procedures are currently processed within 15 days from the date of
receipt, which we believe is substantially bettter than the industry standard.
MANAGEMENT INFORMATION SYSTEMS
We have made a substantial investment in acquiring and making operational
the hardware and software comprising our management information systems,
including the source code for all of our core operational functions and billing,
medical management, capitation and claims payment functions. We have also
acquired software used in the credentialing of providers and analyzing provider
claims for possible overcharges or duplicate claims and have developed and
maintain a web site at "www.ppccares.com."
INVESTMENTS
Monies in excess of day-to-day cash requirements are invested in U.S.
government securities with maturities periodically staggered over three years.
We are not exposed to any material market risk with respect to investments.
Monies in checking accounts are invested overnight with PNC Bank, N.A. We use
PNC Bank, N.A. as our investment manager.
RISK MANAGEMENT AND REINSURANCE
We seek to limit the risk of catastrophic losses by maintaining reinsurance
coverage. Our current reinsurance arrangements cover 50% to 90% of certain
hospitalization expenses, depending on whether the treating facility is a
participating facility, beyond an annual deductible of $50,000 for each member
covered by our HMO and $75,000 for each member covered by our PPO, up to a
lifetime maximum of $2 million per member. This reinsurance coverage is also
subject to certain maximum limits on daily hospital charges. Reinsurance does
not legally discharge us from our primary liability to the insured for the full
amount of the policy, but it does make the reinsurer liable to us to the extent
of the reinsured portion of any loss that may be incurred. Our reinsurance
carrier is Allianz Life Insurance Company of North America, which currently has
an "A+" rating from A.M. Best. We continually evaluate our reinsurance
arrangements in an effort to keep them commensurate with our growth.
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We also maintain general liability, property, employee fidelity, directors
and officers, and professional liability insurance in amounts we deem prudent.
We require contracting physicians, physician groups and hospitals to maintain
professional liability and malpractice insurance in an amount at least equal to
industry standards.
COMPETITION
HMOs and PPOs operate in a highly competitive environment. Competition in
the managed 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 health care benefit options, including
HMOs and PPOs.
The managed care industry in Pennsylvania is characterized by vigorous
competition, and is currently dominated by Aetna-US Healthcare, Independence
Blue Cross, Keystone Health Plan East, Keystone Health Plan West, Keystone
Health Plan Central, Highmark, Inc., Geisinger Health Plan, First Priority, Blue
Cross of Northeastern Pennsylvania and HealthAmerica. There are larger, better
established and financially stronger managed care organizations currently
operating in each market in which we currently operate and into which we may
expand our operations. Similar conditions exist in each other state into which
we might also consider expanding.
We also compete with other managed care plans that are operating, or may in
the future operate, in our service area, as well as traditional indemnity
insurance companies. There are numerous HMOs now operating in Pennsylvania. In
addition, several larger employers have adopted self-funded health benefit
plans, with plan administration provided by a third party. Other managed care
companies may have competitive advantages, including:
o having greater capitalization;
o providing a wider variety of products and services;
o offering more attractive pricing;
o covering a larger geographic territory or one with a higher population
density;
o having greater operating experience;
o having longer established relationships with providers and member groups;
and
o enjoying greater market recognition.
In addition, larger out-of-state managed care companies may acquire a
Pennsylvania HMO or PPO, thereby entering the Pennsylvania marketplace and
commencing business without the delay of applying for an HMO or PPO license.
The costs of competing in large metropolitan areas, such as Philadelphia
and Pittsburgh, are often higher than other areas and these costs may make it
prohibitive for us to enter these markets. Competition may also affect our
ability to enter into provider contracts on satisfactory terms with primary care
physicians, hospitals and other professionals. However, the rates of premiums
charged are in many instances the controlling factor in obtaining and retaining
employer groups, and certain of our competitors have set premium rates at levels
below our rates for comparable plans. We anticipate that premium pricing will
continue to be highly competitive.
GOVERNMENT REGULATION AND HEALTH CARE INDUSTRY REFORM
Our ability to operate our PPO and HMO in additional areas in Pennsylvania
is dependent upon our obtaining approval to do so from the Department of Health.
In the case of our PPO and HMO, the Department of Health will review our
provider network in the targeted area in Pennsylvania to determine whether
members will have satisfactory "reasonable access" to health care providers.
However, because our PPO members may seek care outside of our PPO's provider
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network, the criteria used by the Department of Health in the determination of
"reasonable access" for our HMO is more stringent than that applied to our PPO.
The provider network for our HMO must be more extensive in the given area than
that for our PPO and must contain more health care providers per member.
In addition, the laws and regulations concerning conduct of our PPO and HMO
impose certain restrictions on us regarding the conduct of our business,
resulting in additional burdens and costs to us. Areas of governmental
regulation over our PPO and HMO include the following:
o requirements that specific benefits or levels of benefits be offered to
members, increasing the medical costs that we must bear;
o restrictions, limitations and disclosures of financial incentives to
physicians, reducing our ability to share financial risk;
o the amount of premiums that may be charged;
o approval of changes in service area;
o processes to monitor and improve the quality of plan operations;
o coverage limitations, exclusions and other elements of plan design;
o requirements that coverage be expanded to certain dependents of members;
o the terms of contracts with members, physicians, hospitals and other
providers;
o processes for addressing member grievances and complaints and for hearing
appeals of adverse coverage decisions, potentially increasing the cost of
making appropriate coverage decisions;
o permissible investments;
o procedures for receiving, processing and paying claims;
o underwriting and financial arrangements; and
o financial condition (including reserve and minimum net worth
requirements).
We are also required to file with the Insurance Department and the
Department of Health quarterly and annual reports containing financial
statements and other information concerning the operation of our business, and
are subject to periodic audits by government regulators.
Future changes in the regulatory environment in which we operate could
increase our costs and limit profitability. Managed care insurers are the
subject of a growing number of legislative and regulatory initiatives at both
the state and national levels intended to protect the interests of consumers.
Proposed federal and state laws and regulations that may, if enacted, be
applicable to us include, but are not limited to:
o expansion of the definition of primary care provider;
o mandatory direct access to certain providers without a referral;
o open enrollment;
o granting or enlarging patient and provider grievance and appeal rights;
o elimination of preemption under the Employee Retirement Income Security
Act of 1974, known as ERISA, 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;
o the addition of various mandated benefits for specific medical conditions
or prevention efforts;
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o new data collection requirements by consumers for use in comparisons
among HMOs;
o more intensive medical records procedures to protect patient
confidentiality;
o amendment of the HMO licensing requirements, including recertification
every two years and a 90-day public comment period;
o limiting or eliminating an HMO's ability to determine what is medically
necessary through statutory definition, binding external reviews of
medical coverage decisions and/or requiring an HMO to accept the opinion
of a member's physician; and
o imposing a requirement 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 size and quality of its provider network.
In addition, various federal and state courts, including courts in
Pennsylvania, have imposed tort liability on health plans, despite the
preemption provisions of ERISA that have been held to bar such liability. These
cases and future court decisions narrowing ERISA preemption could materially
adversely affect our business operations.
Examples of recently enacted legislation applicable to our operations
include:
o Pennsylvania Act No. 1998-68 named, in part, "An Act Providing Quality
Health Care Accountability and Protection." This legislation will impose
additional requirements that will increase the operational burdens on us
and which could adversely impact our business. These additional
requirements include, but are not limited to:
o enaction of a prudent layperson standard for determining what
constitutes an emergency;
o the fact that, in the case of certain illnesses and conditions,
members are entitled to "standing referrals" for specialty care
without requiring visits to, and referrals from, the primary care
physician;
o in the case of certain illnesses and conditions, specialists rather
than primary care physicians must coordinate the care of a member;
o the prohibition of financial incentives for "less than appropriate
care";
o restrictions on the ability to terminate a provider from the
provider network;
o the entitlement of members being treated by a provider, upon being
terminated from the provider network, to continue care by that
provider for 60 days despite the termination;
o the entitlement of new members to continue care with their previous
physicians for 60 days, whether or not such physicians are in the
provider network;
o extensive mandatory disclosures to members and prospective members
as a matter of course and upon request; and
o access to pharmaceuticals not contained in the plan's formulary.
In addition, Act No. 1998-68 imposes requirements for a consumer complaint
system, a consumer and provider grievance system and for the certification of
utilization review entities. On October 3, 1998, the Pennsylvania Department of
Health issued a joint policy statement to provide interim guidance in these
areas. Furthermore, on April 30, 1999 the Department of Health produced draft
regulations to be promulgated under Act No. 1998-68. We are unable to predict
if, when and in what form these regulations will ultimately be enacted.
o Pennsylvania Act No. 1998-98 which requires health insurance plans,
including those offered by HMOs and PPOs, to include coverage for certain
equipment, supplies, training and education relating to the management of
diabetes. Act No. 1998-98 became effective on February 13, 1999.
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o The "Women's Health and Cancer Rights Act of 1998," enacted by Congress
on October 21, 1998, and requires coverage for breast reconstruction,
prostheses and treatment for complications following a mastectomy. This
legislation became effective immediately, applying to plan years
beginning on or after October 21, 1998.
We believe that the enactment of Act No. 1998-68, Act No. 1998-98 and the
Women's Health and Cancer Rights Act of 1998, as well as other currently
proposed laws and regulations, if enacted, will not have a material adverse
effect on us. However, we are 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 or (iv) what effect any new laws
and regulations will have on our business.
The current federal anti-kickback statutes and regulations prohibit payment
of any remuneration, directly or indirectly, which is intended to induce a
person to refer payments or to order any goods or services for which payment may
be made, in whole or in part, by Medicare or Medicaid, either as primary or
secondary payor. Because we are not a federally qualified HMO, and do not
otherwise contract for Medicare or Medicaid patients, we do not believe that our
operations are within the scope of these laws and regulations. Should the
application of these laws and regulations be extended to apply to the operations
of all payors, our operations may be affected.
The "Stark" federal anti-referral law, in general, prohibits a physician
from making referrals for the furnishing of "designated health services," such
as diagnostic services, hospital inpatient-outpatient services, laboratory
services, etc., for which payment may be made under the Medicare or Medicaid
programs, either as primary or secondary payor, to any entity with which the
physician or an immediate family member has a financial interest. Again, because
we do not contract for Medicare or Medicaid patients, we do not believe that our
operations are within the scope of such laws.
In the event that the opportunity arises to expand our operations into
other states, and we determine that it is in our best interests to do so, the
laws and regulations concerning conduct of a PPO and an HMO in those other
states would also impose certain restrictions on us.
NET WORTH REQUIREMENTS
Our PPO and HMO are each operated by our wholly-owned Pennsylvania
subsidiaries formed for that purpose. Pennsylvania has passed and adopted laws
and regulations governing the licensing and operation of PPOs and HMOs. These
laws and regulations require that a managed care company possess an initial
minimum net worth, generally calculated as the amount of an entity's assets
minus its liabilities, of $1,175,000 to operate a PPO, and an additional
$1,500,000 for an HMO. In practice, the Insurance Department requires higher
initial net worth deposit amounts equal to one-fifteenth of the annual premium
revenue for each of our PPO subsidiary and HMO subsidiary.
We may receive dividends from our regulated subsidiaries, but generally
these dividends must be approved by the Insurance Department. Neither we nor any
of our subsidiaries may receive dividends from our PPO or HMO subsidiaries
which, if paid, would cause a violation of statutory net worth and reserve
requirements.
In addition to the net worth requirements, the Pennsylvania managed care
laws and regulations required us to deposit with the Insurance Department,
before commencing the operation of our HMO, cash or securities in a minimum
amount of $100,000. This deposit requirement is reviewed by the Insurance
Department at least annually. If we become unable to meet the foregoing deposit
and net worth requirements, or any more stringent requirements that may be
imposed, our PPO and HMO licenses may be revoked.
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ANTITRUST CONSIDERATIONS
Whenever physicians or other health care providers join together to form
ventures for the delivery of health care services, including activities such as
those conducted by us, antitrust issues may be present. These issues primarily
concern conspiracies, combinations and agreements in restraint of trade in the
form of 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, the Pennsylvania Attorney General or private litigants. Adverse
consequences that can result from legal action include the imposition of treble
damages, injunctions, restrictions on the way we operate, civil or criminal
fines and substantial expenses in the form of attorneys' fees and costs. To
date, we believe that we are in compliance with all applicable antitrust laws.
We carefully analyze our business activities against the applicable
antitrust laws. However, such analysis is inherently fact-sensitive and based
upon the comparative pro-competitive and anti-competitive effects of our
proposed operations. Even with such analysis, in the litigious atmosphere
surrounding health care, our operations might be challenged on the basis of
antitrust violations at some time in the future. Antitrust law in this area is
unsettled and future developments could require substantial changes in our
method of doing business which could have a negative impact on our
profitability. Moreover, if antitrust lawsuits were to be filed against us, we
would be forced to incur substantial legal expenses, and, if any challenge were
successful, we could suffer additional material adverse consequences.
EMPLOYEES
As of May 21, 1999 we employed 62 people in various management or clerical
positions, 60 of whom were full-time employees. We believe that our relationship
with our employees is good.
As we grow, we intend to continue to hire individuals to fill operational
positions, which may include the following: sales managers, account executives,
service representatives, membership services personnel, utilization review
personnel, claims processors and provider relations personnel.
MANAGEMENT AGREEMENT
During our early stages of development, we engaged Infinity Management
Services, Inc., a subsidiary of Pennsylvania Medical Society Liability Insurance
Company ("PMSLIC"), to provide administrative and management services to us.
PMSLIC, which is majority-owned by Medical Group Holdings, Inc., writes medical
professional liability insurance coverage in Pennsylvania. As we have grown, we
have hired more executive and staff personnel to support our operations and
currently we engage PMSLIC to provide us with only limited payroll, accounting
and information systems services on an hourly fee basis.
LEGAL PROCEEDINGS
We are not currently a party to any litigation.
PROPERTIES
We lease 13,123 square feet of office space in Harrisburg, Pennsylvania
under a lease expiring in February, 2003 and sublease an additional 2,700 square
feet of office space at the same location under a sublease expiring in December,
1999. We believe that we will be able to renew our sublease or obtain other
satisfactory additional office space. The lease and sublease provide for monthly
aggregate rental payments of $20,442.
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MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The table below contains certain information with respect to our executive
officers and directors:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
Gary C. Brown, M.D........................... 49 Chairman of the Board and Director
Richard J. Minehart, M.D..................... 48 Vice Chairman of the Board and Director
Richard A. Felice............................ 44 President, Chief Executive Officer and Director
T. Clark Phillip............................. 48 Treasurer and Chief Financial Officer
Jack J. Jaroh................................ 39 Vice President, Sales and Marketing
Valerie A. Harris............................ 47 Vice President, Operations
Darlene Ann M. Dunay, D.O.................... 41 Director
Gay D. Dunne, M.D............................ 58 Director
Edward W. Gerner, M.D........................ 58 Director
Larry E. Goldstein, M.D...................... 51 Director
Frank H. Guinn, D.O.......................... 62 Director
Leonard P. Harman, D.O....................... 55 Director
George R. Homa, D.O.......................... 47 Director
Lila Stein Kroser, M.D....................... 66 Director
Alice McCormick, D.O......................... 52 Director
John J. Nevulis, M.D......................... 48 Director
Mark A. Piasio, M.D.......................... 43 Director
James G. Pitcavage, M.D...................... 65 Director
Robert S. Pyatt, Jr., M.D.................... 48 Director
Saad Sakkal, M.D............................. 51 Director
Jay H. Shah, M.D............................. 54 Director
Milton D. Soiferman, J.D., D.O............... 56 Director
Jay Anthony Townsend, M.D.................... 63 Director
</TABLE>
Our Board of Directors is divided into three classes serving staggered
three-year terms. Currently, the terms of Mr. Felice and Drs. Brown, Dunay,
Gerner, Kroser, McCormick and Shah expire in 1999; those of Drs. Goldstein,
Guinn, Minehart, Nevulis, Sakkal and Townsend, in 2000; and those of Drs. Dunne,
Harman, Homa, Piasio, Pitcavage, Pyatt and Soiferman in, 2001. PPHP's Bylaws
provide that at least two-thirds of the directors must be actively practicing
medical doctors or doctors of osteopathy.
