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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-KSB
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1998
Commission File Number: 0-28390
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PENNSYLVANIA PHYSICIAN HEALTHCARE PLAN, INC.
(Name of Small Business Issuer in Its Charter)
Pennsylvania 23-2795795
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification Number)
651 East Park Drive Harrisburg, Pennsylvania 17111
(Address of Principal Executive Offices) (Zip Code)
(717) 561-7890
(Issuer's Telephone Number, Including Area Code)
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Securities registered under Section 12(b) of the
Exchange Act: None Securities registered under Section 12(g)
of the Exchange Act:
Class A Common Stock, $.01 par value per share
(Title of Class)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days. Yes X No
--- ---
Check if there is no disclosure of delinquent filers in response to
Item 405 of Regulation S-B contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy of
information statements incorporated by reference in Part III of Form 10-KSB or
any amendments to this Form 10-KSB. [ ]
Issuer's revenues for its most recent fiscal year are $7,335,663.
The aggregate market value of Class A and Class B Common Stock, held by
non-affiliates, based upon the price at which the Class A Common Stock and Class
B Common Stock was sold, is $21,353,000.
As of March 15, 1999, 4,087 shares of Class A Common Stock, $.01 par
value per share, and 1,074 shares of Class B Common Stock, $.01 par value per
share, were outstanding.
Transitional Small Business Disclosure Format (check one):
Yes _X_ No ___
DOCUMENTS INCORPORATED BY REFERENCE
None.
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INFORMATION REQUIRED IN ANNUAL REPORT OF
TRANSITIONAL SMALL BUSINESS ISSUERS
PART I
[Alternative 2 (Items 6-11 of Model B of Form 1-A)]
Item 6. Description of Business
General
Pennsylvania Physician Healthcare Plan, Inc. ("PPHP") was organized in February,
1995 by Pennsylvania practicing physicians to establish a physician-controlled
managed care organization in Pennsylvania.
Industry Overview
Medical services traditionally have been 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. However, due to a variety of reasons,
employers, insurers and governmental entities began to seek approaches to
deliver and pay for quality health care services more efficiently. HMOs and
other managed health care organizations have emerged as integral components in
this effort. Like traditional indemnity health care plans, HMOs and other
managed health care organizations typically assume most of the financial risk
for the delivery of medical care. Unlike traditional indemnity health care
plans, managed care organizations seek to reduce the cost of medical services
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 treatment for medical necessity;
o encouraging use of more cost effective treatment settings; and
o monitoring hospital admissions and length of stay.
Although managed care concepts have emerged as part of traditional indemnity
insurance products, managed care has given rise to completely new forms of
insurance, most notably preferred provider organizations and health maintenance
organizations. A preferred provider organization, or "PPO", enters into
agreements with health care providers to provide medical care services for its
members, who may be individuals or employer groups. A risk-assuming PPO may be
responsible for all covered medical care for the members in exchange for a fixed
premium. Under Pennsylvania law, the PPO may not place its providers at
financial risk, such as through capitation (fixed fee) payments as discussed
below in the case of a health maintenance organization. The provider contracts
for a PPO are generally on a discounted fee-for-service basis. Typically, a PPO
does not require the members' care to be managed by a pre-selected primary care
physician (i.e., a gatekeeper), but so-called "gatekeeper" PPOs do exist.
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A health maintenance organization, or "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 ("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, inpatient hospitalization
and certain other services are often managed by primary care physicians
("gatekeepers") and are subject to pre-authorization requirements. Contracts
with health care providers may include certain financial incentives designed to
encourage the provision of high-quality and cost-effective health care.
Companies providing managed care services, however, do not always provide
services directly to the ultimate consumer. A third party administrator, or
"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. The 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.
On May 9, 1996 PPHP filed an application with the Pennsylvania Department of
Health (the "Department of Health") and the Pennsylvania Insurance Department
(the "Insurance Department") (together, the "Departments") for a license to
operate a risk-assuming PPO. PPHP's license was granted in April, 1997. Pursuant
to this license, PPHP operates a managed care organization that offers a
preferred provider organization plan in 18 contiguous counties in Pennsylvania
to employers and other group purchasers of health care plans. These counties
are:
Southcentral Pennsylvania:
o Franklin o Lebanon
o Adams o Lancaster
o Cumberland o Berks
o Dauphin o Schuylkill
o York o Perry
o Fulton
Lehigh Valley:
o Lehigh
o Northampton
Northeastern Pennsylvania:
o Carbon
o Lackawanna
o Monroe
o Luzerne
o Wyoming
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PPHP began marketing its initial PPO product to employer groups in April, 1997,
with coverage beginning July 1, 1997. The PPO covered 14,492 members as of March
1, 1999. Revenues from PPHP's PPO accounted for 0%, 18% and 90.3% of PPHP's
total revenues for the years 1996, 1997 and 1998, respectively.
On November 27, 1996 PPHP filed an application with the Departments for a
license to operate an HMO. On March 22, 1999 PPHP's license was granted,
permitting it to operate in Dauphin, Berks and Cumberland Counties. PPHP will
continue to assemble an adequate provider network for its HMO in the remaining
15 counties of its current PPO service area. The HMO has not been able to
solicit members until the HMO license was granted.
On February 12, 1997, PPHP filed an application with the Insurance Department
for a license to provide third party administrator services. This license was
granted in March, 1997. Pursuant to this license, PPHP provides TPA services to
its own managed care organization. In the future, it 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, it has chosen to concentrate on PPO member growth, and has no current
plans to pursue this line of business actively. Furthermore, PPHP offers
consulting services, including feasibility studies and business plan
development, to provider sponsored managed care organizations, or persons
seeking to establish such organizations, in other states and has performed one
contract to render such services.
Proposed Expansion
PPHP's PPO currently operates in 18 contiguous counties in Pennsylvania and PPHP
has obtained approval to operate its HMO in three of these counties. In
addition, on March 19, 1999, PPHP applied for a certificate of authority with
the Department of Health to operate its PPO in three additional counties in
Pennsylvania: Wayne, Pike and Susquehanna. PPHP's plan of operation contemplates
the expansion of its PPO and HMO operations beyond these service areas and
throughout Pennsylvania. PPHP has no current plans to operate a PPO or an HMO in
any other state.