Gary C. Brown, M.D., M.B.A. Dr. Brown has served as a Director since
February, 1995. Dr. Brown 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. He is also
a Director of Philadelphia Medical Press. Dr. Brown served as President of PPHP
from March, 1995 to November, 1996. He is also a member of our company's
Executive Committee.
Richard J. Minehart, M.D. Dr. Minehart has served as a Director since
February, 1995. Dr. Minehart has conducted a medical practice in General Surgery
since 1983. From June, 1996 to June, 1998, Dr. Minehart was the Chairman of the
Medical Executive Committee and President of the Medical Staff at North Penn
Hospital. Dr. Minehart served as our Treasurer from March, 1995 to November,
1996. He is also a member of our company's Executive Committee.
Richard A. Felice Mr. Felice has been President and Chief Executive
Officer since September, 1996 and a Director since January, 1999. From July,
1994 to August, 1996 he was President of Doctors Health Plan, Inc., a Durham,
North Carolina HMO. From January, 1993 to
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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 US Healthcare in Blue Bell, Pennsylvania and Waltham,
Massachusetts.
T. Clark Phillip Mr. Phillip has been our Treasurer and Chief Financial
Officer since November, 1996. From February, 1995 until assuming his present
position he was Treasurer and Chief Financial Officer of Doctors Health Plan,
Inc. From November, 1986 until February, 1995, he was Vice President of Finance
and Operations of HMO Rhode Island, Inc.
Jack J. Jaroh Mr. Jaroh has been our Vice President, Sales and Marketing
since March, 1997. From June, 1995 until assuming his present position he was
Executive Vice President, External Affairs of Health Power HMO of Columbus,
Ohio. From June, 1994 to June, 1995 Mr. Jaroh was Vice President, Sales and
Marketing of First Option Health Plan of Red Bank, New Jersey. From June, 1989
to June, 1994 he was Vice President, Sales and Marketing of Keystone Health Plan
Central, Harrisburg, Pennsylvania.
Valerie A. Harris Ms. Harris has been employed by us since May, 1997,
first as Vice President, Network Development and then, since March, 1998, as
Vice President, Operations. From August, 1996 to May, 1997 Ms. Harris was a
Managed Care Consultant with Insource Management Group. From August, 1994 to
August, 1996 she was Vice President, Health Services for Doctors Health Plan,
Inc. From July, 1991 to August, 1994 Ms. Harris held several positions with
CIGNA, the last being Manager, Provider Relations in the Carolinas.
Darlene Ann M. Dunay, D.O. Dr. Dunay has served as a Director since April,
1995. Since 1987 Dr. Dunay has maintained a solo general practice in Old Forge,
Pennsylvania specializing in primary care. She is a diplomate of the National
Board of Medical Examiners and is Board-certified in family medical practice.
Gay D. Dunne, M.D. Dr. Dunne has served as a Director since June, 1995.
Dr. Dunne 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.
Edward W. Gerner, M.D. Dr. Gerner has served as a Director since February,
1995. Dr. Gerner 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 our company's Executive Committee.
Larry E. Goldstein, M.D., M.B.A. Dr. Goldstein has served as a Director
since February, 1995. Dr. Goldstein 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 our
company from March, 1995 to November, 1996. He is also a member of our company's
Executive Committee.
Frank H. Guinn, D.O. Dr. Guinn has served as a Director since February,
1995. Dr. Guinn has conducted an internal medical practice in Philadelphia,
Pennsylvania since 1980. He is the Corporate Medical Director of Green Acres
System, a nursing home.
Leonard P. Harman, D.O. Dr. Harman has served as a Director since March,
1995. Dr. Harman 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 our
company's Executive Committee.
George R. Homa, D.O. Dr. Homa has served as a Director since February,
1995. Dr. Homa has conducted a family medical practice in Bridgeport,
Pennsylvania since 1979. He is Board-certified by the American College of
Osteopathic General Practitioners and the American Board of Quality Assurance
and Utilization Review Physicians.
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Lila Stein Kroser, M.D. Dr. Kroser has served as a Director since July,
1996. Dr. Kroser has conducted a family medical practice in Philadelphia,
Pennsylvania since 1960. She is a Clinical Assistant Professor at MCP/Hahnemann
School of Medicine. Dr. Kroser is the President of Medical Women's International
Association and has been elected the President of the Philadelphia County
Medical Society, effective June, 1999. She is a member of the Commission on
Quality and Scope of Practice of the American Academy of Family Physicians and
the Council on Policy and Governmental Affairs of the Pennsylvania Medical
Society.
Alice McCormick, D.O. Dr. McCormick has served as a Director since April,
1995. Dr. McCormick has been practicing medicine since 1980. She has maintained
a practice in internal medicine in Greentown, Pennsylvania since July, 1995. She
is a diplomate of the National Board of Medical Examiners.
John J. Nevulis, M.D. Dr. Nevulis has served as a Director since February,
1995. Dr. Nevulis has conducted a medical practice in orthopaedic surgery in the
Philadelphia area since 1977. He is also President of the Pennsylvania
Orthopedic Network, an independent practice association of orthopaedists. He is
a Board-certified orthopaedic surgeon and a Fellow of the American Academy of
Orthopaedic Surgeons. Dr. Nevulis served as Executive Vice President of our
company from March, 1995 to November, 1996. He is also a member of our company's
Executive Committee.
Mark A. Piasio, M.D. Dr. Piasio has served as a Director since March,
1995. Dr. Piasio 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. He is also a member of our company's Executive Committee.
James G. Pitcavage, M.D. Dr. Pitcavage has served as a Director since
June, 1995. Dr. Pitcavage has conducted a medical practice in pediatrics since
1965. Dr. Pitcavage is Past Chairman of Children's Health Network (a physician
hospital organization 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. Dr. Pyatt has served as a Director since
February, 1995. Dr. Pyatt has conducted a medical practice in radiology since
1982. Since January, 1982 he has served as Medical Director of Chambersburg
Imaging Associates. Since January, 1996 he has also served as part-time 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. Dr. Pyatt is also Clinical Professor of
Radiology at the George Washington University School of Medicine, Washington
D.C.
Saad Sakkal, M.D. Dr. Sakkal has served as a Director since March, 1995.
Dr. Sakkal has been the Medical Director of the Metabolic Care Center of
Greenville since 1981 and of the Regional Diabetes Center in Greenville,
Pennsylvania since 1991. He is Board-certified 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 H. Shah, M.D. Dr. Shah has served as a Director since February, 1995.
Dr. Shah has maintained a family medical practice in Richboro, Pennsylvania
since 1979. 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 our Vice President-Medical Affairs from April, 1995 to
November, 1996. He is also a member of our company's Executive Committee.
Milton D. Soiferman, J.D., D.O. Dr. Soiferman has served as a Director
since February, 1995. Dr. Soiferman 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. He is also a member of our company's Executive Committee.
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<PAGE>
Jay Anthony Townsend, M.D. Dr. Townsend has served as a Director since
June, 1995. Dr. Townsend has maintained a family practice in Newville,
Pennsylvania since 1972. He is the President of Graham Medical Clinic, P.C. From
1992 to 1997 Dr. Townsend was the President of Carlisle Healthcare Alternatives,
Inc., a physician hospital organization.
EXECUTIVE COMPENSATION
The following Summary Compensation Table sets forth the cash compensation
and certain other components of the compensation of Richard A. Felice, our
President and Chief Executive Officer, and our other most highly compensated
executive officers whose salary and bonus exceeded $100,000 in the most recent
fiscal year, for services rendered in all capacities to us in the years ended
December 31, 1998, 1997 and 1996.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
-----------------------------------------------------------------
OTHER
ANNUAL ALL OTHER
SALARY BONUS COMPENSATION COMPENSATION
NAME AND PRINCIPAL POSITION YEAR ($) ($) ($) ($)
- --------------------------- ---- ------- ------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Richard A. Felice ..................... 1998 239,612 35,250 -- 7,016(2)
President and Chief Executive Officer (1) 1997 211,397 -- 39,682(3) 3,048(2)
1996 66,667 35,000 44,751(3) --
Jack J. Jaroh ......................... 1998 143,328 27,738(5) -- 6,325(6)
Vice President, Sales and Marketing (4) 1997 110,833 21,068(5) 92,845(7) 2,224(6)
1996 -- -- -- --
T. Clark Phillip ...................... 1998 126,823 18,750 -- 5,288(9)
Treasurer and Chief Financial Officer (8) 1997 107,292 15,000 -- 1,464(9)
1996 29,167 10,000 7,992(10) --
Valerie A. Harris ..................... 1998 117,276 3,250 -- 5,922(12)
Vice President, Operations (11) 1997 61,654 10,000 10,891(13) 1,402(12)
1996 -- -- -- --
</TABLE>
- ------------------
(1) Mr. Felice became our President and Chief Executive Officer in September,
1996.
(2) Includes matching contributions by us of $5,000 and $1,200 in 1998 and
1997, respectively, to our savings plan and insurance premiums paid by us
in the amounts of $2,016 and $1,848 in 1998 and 1997, respectively, for
term life insurance for the benefit of Mr. Felice.
(3) Includes reimbursement of moving expenses of $34,182 and $39,751 in 1997
and 1996, respectively.
(4) Mr. Jaroh became our Vice President, Sales and Marketing, in March, 1997.
(5) Includes sales commissions of $18,288 and $1,068 in 1998 and 1997,
respectively.
(6) Includes matching contributions by us of $5,000 and $1,120 in 1998 and
1997, respectively, to our savings plan and insurance premiums paid by us
in the amounts of $1,325 and $1,104 in 1998 and 1997, respectively, for
term life insurance for the benefit of Mr. Jaroh.
(7) Includes reimbursement of moving expenses of $88,345.
(8) Mr. Phillip became our Treasurer and Chief Financial Officer in November,
1996.
(9) Includes matching contributions by us of $5,000 and $1,200 in 1998 and
1997, respectively, to our savings plan and insurance premiums paid by us
in the amounts of $288 and $264 in 1998 and 1997, respectively, for term
life insurance for the benefit of Mr. Phillip.
(10) Consists of reimbursement of moving expenses.
(11) Ms. Harris became our Vice President, Operations, in March, 1998.
(12) Includes matching contributions by us of $5,000 and $788 in 1998 and 1997,
respectively, to our savings plan and insurance premiums paid by us in the
amounts of $922 and $614 in 1998 and 1997, respectively, for term life
insurance for the benefit of Ms. Harris.
(13) Consists of reimbursement of moving expenses.
39
<PAGE>
STOCK OPTION PLAN
At a Special Meeting of our shareholders held on January 9, 1999, our
shareholders approved the adoption of the Pennsylvania Physician Healthcare
Plan, Inc. Stock Option Plan. The Stock Option Plan provides for the grant to
our officers and full-time employees of options to the purchase of up to an
aggregate of 200,000 shares of common stock. Options may be either "incentive
options" within the meaning of Section 422 of the Internal Revenue Code, non-
qualified options or a combination of incentive and non-qualified options.
Options granted under the Stock Option Plan may expire no later than ten years
from the date of grant. The Board of Directors has the authority to determine
those individuals who shall receive options, the time period during which the
options may be partially or fully exercised, the number of shares of common
stock that may be purchased and the option price.
On April 30, 1999 the Board of Directors authorized grants under the Stock
Option Plan of options to purchase 15,000 shares of common stock to each of
Messrs. Felice, Phillip and Jaroh and Ms. Harris. In addition, all of our other
employees received options in amounts commensurate with their responsibilities.
The options vest in equal increments over a three year period from the date of
grant, expire ten years from the date of grant and carry an exercise price of
$20 per share.
DIRECTORS' COMPENSATION
Each of our directors is entitled to reimbursement for all reasonable
out-of-pocket expenses incurred in attending meetings of the Board of Directors
and committees thereof. Directors do not receive separate cash consideration for
their services in that capacity although, on April 30, 1999, the Board of
Directors adopted a plan to award options to purchase common stock to members of
the Board. Pursuant to the plan, each director receives options to purchase 125
shares of common stock for each Board and committee meeting attended, beginning
with the April 30, 1999 Board meeting, up to a maximum of 1,000 options each
calendar year. The exercise price of all options granted to directors will be
the fair market value of our common stock at the time of grant, as determined by
the Board. The Board fixed the exercise price of the options granted on April
30, 1999 at $20 per share.
EMPLOYMENT AGREEMENTS
Mr. Felice is employed under an agreement with Pennsylvania Physicians Care
Service Corp., our wholly-owned subsidiary, dated as of September 3, 1996. The
agreement originally provided Mr. Felice with an annual salary of $200,000 and
an annual bonus of 15% of his annual salary based on mutually agreed performance
criteria, which was guaranteed and paid in advance in the first year. The
agreement provided for reimbursement of moving expenses when they were incurred
as well as certain other fringe benefits. Mr. Felice also received a $5,000
signing bonus. The agreement was amended September 2, 1997 to increase Mr.
Felice's annual salary to $235,000, subject to adjustment, and to provide for an
annual bonus of up to 20% of his annual salary, based on mutually agreed
performance criteria. The agreement is subject to automatic renewal for
additional periods of one year each, unless terminated by either party at least
60 days prior to the end of the then-current term. Mr. Felice is entitled to a
$200,000 payment if we fail to renew the agreement during its first five years
or terminate the agreement prior to the end of any renewal term, for other than
good and sufficient cause. Additionally, in the event our management is
restructured during the five year period so that Mr. Felice is no longer Chief
Executive Officer, or such that he does he does not accept the position upon
being offered it, he has the right to terminate the agreement and receive a
severance payment of $400,000. Under the agreement Mr. Felice may not, for a
period of one year after termination, regardless of the cause of termination,
compete with us in any geographic area in which we are then doing business, are
licensed, or have a license application pending with any state agency.
Mr. Jaroh is employed under an agreement with Pennsylvania Physicians Care
Service Corp. dated as of February 28, 1997. The agreement provides for an
annual salary of $140,000, subject to adjustment, plus commissions equal to
$2.00 per member for each member enrolled in our health care plans, other than
members enrolled pursuant to self-insured employer agreements or
40
<PAGE>
arrangements. Mr. Jaroh is eligible for an annual bonus of up to 15% of his
annual salary, based on mutually agreed performance criteria. The agreement
provided for reimbursement of his moving expenses when they are incurred, as
well as certain other fringe benefits. Mr. Jaroh also received a $20,000 signing
bonus. The agreement is subject to automatic renewal for additional periods of
one year, unless terminated by either party at least 60 days prior to the end of
the then-current term. Mr. Jaroh is entitled to $140,000, payable over 12
months, if we terminate the agreement within the first two years for other than
good and sufficient cause. After the first two years, Mr. Jaroh is entitled to
an amount equal to one half of his then annual salary, payable over six months,
if we terminate the agreement prior to the end of any renewal term for other
than good and sufficient cause. Under the agreement, Mr. Jaroh may not, for a
period of one year after termination, if such termination is for good and
sufficient cause or due to his disability, compete with us in any geographic
area in which we are then doing business, are licensed, or have a license
application pending with any state agency. If Mr. Jaroh is terminated for other
than good and sufficient cause, the non-compete period only extends for the
period of time for which Mr. Jaroh is receiving payments from us.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
We do not have a Compensation Committee of its Board of Directors. All
directors present participate in deliberations of our Board of Directors
concerning executive officer compensation.
41
<PAGE>
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth the number of shares of common stock and the
percentage of all of our outstanding shares of common stock beneficially owned
as of May 21, 1999 by (1) each of our directors, (2) our Chief Executive Officer
and the other three individuals named in the Summary Compensation Table and (3)
all of our directors and executive officers as a group. As of April 30, 1999, no
person or entity beneficially owned more than 5% of our common stock. The
following table assumes the conversion of all of our outstanding Class A voting
common stock and Class B non-voting common stock by the holders thereof into
shares of common stock at the applicable conversion rates pursuant to the terms
of the recapitalization. See "The Recapitalization." Each individual named below
has an address in care of our principal executive offices. Prior to October 3,
1998, employees who were not also practicing physicians were prohibited from
owning our shares.
<TABLE>
<CAPTION>
SHARES OF COMMON STOCK
BENEFICIALLY OWNED(1)
--------------------------------
NAME OF BENEFICIAL OWNER NUMBER OF SHARES PERCENTAGE
- ------------------------ ---------------- ----------
<S> <C> <C>
Gary C. Brown, M.D........................................ 2,600(2) *
Darlene Ann M. Dunay, D.O................................. 400 *
Gay D. Dunne, M.D......................................... 400 *
Edward W. Gerner, M.D..................................... 700 *
Larry E. Goldstein, M.D................................... 700 *
Frank H. Guinn, D.O....................................... 400 *
Leonard P. Harman, D.O.................................... 400 *
George R. Homa, D.O....................................... 400 *
Lila Stein Kroser, M.D.................................... 800(3) *
Alice McCormick, D.O...................................... 400 *
Richard J. Minehart, M.D.................................. 400 *
John J. Nevulis, M.D...................................... 1,000 *
Mark A. Piasio, M.D....................................... 1,600 *
James G. Pitcavage, M.D................................... 400 *
Robert S. Pyatt, Jr., M.D................................. 1,600(4) *
Saad Sakkal, M.D.......................................... 400 *
Jay H. Shah, M.D.......................................... 1,400(5) *
Milton D. Soiferman, J.D., D.O............................ 700 *
Jay Anthony Townsend, M.D................................. 400 *
Richard A. Felice......................................... --(6) *
T. Clark Phillip.......................................... --(6) *
Jack J. Jaroh............................................. --(6) *
Valerie A. Harris......................................... --(6) *
All Directors and Executive Officers as a group (23
Persons)................................................ 15,100 *
</TABLE>
- ------------------
(1) As used in this table, "beneficial ownership" means the sole or shared power
to vote or direct the voting of a security, or the sole or shared investment
power with respect to a security (i.e., the power to dispose, or direct the
disposition of, a security). Pursuant to the rules of the Securities and
Exchange Commission, a person is deemed to have beneficial ownership of any
security that such person has a right to acquire within 60 days pursuant to
the exercise of options or warrants.
(2) Includes 1,300 shares of common stock held by Dr. Brown's spouse.
(3) Includes 400 shares of common stock held by Dr. Kroser's spouse.
(4) Includes 400 shares of common stock held by a pension and profit sharing
plan with respect to which Dr. Pyatt acts as co-trustee.
(5) Includes 500 shares of common stock held by Dr. Shah's spouse.
(6) Owns options to purchase 15,000 shares of common stock, granted April 30,
1999, which vest in equal annual increments over a three-year period from
the date of grant.
* Less than 1%
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<PAGE>
THE RECAPITALIZATION
At a Special Meeting of Shareholders held on January 9, 1999, the holders
of the Class A voting common stock and Class B non-voting common stock approved
a plan of recapitalization and amended and restated articles of incorporation.
The plan of recapitalization changed the voting rights of the Class A shares,
created new classes of both common and preferred stock, provided for the
conversion of the outstanding Class A shares and Class B shares to shares of the
new class of common stock and simplified our capitalization by eliminating the
Class C common stock and Class D common stock, no shares of which were
outstanding.
The rights of Class A shares were modified to provide that, upon the
issuance of any shares of common stock, holders of Class A shares shall be
entitled to cast 400 votes for each share of Class A voting common stock held on
all matters presented to the shareholders for a vote. The holders of Class A
shares previously had only one vote per person regardless of the number of
shares held. The purpose of this modification was to simplify the voting rights
of the Class A shares. The recapitalization did not provide for any change in
the voting rights of the Class B shares, which are non-voting except where
required by law.
The Class A shares and Class B shares were made convertible, at the
election of the holder, into shares of a new class of common stock on or after
January 11, 1999. All shares not converted sooner will be automatically
converted on January 1, 2000. The conversion ratio is 400 shares of common stock
for each Class A share and 100 shares of common stock for each Class B share.
The conversion ratio is subject to certain adjustments in the event of a stock
split or stock dividend, distribution or other transaction affecting the common
stock prior to conversion. All Class A and Class B shares will also
automatically convert to shares of common stock on the day before the occurrence
of any of the following events: (i) a reclassification or change of the
outstanding common stock (except a stock split or a combination of shares); (ii)
a consolidation or merger of our company (except a merger in which we survive
without a reclassification or change of our common stock, except for a split or
combination of shares); or (iii) the sale or conveyance (except if the sale or
conveyance is for cash followed by the immediate distribution of such cash to
our shareholders) to another corporation of all or substantially all of our
property. Holders of Class A shares and Class B shares who elect to convert
their shares must convert all of their Class A shares or Class B shares to
common stock.
After the conversion of the Class A shares and Class B shares, our only
outstanding class of shares of stock will be common stock.
DESCRIPTION OF THE UNITS
Each unit consists of one share of common stock and one warrant to purchase
one share of common stock. The securities comprising the units are not
detachable from one another and, prior to the exercise of the warrants, are
transferable only together. The units are subject to the same restrictions on
transfer as our common stock. For a discussion of the terms of the common stock
and the warrants, see "Description of Common Stock" and "Description of the
Warrants."
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<PAGE>
DESCRIPTION OF COMMON STOCK
For a discussion of the terms of our Class A voting common stock and Class
B non-voting common stock, see "The Recapitalization." As of May 21, 1999 there
were 4,087 shares of Class A voting common stock outstanding, owned of record by
3,968 shareholders, and 1,074 shares of Class B non-voting common stock
outstanding, owned of record by 356 shareholders.
No later than January 1, 2000, and assuming no event occurs which would
have the effect of changing the conversion ratio for the Class A shares or Class
B shares, we will issue 1,634,800 shares of common stock to holders of Class A
shares in exchange for their Class A shares and 107,400 shares of common stock
to holders of Class B shares in exchange for their Class B shares. In addition,
we are offering up to 2,000,000 shares of common stock in this offering. We also
expect to issue shares of common stock to the extent that the warrants are
exercised. We expect to continue to issue options for the purchase of shares of
common stock to our employees under the terms of the stock option plan and have
101,700 shares of common stock reserved for this purpose. We also expect to
issue non-qualified options to our directors and may also issue these options to
consultants or others. All outstanding shares of common stock are fully paid and
non-assessable.
COMMON STOCK
We are authorized to issue 20,000,000 shares of common stock, par value
$.01 per share. All shares of common stock have the same rights, privileges and
preferences, including voting, dividend and liquidation rights. Holders of
shares of common stock are entitled to one vote per share, but only if the
holder meets the shareholder eligibility requirements (described below) under
our Amended and Restated Articles of Incorporation. Holders of common stock have
no preemptive rights. Except as otherwise provided by law, the holders of common
stock and the holders of Class A shares (until converted) vote as a class. The
holders of common stock have non-cumulative voting rights, which means that the
holders of more than 50% of the shares of common stock voting for the election
of directors can elect all of the directors. Currently, no persons own more than
0.2% of the issued and outstanding common stock (after taking into account the
conversion of all the Class A and Class B shares).
Holders of common stock are entitled to such dividends as may be declared
by the Board of Directors. In the event of any liquidation, dissolution or
winding up of our company, whether voluntary or involuntary, holders of the
common stock are entitled, after payment or provision for payment of our debts
or other liabilities, and subject to the prior rights of holders of any shares
of preferred stock which may then be outstanding, to share ratably in our
remaining net assets.
The Board of Directors is divided into three classes serving staggered
three-year terms.
The transfer agent and registrar for the common stock is StockTrans, Inc.
SHAREHOLDER ELIGIBILITY REQUIREMENTS; STOCK TRANSFER RESTRICTIONS
Shares of common stock may not be transferred until January 1, 2000 except
in limited circumstances arising by operation of law, such as a shareholder's
death, bankruptcy or insolvency. On and after January 1, 2000, holders of common
stock will be permitted to transfer their shares of common stock only to persons
who meet the shareholder eligibility requirements discussed below and to no
other persons, except for gifts or in limited circumstances arising by operation
of law.
44
<PAGE>
Our Amended and Restated Articles of Incorporation restrict share ownership
to:
o a "health professional" licensed in Pennsylvania or elsewhere;
o a retired, but formerly licensed, "health professional";
o a professional corporation (or other legally constituted professional
practice group) of "health professionals";
o an individual retirement account or other retirement plan established by
a person eligible to be a shareholder or in which such person is a
participant;
o an employee or former employee of our company; or
o a person or entity registered as a broker or dealer under Section 15 of
the Securities Exchange Act of 1934 who or which is engaged in making a
market in the common stock.
The term "health professional" means and includes physicians, podiatrists,
dentists, oral surgeons, optometrists, pharmacists, chiropractors, nurses, nurse
practitioners, physical or occupational therapists, physicians' assistants and
other similar licensed professional health care providers. Any person not
meeting the eligibility requirements set forth above may not purchase shares of
common stock in the offering. Further, if a proposed transferee of shares of
common stock does not fall within the definition of an eligible shareholder
under our amended and restated articles of incorporation, we will not permit the
transfer to be effected on our books. Consequently, the transferee will have no
right to vote the shares of common stock and will not be able to receive
dividends declared on the shares of common stock directly from us.
RESTRICTIONS ON OUR SALE
Our bylaws require the affirmative vote of 90% of the votes cast by all
shareholders entitled to vote in order to approve an acquisition of all or
substantially all of our business and assets by a third party through a merger,
sale or other disposition transaction. This is a much more stringent requirement
than is imposed by Pennsylvania law (the simple majority requirement at a duly
convened meeting at which a quorum is present). This provision of the bylaws,
which can only be amended by a similar vote of shareholders, is intended to and
can be expected to have the effect of limiting our ability to enter into any
sale of assets, merger or other combination with any other entity.
PREFERRED STOCK
We are authorized to issue 2,000,000 shares of preferred stock with a par
value of $.01 per share. The preferred stock may be issued in one or more
classes and in one or more series within a class. The dividend, conversion,
voting, redemption and liquidation rights and all other rights, preferences,
qualifications and restrictions pertaining to each class or series of preferred
stock will be determined by the Board of Directors by resolution at the time of
issuance of the shares of any class or series. We have no present plans to issue
any shares of our preferred stock.
45
<PAGE>
DESCRIPTION OF THE WARRANTS
The following is a summary of certain provisions of the warrants that
comprise part of the units. This summary does not purport to be complete and is
qualified in all respects by reference to the actual text of the warrants. In
the event that our existing shareholders, our employees and certain persons who
contributed towards the costs of our initial feasibility study were to subscribe
to the entire offering of units, the maximum number of additional shares of
common stock that we could issue upon exercise of all of the warrants would be
250,000 (subject to adjustment upon the occurrence of certain anti-dilution
events). A copy of the form of warrant has been filed as an exhibit to the
Registration Statement of which this prospectus is a part. See "Where You May
Find More Information."
EXERCISE PRICE AND TERMS
Each warrant entitles the registered holder thereof to purchase one share
of common stock at a price of $20 per share, subject to adjustment in accordance
with the provisions referred to below, at any time between January 1, 2002 and
December 31, 2002, after which time the warrants will become wholly void and
unexercisable. The holder of any warrant may exercise the warrant by
surrendering the certificate representing the warrant to us, with the
subscription form thereon properly completed and executed, together with the
payment of the exercise price. The warrants are exercisable only in full, and
not in part. No fractional shares of common stock will be issued upon exercise
of the warrants.
During the period that the warrants are exercisable, we will in good faith
use our best efforts to make all necessary filings under the Securities Act, and
to take appropriate action under federal law and the securities laws of those
states where the units were initially offered, to permit the issuance of the
shares of common stock issuable upon exercise of the warrants. However, there
can be no assurance that we will be able to take such action, and the failure to
do so may cause the exercise of the warrants or the resale or other disposition
of the shares of common stock issued upon such exercise to become unlawful. In
addition, in the event a purchaser of units in this offering relocates to a
state in which the units were not initially offered, or in the event that a
purchaser of warrants in the open market resides in a state in which the units
were not initially offered, the exercise of the warrants or the resale or other
disposition of the shares of common stock issued upon such exercise by such
holders may be unlawful.
REDEMPTION
The warrants are not subject to redemption.
ADJUSTMENTS
The exercise price and the number of shares of common stock issuable upon
the exercise of the warrants are subject to adjustment upon the occurrence of
certain events. These events include stock dividends, stock splits,
consolidation or merger of our company with or into another entity, our company
engaging in any other corporate reorganization where we are the surviving
entity, or any distribution of our assets to our shareholders in partial
liquidation. The adjustment would be intended to enable warrant holders to
acquire the kind and number of shares of stock or other securities or property
receivable in such event by a holder of the number of shares of common stock
that could be purchased upon the exercise of the warrant. The Board of Directors
may accelerate the exercisability of the warrants upon the occurrence of any of
the foregoing events.
In the event that at any time prior to January 1, 2002 our company
consolidates or merges with another entity or engages in any other corporate
reorganization where we are not the surviving entity, or sells all or
substantially all of its assets or otherwise completely liquidates, we will give
each holder of warrants written notice of the event, whereupon, unless otherwise
provided in the plan with respect to any of the foregoing events, the warrants
will immediately become exercisable for a period of 30 days from the date of our
notice. If not exercised within this 30 day period, the warrants will terminate.
46
<PAGE>
TRANSFER, EXCHANGE, EXERCISE
The warrants are not detachable from the units. Prior to their exercise,
the warrants are transferable only together with the shares of common stock
included in the units. Once exercised, the shares of common stock issued upon
exercise of the warrants are subject to certain restrictions on transfer. See
"Description of Common Stock -- Shareholder Eligibility Requirements; Stock
Transfer Restrictions."
MODIFICATION OF WARRANTS
No modifications can be made to the warrants without our consent and the
consent of holders of 66 2/3% of the warrants then outstanding.
DIVIDEND POLICY
We have not paid any dividends to date and do not expect to do so for the
foreseeable future. The Board of Directors has the authority to determine when a
dividend should be paid on shares of common stock and how much the dividend
should be. In making this decision the Board will consider our earnings, capital
needs and financial condition. It will also take account any restrictions on our
ability to pay dividends contained in any loan agreement, indenture, mortgage or
other financing document binding on us as well as capital requirements or other
regulatory provisions imposed by statute or the regulations or procedures of the
Department of Insurance. Presently, the Board of Directors intends to retain all
earnings, if any, and use them to meet our operating and capital needs.
47
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
If a market for the common stock develops, the market price of the common
stock could be adversely affected by the sale of substantial amounts of common
stock by the current holders following this offering.
Upon completion of this offering and assuming all of the units and shares
of common stock being offered are sold and upon conversion of all of the
outstanding shares of Class A voting common stock and Class B non-voting common
stock into shares of common stock (but not the exercise of the warrants being
offered in this offering or any options granted to our officers or directors,
none of which options are presently exercisable), we will have 3,742,200 shares
of common stock outstanding. Subject to the restrictions on transfer discussed
under "Description of Common Stock -- Shareholder Eligibility Requirements;
Stock Transfer Restrictions" and the development of a market, if any, for the
shares of common stock, all of these shares of common stock will be tradable
without further registration under the Securities Act, except that any shares of
common stock purchased by our "affiliates," as that term is defined under the
Securities Act, may generally only be sold in compliance with the limitations of
Rule 144 under the Securities Act, described below.