1995-1996 Offering
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 PPHP without an underwriter. PPHP
raised $21,509,000 from investments by almost 4,000 physicians in Pennsylvania.
Expenses associated with the offering totaled $288,171, resulting in net
proceeds to PPHP of $21,220,829. Approximately $9,691,000 of the net proceeds
was reserved for post-HMO licensure activities. However, this amount was reduced
by vote of PPHP's shareholders (see "-Recent Developments - Special Meetings of
Shareholders").
Recent Developments
Special Meetings of Shareholders. At a Special Meeting of Shareholders held on
January 9, 1999, the holders of PPHP's Class A voting common stock (the "Class A
Shares") and Class B non-voting
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common stock (the "Class B Shares") approved a Plan of Recapitalization and
Amended and Restated Articles of Incorporation of PPHP. 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 PPHP by eliminating the Class C common stock and Class
D common stock of PPHP (no shares of which had been outstanding).
The rights of Class A Shares were modified to provide that, upon the issuance by
PPHP of any shares of common stock, holders of Class A Shares will be entitled
to cast 400 votes for each share of Class A 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 change was to assure that the voting rights of the holders
of the Class A Shares were equal to those of holders of shares of the new class
of common stock into which they are convertible. 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 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 PPHP (except a merger in which PPHP
survives without a reclassification or change of PPHP'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 PPHP) to another corporation of all or substantially
all of PPHP'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.
After the conversion, PPHP's only outstanding class of shares of stock will be
common stock.
The shareholders of PPHP also approved Amended and Restated Articles of
Incorporation pursuant to which PPHP's shareholder eligibility requirements were
expanded to include certain "health professionals" and present and former
employees of PPHP. The term "health professional" includes physicians,
podiatrists, dentists, oral surgeons, optometrists, pharmacists, chiropractors,
nurses, nurse practitioners, physical and occupational therapists, physicians'
assistants, and other similarly licensed professional persons.
Additionally, the holders of Class A Shares approved the adoption of the
Pennsylvania Physician Healthcare Plan, Inc. Stock Option Plan which provides
for the grant to officers and full-time employees
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of PPHP of up to 200,000 shares of common stock. See "Item 9. Remuneration of
Directors and Officers - Stock Option Plan."
The purposes of these shareholder actions were:
o to simplify PPHP's share structure;
o to increase the liquidity of the shares in the capital markets;
o to enhance the marketability of PPHP's shares and its ability to
raise capital;
o to expand the pool of potential investors who are eligible to
purchase PPHP's shares to include other licensed or retired health
professionals who are not physicians and their practice groups and
retirement plans;
o to increase the transferability of PPHP's shares to other health
professionals;
o to allow PPHP's employees to acquire and retain shares of PPHP; and
o to provide option shares to be awarded to management and full-time
employees of PPHP and its subsidiaries, directors and consultants as
a performance incentive.
At a Special Meeting of Shareholders held on February 3, 1999, the holders of
the Class A Shares approved a reduction in the amount of net proceeds from the
1995-1996 offering required to be retained by PPHP for post-HMO licensure
activities to $5,000,000 in order to allow any excess to be employed by PPHP in
the operations of its PPO and other activities while it continued to seek its
HMO license.
In addition to the above actions, PPHP is currently seeking approval of the
holders of Class A Shares of an amendment to PPHP's Bylaws to reduce the
affirmative vote required to approve the sale or transfer of all or
substantially all of the business or assets of PPHP from 90% of the votes able
to be cast by all shareholders entitled to vote to 662/3% of the votes able to
be cast by all shareholders entitled to vote.
Amendment of Bylaws. Prior to October 3, 1998, PPHP's Bylaws provided that all
directors were required to be shareholders of PPHP and Pennsylvania licensed
physicians, podiatrists or oral surgeons. On October 3, 1998, PPHP's Board of
Directors adopted an amendment to the Bylaws to provide that at least two-thirds
of the directors must be actively practicing medical doctors or doctors of
osteopathy.
Recent Legislation. On June 17, 1998, the Pennsylvania legislature enacted
legislation (Act No. 1998-68) that required PPHP to resubmit its HMO forms and
procedures to the Insurance Department for approval. On January 26, 1999 the
Insurance Department approved PPHP's forms and procedures.
Plan of Operation
PPHP's plan of operation entails:
o Marketing its licensed PPO in its initial market areas: During 1997 and 1998,
PPHP worked with the Departments to process its application for a PPO
product, obtained its PPO license, began marketing in 18 contiguous counties
in Pennsylvania, and enrolled 14,492 members as of March 1, 1999.
o Securing a license to operate as an HMO initially in three counties and
thereafter in the entire market area served by its PPO: During 1997 and 1998,
PPHP worked with the Departments to process its application for an HMO
product and assembled a provider network. PPHP's HMO license for three
counties was issued on March 22, 1999.
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o Expanding its provider network in its market area and in other counties in
Pennsylvania in which it wishes to operate: PPHP (1) had contracted with 47
hospital providers and over 4,832 physician providers for its PPO product as
of March 22, 1999 (and is in the process of credentialing additional
physician providers), and engaged providers for other services and (2) had
contracted with 8 hospital providers and over 517 physician providers for its
HMO product as of March 22, 1999 (and is in the process of credentialing
additional physician providers), and engaged providers for other services.
o Marketing its consulting services: During 1997 and 1998, PPHP began marketing
its consulting services. In the third quarter of 1998, PPHP completed a
feasibility study for a physician organization located in Texas and is
actively seeking additional engagements.
o Making its licensed third party administrator services available to
individual practitioners and medical entities: During 1997 and 1998, PPHP
obtained a TPA license for Pennsylvania. To date, however, PPHP has
concentrated on developing the growth of its PPO member base.
o Recruiting additional managers and staff, as required by its business and to
support expansion: During 1997 and 1998, PPHP engaged key employees,
contracted for data processing systems for claims processing, eligibility,
billing and medical management which are year 2000 compliant (see "- Year
2000") and adopted the trade name "Pennsylvania Physicians Care" for its
managed care products.
o Expanding its service territory beyond its current market area of 18 counties
and ultimately throughout Pennsylvania: Following the anticipated licensing
of its HMO in the same 18 counties in which its PPO is licensed, and the
further development of its provider network, PPHP's goal is to expand its
service area to other markets throughout Pennsylvania. PPHP is awaiting
approval to operate its PPO in three additional counties in Pennsylvania.
In order to operate the PPO and the HMO, PPHP has developed systems to deal
with:
o management information;
o eligibility and premium billing;
o claims and capitation administration;
o utilization management;
o case management;
o quality improvement;
o physician credentialing and recruitment; and
o grievance procedures.
Arrangements with the Physician Providers
PPHP has negotiated and continues to negotiate contracts with hospitals and
other providers for inclusion in its PPO and HMO provider networks. An important
factor in the success of PPHP's business will be the development of a network of
physician providers in the appropriate numbers in PPHP's geographic markets, the
appropriate mix of primary care physicians and specialists and satisfactory
financial arrangements between PPHP and its providers.
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The selection of physicians includes a review of licensure, hospital admitting
privileges, demonstrated proficiency, patient access, office standards,
after-hours coverage and many other factors.
Arrangements with Other Health Care Providers
PPHP will provide for the delivery of necessary preventive, diagnostic,
therapeutic, and rehabilitation health care services to members, in part, by
contracting with qualified non-physician providers who meet the participation
criteria of PPHP. PPHP has negotiated and continues to negotiate contracts with
hospitals and other providers on behalf of its HMO. Generally, these contracts
provide that the participating hospitals and other providers will accept as
patients members in PPHP's HMO, will provide to those members all medically
necessary services that are ordered by a participating physician that are
covered services under the applicable managed care plan, and will bill PPHP
according to the parameters set forth in their participation agreement with
PPHP. The services provided by hospitals and other providers will be reviewed
for quality improvement, utilization management, and risk management by
appropriate committees of PPHP, which have been organized.
Premium Rates
PPHP's primary source of revenue will be the premiums paid by or on behalf of
members in its PPO and its HMO. PPHP intends to structure its benefit plans and
set its premium rates to be competitive with other health insurance programs
available in Pennsylvania. The premium rates and benefits are and will be
consistent with state and federal laws regulating PPOs and HMOs and, in the case
of the HMO, have been approved by the Departments as part of the application
process.
Employees
As of March 19, 1999 PPHP employed 62 people in various management or clerical
positions, 60 of whom were full-time employees.
As PPHP grows, it intends 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
In April, 1995 PPHP engaged Infinity Management Services, Inc. ("Infinity"), a
subsidiary of Pennsylvania Medical Society Liability Insurance Company
("PMSLIC"), to provide administrative and management services to PPHP. PMSLIC,
which is majority-owned by Medical Group Holdings, Inc., writes medical
professional liability insurance coverage in Pennsylvania. Infinity provided
management services to PPHP subject to the authority and control of Company's
Board of Directors.
In March, 1996 PPHP and Infinity entered into a new agreement under which
Infinity provided similar services until PPHP secured its license from the
Departments to operate its business. Until PPHP engaged its own management team
in late 1996, Infinity managed the development and implementation of PPHP's
business plan, including locating and recommending appropriate third-party
service providers. Infinity generally oversaw the activities of PPHP's
consultants associated with developing its applications for licenses and the
design and development of its start-up operations. Infinity was paid a fixed
monthly retainer of $55,000 through September, 1996. PPHP elected the
alternative of an hourly
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fee basis beginning in October, 1996, and Infinity continued to provide limited
management services to PPHP throughout 1997. During the term of the agreement,
Infinity could not provide similar services to any organization offering a
managed care insurance product in Pennsylvania. PPHP agreed not to solicit for
employment any personnel employed by Infinity during the term of the agreement
and for one year thereafter. This agreement expired by its terms on December 31,
1997. In January, 1998, PPHP's wholly-owned subsidiary, Pennsylvania Physicians
Care Service Corp., which provides all administrative services to PPHP and its
other subsidiaries, entered into a services agreement with PMSLIC for limited
payroll, accounting and information systems services on an hourly fee basis.
This agreement supercedes all prior agreements with Infinity.
Marketing and Sales
PPHP has hired direct sales representatives to offer membership in PPHP's PPO
and HMO to purchasers of health care services, including private and
governmental employers, and will contract with independent insurance agents to
make sales for it on a commission basis. PPHP's marketing efforts also include
media advertising and direct mailings.
The overall objective of PPHP's marketing strategy is twofold: (1) to enroll
membership sufficient to attain financial viability and (2) to do so on a
controlled growth basis so that the necessary health resources are available to
provide quality services.
Members will join PPHP's PPO or HMO primarily through employer groups. In many
instances, employers offer employees a choice of coverage by a managed care
company or an indemnity health insurer. Employees may select their desired
health coverage during a designated period (usually one month annually). New
employees make their selections at the time of employment. Employers generally
pay all or part of the monthly charges and make payroll deductions for any
portion of the premium not provided as an employee benefit.
Competition
HMOs and PPOs operate in a highly competitive environment. Competition in the
health care industry has intensified in recent years, primarily due to more
aggressive marketing, a proliferation of competing products from new and
existing competitors and increased quality and price sensitivity. Employer
groups have increasingly demanded new benefit options, including HMOs and PPOs.
The managed care industry in Pennsylvania is characterized by vigorous
competition, and is currently dominated by Aetna-U.S. 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.