The shares of common stock purchased by affiliates are deemed "restricted
securities" under Rule 144. Under Rule 144, a person (or persons whose sales of
shares of common stock must be aggregated) who has beneficially owned restricted
securities for at least one year, including a person who may be deemed our
affiliate, is entitled to sell within any three-month period a number of shares
of common stock that does not exceed the greater of 1% of the then-outstanding
shares of common stock (approximately 37,422 shares of common stock after giving
effect to the offering and the conversion of the outstanding shares of Class A
voting common stock and Class B non-voting common stock) or the average weekly
reported trading volume of the common stock during the four calendar weeks
preceding such sale. Effectively, this means that all shares of common
outstanding prior to the offering may be sold freely. Sales under Rule 144 of
the Securities Act are subject to certain restrictions relating to manner of
sale, notice and the availability of current public information about us.
However, under Rule 144(k) of the Securities Act, a person who has not been an
affiliate of ours at any time within the 90 days preceding a sale, and who has
beneficially owned shares of common stock for at least two years, would be
entitled to sell such shares of common stock immediately following the offering
without regard to the volume limitations, manner of sale provisions or notice or
other requirements of Rule 144 of the Securities Act, but subject to the
shareholder eligibility requirements.
Shares of common stock issued upon exercise of the warrants are also
subject to the same shareholder eligibility requirements. We intend to maintain
a current registration statement covering such shares of common stock during the
period that the warrants are exercisable and thereby allow a warrant holder who
is not an affiliate of ours to freely trade the shares of common stock upon
exercise of the warrants, subject only to the restrictions on share ownership
contained in our articles of incorporation and bylaws. If, for any reason, we
fail to maintain a currently effective registration statement with respect to
the shares of common stock issuable upon the exercise of the warrants, then
holders of shares of common stock purchased upon exercise of a warrant may
generally only sell them in compliance with Rule 144, as discussed above.
48
<PAGE>
THE OFFERING; HOW TO SUBSCRIBE
HOPPER SOLIDAY
We have engaged Hopper Soliday, a division of Tucker Anthony Incorporated
("Hopper Soliday"), as our financial advisor in connection with this offering
and will pay Hopper Soliday certain fees. See "Plan of Distribution." Hopper
Soliday has agreed to exercise its best efforts to assist us to solicit orders
for units and shares of common stock in this offering. However, Hopper Soliday
is not obligated to, and will not, take or purchase any units or shares of
common stock in this offering. We have agreed to indemnify Hopper Soliday and
its officers, directors and other affiliates for reasonable costs and expenses
(including legal fees) incurred in connection with certain claims or liabilities
that may arise in connection with this offering, regardless of whether this
offering is consummated.
The units and shares of common stock will be offered principally through
seminars we conduct, by the distribution of this document and through activities
conducted at a Stock Information Center maintained at Hopper Soliday. See "Plan
of Distribution." The Stock Information Center is expected to operate during its
normal business hours throughout this offering. A registered representative
employed by Hopper Soliday will be working at, and supervising the operation of,
the Stock Information Center. Hopper Soliday will assist us in responding to
questions regarding this offering and processing order forms. Our personnel will
be present in the Stock Information Center to assist Hopper Soliday with
clerical matters and to answer questions related solely to our business.
USE OF ORDER FORM
Based on your eligibility, you may order units and/or shares of common
stock by executing and delivering to us, by mail or in person, the order form we
have provided to you. You must deliver the order form to us on or prior to 12:00
p.m. (noon), Eastern Time, on or before September 10, 1999, if ordering units,
or November 13, 1999 if ordering shares of common stock, unless we extend the
offering. The order form must be accompanied by full payment of the purchase
price for all units and/or shares of common stock for which you are subscribing.
You should retain a copy of the completed order form for your records. If you
have not received an order form, contact the Stock Information Center at Hopper
Soliday, at ___________________ , (800) _________.
We may, but will not be required to, waive any irregularity on any order
form or require the submission of a revised order form if it has not been filled
out or signed correctly. If you fail to include with your order form the full
payment for the units and/or shares of common stock for which you wish to
subscribe, we may notify you to submit full payment by such date as we may
specify. The waiver of any irregularity in no way obligates us to waive any
other irregularity. Waivers will be considered on a case-by-case basis.
PAYMENT FOR UNITS AND/OR SHARES OF COMMON STOCK
For subscriptions to be valid, you must submit payment for all units and/or
shares of common stock which you are subscribing for, computed on the basis of
the offering price, with your order form properly completed on or prior to the
expiration date of the offering. You may make payment (i) in cash delivered in
person to us, (ii) by check or money order drawn to the order of Pennsylvania
Physician Healthcare Plan, Inc. or (iii) by wire transfer of funds to our
account at ___________, account number __________, ABA number _______________.
Certain persons in late 1995 and early 1996 contributed a minimum of $500
each toward the costs of our initial feasibility study prior to the organization
of our company. They received no stock, options or anything else of value in
return for their contributions. We have identified those persons and have
decided to offer each a credit towards the purchase of units in an amount equal
49
<PAGE>
to their respective contributions. At the time, 3,604 persons contributed an
aggregate of $311,675 for that purpose.
SUBSCRIPTIONS ARE IRREVOCABLE
Following acceptance by us, subscriptions are binding on subscribers and
may not be revoked by subscribers except with our consent. In addition, we
reserve the right to cancel accepted subscriptions at any time and for any
reason, or for no reason, until the proceeds of this offering are released from
escrow, and we reserve the right to reject, in whole or in part and in our sole
discretion, any subscription. We may, in our sole discretion, allocate units or
shares of common stock among subscribers in the event of an oversubscription for
the units. In determining which subscriptions to accept, in whole or in part, we
may, but are not obligated to, take into account the order in which
subscriptions are received.
In the event that we reject, or accept only in part, any subscription, we
will promptly refund, without interest or deductions of any kind, the amount
remitted that corresponds to $20 multiplied by the number of units or shares of
common stock as to which the subscription was not accepted. If we accept a
subscription but in our discretion subsequently elect to cancel all or part of
such subscription, we will promptly refund the amount remitted that corresponds
to $20 multiplied by the number of units or shares of common stock as to which
the subscription was canceled, together with any interest earned thereon.
ESCROW ACCOUNT
Subscription proceeds for units and shares of common stock subscribed for
will be deposited promptly in an escrow account with _________________________,
as escrow agent (the "Escrow Agent"), under the terms of an escrow agreement
(the "Escrow Agreement"). These proceeds will remain in the escrow account from
the date they are received until the next periodic closing under this offering,
which we will schedule from time to time at our discretion. Neither we nor any
of our officers or directors is affiliated with the Escrow Agent.
The Escrow Agent has not investigated the desirability or advisability of
an investment in the units or shares of common stock by prospective investors
and has not approved, endorsed or passed upon the merits of an investment in the
units or shares of common stock. Subscription funds held in escrow will, at our
discretion, be invested by the Escrow Agent only in bank accounts, including
savings accounts and bank money market accounts, short-term certificates of
deposit issued by a bank or short-term securities issued or guaranteed by the
United States Government. If we terminate the offering after a subscription is
accepted, we will return the funds from that subscription to the subscriber with
interest.
50
<PAGE>
PLAN OF DISTRIBUTION
We are offering the units and shares of common stock on a "best-efforts"
basis. The minimum investment per purchaser is 125 units or 125 shares of common
stock (or $2,500). The maximum investment per purchaser is an aggregate of 5,000
units and/or shares of common stock (or $100,000). We intend to offer the units
for sale to holders of our Class A voting common stock and Class B non-voting
common stock, our employees and certain persons who contributed towards the
costs of our initial feasibility study. Those persons who contributed towards
the costs of our initial feasibility study will receive a credit towards the
purchase of units in an amount equal to the amount of their respective
contributions.
We intend to offer the shares of common stock for sale only to those
persons eligible to be shareholders, including persons eligible to buy units,
who include current or formerly licensed "health professionals" and our current
and former employees. The offering of units will continue until September 10,
1999. The offering of shares of common stock will continue until all 2,000,000
shares of common stock are sold, including shares of common stock constituting a
part of the units, or until we elect to terminate the offering, which we expect
to occur on or before November 13, 1999. We reserve the right to extend the
offering of shares of common stock without notice. We will not pay any sales
fees or commissions in connection with the offering. Hopper Soliday has acted as
financial advisor and sales agent to us in connection with the offering and will
receive a financial advisory fee of $35,000 plus 3% of the gross proceeds of the
offering, subject to a minimum fee of $150,000 for its services. Hopper Soliday
will also be entitled to be reimbursed for its expenses in connection with the
offering up to $75,000, including the fees of its counsel.
We estimate that our expenses of the offering, including printing,
accounting, legal fees and other expenses (but not including the fees and
expenses of Hopper Soliday) will be approximately $547,120.
RESTRICTION ON SALES ACTIVITIES
The units and shares of common stock will be offered principally through
seminars we conduct, by the distribution of this prospectus and through
activities conducted at the Stock Information Center. In addition, materials for
this offering have also been distributed to certain eligible purchasers by mail.
Additional copies are available at our Stock Information Center.
The Stock Information Center is expected to operate during normal business
hours throughout this offering. Our directors and executive officers may
participate in the solicitation of offers to purchase units and shares of common
stock in jurisdictions where such participation is not prohibited. Our directors
and executive officers may be available to answer questions about the offering.
Responses to questions about us will be limited to the information contained in
this document. Directors and executive officers will not be authorized to render
investment advice.
Questions of prospective purchasers will be directed to our executive
officers. We will rely on Rule 3a4-1 promulgated under the Securities Exchange
Act of 1934, and sales of units and shares of common stock will be conducted in
accordance with Rule 3a4-1, so as to permit officers, directors, and employees
to participate in the sale of units and shares of common stock. None of our
officers, directors, or employees will be compensated in connection with his or
her solicitations or other participation in this offering by the payment of
commissions or other remuneration based either directly or indirectly on
transactions in the units and shares of common stock.
All subscribers for the units and shares of common stock being offered will
be instructed to send payment directly to us. The funds will be held in a
segregated escrow account. See "The Offering; How to Subscribe -- Escrow
Account."
Prior to the offering there has been no public market for the units or the
shares of common stock. The offering price of the units and the shares of common
stock to the public has been determined by our Board of Directors in
consultation with our financial advisor and sales agent, Hopper Soliday. Among
the factors considered in determining such public offering price, in
51
<PAGE>
addition to prevailing market conditions, were our operations and performance,
estimates of our business potential and earning prospects, an assessment of our
assets and management and the consideration of the above factors in relation to
market valuation of companies in related businesses.
We are offering the units of shares of common stock in the states of
Delaware, Florida, Maryland, New Jersey, Ohio and Pennsylvania.
We anticipate that trading in the units and the shares of common stock will
be reported in the National Quotation Bureau "pink sheets."
There is no established active public trading market for the units or
shares of common stock.
Making a market in securities involves maintaining bid and ask quotations
and being able, as principal, to effect transactions in reasonable quantities at
those quoted prices, subject to various securities laws and other regulatory
requirements. The development of a public trading market depends, however, upon
the existence of willing buyers and sellers, the presence of which is not within
our control or the control of any market maker. Market makers trading securities
in trades that are reported only in the "pink sheets" are not required to
maintain a continuous two-sided market, are required to honor firm quotations
for only a limited number of shares, and are free to withdraw firm quotations at
any time. Even with a market maker, factors such as the limited size of this
offering and our limited number of current shareholders, our shareholder
eligibility requirements, our lack of earnings history and the absence of a
reasonable expectation of dividends within the near future means that there can
be no assurance of the development in the foreseeable future of an active and
liquid market for the units or the common stock. Even if a market develops,
there can be no assurance that a market will continue, or that holders will be
able to sell their units or shares of common stock at or above the offering
price or at all. If a market for the units or shares of common stock does not
develop, any investment in these securities will be highly illiquid, and
purchasers in this offering may not be able to liquidate their investments in
the event of an emergency or for any other reason. Purchasers of units and
shares of common stock in this offering should carefully consider the
potentially illiquid and long-term nature of their investment.
52
<PAGE>
LEGAL MATTERS
The validity of the common stock offered hereby will be passed upon for us
by Pelino & Lentz, P.C., Philadelphia, Pennsylvania.
EXPERTS
The financial statements included in this prospectus have been audited by
Deloitte & Touche LLP, independent auditors, as stated in their report appearing
herein, and have been so included in reliance upon the report of such firm given
upon their authority as experts in accounting and auditing.
WHERE YOU MAY FIND MORE INFORMATION
We have filed with the United States Securities and Exchange Commission a
Registration Statement on Form S-1 (together with all amendments, exhibits,
schedules and supplements thereto, the "Registration Statement"). This
prospectus, which forms a part of the Registration Statement, does not contain
all of the information set forth in the Registration Statement, certain parts of
which have been omitted as permitted by Commission rules and regulations. For
further information with respect to our company and the units and shares of
common stock offered hereby, you should refer to the Registration Statement.
Statements contained in this prospectus as to the contents of any agreement or
other document are not necessarily complete, although all material information
is provided regarding the agreements or documents referred to, and in each
instance you should refer to the exhibits attached to or incorporated by
reference in the Registration Statement for copies of the actual agreement or
document.
You may review a copy of the Registration Statement without charge at the
principal office of the Commission in Washington, DC at 450 Fifth Street, N.W.,
Washington, DC 20549, and at the Commission's regional offices at 7 World Trade
Center, Suite 1300, New York, New York 10048, and Citicorp Center, 500 West
Madison Street, Suite 1400, Chicago, Illinois 60661. You may also obtain a copy
of the Registration Statement at the Commission's prescribed rates from its
Public Reference Room at 450 Fifth Street, N.W., Washington, DC 20549. You may
obtain information on the operation of the Commission's Public Reference Room by
calling the Commission at 1-800-SEC-0330. In addition, you may review the
Registration Statement and certain other filings made with the Commission
through its Electronic Data Gathering, Analysis, and Retrieval system through
the Commission's Web site located at http://www.sec.gov.
We are subject to the informational requirements of the Securities Exchange
Act of 1934. We fulfill our obligations with respect to such requirements by
filing periodic reports, proxy statements and other information with the
Commission. We will furnish our shareholders with annual reports containing
financial statements certified by an independent public accounting firm.
53
<PAGE>
INDEX TO FINANCIAL STATEMENTS
FINANCIAL STATEMENTS OF
PENNSYLVANIA PHYSICIAN HEALTHCARE PLAN, INC.
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Independent Auditors' Report................................ F-2
Consolidated Balance Sheets as of December 31, 1998 and
1997...................................................... F-3
Consolidated Statements of Income and Comprehensive Income
for the Years Ended December 31, 1998, 1997 and 1996...... F-4
Consolidated Statements of Changes in Stockholders' Equity
from January 1, 1996 to December 31, 1998................. F-5
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1998, 1997 and 1996.......................... F-6
Notes to Consolidated Financial Statements for the Years
Ended December 31, 1998, 1997 and 1996.................... F-7
Consolidated Balance Sheets as of March 31, 1999 and 1998... F-14
Consolidated Statements of Income and Comprehensive Income
for the Three Months Ended March 31, 1999 and 1998........ F-15
Consolidated Statements of Changes in Stockholders' Equity
(Deficit) from January 1, 1999 to March 31, 1999.......... F-16
Consolidated Statements of Cash Flows for the Three Months
Ended March 31, 1999 and 1998............................. F-17
Notes to Consolidated Financial Statements for the Three
Month Periods Ended March 31, 1999 and 1998............... F-18
</TABLE>
F-1
<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, 1998 and 1997, and the related consolidated statements of income
and comprehensive income, changes in stockholders' equity, and cash flows for
the years ended December 31, 1998, 1997 and 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 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, 1998
and 1997, and the results of its operations and its cash flows for the years
ended December 31, 1998, 1997 and 1996, in conformity with generally accepted
accounting principles.