PPHP will also compete with other managed care plans that are operating, or may
in the future operate, in PPHP's service area, as well as traditional indemnity
insurance companies. Based on filings with the Departments, PPHP believes there
are approximately 33 HMOs now operating in Pennsylvania; and several larger
employers have adopted self-funded health benefit plans, with plan
administration provided by a third-party. Managed care companies may be able to
compete against PPHP in many ways, including by:
o having a larger and stronger capitalization;
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o providing a wider variety of products and services;
o offering more attractive pricing;
o having a larger geographic territory or one with a higher population
density;
o having greater experience in operating managed care organizations;
o having longer established relationships with providers and member
groups; and
o having well-known names.
In addition, larger HMOs may acquire a Pennsylvania HMO, thereby entering the
Pennsylvania marketplace and commencing business without the delay of applying
for an HMO or PPO license.
Competition may also affect PPHP's ability to obtain the services of health care
providers, including primary care physicians and hospitals.
Government Regulation and Health Care Industry Reform
The laws and regulations concerning conduct of a PPO and an HMO restrict how
PPHP conducts its business, resulting in additional burdens and costs to PPHP.
Areas of governmental regulation include mandated and other benefits, limitation
and disclosures of incentives to physicians, licensure, premium rate approval,
service area expansion, quality improvement procedures, plan design, eligibility
requirements, provider contracts, member contracts, permissible investments,
claims and grievance procedures and rates of payment, underwriting, financial
arrangements, financial condition (including reserves) and corporate governance.
PPHP will also be required to file with the Departments quarterly and annual
reports containing financial statements and other information concerning the
operation of PPHP's business.
There can be no assurance that the regulatory environment in which PPHP operates
will not change significantly in the future. Legislative efforts to change the
health insurance system have received increased attention in recent years at
both the state and national levels. Material changes in applicable federal and
state laws and regulations could adversely affect PPHP's business operations.
Specifically, managed care insurers are the subject of a growing number of
initiatives intended to protect the interests of consumers. Proposed federal and
state laws and regulations include, but are not limited to:
o Expansion of the definition of primary care provider;
o Open enrollment;
o Patient and provider grievance and appeal rights;
o Elimination of the ERISA preemption of state law causes of action,
permitting managed care organizations to be sued for negligence,
malpractice, and other torts, thus increasing risk of liability and
legal expenses; and
o Requirements that a managed care entity accept any provider willing
to accept its payment rates and contracting terms ("any willing
provider" statutes), which reduce a managed care entity's ability to
control the quality of its provider network.
In addition, various federal and state courts, including courts in Pennsylvania,
have imposed tort liability on health plans despite the preemption provisions of
the Employee Retirement Income Security Act of 1974 ("ERISA") that have been
held to bar such liability. These cases and future court decisions narrowing
ERISA preemption could materially adversely affect PPHP's business operations.
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On June 17, 1998, the Pennsylvania legislature enacted 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 PPHP and which could adversely impact PPHP's business.
These additional requirements include, but are not limited to:
o Prudent layperson standard for determining what constitutes an
emergency;
o In the case of certain illnesses and conditions, enrollees 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 must
coordinate the care of an enrollee, not a primary care physician;
o No financial incentives for "less than appropriate care;"
o Restrictions on the ability to terminate a provider from the provider
network;
o Enrollees being treated by a provider terminated from the provider
network are entitled to continue care by that provider for 60 days
despite the termination; o New enrollees are entitled 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 enrollees and prospective
enrollees as a matter of course and upon request; and
o Access to pharmaceuticals not contained in the plan's formulary.
Penalties for violation of Act No. 1998-68 include the issuance of an
injunction, a $10,000 fine per occurrence, a prohibition of new enrollment,
imposition of a plan of correction, and, for a second violation, restrictions or
prohibitions on marketing.
Act No. 1998-68 became effective on January 1, 1999. 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 Departments issued a joint policy statement to
provide interim guidance in these areas before proposed regulations are
published by the Departments (expected to occur in 1999).
The provisions of Act No. 1998-68 required PPHP to resubmit its HMO forms and
procedures to the Insurance Department to ensure that they address the
applicable concerns of Act No. 1998-68. On January 26, 1999 the Insurance
Department approved PPHP's forms and procedures.
On October 16, 1998, the Pennsylvania legislature enacted 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. On October 21, 1998, Congress enacted the Women's Health and
Cancer Rights Act of 1998, which requires coverage for breast reconstruction,
protheses and treatment for complications following a mastectomy. This
legislation became effective immediately, applying to plan years beginning on or
after October 21, 1998.
PPHP believes that the enactment of Act No. 1998-68, and Act No. 1998-98, and
the Women's Health and Cancer Rights Act of 1998, as well as other currently
proposed laws and regulations, will not have a material adverse effect on PPHP.
However, PPHP is unable to predict (1) how existing federal or state laws and
regulations may be changed or interpreted, (2) what additional laws or
regulations affecting its
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business may be enacted or proposed, (3) when any of the proposed laws will be
adopted and (4) what effect any new laws and regulations will have on its
business.
Net Worth Requirements
Pennsylvania managed care laws and regulations (the "Managed Care Laws") govern
the licensing and operation of PPOs and HMOs in the Commonwealth of
Pennsylvania. They require that a managed care company possess an initial
minimum net worth (generally, PPHP's assets minus its liabilities) of $1,500,000
to operate an HMO and an additional $1,175,000 for a risk-assuming PPO. In
practice the Insurance Department requires higher initial amounts equal to one
fifteenth of projected fifth year premium revenue. In addition to the net worth
requirements, the Managed Care Laws require that PPHP, before commencing the
operation of its HMO, deposit with the Insurance Department cash or securities
in a minimum amount of $100,000 to insure against the insolvency of PPHP. This
deposit requirement is reviewed by the Insurance Department at least annually.
If PPHP becomes unable to meet the foregoing deposit and net worth requirements,
or any more stringent requirements that may be imposed, PPHP's PPO and HMO
licenses may be revoked.
Antitrust Considerations
Antitrust concerns have become central issues in the new managed care
environment of the health care industry. Whenever physicians or other health
care providers join together to form ventures for the delivery of health care
services, including activities conducted by PPHP, antitrust issues may be
present. These issues primarily concern conspiracies, combinations and
agreements in restraint of competition 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, restricting
the way PPHP operates, civil or criminal fines and substantial expenses in the
form of attorneys' fees and costs. To date, PPHP believes that it is in
compliance with all applicable antitrust laws.
PPHP carefully analyzes its 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 PPHP's proposed
operations. Even with such analysis, there can be no assurance that PPHP's
operations will not be challenged on the basis of antitrust violations at some
time in the future. In addition, antitrust law in this area is unsettled and
future developments could require substantial changes in its method of doing
business which could negatively impact the profitability of PPHP. Moreover, if
antitrust lawsuits were to be filed against PPHP, it would be forced to incur
substantial legal expenses, and, if any challenge were successful, PPHP could
suffer additional material adverse consequences.
Year 2000
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. 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
12
<PAGE>
based on dates incorrectly, or report information inaccurately. Year 2000 issues
affect virtually all companies and organizations.
PPHP has undertaken a review of its systems infrastructure and operations in
order to determine the extent to which its computer systems will be vulnerable
to potential errors and system failures arising from the transition of dates
from 1999 to 2000. PPHP's financial and operational computer systems utilize
computer software and hardware developed by outside vendors. PPHP has, through
communication with its software and hardware vendors, determined which internal
information technology systems are Year 2000 compliant and which systems need
updating. Most systems, including PPHP's main system used to process enrollment,
billing and accounts receivable, authorizations, and claims payments, and PPHP's
local area network, have been updated to process calendar dates beginning in the
Year 2000. Updates on the remaining systems are scheduled to be completed in
July, 1999. Additionally, PPHP's 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 will begin in May, 1999.
PPHP does not expect the costs associated with this upgrade to be material to
PPHP's consolidated financial position, results of operations or cash flows.
However, PPHP is currently unable to determine the potential impact, if any,
that could result from any of its vendors' failure to address this issue
adequately. Despite any of its vendors' efforts, PPHP's system infrastructure,
software and hardware may still be materially adversely impacted by the
transition to Year 2000 through:
o the inability to accurately and timely process benefit claims
o the inability to update customers' accounts
o the inability to process financial transactions
o the inability to bill customers
o the inability to assess exposure to risks
o the inability to determine liquidity requirements or report accurate financial
data to management, shareholders, customers, regulators and others
o business interruptions or shutdowns
o reputational harm
o increased scrutiny by regulators
o litigation related to Year 2000 issues
any of which events could have a material adverse effect on PPHP's business,
results of operations and financial condition.
In addition, PPHP has begun to develop contingency/recovery plans aimed at
ensuring the continuity of critical business functions before December 31, 1999.
As part of that process, PPHP has begun to develop reasonably likely failure
scenarios for its critical information technology systems and external
relationships. Once these scenarios are identified, PPHP will develop plans that
are designed to reduce the impact on PPHP and provide methods for returning to
normal operations if one or more of those scenarios occur.
Year 2000 considerations may also have an effect on some third parties with whom
PPHP does business and thus indirectly affect PPHP. One or more of PPHP's
physician providers, 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 PPHP's control. For example,
PPHP could be
13
<PAGE>
responsible if a hospital system failed to adequately address its Year 2000
issues and a patient insured by PPHP were to suffer as a result of such failure.
PPHP has initiated contact with many of its providers, contractors and suppliers
to determine if these third parties are appropriately responding to their Year
2000 issues. PPHP will 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 the cost to PPHP
with respect to third parties with Year 2000 problems, although PPHP does not
anticipate that it will have a material adverse effect on its business, results
of operations and financial condition.
Item 7. Description of Property
PPHP leases 13,123 square feet of office space in Harrisburg, Pennsylvania under
a lease expiring in February, 2003 and subleases an additional 2,700 square feet
of office space at the same location under a sublease expiring December,
1999. The lease and sublease provide for monthly aggregate rental payments by
PPHP of $20,442.
Item 8. Directors, Executive Officers and Significant Employees
The table below sets forth certain information with respect to PPHP's executive
officers, significant employees and directors:
<TABLE>
<CAPTION>
Name Age Position with PPHP
---- --- ------------------
<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, Chief Financial Officer and Assistant
Secretary
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
</TABLE>
14
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
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>
The Board of Directors of PPHP 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 the terms of Drs.
Dunne, Harman, Homa, Piasio, Pitcavage, Pyatt and Soiferman, in 2001. PPHP's
Bylaws provide that, effective October 3, 1998, 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 of PPHP 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 PPHP's Executive
Committee.
Richard J. Minehart, M.D. Dr. Minehart has served as a Director of PPHP since
February, 1995. Dr. Minehart has conducted a medical practice in General Surgery
since 1983. Dr. Minehart is presently the Chairman of the Medical Executive
Committee and President of the Medical Staff at North Penn Hospital. Dr.
Minehart served as Treasurer of PPHP from March, 1995 to November, 1996. He is
also a member of PPHP's Executive Committee.
Richard A. Felice. Mr. Felice has been President and Chief Executive Officer of
PPHP since September, 1996 and a Director of PPHP since January, 1999. From
July, 1994 to August, 1996 he was President of Doctors Health Plan, a Durham,
North Carolina HMO. From 1993 to July, 1994 he was Senior Vice President of
Wellmark Healthcare Services, Inc., Wellesley, Massachusetts. From 1985 to 1993,
he served as Sales Manager and Regional Vice President of U.S. Healthcare in
Blue Bell, Pennsylvania and Waltham, Massachusetts.
T. Clark Phillip. Mr. Phillip has been Treasurer, Chief Financial Officer and
Assistant Secretary of PPHP since November, 1996. From February, 1995 until
assuming his present position he was Treasurer of Doctors Health Plan, Inc. From
November, 1986 until February, 1995, he was Vice President, Finance of HMO Rhode
Island, Inc.