Deloitte & Touche LLP
/s/ Deloitte & Touche LLP
- ---------------------------------------------
Philadelphia, Pennsylvania
March 17, 1999
F-2
<PAGE>
PENNSYLVANIA PHYSICIAN HEALTHCARE PLAN, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1998 1997
------------ ------------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents.............................. $ 2,608,269 $14,250,640
Short-term investment securities....................... 400,750 --
Accrued interest income................................ 145,654 65,611
Premiums receivable, net............................... 171,766 25,393
Income taxes receivable................................ 28,853 28,853
Other assets........................................... 245,056 71,585
----------- -----------
Total current assets................................ 3,600,348 14,442,082
----------- -----------
Long-term investment securities.......................... 6,860,624 --
Equipment (net of accumulated depreciation of $684,830
and $272,859, respectively)............................ 571,911 789,589
----------- -----------
Total assets........................................ 11,032,883 15,231,671
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Medical claims liabilities............................. 1,945,722 63,458
Accounts payable....................................... 152,558 113,128
Accrued expenses....................................... 44,350 43,500
Other liabilities...................................... 29,075 65,000
----------- -----------
Total current liabilities........................... 2,171,705 285,086
----------- -----------
Stockholders' Equity:
Class A common voting stock, $0.01 par value, 40,000
shares authorized; 4,087 shares issued and
outstanding............................................ 41 41
Class B common non-voting stock, $0.01 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...................................... (12,364,727) (6,274,244)
Accumulated other comprehensive income, net of taxes..... 5,076 --
----------- -----------
Total stockholders' equity.......................... 8,861,178 14,946,585
----------- -----------
Total liabilities and stockholders' equity.......... $11,032,883 $15,231,671
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
PENNSYLVANIA PHYSICIAN HEALTHCARE PLAN, INC.
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
<TABLE>
<CAPTION>
YEAR-ENDED YEAR-ENDED YEAR-ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
Revenues:
Premiums................................... $ 6,622,311 $ 183,222 --
Consulting................................. 65,000 -- --
Investment income, net..................... 648,352 836,450 $ 962,258
----------- ----------- -----------
Total Revenue........................... 7,335,663 1,019,672 962,258
----------- ----------- -----------
Expenses:
Health care services....................... 7,588,762 172,940 --
Salary and benefits........................ 3,003,529 2,088,976 534,967
Operating expenses......................... 1,953,429 1,124,602 619,503
Professional services...................... 430,447 394,125 2,385,746
Other taxes................................ 38,008 25,256 (29,630)
Depreciation............................... 411,971 272,859 --
----------- ----------- -----------
Total expenses.......................... 13,426,146 4,078,758 3,510,586
----------- ----------- -----------
Net loss................................ $(6,090,483) $(3,059,086) $(2,548,328)
=========== =========== ===========
Other comprehensive income,
net of income taxes:
Unrealized gain on investments............. 5,076 -- --
Comprehensive loss........................... (6,085,407) (3,059,086) (2,548,328)
Net loss per common share.................... $ (1,180.10) $ (592.73) $ (501.24)
Weighted average common shares............... 5,161 5,161 5,084
=========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
PENNSYLVANIA PHYSICIAN HEALTHCARE PLAN, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK COMMON STOCK ACCUMULATED
SHARES PAR VALUE ADDITIONAL OTHER
----------------- ----------------- PAID IN ACCUMULATED COMPREHENSIVE
CLASS A CLASS B CLASS A CLASS B CAPITAL DEFICIT INCOME TOTAL
------- ------- ------- ------- ------------ ------------ ------------- -----------
<S> <C> <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 2,370,00
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)
Comprehensive loss
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
====== ====== === === ============ ============ ====== ===========
Balance, January 1, 1997..... 4,087 1,074 $41 $11 $ 21,220,777 $ (3,215,158) $ -- $18,005,671
Comprehensive loss...........
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
====== ====== === === ============ ============ ====== ===========
Comprehensive loss...........
Net loss................... $ (6,090,483) $(6,090,483)
Other comprehensive
income
Unrealized gain on
investments,
net of taxes........... $5,076 $ 5,076
------ ------ --- --- ------------ ------------ ------ -----------
Comprehensive Loss........... (6,090,483) 5,076 (6,085,407)
====== ====== === === ============ ============ ====== ===========
Balance, December 31, 1998... 4,087 1,074 $41 $11 $ 21,220,777 $(12,364,727) $5,076 $ 8,861,178
====== ====== === === ============ ============ ====== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
PENNSYLVANIA PHYSICIAN HEALTHCARE PLAN, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR-ENDED YEAR-ENDED YEAR-ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss................................ $ (6,090,483) $ (3,059,086) $ (2,548,328)
Adjustments to reconcile net loss to net
cash provided by (used in) operating
activities:
Depreciation, amortization and
accretion......................... 419,966 272,859 --
Net loss on sale of investment
securities........................ 670 -- --
Change in assets and liabilities:
Due from related entity........... -- -- 18,531
Accrued interest income........... (80,043) 12,030 (1,070)
Prepaid expenses.................. -- -- (15,669)
Premiums receivable............... (146,373) (25,393) --
Income tax receivable............. -- 137,147 (166,000)
Other assets...................... (173,471) 18,231 (44,000)
Medical claims liabilities........ 1,882,264 63,458 --
Accounts payable.................. 39,430 (221,978) 200,704
Deferred income tax benefit....... -- -- 28,571
Accrued expenses.................. 850 43,500 (28,571)
Other liabilities................. (35,925) 42,942 (22,908)
------------ ------------ ------------
Net cash used in operating activities..... (4,183,115) (2,716,290) (2,578,740)
------------ ------------ ------------
Cash flows from investing activities:
Purchases of investment securities...... (9,564,463) -- --
Proceeds from maturities of investment
securities........................... 1,350,000 -- --
Proceeds from sale of investment
securities........................... 949,500 -- --
Purchases of equipment.................. (194,293) (414,677) (647,771)
------------ ------------ ------------
Net cash (used) provided in investing
activities.............................. (7,459,256) (414,677) (647,771)
------------ ------------ ------------
Cash flows from financing activities:
Proceeds from sale of common stock...... -- -- 2,526,000
Deferred offering cost.................. -- -- (60,830)
------------ ------------ ------------
Net cash provided from financing
activities.............................. -- -- 2,465,170
------------ ------------ ------------
Net decrease in cash and cash
equivalents............................. (11,642,371) (3,130,967) (761,341)
Cash and cash equivalents,
beginning of period..................... 14,250,640 17,381,607 18,142,948
------------ ------------ ------------
Cash and cash equivalents, end of
period.................................. $ 2,608,269 $ 14,250,640 $ 17,381,607
============ ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
PENNSYLVANIA PHYSICIAN HEALTHCARE PLAN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1998, 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 received a license to operate a health maintenance
organization (HMO) on March 22, 1999.
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.
Investments
The investment securities portfolio is classified as available for sale,
and carried at fair value. Such fair value is based upon values obtained from
independent third parties or quoted market prices of comparable instruments.
Temporary changes in the fair value of investments are reflected as a component
of other comprehensive income.
Premiums and discounts are amortized and accreted over the term of the
related securities using a method that approximates the interest method,
adjusted for prepayments. Realized gains and losses on the sale of investment
securities (determined by the specific identification method) are shown
separately in the consolidated statement of operations. A decline in the fair
value of any investment below cost that is deemed other than temporary results
in a reduction of the carrying amount to fair value through a charge to income.
Dividends and interest income are recognized when earned.
Equipment
Equipment, consisting of furniture and office equipment, data processing
equipment, leasehold improvements and capitalized software, is carried at cost.
Depreciation is calculated on the accelerated cost recovery method for both
financial reporting and income tax purposes over the estimated useful lives of
the assets.
F-7
<PAGE>
PENNSYLVANIA PHYSICIAN HEALTHCARE PLAN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 -- (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
When changes in business circumstances warrant, the Company reviews 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.
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
Premiums are 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.
F-8
<PAGE>
PENNSYLVANIA PHYSICIAN HEALTHCARE PLAN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 -- (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
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 issued if all dilutive
potential common shares 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 of earnings per share in the accompanying financial
statements.
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 Standards
In June 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive
Income" (FASB 130). This statement, which establishes standards for reporting
and disclosure of comprehensive income, is effective for annual periods
beginning after December 15, 1997. The adoption of FASB No. 130 has not had any
material impact on the Company's financial position or results of operations.
In June 1997, the FASB issued Statement of Financial Accounting Standards
No. 131, "Disclosures about Segments of an Enterprise and Related Information,"
which became effective in 1998. This statement establishes standards for
reporting selected information about operating segments in the Company's interim
and annual financial statements. Adoption of this statement did not impact the
presentation of the Company's financial information.
In June 1998, the FASB issued Statement of Financial Accounting Standards
No. 133, "Accounting for Derivative Instruments and Hedging Activities" (FASB
133), which is effective for the Company's fiscal year ending December 31, 2000.
This statement establishes accounting and reporting standards for derivative
instruments, including those embedded in other contracts, and for hedging
activities. It requires recognizing derivatives as assets or liabilities at fair
value on the balance sheet. Management is currently evaluating the effects of
FASB No. 133 on the Company's financial condition and results of operations.
F-9
<PAGE>
PENNSYLVANIA PHYSICIAN HEALTHCARE PLAN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 -- (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (Continued)
Year 2000
Costs incurred by the Company to address Year 2000 issues, to include costs
for assessment, renovation, testing, verification, and implementation, are
charged to expense as incurred.
3. RESTRICTIONS ON CASH
Approximately $9,691,000 of offering proceeds included in the Company's
cash and cash equivalents and investments as of December 31, 1998 could only be
used after an HMO license was obtained; otherwise, such funds, less claims of
creditors, were required to be distributed to the shareholders, unless holders
of a majority of the voting shares elected otherwise.
In February 1999 the Company, in accordance with the provisions of the
prospectus, requested and received shareholder approval for a reduction in the
restriction of offering proceeds from $9,691,000 to $5,000,000. The Company
received a license to operate an HMO on March 22, 1999.
4. INVESTMENT SECURITIES
The amortized cost, gross unrealized holding gains, gross unrealized
holding losses and estimated fair value of investments in debt securities by
security type at December 31, 1998 are as follows:
<TABLE>
<CAPTION>
AMORTIZED COST UNREALIZED GAIN UNREALIZED LOSS FAIR VALUE
-------------- --------------- --------------- ----------
<S> <C> <C> <C> <C>
U.S. government agency debt
securities....................... $7,256,298 $6,858 $1,782 $7,261,374
---------- ------ ------ ----------
</TABLE>
The amortized cost and estimated fair value of short-term and long-term
investments by contractual maturity at December 31, 1998 are as follows:
<TABLE>
<CAPTION>
AMORTIZED COST FAIR VALUE
-------------- ----------
<S> <C> <C>
Maturities:
Within 1 year.................................. $ 400,510 $ 400,750
1 to 3 years 6,855,788 6,860,624
---------- ----------
Total short-term and long-term investment
securities..................................... $7,256,298 $7,261,374
---------- ----------
</TABLE>
The entire investment securities portfolio is classified as
available-for-sale.
5. EQUIPMENT
Equipment owned at December 31, 1998, 1997 and 1996 consists of the
following:
<TABLE>
<CAPTION>
USEFUL LIVES 1998 1997 1996
------------ ----------- ----------- --------
<S> <C> <C> <C> <C>
Capitalized software.................. 3 years $ 574,793 $ 551,893 $460,004
Data processing equipment............. 5 years 272,077 216,947 92,338
Furniture and office equipment........ 5 - 7 years 395,182 280,235 95,429
Leasehold improvements................ 5 years 14,689 13,373 --
----------- ----------- --------
Total equipment.................. 1,256,741 1,062,448 647,771
Accumulated depreciation.............. (684,830) (272,859) --
----------- ----------- --------
Equipment (net)....................... $ 571,911 $ 789,589 $647,771
----------- ----------- --------
</TABLE>
F-10
<PAGE>
PENNSYLVANIA PHYSICIAN HEALTHCARE PLAN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 -- (CONTINUED)
5. EQUIPMENT - (Continued)
Depreciation expense was $411,971 and $272,859 for the years ended December
31, 1998 and 1997, respectively. As of December 31, 1996, equipment was not
placed into service. Therefore, no depreciation expense was recorded for the
year ended December 31, 1996.
6. MEDICAL CLAIMS LIABILITY
Activity in medical claims liability consisted of the following for the
years ended December 31, 1998 and 1997:
<TABLE>
<CAPTION>
1998 1997
---------- ----------
<S> <C> <C>
Balance at beginning of year............................. $ 63,458 $ --
Incurred related to:
Current year........................................... 7,589,230 172,941
Prior year............................................. (468) --
---------- ----------
Net incurred........................................... 7,588,762 172,941
---------- ----------
Paid related to:
Current year........................................... 5,643,508 109,483
Prior year............................................. 62,990 --
---------- ----------
Total paid............................................. 5,706,498 109,483
---------- ----------
Balance at end of year................................... $1,945,722 $ 63,458
========== ==========
</TABLE>
7. REINSURANCE
The Company has a reinsurance agreement for portions of the risk that 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, 1998
and 1997.
8. COMMITMENTS
At December 31, 1998 the Company is obligated under non-cancelable
operating leases for office space and equipment expiring at various dates
through December 2003. Rental expense for office space and equipment totaled
approximately $250,406, $171,699 and $27,092 for the years ended December 31,
1998, 1997 and 1996, respectively.
Future minimum rental payments under the terms of the operating leases at
December 31, 1998 are as follows:
<TABLE>
<S> <C>
1999............................................ $ 258,076
2000............................................ 262,083
2001............................................ 269,597
2002............................................ 271,045
2003............................................ 46,084
----------
Total $1,106,885
----------
</TABLE>
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.
F-11
<PAGE>
PENNSYLVANIA PHYSICIAN HEALTHCARE PLAN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 -- (CONTINUED)
8. COMMITMENTS - (Continued)
With respect to these officers' agreements, the total minimum commitment level
of the Company and its subsidiaries over the next two years is approximately
$340,000.
9. INCOME TAXES
The net deferred amounts reported by the Company at December 31, 1998, 1997
and 1996 are as follows:
<TABLE>
<CAPTION>
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Deferred tax assets:
Start up costs............................. $ 879,794 $ 1,148,518 1,202,846
Net operating loss carryforward............ 4,073,697 1,394,145 131,300
Other assets............................... 35,958 19,548 --
----------- ----------- -----------
Deferred tax asset........................... 4,989,449 2,562,211 1,334,146
Valuation allowance.......................... (4,989,449) (2,562,211) (1,334,146)
----------- ----------- -----------
Net deferred tax asset....................... $ -- $ -- --
----------- ----------- -----------
</TABLE>
The Company has Federal net operating losses of approximately $10,035,000
available to offset future income before taxes, which expire in the period from
2011 to 2018. Management recorded the valuation allowance to reduce the deferred
income tax benefit to its estimated realizable value in light of the Company's
lack of profitable operating history.
10. SERVICE AGREEMENT
The Company has contracted with the Pennsylvania Medical Society Liability
Insurance Company, to provide various accounting and administrative services.
11. CONCENTRATIONS OF CREDIT RISK
The Company maintains cash accounts in excess of federally insured limits.
These amounts 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.
Investments in marketable securities are managed within the guidelines
established by the Board of Directors which emphasize investment-grade fixed
income securities and limits the amount that may be invested in any one issuer.
The fair value of the Company's financial instruments is substantially
equivalent to their carrying value and, although there is some credit risk
associated with these instruments, the Company believes this risk to be minimal.