15
<PAGE>
Jack J. Jaroh. Mr. Jaroh has been the Vice President, Sales and Marketing of
PPHP 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 PPHP since May, 1997, first
as Vice President, Network Development and 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 of PPHP 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 of PPHP 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 of PPHP 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 PPHP's Executive Committee.
Larry E. Goldstein, M.D., M.B.A. Dr. Goldstein has served as a Director of PPHP
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 PPHP
from March, 1995 to November, 1996. He is also a member of PPHP's Executive
Committee.
Frank H. Guinn, D.O. Dr. Guinn has served as a Director of PPHP 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 of PPHP 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 PPHP's
Executive Committee.
George R. Homa, D.O. Dr. Homa has served as a Director of PPHP since February,
1995. Dr. Homa
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<PAGE>
has conducted a family medical practice in Bridgeport, Pennsylvania since 1979.
He is Board certified by the American College of Osteopathic General
Practitioners and a Clinical Instructor of General Practice at the Philadelphia
College of Osteopathic Medicine.
Lila Stein Kroser, M.D. Dr. Kroser has served as a Director of PPHP since July,
1996. Dr. Kroser has conducted a family medical practice in Philadelphia,
Pennsylvania since 1960. She is a Clinical Associate Professor at MCP/Hahnemann
School of Medicine. Dr. Kroser is the President of Medical Women's International
Association and is the President-elect of the Philadelphia County Medical
Society. 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 of PPHP 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 of PPHP since
February, 1995. Dr. Nevulis has conducted a medical practice in orthopaedic
surgery in the Philadelphia area since 1977. He is the managing partner of
Norristown Orthopaedic Associates, Inc. He is also President of Pennsylvania
Orthopedic Network, an independent practice association of orthopaedists. He is
a Board certified orthopaedic surgeon and Fellow of the American Academy of
Orthopaedic Surgeons. Dr. Nevulis served as Executive Vice President of PPHP
from March, 1995 to November, 1996. He is also a member of PPHP's Executive
Committee.
Mark A. Piasio, M.D. Dr. Piasio has served as a Director of PPHP 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 PPHP's Executive Committee.
James G. Pitcavage, M.D. Dr. Pitcavage has served as a Director of PPHP since
June, 1995. Dr. Pitcavage has conducted a medical practice in pediatrics since
1965. Dr. Pitcavage is Chairman of Children's Health Network (a PHO involving
Children's Hospital of Pittsburgh and community physicians) and a Director of
MCA/Sewickley Valley Hospital. 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 of PPHP since
February, 1995. Dr. Pyatt has conducted a medical practice in radiology since
1982. Since January, 1982 he has served as President of Chambersburg Imaging
Associates. Since January, 1996 he has also served as 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 of PPHP 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
17
<PAGE>
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 of PPHP 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 Vice President-Medical Affairs of PPHP from
April, 1995 to November, 1996. He is also a member of PPHP's Executive
Committee.
Milton D. Soiferman, J.D., D.O. Dr. Soiferman has served as a Director of PPHP
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 PPHP's Executive Committee.
Jay Anthony Townsend, M.D. Dr. Townsend has served as a Director of PPHP 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.
Herbert C. Perlman, M.D., F.A.C.R., M.P.A, resigned as a director of PPHP
effective November 27, 1998.
Item 9. Remuneration of Directors and Officers
The following table shows the aggregate annual remuneration of each of the three
highest paid persons who were officers or directors of PPHP during 1998, and for
all officers and directors as a group.
<TABLE>
<CAPTION>
Name of Individual or Capacities in Which Aggregate
Identity of Group Remuneration was Received Remuneration
- -------------------- ------------------------- ------------
<S> <C> <C>
Richard A. Felice President and Chief Executive
Officer $283,428
Jack J. Jaroh Vice President, Sales and Marketing $178,390
T. Clark Phillip Treasurer, Chief Financial Officer
and Assistant Secretary $145,861
All officers and directors as a group (23 persons) $729,127
</TABLE>
Stock Option Plan
At a Special Meeting of the shareholders of PPHP held on January 3, 1999, the
shareholders of PPHP approved the adoption of the Pennsylvania Physician
Healthcare Plan, Inc. Stock Option Plan (the "Stock Option Plan"). The Stock
Option Plan provides for the grant to officers and full-time employees of PPHP
of options for the purchase of up to 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
18
<PAGE>
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 of PPHP 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. As of March 15, 1999 no options had been
granted under the Stock Option Plan.
Directors' Compensation
Each director of PPHP is entitled to reimbursement for all reasonable
out-of-pocket expenses incurred in attending meetings of the Board of Directors
and committees thereof. Directors currently do not receive separate cash
consideration for their services in that capacity, although the Board of
Directors expects to adopt a plan to award options to purchase PPHP's common
stock annually to members of the Board.
Employment Agreements
Mr. Felice is employed under an agreement with Pennsylvania Physicians Care
Service Corp., a subsidiary of PPHP, dated as of September 3, 1996. The
agreement originally provided Mr. Felice with an annual salary of $200,000 and a
guaranteed bonus of 15% of his annual salary, which was paid in advance in the
first year. The agreement provided for reimbursement of moving expenses when
they were incurred. 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 and to provide for an annual bonus of up to 20% of 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 PPHP fails to renew the agreement
during its first five years or terminates the agreement prior to the end of any
renewal term, for other than good and sufficient cause. Additionally, in the
event PPHP is restructured so that Mr. Felice is no longer Chief Executive
Officer, or if so offered, he does not accept such position, 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 PPHP in any geographic area
in which PPHP is then doing business, is licensed, or has a license application
pending.
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 plus commissions equal to $2.00 per member for each
member enrolled in the Company's healthcare plans, other than members enrolled
pursuant to self-insured employer agreement or 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 provides for reimbursement
of moving expenses when they are incurred. 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 PPHP terminates 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 PPHP terminates 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 disability, compete with PPHP in any geographic
area in which PPHP is then doing business, is licensed, or has a license
application pending. 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.
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<PAGE>
Jaroh is receiving payments from PPHP.