Substantially all of the Company's revenues were generated from employer
contracts entered into in the Commonwealth of Pennsylvania. Such contracts are
subject to certain regulations and requirements as determined by the
Commonwealth of Pennsylvania Insurance Department.
12. BENEFIT PLAN
In October 1997 the Company adopted a qualified 401(k) deferred salary plan
(the "Plan") covering substantially all employees who meet certain requirements
as to age and length of service and who elect to participate in the Plan. Under
the Plan, employees may defer up to 15% of their compensation. The Company makes
matching contributions equal to 50% of employee contributions up to 6% of
compensation. Employees become fully vested in the Plan after 3 years of
service. All
F-12
<PAGE>
PENNSYLVANIA PHYSICIAN HEALTHCARE PLAN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 -- (CONTINUED)
12. BENEFIT PLAN - (Continued)
costs of the Plan are funded as incurred. Employer matching
contributions were approximately $51,000 and $13,000 for the years ended
December 31, 1998 and 1997, respectively.
13. SUBSEQUENT EVENTS
At a Special Meeting of Shareholders held on January 9, 1999, the holders
of the Company's Class A voting common stock and Class B non-voting common stock
approved a Plan of Recapitalization and Amended and Restated Articles of
Incorporation of the Company. The recapitalization changed the voting rights of
the Class A shares, created new classes of both common and preferred stock,
provided for the conversion of the outstanding Class A shares and Class B shares
to shares of a new class of voting common stock and simplified the shares of the
Company by eliminating the Class C common stock and Class D common stock of the
Company (no shares of which had been outstanding).
The Class A shares and Class B shares were changed to permit the voluntary
conversion into a new class of voting common stock on or after January 11, 1999
at the election of the holder and to require conversion effective as of January
1, 2000. The conversion ratio is 400 shares of common stock for each Class A
share and 100 shares of common stock for each Class B share. The conversion
ratio is subject to adjustment in the event of a stock split, stock dividend,
distribution or other transaction affecting the common stock prior to
conversion. All Class A and Class B shares will also automatically convert to
shares of common stock on the day before the occurrence of any of the following
events:
o a reclassification or change of the outstanding common stock (except a
stock split or a combination of shares);
o a consolidation or merger of the Company (except a merger in which the
Company survives without a reclassification or change of the Company's
common stock, except for a split or combination of shares); or
o the sale or conveyance (except if the sale or conveyance is for cash
followed by the immediate distribution of such cash to the shareholders
of the Company) to another corporation of all or substantially all of the
Company's property.
Holders who elect to convert their Class A shares or Class B shares to common
stock must convert all of such shares. As of March 17, 1999, no Class A shares
or Class B shares had been converted by the holders thereof into shares of
common stock.
F-13
<PAGE>
PENNSYLVANIA PHYSICIAN HEALTHCARE PLAN, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
MARCH 31, MARCH 31,
1999 1998
----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.............................. $ 3,728,215 $13,556,875
Short-term investment securities....................... 400,000 --
Accrued interest income................................ 56,248 59,579
Premiums receivable, net............................... 283,633 15,972
Prepaid expenses....................................... -- 29,596
Income taxes receivable................................ 28,853 28,853
Other assets........................................... 323,485 49,346
----------- -----------
Total current assets................................ 4,820,434 13,740,221
----------- -----------
Long-term investment securities.......................... 4,891,379 --
Equipment (net of accumulated depreciation of $741,852
and $684,830, respectively)............................ 599,376 753,607
----------- -----------
Total assets........................................ 10,311,189 14,493,828
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Medical claims liabilities............................. 2,579,762 215,440
Accounts payable....................................... 120,349 103,455
Accrued expenses....................................... 56,162 25,113
Other liabilities...................................... 480,933 65,000
----------- -----------
Total current liabilities........................... 3,237,206 409,008
----------- -----------
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...................................... (14,135,206) (7,136,009)
Net unrealized loss on investment securities, net of
taxes.................................................. (11,640) --
----------- -----------
Total stockholders' equity............................... 7,073,983 14,084,820
----------- -----------
Total liabilities and stockholders' equity............... $10,311,189 $14,493,828
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-14
<PAGE>
PENNSYLVANIA PHYSICIAN HEALTHCARE PLAN, INC.
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
<TABLE>
<CAPTION>
THREE
THREE MONTHS MONTHS
ENDED ENDED
MARCH 31, MARCH 31,
1999 1998
------------ -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
Revenues:
Premiums................................................. $ 4,976,586 $ 928,238
Investment income, net................................... 118,680 180,688
----------- ---------
Total Revenue...................................... 5,095,266 1,108,926
----------- ---------
Expenses:
Health care services..................................... 5,196,094 713,076
Salary and benefits...................................... 981,286 687,780
Operating expenses....................................... 533,040 390,353
Professional services.................................... 87,660 77,864
Other taxes.............................................. 10,643 2,485
Depreciation............................................. 57,022 99,133
----------- ---------
Total expenses........................................ 6,865,745 1,970,691
----------- ---------
Net loss.............................................. $(1,770,479) $(861,765)
=========== =========
Other comprehensive income, net of income taxes:
Unrealized loss on investments........................... (16,716) --
Comprehensive loss......................................... (1,787,195) (861,765)
Net loss per common share.................................. $ (343.05) $ (166.98)
Weighted average common shares............................. 5,161 5,161
=========== =========
</TABLE>
See accompanying notes to consolidated financial statements.
F-15
<PAGE>
PENNSYLVANIA PHYSICIAN HEALTHCARE PLAN, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK COMMON STOCK ACCUMULATED
SHARES PAR VALUE ADDITIONAL OTHER
----------------- ----------------- PAID IN ACCUMULATED COMPREHENSIVE
CLASS A CLASS B CLASS A CLASS B CAPITAL DEFICIT INCOME TOTAL
------- ------- ------- ------- ----------- ------------ ------------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1999....... 4,087 1,074 $41 $11 $21,220,777 ($12,364,727) $ 5,076 $8,861,178
----- ----- --- --- ----------- ------------ -------- ----------
Comprehensive loss
Net loss..................... (1,770,479) (1,770,479)
Other comprehensive income
Unrealized losses on
investments................ (16,716) (16,716)
----- ----- --- --- ----------- ------------ -------- ----------
Balance, March 31, 1999........ 4,087 1,074 $41 $11 $21,220,777 $(14,135,206) $(11,640) $7,073,983
===== ===== === === =========== ============ ======== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
F-16
<PAGE>
PENNSYLVANIA PHYSICIAN HEALTHCARE PLAN, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS THREE MONTHS
ENDED ENDED
MARCH 31, MARCH 31,
1999 1998
------------ ------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
Cash flows from operating activities:
Net loss.................................................. $(1,770,479) $ (861,765)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation, amortization and accretion............... 61,457 99,133
Net loss on sale of investment securities.............. 22 --
Change in assets and liabilities:
Accrued interest income............................. 89,406 6,032
Premiums receivable................................. (111,867) 9,421
Other assets........................................ (78,429) (7,357)
Medical claims liabilities.......................... 634,040 151,982
Accounts payable.................................... (32,209) (9,673)
Accrued expenses.................................... 11,812 (18,387)
Other liabilities................................... 451,858 --
----------- -----------
Net cash used in operating activities....................... (744,389) (630,614)
----------- -----------
Cash flows from investing activities:
Purchases of investment securities........................ (2,151,194) --
Proceeds from maturities of investment securities......... 4,000,000 --
Proceeds from sale of investment securities............... 100,016 --
Purchases of equipment.................................... (84,487) (63,151)
----------- -----------
Net cash received from (used in) investing activities....... 1,864,335 (63,151)
----------- -----------
Net increase (decrease) in cash and cash equivalents........ 1,119,946 (693,765)
Cash and cash equivalents, beginning of period.............. 2,608,269 14,250,640
----------- -----------
Cash and cash equivalents, end of period.................... $ 3,728,215 $13,556,875
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-17
<PAGE>
PENNSYLVANIA PHYSICIAN HEALTHCARE PLAN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTH PERIODS ENDED MARCH 31, 1999 AND 1998
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 received a license to operate a health maintenance
organization (HMO) on March 22, 1999.
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
UNAUDITED FINANCIAL STATEMENTS
The unaudited consolidated financial statements should be read in
conjunction with the audited consolidated financial statements as of December
31, 1998 and reflect, in the opinion of management, all adjustments necessary to
fairly state the results of operations for such periods.
The results of operations for the three month periods ended March 31, 1999
and 1998 are not necessarily indicative of the results of operations expected
for the full year.
The notes to the financial statements are condensed and may not include all
information that is required to be disclosed by generally accepted accounting
principles.
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.
INVESTMENTS
The investment securities portfolio is classified as available-for-sale,
and carried at fair value. Such fair value is based upon values obtained from
independent third parties or quoted market prices of comparable instruments.
Temporary changes in the fair value of investments are reflected as a component
of other comprehensive income.
Premiums and discounts are amortized and accreted over the term of the
related securities using a method that approximates the interest method,
adjusted for prepayments. Realized gains and losses on the sale of investment
securities (determined by the specific identification method) are shown
separately in the consolidated statement of operations. A decline in the fair
F-18
<PAGE>
PENNSYLVANIA PHYSICIAN HEALTHCARE PLAN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTH PERIODS ENDED MARCH 31, 1999 AND 1998 -- (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
value of any investment below cost that is deemed other than temporary results
in a reduction of the carrying amount to fair value through a charge to income.
Dividends and interest income are recognized when earned.
EQUIPMENT
Equipment, consisting of furniture and office equipment, data processing
equipment, leasehold improvements and capitalized 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
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.
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
Premiums are 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.
F-19
<PAGE>
PENNSYLVANIA PHYSICIAN HEALTHCARE PLAN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTH PERIODS ENDED MARCH 31, 1999 AND 1998 -- (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
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 No. 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 issued if all dilutive
potential common shares 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 of earnings per share in the accompanying financial
statements.
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
Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive
Income" (FASB No. 130). This statement, which establishes standards for
reporting and disclosure of comprehensive income, is effective for annual
periods beginning after December 15, 1997. The adoption of FASB No. 130 has not
had any material impact on the Company's financial position or results of
operations.
In June 1997, the FASB issued Statement of Financial Accounting Standards
No. 131, "Disclosures about Segments of an Enterprise and Related Information,"
which became effective in 1998. This statement establishes standards for
reporting selected information about operating segments in the Company's interim
and annual financial statements. Adoption of this statement did not impact the
presentation of the Company's financial information.
In June 1998, the FASB issued Statement of Financial Accounting Standards
No. 133, "Accounting for Derivative Instruments and Hedging Activities" (FASB
No. 133), which is effective for the Company's fiscal year ending December 31,
2000. This statement establishes accounting and reporting standards for
derivative instruments, including those embedded in other contracts, and for
hedging activities. It requires recognizing derivatives as assets or liabilities
at fair value on the balance sheet. Management is currently evaluating the
effects of FASB No. 133 on the Company's financial condition and results of
operations.
F-20
<PAGE>
PENNSYLVANIA PHYSICIAN HEALTHCARE PLAN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTH PERIODS ENDED MARCH 31, 1999 AND 1998 -- (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
YEAR 2000
Costs incurred by the Company to address Year 2000 issues, to include costs
for assessment, renovation, testing, verification, and implementation, are
charged to expense as incurred.
3. RESTRICTIONS ON CASH
The Company received a license to operate an HMO on March 22, 1999, which
eliminated certain restrictions on its use of cash proceeds from its 1995-1996
stock offering.
4. REINSURANCE
The Company has a reinsurance agreement for portions of the risk that 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 three month periods ended
March 31, 1999 and 1998.
5. INCOME TAXES
The net deferred amounts reported by the Company at March 31, 1999 and
December 31, 1998 are as follows:
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1999 1998
---------- ------------
<S> <C> <C>
Deferred tax assets:
Start up costs..................................... $ 835,476 $ 879,794
Net operating loss carryforward.................... 4,842,454 4,073,697
Other assets....................................... 18,015 35,958
---------- ----------
Deferred tax asset................................... 5,695,945 4,989,449
Valuation allowance.................................. (5,695,945) (4,989,449)
---------- ----------
Net deferred tax asset............................... $ -- $ --
========== ==========
</TABLE>
The Company has Federal net operating losses of approximately $11,927,000
available to offset future income before taxes, which expire in the period from
2011 to 2019. Management recorded the valuation allowance to reduce the deferred
income tax benefit to its estimated realizable value in light of the Company's
lack of profitable operating history.
6. RECAPITALIZATION
At a Special Meeting of Shareholders held on January 9, 1999, the holders
of the Company's Class A voting common stock and Class B non-voting common stock
approved a Plan of Recapitalization and Amended and Restated Articles of
Incorporation of the Company. The recapitalization changed the voting rights of
the Class A shares, created new classes of both common and preferred stock,
provided for the conversion of the outstanding Class A shares and Class B shares
to shares of a new class of voting common stock and simplified the shares of the
Company by eliminating the Class C common stock and Class D common stock of the
Company (no shares of which had been outstanding).
F-21
<PAGE>
PENNSYLVANIA PHYSICIAN HEALTHCARE PLAN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTH PERIODS ENDED MARCH 31, 1999 AND 1998 -- (CONTINUED)
6. RECAPITALIZATION -- (CONTINUED)
The Class A shares and Class B shares were changed to permit the voluntary
conversion into a new class of voting common stock on or after January 11, 1999
at the election of the holder and to require conversion effective as of January
1, 2000. The conversion ratio is 400 shares of common stock for each Class A
share and 100 shares of common stock for each Class B share. The conversion
ratio is subject to adjustment in the event of a stock split, stock dividend,
distribution or other transaction affecting the common stock prior to
conversion. All Class A and Class B shares will also automatically convert to
shares of common stock on the day before the occurrence of any of the following
events:
o a reclassification or change of the outstanding common stock (except a
stock split or a combination of shares);
o a consolidation or merger of the Company (except a merger in which the
Company survives without a reclassification or change of the Company's
common stock, except for a split or combination of shares); or
o the sale or conveyance (except if the sale or conveyance is for cash
followed by the immediate distribution of such cash to the shareholders
of the Company) to another corporation of all or substantially all of the
Company's property.
Holders who elect to convert their Class A shares or Class B shares to
common stock must convert all of such shares. As of March 31, 1999, no Class A
shares or Class B shares had been converted by the holders thereof into shares
of common stock.
F-22
<PAGE>
================================================================================
PROSPECTIVE INVESTORS MAY RELY ONLY ON INFORMATION CONTAINED IN THIS PROSPECTUS.
NEITHER PENNSYLVANIA PHYSICIAN HEALTHCARE PLAN, INC. NOR HOPPER SOLIDAY HAS
AUTHORIZED ANYONE TO PROVIDE PROSPECTIVE INVESTORS WITH INFORMATION DIFFERENT
FROM THAT CONTAINED IN THIS PROSPECTUS. THIS PROSPECTUS IS NOT AN OFFER TO SELL,
NOR IS IT SEEKING AN OFFER TO BUY, THESE SECURITIES IN ANY JURISDICTION WHERE
THE OFFER OR SALE IS NOT PERMITTED. THE INFORMATION CONTAINED IN THIS PROSPECTUS
IS CORRECT ONLY AS OF THE DATE OF THIS PROSPECTUS, REGARDLESS OF THE TIME OF THE
DELIVERY OF THIS PROSPECTUS OR ANY SALE OF THESE SECURITIES.
PENNSYLVANIA PHYSICIAN
HEALTHCARE PLAN, INC.
250,000 UNITS
CONSISTING OF
ONE SHARE OF COMMON STOCK
AND
ONE WARRANT TO PURCHASE ONE
SHARE OF COMMON STOCK
AND
A MAXIMUM OF 2,000,000
SHARES OF COMMON STOCK
----------------
PROSPECTUS
----------------
_________, 1999
HOPPER SOLIDAY
A DIVISION OF TUCKER ANTHONY INCORPORATED
================================================================================
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the estimated expenses, other than the fee
of the financial advisor of Pennsylvania Physician Healthcare Plan, Inc.