Item 10. Security Ownership of Management and Certain Security Holders
The following table lists certain information with respect to all outstanding
shares of PPHP Class A common stock and Class B common stock held of record by
each of the three highest paid persons who were officers or directors of PPHP
during 1998, as well as the number of shares held of record owned by all
officers and directors as a group on March 15, 1999. Each individual named below
has an address in care of PPHP's principal executive offices.
<TABLE>
<CAPTION>
Shares of Class A Common Shares of Class B Common
Stock Owned of Record Stock Owned of Record
--------------------- ---------------------
Name of Owner Number of Shares Percentage Number of Shares Percentage
- ------------ ---------------- ---------- ---------------- ----------
<S> <C> <C> <C> <C>
Richard A. Felice 0 0 0 0
T. Clark Phillip 0 0 0 0
Jack J. Jaroh 0 0 0 0
All directors and officers 27 1% 21 2%
as a group (23 persons)(1)
</TABLE>
- -----------------
(1) Includes 1 share of Class A common stock held by a pension and profit
sharing plan with respect to which Dr. Pyatt acts as co-trustee.
To the knowledge of management of PPHP, no person owns more than 10% of any
class of PPHP's securities. PPHP has not granted any options, warrants or rights
to purchase any of its securities. The directors of PPHP may be regarded as the
"parents" of PPHP, as that term is defined under the Securities Act of 1933.
Item 11. Interest of Management and Others in Certain Transactions
None.
PART II
Item 1. Market Price of and Dividends on the Registrant's Common Equity and
Other Shareholder Matters
PPHP's initial public offering was concluded in early 1996, and no public
trading market has yet developed.
20
<PAGE>
No cash dividends were declared or paid by PPHP in 1997 or 1998.
As of March 15, 1999 there were 3,968 holders of record of Class A common stock
and 356 holders of record of Class B common stock. No shares of the new class of
common stock into which shares of Class A and Class B common stock are
convertible have yet been issued.
Item 2. Legal Proceedings
As of March 18, 1999, PPHP was not a party to any litigation.
Item 3. Changes in and Disagreements With Accountants
None.
Item 4. Submission of Matters to a Vote of Security Holders
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. 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 PPHP by
eliminating the Class C common stock and Class D common stock of PPHP (no shares
of which had been outstanding).
The holders of Class A Shares and Class B Shares also approved Amended and
Restated Articles of Incorporation pursuant to which PPHP's shareholder
eligibility requirements were expanded to include certain "health professionals"
and present and former employees of PPHP. The term "health professional" means
and includes physicians, podiatrists, dentists, oral surgeons, optometrists,
pharmacists, chiropractors, nurses, nurse practitioners, physical or
occupational therapists and physicians' assistants, and other similar licensed
professional persons.
At the meeting, and any subsequent adjournments pursuant to PPHP's then
effective Articles of Incorporation, each holder of Class A Shares was entitled
to only one vote for each matter brought before the meeting, in person or by
proxy, regardless of the number of Class A Shares owned.
A total of 2,539 Class A shareholders voted in favor of the Plan of
Recapitalization and Amended and Restated Articles of Incorporation, 119 voted
against the proposal and 126 Class A shareholders abstained. A total of 467
Class B Shares were voted in favor of the Plan of Recapitalization and Amended
and Restated Articles of Incorporation, 17 voted against the proposal and 21
Class B Shares abstained.
Additionally, the holders of Class A Shares approved the adoption of the
Pennsylvania Physician Healthcare Plan, Inc. Stock Option Plan which provides
for the grant to officers and full-time employees of PPHP of options for the
purchase of up to 200,000 shares of common stock. A total of 2,359 Class A
shareholders voted in favor of the Stock Option Plan, 273 voted against the
proposal and 152 Class A shareholders abstained.
At a Special Meeting of Shareholders held on February 3, 1999, the holders of
the Class A Shares
21
<PAGE>
approved a reduction in the amount of net proceeds from the 1995-1996 offering
required to be retained by PPHP for post-HMO licensure activities to $5,000,000
in order to allow any excess to be employed by PPHP in the operations of its PPO
and other activities while it continued to seek its HMO license. A total of
2,194 Class A shareholders voted in favor of the retention of $5,000,000, 104
voted against the proposal and 81 Class A shareholders abstained.
In addition to the above actions, PPHP is currently seeking approval of the
holders of Class A Shares for an amendment to PPHP's Bylaws to require the
affirmative vote of 662/3% of the votes able to be cast by all shareholders
entitled to vote in order to approve the acquisition of all or substantially all
of the entire business of PPHP by another person through a merger, sale or other
disposition by PPHP of its assets (the Bylaws currently require the affirmative
vote of 90% of the votes able to be cast by all shareholders entitled to vote).
Item 5. Compliance with Section 16(a) of the Exchange Act
Section 16(a) of the Securities Exchange Act of 1934 requires PPHP's officers
and directors, and persons who own more than 10% of its Class A Shares, to file
reports of ownership and changes in ownership with the Securities and Exchange
Commission (the "Commission"). Officers, directors and greater than ten percent
shareholders are required to furnish PPHP with copies of all Section 16(a) forms
that they file.
Based solely on a review of the copies of such forms received by it, or written
representations from certain reporting persons that no reports on Form 5 were
required for those persons, PPHP believes that during 1998 all filing
requirements applicable to its officers, directors and greater than ten percent
shareholders were complied with, except that Valerie Harris and Jack Jaroh each
failed to file an initial statement of beneficial ownership of equity securities
on Form 3. The appropriate Form 3's were filed shortly after PPHP discovered the
omission. Prior to January 9, 1999 PPHP's charter documents precluded Ms. Harris
and Mr. Jaroh from being shareholders. As of March 15, 1999 Ms. Harris and Mr.
Jaroh could only become shareholders if PPHP issued options to them and they
exercised these options. No options have, as yet, been issued to either of them.
Consequently, neither Ms. Harris or Mr. Jaroh beneficially owns any equity
securities of PPHP.
Item 6. Reports on Form 8-K
No reports on Form 8-K were filed by PPHP during the fourth quarter of 1998.