("PPHP"), in connection with the issuance and distribution of the units and
shares of common stock being registered, all of which are being borne by PPHP:
SEC Registration Fee........................................ $ 11,120
Transfer agent and registrar's fees*........................ 21,000
Printing and engraving*..................................... 85,000
Legal fees and expenses*.................................... 310,000
Blue Sky fees and expenses*................................. 10,000
Accounting fees and expenses*............................... 85,000
Miscellaneous*.............................................. 25,000
Total..................................................... $547,120
- ------------------
* Estimated.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 1713 of Subchapter B of the Pennsylvania Business Corporation Law
of 1988, as amended (the "BCL"), provides that if the bylaws of a business
corporation so provide, no directors shall be personally liable for monetary
damages for any action or failure to act unless the director has breached or
failed to perform his or her duties under Subchapter B of Chapter 17 of the BCL
and the breach or failure to perform constitutes self-dealing, wilful misconduct
or recklessness. Such provision does not apply to the responsibility or
liability of a director with respect to any criminal statute or for the payment
of taxes. PPHP's Bylaws ("Bylaws") contain provisions which limit the liability
of directors as described in Section 1713.
Subchapter D (Sections 1741 through 1750) of Chapter 17 of the BCL contains
provisions for mandatory and discretionary indemnification of a corporation's
directors, officers, employees and agents (each a "Representative," and
collectively, "Representatives"), and related matters.
Under Section 1741, subject to certain limitations, a corporation has the
power to indemnify Representatives under certain prescribed circumstances
against expenses (including attorneys' fees), judgments, fines and amounts paid
in settlement actually and reasonably incurred in connection with a threatened,
pending or completed action or proceeding, whether civil, criminal,
administrative or investigative, to which any of them is a party or threatened
to be made a party by reason of his or her being a Representative of the
corporation or serving at the request of the corporation as a Representative of
another corporation, partnership, joint venture, trust or other enterprise, if
the Representative acted in good faith and in a manner he or she reasonably
believed to be in, or not opposed to, the best interests of the corporation and,
with respect to any criminal proceeding, had no reasonable cause to believe the
Representative's conduct was unlawful.
Section 1742 provides for indemnification with respect to derivative
actions similar to that provided by Section 1741. However, indemnification is
not provided under Section 1742 in respect of any claim, issue or matter as to
which a Representative has been adjudged to be liable to the corporation unless
and only to the extent that the proper court determines upon application that,
despite the adjudication of liability but in view of all the circumstances of
the case, a Representative is fairly and reasonably entitled to indemnity for
the expenses that the court deems proper.
II-1
<PAGE>
Section 1743 provides that indemnification against expenses is mandatory to
the extent that a Representative has been successful on the merits or otherwise
in defense of any such action or proceeding referred to in Section 1741 or 1742.
Section 1744 provides that unless ordered by a court, any indemnification
under Section 1741 or 1742 shall be made by the corporation only as authorized
in the specific case upon a determination that indemnification of a
Representative is proper because the Representative met the applicable standard
of conduct, and such determination will be made by the board of directors by a
majority vote of a quorum of directors not parties to the action or proceeding;
if a quorum is not obtainable or if obtainable and a majority of disinterested
directors so directs, by independent legal counsel; or by the shareholders.
Section 1745 provides that expenses incurred by a Representative in
defending any action or proceeding referred to in Subchapter D of Chapter 17 of
the BCL may be paid by the corporation in advance of the final disposition of
such action or proceeding upon receipt of an undertaking by or on behalf of the
Representative to repay such amount if it shall ultimately be determined that
the Representative is not entitled to be indemnified by the corporation.
Section 1746 provides generally that except in any case where the act or
failure to act giving rise to the claim for indemnification is determined by a
court to have constituted willful misconduct or recklessness, the
indemnification and advancement of expenses provided by Subchapter D of Chapter
17 of the BCL shall not be deemed exclusive of any other rights to which a
Representative seeking indemnification or advancement of expenses may be
entitled under any bylaw, agreement, vote of shareholders or disinterested
directors or otherwise, both as to action in the Representative's official
capacity and as to action in another capacity while holding that office and that
the corporation may create a fund or otherwise secure or insure its
indemnification obligations, whether arising by law or otherwise.
Section 1747 grants a corporation the power to purchase and maintain
insurance on behalf of any Representative against any liability incurred by the
Representative in his or her capacity as a Representative, whether or not the
corporation would have the power to indemnify the Representative against that
liability under Subchapter D of Chapter 17 of the BCL.
Sections 1748 and 1749 apply the indemnification and advancement of
expenses provisions contained in Subchapter D of Chapter 17 of the BCL to
successor corporations resulting from consolidation, merger or division and to
service as a representative of a corporation with respect to an employee benefit
plan.
Section 1750 provides that the indemnification and advancement of expenses
provided by, or granted pursuant to, Subchapter D of Chapter 17 of the BCL
shall, unless otherwise provided when authorized or ratified, continue as to a
person who has ceased to be a Representative and shall inure to the benefit of
the heirs and personal representatives of such Representative.
PPHP's Bylaws provide that any person who was or is a party or is
threatened to be made a party to any threatened, pending or completed action or
proceeding, whether civil, criminal, administrative or investigative (whether or
not the liability arises or arose from any threatened, pending or completed
action by or in the right of PPHP) by reason of the fact that the person at any
time is or shall have been a director or officer of PPHP or any of its
subsidiaries, or is or shall have been serving at the written request of PPHP as
a director, officer, employee or agent of another corporation, for profit or
not-for-profit, partnership, joint venture, trust or other enterprise, and such
person's heirs, executors and administrators, shall be indemnified by PPHP, to
the fullest extent permitted by applicable law, against expenses (including
attorney's fees), judgments, fines and amounts paid in settlement actually and
reasonably incurred by such person in connection with such action or proceeding
unless the act or failure to act giving rise to the claim for indemnification is
determined to have constituted willful misconduct or recklessness. The
determination that indemnification shall be made because such standard of
conduct has been met may be made by a court or, in the absence of a court
determination, shall be made by the board by
II-2
<PAGE>
a majority vote of any directors who were not parties to the action or
proceeding, even though such directors are less than a quorum, or, if no
directors are disinterested, by independent legal counsel in a written opinion.
PPHP's Bylaws provide that expenses (including attorneys' fees) incurred in
defending any action or proceeding shall be paid by PPHP in advance of the final
disposition of the action or proceeding upon receipt of an undertaking by or on
behalf of the person to be indemnified to repay the amount if it is ultimately
determined that he or she is not entitled to be indemnified by PPHP as
authorized by the Bylaws or otherwise. The right to be indemnified or to receive
an advancement or reimbursement of expenses may also be enforced as a contract
right pursuant to which the person entitled thereto may bring suit as if there
were a separate written contract between PPHP and such person, and shall
continue to exist despite rescission or retroactive modification of the Bylaws
with respect to events, acts or omissions occurring before such rescission or
restrictive modification is adopted.
The right of indemnification is not exclusive of other rights to which any
director, officer, employee, agent or other person may be entitled in any
capacity as a matter of law, under any bylaw, agreement, vote of directors, or
otherwise. PPHP is authorized to purchase and maintain insurance to insure its
indemnification obligations, whether arising under the Bylaws or otherwise. PPHP
may also create a fund or otherwise secure its indemnification obligations.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
From July, 1995 through March, 1996 PPHP sold 4,087 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 share, exclusively to practicing
physicians residing in Pennsylvania. The offering was conducted by Company
without an underwriter. PPHP raised $21,379,000 from investment by almost 4,000
physicians in Pennsylvania. The net proceeds to PPHP from the offering were
approximately $20,432,000.
PPHP claimed an exemption from the registration of the offering with the
Securities and Exchange Commission pursuant to Section 3(a)(11) of the
Securities Act of 1933, as amended. The exemption was predicated upon the fact
that (1) the shares of Class A voting common stock and Class B non-voting common
stock were offered and sold only to residents of the Commonwealth of
Pennsylvania and (2) PPHP was and is a corporation incorporated under the laws
of the Commonwealth of Pennsylvania, with its offices and principal place of
business in Pennsylvania and doing business within such state.
At a Special Meeting of Shareholders held on January 9, 1999, the holders
of PPHP's Class A voting common stock and Class B non-voting common stock
approved a Plan of Recapitalization and Amended and Restated Articles of
Incorporation of PPHP. Among other things, the recapitalization provided for the
conversion of the outstanding Class A Shares and Class B shares into shares of a
new class of voting common stock on or after January 1, 1999 at the election of
the holder and to require conversion effective as of January 1, 2000. The
conversion ratio is 400 shares of common stock for each Class A share and 100
shares of common stock for each Class B share. Shares of common stock issued in
the conversion are exempt from registration pursuant to Section 3(a)(9) of the
Securities Act of 1933, as amended.
II-3
<PAGE>
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Exhibits.
The following exhibits are filed as part of this Registration Statement:
EXHIBIT
NUMBER DOCUMENT AND DESCRIPTION
- ------- ------------------------
1 Form of Agency Agreement.***
3.1 Amended and Restated Articles of Incorporation of Pennsylvania Physician
Healthcare Plan, Inc. (incorporated by reference to Exhibit C to PPHP's
definitive Proxy Statement, as supplemented, for the Special Meeting of
Class A and Class B Stockholders held on January 9, 1999 (Commission
File No. 0-28390)).
3.2 Amended and Restated Bylaws of Pennsylvania Physician Healthcare Plan,
Inc. dated as of October 3, 1998 (incorporated by reference to Exhibit
2.2 to PPHP's Form 10-KSB for the fiscal year ended December 31, 1998
(Commission File No. 0-28390)).
4.1 Form of Certificate of Common Stock (incorporated by reference to
Exhibit 3 to PPHP's Form 8-A filed with the Commission on May 10, 1999
(Commission File No. 0-28390)).
4.2 Plan of Recapitalization of PPHP, dated October 3, 1998 (incorporated by
reference to Exhibit B to PPHP's definitive Proxy Statement, as
supplemented, for the Special Meeting of Class A and Class B
Stockholders held on January 9, 1999 (Commission File No. 0-28390)).
4.3 Form of Warrant.*
4.3(a) Form of Warrant, as amended.**
5 Opinion of Pelino & Lentz, P.C. regarding legality of the Common Stock.*
10.1 Executive Employment Agreement dated September 3, 1996, between PPHP
Service Corp. and Richard A. Felice (incorporated by reference to
Exhibit 6.2 to PPHP's Form 10-KSB for the fiscal year ended December 31,
1996 (Commission File No. 0-28390)).
10.2 Amendment to Executive Employment Agreement dated as of September 2,
1997, between Pennsylvania Physicians Care Service Corp., and Richard A.
Felice (incorporated by reference to Exhibit 6.3 to PPHP's Form 10-KSB
for the fiscal year ended December 31, 1996 (Commission File No.
0-28390)).
10.3 Services Agreement between Pennsylvania Physicians Care Service Corp.,
and Pennsylvania Medical Society Liability Insurance Company dated
January 1, 1998 (incorporated by reference to Exhibit 6.3 to PPHP's Form
10-KSB for the fiscal year ended December 31, 1997 (Commission File No.
0-28390)).
10.4 Pennsylvania Physician Healthcare Plan, Inc., Stock Option Plan
(incorporated by reference to Exhibit E to PPHP's definitive Proxy
Statement for the Special Meeting of Class A and Class B Stockholders
held on January 9, 1999 (Commission File No. 0-28390)).
10.5 Executive Employment Agreement dated February 28, 1997, between
Pennsylvania Physicians Care Service Corp. and Jack J. Jaroh
(incorporated by reference to Exhibit 6.6 to PPHP's Form 10-KSB for the
fiscal year ended December 31, 1998 (Commission File No. 0-28390)).
10.6 Agreement of Lease, dated September 19, 1996, between Pennsylvania
Physician Healthcare Plan, Inc. and Union Deposit Corporation
(incorporated by reference to Exhibit 6.7 to PPHP's Form 10-KSB for the
fiscal year ended December 31, 1998 (Commission File No. 0-28390)).
II-4
<PAGE>
EXHIBIT
NUMBER DOCUMENT AND DESCRIPTION
- ------- ------------------------
10.7 Amendment No. 1 to Agreement of Lease, dated February 27, 1998, between
Pennsylvania Physician Healthcare Plan, Inc. and Union Deposit
Corporation (incorporated by reference to Exhibit 6.8 to PPHP's Form
10-KSB for the fiscal year ended December 31, 1998 (Commission File No.
0-28390)).
21 Subsidiaries of the registrant.*
23.1 Consent of Pelino & Lentz, P.C. is contained in Exhibit 5.*
23.2 Consent of Deloitte & Touche LLP, independent auditors of PPHP.*
24 Power of Attorney (included in signature page of PPHP on page II-7).*
- ------------------
* Previously filed.
** Filed herewith.
*** To be filed by amendment.
(b) Financial Statement Schedules.
None.
ITEM 17. UNDERTAKINGS.
(i) The undersigned Registrant hereby undertakes:
(1) To file during any period in which offers or sales are being made,
a post-effective amendment to this registration statement:
(A) To include any prospectus required by 10(a)(3) of the
Securities Act of 1933;
(B) To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the registration statement. Notwithstanding the foregoing, any
increase or decrease in volume of securities offered (if the total
dollar value of the securities offered would not exceed that which was
registered) and any deviation from the low or high end of the estimated
maximum offering range may be reflected in the form of prospectus filed
with the Commission pursuant to Rule 424(b) if, in the aggregate, the
changes in volume and price represent no more than 20 percent change in
the maximum aggregate offering price set forth in the "Calculation of
Registration Fee" table in the effective registration statement;
(C) To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or
any material change to such information in the registration statement;
provided, however, that the information in paragraphs (i)(1)(A) and (B) do not
apply if the registration statement is on Form S-3, Form S-8 or Form F-3, and
the information required to be included in the post-effective amendment by those
paragraphs is contained in periodic reports filed with or furnished to the
Commission by the registrant pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 that are incorporated by reference in the registration
statement.
(2) That for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed
to be the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
II-5
<PAGE>
(ii) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and controlling
persons of the registrant pursuant to the foregoing provisions, or otherwise,
the Registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Act and will
be governed by the final adjudication of such issue.
(iii) The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus filed as part
of this registration statement in reliance upon Rule 430A and contained in
a form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
II-6
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 the registrant
has duly caused this Amendment to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of Harrisburg, Commonwealth of
Pennsylvania on May 25, 1999.
PENNSYLVANIA PHYSICIAN
HEALTHCARE PLAN, INC.
By: /s / RICHARD A. FELICE
-------------------------------
Richard A. Felice, President
and Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933 this has been
signed by the following persons in the capacities and on the dates stated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ Richard A. Felice Principal Executive Officer and Director May 25, 1999
- -----------------------------
Richard A. Felice
/s/ T. Clark Phillip Principal Financial and Accounting Officer May 25, 1999
- -----------------------------
T. Clark Phillip
* Director May 25, 1999
- -----------------------------
Gary C. Brown, M.D.
* Director May 25, 1999
- -----------------------------
Darlene Ann M. Dunay, D.O.
* Director May 25, 1999
- -----------------------------
Gay D. Dunne, M.D.
* Director May 25, 1999
- -----------------------------
Edward W. Gerner, M.D.
* Director May 25, 1999
- -----------------------------
Larry E. Goldstein, M.D.
* Director May 25, 1999
- -----------------------------
Frank H. Guinn, D.O.
* Director May 25, 1999
- -----------------------------
Leonard P. Harman, D.O.
* Director May 25, 1999
- -----------------------------
George R. Homa, D.O.
</TABLE>
II-7
<PAGE>
<TABLE>
<S> <C> <C>
* Director May 25, 1999
- -----------------------------
Lila Stein Kroser, M.D.
* Director May 25, 1999
- -----------------------------
Alice McCormick, D.O.
* Director May 25, 1999
- -----------------------------
Richard J. Minehart, M.D.
* Director May 25, 1999
- -----------------------------
John J. Nevulis, M.D.
* Director May 25, 1999
- -----------------------------
Mark A. Piasio, M.D.
* Director May 25, 1999
- -----------------------------
James G. Pitcavage, M.D.
* Director May 25, 1999
- -----------------------------
Robert S. Pyatt, Jr., M.D.
* Director May 25, 1999
- -----------------------------
Saad Sakkal, M.D.
* Director May 25, 1999
- -----------------------------
Jay H. Shah, M.D.
* Director May 25, 1999
- -----------------------------
Milton D. Soiferman, J.D.,
D.O.
* Director May 25, 1999
- -----------------------------
Jay Anthony Townsend, M.D.
*By: /s / Richard A. Felice
------------------------
Richard A. Felice
(Attorney-in-fact)
</TABLE>
II-8
Exhibit 4.3(a)
THIS WARRANT, AND THE SHARES OF COMMON STOCK ISSUABLE BY THE COMPANY UPON THE
EXERCISE OF THIS WARRANT, MAY NOT BE ASSIGNED, SOLD, TRANSFERRED, OFFERED,
CONVEYED, PLEDGED, HYPOTHECATED OR OTHERWISE ENCUMBERED OR DISPOSED OF WITHOUT
COMPLIANCE WITH THE TERMS AND CONDITIONS SET FORTH HEREIN AND IN THE COMPANY'S
AMENDED AND RESTATED ARTICLES OF INCORPORATION (A COPY OF WHICH IS ON FILE WITH
THE SECRETARY OF THE COMPANY).
No. ______
WARRANT
To Purchase ____ Shares of Common Stock, par value $.01 per share, of
PENNSYLVANIA PHYSICIAN HEALTHCARE PLAN, INC.
Exercisable between January 1 and December 31, 2002
THIS IS TO CERTIFY THAT, for value received, _______________ or registered
assigns (the "Holder") is entitled to purchase from PENNSYLVANIA PHYSICIAN
HEALTHCARE PLAN, INC., a Pennsylvania corporation (the "Company"), at any time
on or after January 1, 2002 up until 5:00 p.m., Harrisburg, Pennsylvania time
(the "Expiration Time") on December 31, 2002 (the "Expiration Date") at the
principal office of the Company presently located at 651 East Park Drive,
Harrisburg, PA 17111 (the "Principal Office"), at a price of $20.00 per share
(the "Exercise Price") the number of shares stated above of Common Stock, par
value $.01 per share (the "Common Stock"), of the Company, all subject to
adjustment and upon the terms and conditions as hereinafter provided. If not
exercised previously, the Holder's rights under this Warrant (the "Warrant")
will become void at the Expiration Time on the Expiration Date.
This Warrant is one of a series of warrants (the "Warrants") of the same
form, representing the right to purchase shares of Common Stock and having the
same terms as this Warrant, entitling the Holders thereof initially to purchase
up to an aggregate of 250,000 shares of Common Stock.
This Warrant is part of a unit (each, a "Unit," and collectively, the
"Units") issued by the Company in a public offering of such Units. Each Unit
consists of one share of Common Stock and one Warrant. This Warrant and the Unit
including this Warrant
<PAGE>
have been registered with the United States Securities and Exchange Commission
under the Securities Act of 1933, as amended (the "Securities Act") (SEC
Registration No. 333-____).
ARTICLE I
EXERCISE OF WARRANTS
1.1 Method of Exercise. To exercise this Warrant, the Holder shall deliver
to the Company, at the Principal Office of the Company, (a) this Warrant, (b) a
written notice, in substantially the form of the Subscription Notice attached
hereto, of such Holder's election to exercise this Warrant, which notice shall
specify the denominations of the share certificate or certificates desired, and
(c) payment of the Exercise Price with respect to such shares. Such payment may
be made, at the option of the Holder, by certified or bank cashier's check or
wire transfer of immediately available funds to an account specified by the
Company.
This Warrant may only be exercised in full, and not in part, for the
aggregate number of shares of Common Stock issuable upon the exercise of this
Warrant.
As promptly as practicable after receipt of the items referred to above,
the Company shall execute and deliver, or cause to be executed and delivered, in
accordance with such notice, a certificate or certificates representing the
aggregate number of shares of Common Stock issuable upon exercise of this
Warrant. The share certificate or certificates so delivered shall be in such
denominations as may be specified in such notice or, if such notice shall not
specify denominations, shall be in the amount of the number of shares of Common
Stock issuable upon the exercise of this Warrant, and shall be issued in the
name of the Holder.
1.2 Shares to be Fully Paid and Non-Assessable. All shares of Common Stock
issued upon the exercise of this Warrant shall be validly issued, fully paid and
non-assessable and free from all preemptive rights of any shareholder, and from
all taxes, liens and charges with respect to the issue thereof (other than
transfer taxes).
1.3 No Fractional Shares to be Issued. The Company shall not issue
fractional shares of Common Stock upon exercise of this Warrant.
1.4 Share Legend. Each certificate for shares of Common Stock issued upon
exercise of this Warrant shall bear the following legend:
"The shares represented by this certificate may not be voluntarily
transferred for value except to a transferee who, after the transfer,
will, under the terms of the issuer's Articles of Incorporation,
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be entitled to vote the shares. For this purpose, "voluntarily transfer
for value" does not include gifts or transfers by operation of law."
Any certificate issued at any time in exchange or substitution for any
certificate bearing such legend shall also bear such legend unless, in the
opinion of the Company's counsel, the securities represented thereby are no
longer subject to the restrictions on transfer referred to therein.
1.5 Reservation; Authorization. The Company has reserved and will keep
available for issuance upon exercise of the Warrants the total number of shares
of Common Stock deliverable upon exercise of all Warrants from time to time
outstanding.
ARTICLE II
TRANSFER, EXCHANGE AND REPLACEMENT OF WARRANTS
2.1 Ownership of Warrant. The Company may deem and treat the person in
whose name this Warrant is registered as the holder and owner hereof
(notwithstanding any notations of ownership or writing made hereon by any
person) for all purposes and shall not be affected by any notice to the
contrary, until presentation of this Warrant for registration of transfer as
provided in this Article II.
2.2 Transfer and Exchange. This Warrant is exchangeable for a new Warrant
of like tenor and date representing the right to purchase the aggregate number
of shares of Common Stock purchasable hereunder upon surrender by the Holder
hereof to the Company at its Principal Office. This Warrant is not detachable
from the Unit of which this Warrant is a part. This Warrant and all rights
hereunder are transferrable in whole, but not in part, upon the books of the
Company by the Holder hereof in person or by duly authorized attorney, only upon
a permitted transfer of the Unit of which this Warrant is a part. Upon such a
transfer, a new Warrant of the same tenor and date as this Warrant, registered
in the name of the transferee, shall be issued and delivered by the Company upon
surrender of this Warrant duly endorsed at the Principal Office of the Company.
Notwithstanding the foregoing, this Warrant and the Unit of which this Warrant
is a part (A) may not be transferred by the holder hereof at any time prior to
January 1, 2000, except for transfers made by operation of law, and (B)
thereafter may only be transferred to the following persons and/or entities: (i)
any health professional licensed in Pennsylvania or elsewhere; (ii) any retired,
but formerly licensed, health professional; (iii) any professional corporation
(or other legally constituted professional practice group) of health
professionals; (iv) any individual retirement account or other retirement plan
established by a person eligible to be a transferee or in which such person is a
participant; (v) any employee or former employee of the Company; and (vi)
persons registered under Section 15 of the Securities Exchange Act of 1934, as
amended, who are making a market in the Common Stock of the Company
(collectively, an "Eligible Holder"). As used
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herein, the term "health professional" shall include, without limitation,
physicians, podiatrists, dentists, oral surgeons, optometrists, pharmacists,
chiropractors, nurses, nurse practitioners, physical or occupational therapists
and physicians' assistants or other similar licensed professional persons.
2.3 Loss, Theft, Destruction or Mutilation of Warrants. Upon receipt of
evidence satisfactory of the Company of the loss, theft, destruction or
mutilation of this Warrant and, in the case of any such loss, theft or
destruction, upon receipt of indemnity or security reasonably satisfactory to
the Company or, in the case of any such mutilation, upon surrender and
cancellation of this Warrant, the Company will issue and deliver, in lieu of
such lost, stolen, destroyed or mutilated Warrant, a new Warrant of like tenor
and representing the right to purchase the same aggregate number of shares of
Common Stock as provided for in this Warrant. This Warrant shall be promptly
canceled by the Company upon the surrender hereof in connection with any
exchange, transfer or replacement.
2.4 Expenses of Delivery of Warrants. The Company shall pay all expenses,
taxes (other than transfer taxes) and other charges payable in connection with
the preparation, issuance and delivery of Warrants and shares of Common Stock
issued upon exercise of this Warrant.
ARTICLE III
ANTI-DILUTION PROVISIONS
In the event that the Company shall, at any time prior to the Expiration
Date and the Expiration Time of this Warrant and prior to the exercise thereof:
(i) declare or pay to the Holders of the Common Stock a dividend payable in any
kind of shares of stock of the Company; or (ii) change or divide or otherwise
reclassify its Common Stock into the same or a different number of shares with
or without par value, or into shares of any class or classes; or (iii)
consolidate, merge with any other corporation or other entity or engage in any
other corporate reorganization where the Company is the surviving entity; or
(iv) make any distribution of its assets to Holders of its Common Stock in
partial liquidation or by way of return of capital, then, upon the subsequent
exercise of this Warrant, the Holder thereof shall receive for the Exercise
Price, in addition to or in substitution for the shares of Common Stock to which
the Holder would otherwise be entitled upon such exercise, such additional
shares of stock of the Company, or such reclassified shares of stock of the
Company, or such shares of the securities or property of the Company, or such
assets of the Company which the Holder would have been entitled to receive had
such Holder exercised this Warrant immediately prior to the happening of any of
the foregoing events. Any plan or agreement devised or executed in connection
with any of the foregoing events shall explicitly provide for the aforesaid
rights of the Holder of this Warrant and of all other Warrants of similar tenor.
Within a reasonable time prior to or subsequent to the occurrence of any of the
foregoing events, the Company shall notify the registered Holder hereof and all
Holders of Warrants of similar tenor, with respect
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to their rights in connection therewith, so as to ensure the Holders hereof an
opportunity to exercise those rights in a timely manner. In connection with that
notice, the Company shall send a detailed written explanation of the relevant
events, transactions and resulting capital adjustments to the Holders of the
Warrants. If no Holder gives the Company written objection to such adjustments
within ten (10) days after such Holder's receipt of such explanation, no
Warrantholder (including the Holder hereof) may thereafter object to such
adjustments. Notwithstanding the foregoing, upon the occurrence of any of the
foregoing events, the Board of Directors of the Company shall have the right to
accelerate the Warrants whereupon they shall become immediately exercisable.
In the event that the Company shall, at any time prior to January 1, 2002,
propose to (i) consolidate or merge with any other corporation or entity or
engage in any other corporate reorganization, where the Company is not the
surviving entity, (ii) transfer its property as an entirety or substantially as
an entirety to any other corporation or entity or (iii) make a distribution of
its assets in complete liquidation, the Company shall send written notice of
such event to the Holder of this Warrant at the address set forth on the books
of the Company, whereupon, unless otherwise provided in the plan with respect to
any of the foregoing events, this Warrant shall become immediately exercisable
by the Holder hereof for a period of thirty (30) days from the date such notice
is sent. In the event that this Warrant is not exercised on or prior to the
expiration of such thirty (30) day period, this Warrant shall immediately
terminate and become null and void.
Notwithstanding anything herein to the contrary, if the Company issues a
new Warrant certificate in replacement of this Warrant certificate upon the
transfer of this Warrant, in replacement of a loss, theft, destruction or
mutilation of this Warrant or for any other reason, the new Warrant certificate,
at the Company's option, may reflect any adjustments theretofore made pursuant
to this Article III.
ARTICLE IV
MISCELLANEOUS
4.1 Notices. All notices, requests, demands and other communications
required or permitted hereunder shall be in writing and shall, unless otherwise
expressly required, be deemed to have been duly given, made and received only
when delivered (personally, by courier service such as Federal Express, or by
other messenger) or when deposited in the United States mails, registered or
certified mail, postage prepaid, return receipt requested, addressed as set
forth herein. In the case of the Company, such notices, requests, demands and
other communications shall be addressed to:
T. Clark Phillip
Treasurer and Chief Financial Officer
Pennsylvania Physician Healthcare Plan, Inc.
651 East Park Drive
Harrisburg, PA 17111
In the case of the Holder, such notices, requests, demands and communications
shall be addressed to his or her address as shown on the books maintained by the
Company, unless the Holder shall notify the Company that notices and
communications should be sent to a different address, in which case such notices
and communications shall be sent to the address specified by the Holder
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4.2 Amendments. The provisions of this Warrant may not be amended, modified
or waived without the written consent of the Company and the Warrantholders,
voting as a single class, holding 66 2/3% of the then-outstanding Warrants
(exclusive of Warrants then owned by the Company).
Any such amendment or modification effected pursuant to this Section shall
be binding upon all Warrantholders, upon each future Warrantholder and upon the
Company. In the event of any such amendment, modification or waiver, the Company
shall give prompt notice thereof to all Warrantholders, and, if appropriate,
notation thereof shall be made on all Warrants thereafter surrendered for
registration of transfer or exchange.
4.3 Covenants to Bind Successor and Assigns. All covenants, stipulations,
promises and agreements contained in this Warrant by or on behalf of the Company
shall bind its successors and assigns, whether so expressed or not.
4.4 No Rights as Shareholder. This Warrant shall not entitle the Holder to
any rights as a shareholder of the Company, either at law or in equity, unless
and until the Holder exercises the right to purchase Common Stock strictly in
accordance with the terms hereof.
4.5 No Impairment. The Company will (a) take all such action as may be
necessary or appropriate in order that the Company may validly and legally issue
fully paid and non-assessable shares of Common Stock upon the exercise of this
Warrant, and (b) use its best efforts to obtain all such authorizations,
exemptions or consents from any public regulatory body having jurisdiction
thereof as may be necessary to enable the Company to perform its obligations
under this Warrant.
IN WITNESS WHEREOF, the Company has caused this Warrant to be executed on
___________________, 1999.
PENNSYLVANIA PHYSICIAN HEALTHCARE
PLAN, INC.
By:
-------------------------------------
Richard A. Felice, President
and Chief Executive Officer
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SUBSCRIPTION NOTICE
(To be executed for exercise of the Warrant)
To: PENNSYLVANIA PHYSICIAN HEALTHCARE PLAN, INC.
The undersigned hereby irrevocably elects to exercise the right of purchase
represented by the attached Warrant No. ______ for, and to purchase thereunder,
the full number of shares of Common Stock issuable upon the exercise of such
Warrant, as provided for therein, and tenders herewith payment of the Exercise
Price in full in the form of certified or bank cashier's check or wire transfer
in the amount of $_____________.
The undersigned, intending that the Company will rely thereon, certifies
that (i) he or she has received and reviewed all information requested by him or
her from the Company prior to and in connection with his or her decision to
exercise this Warrant and purchase the shares of Common Stock to be issued upon
such exercise and (ii) he or she is an "Eligible Holder", as such term is
defined in Section 2.2 of the Warrant.
The undersigned requests that certificates representing such number of
shares be issued in the following denominations: ______________________________
Dated: _________________ _________________________________________
Note: The above signature must correspond
exactly with the name on the face of the
attached Warrant.