PART F/S
22
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders
Pennsylvania Physician Healthcare Plan, Inc.
Harrisburg, PA
We have audited the accompanying consolidated balance sheets of Pennsylvania
Physician Healthcare Plan, Inc. and its subsidiaries (the "Company") as of
December 31, 1998 and 1997, and the related consolidated statements of income
and comprehensive income, changes in stockholders' equity, and cash flows for
the years then ended. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements present fairly, in all
material respects, the financial position of the Company at December 31, 1998
and 1997, and the results of its operations and its cash flows for the years
then ended, in conformity with generally accepted accounting principles.
Deloitte & Touche LLP
/s/ Deloitte & Touche LLP
- -------------------------
Philadelphia, Pennsylvania
March 17, 1999
23
<PAGE>
<TABLE>
<CAPTION>
PENNSYLVANIA PHYSICIAN HEALTHCARE PLAN, INC. Consolidated Balance Sheets
- ----------------------------------------------------------------------------------------------------------------------
December 31, December 31,
Assets 1998 1997
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
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, $.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 (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.
24
<PAGE>
PENNSYLVANIA PHYSICIAN HEALTHCARE PLAN, INC.
Consolidated Statements of Income and Comprehensive Income
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------
Year-Ended Year-Ended
December 31, December 31,
1998 1997
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Revenues:
Premiums $ 6,622,311 $ 183,222
Consulting 65,000 -
Investment income, net 648,352 836,450
- ----------------------------------------------------------------------------------------------------------------------
Total Revenue 7,335,663 1,019,672
- ----------------------------------------------------------------------------------------------------------------------
Expenses:
Health care services 7,588,762 172,940
Salary and benefits 3,003,529 2,088,976
Operating expenses 1,953,429 1,124,602
Professional services 430,447 394,125
Other taxes 38,008 25,256
Depreciation 411,971 272,859
- ----------------------------------------------------------------------------------------------------------------------
Total expenses 13,426,146 4,078,758
- ----------------------------------------------------------------------------------------------------------------------
Net loss $ (6,090,483) $ (3,059,086)
- ----------------------------------------------------------------------------------------------------------------------
Other comprehensive income, net of income taxes:
Unrealized gain on investments 5,076 -
Comprehensive Loss (6,085,407) (3,059,086)
Net loss per common share $ (1,180.10) $ (592.73)
Weighted average common shares 5,161 5,161
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
25
<PAGE>
PENNSYLVANIA PHYSICIAN HEALTHCARE PLAN, INC.
Consolidated Statements of Changes in Stockholders' Equity
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Common Stock Shares Common Stock Par Additional Accumulated Accumulated
Value Paid In Deficit Other Total
Capital Comprehensive
Class A Class B Class A Class B Income
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
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 gains on
investments 5,076 5,076
- ------------------------------------------------------------------------------------------------------------------------------------
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.
26
<PAGE>
PENNSYLVANIA PHYSICIAN HEALTHCARE PLAN, INC.
Consolidated Statement of Cash Flows
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------
Year-Ended Year-Ended
December 31, December 31,
1998 1997
- ------------------------------------------------------------------------------------------------------------------------------
Cash flows from operating activities:
<S> <C> <C>
Net loss $ (6,090,483) $ (3,059,086)
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:
Accrued interest income (80,043) 12,030
Premiums receivable (146,373) (25,393)
Income tax receivable - 137,147
Other assets (173,471) 18,231
Medical claims liabilities 1,882,264 63,458
Accounts payable 39,430 (221,978)
Accrued expenses 850 43,500
Other liabilities (35,925) (42,942)
- ------------------------------------------------------------------------------------------------------------------------------
Net cash used in operating activities (4,183,115) (2,716,290)
- ------------------------------------------------------------------------------------------------------------------------------
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)
- ------------------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (7,459,256) (414,677)
- ------------------------------------------------------------------------------------------------------------------------------
Net decrease in cash and cash equivalents (11,642,371) (3,130,967)
Cash and cash equivalents, beginning of period 14,250,640 17,381,607
- ------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of period $ 2,608,269 $ 14,250,640
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
27
<PAGE>
PENNSYLVANIA PHYSICIAN HEALTHCARE PLAN, INC.
Notes to Consolidated Financial Statements for the Years Ended December 31, 1998
and 1997
- --------------------------------------------------------------------------------
(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.
28
<PAGE>
PENNSYLVANIA PHYSICIAN HEALTHCARE PLAN, INC.
Notes to Consolidated Financial Statements for the Years Ended December 31, 1998
and 1997
- --------------------------------------------------------------------------------
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.
Earnings Per Common Share
Earnings per common share have been computed based upon the weighted average
number of common shares outstanding during each period.
29
<PAGE>
PENNSYLVANIA PHYSICIAN HEALTHCARE PLAN, INC.
Notes to Consolidated Financial Statements for the Years Ended December 31, 1998
and 1997
- --------------------------------------------------------------------------------
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 FASB No.
130 "Reporting Comprehensive Income". 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 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 PPHP's interim and annual financial statements. Adoption
of this statement did not impact the presentation of PPHP's financial
information.
In June 1998, the FASB issued Statement No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which is effective for PPHP'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 PPHP's financial condition
and results of operations.
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.
30
<PAGE>
PENNSYLVANIA PHYSICIAN HEALTHCARE PLAN, INC.
Notes to Consolidated Financial Statements for the Years Ended December 31, 1998
and 1997
- --------------------------------------------------------------------------------
(3) Restrictions on Cash
As specified in the prospectus for the public stock offering, approximately
$9,691,000 of offering proceeds which are included in the Company's cash and
cash equivalents 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 Unrealized Unrealized Fair Value
Cost Gain Loss
<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
---------------------------------------------
Maturities:
<S> <C> <C>
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.
31
<PAGE>
PENNSYLVANIA PHYSICIAN HEALTHCARE PLAN, INC.
Notes to Consolidated Financial Statements for the Years Ended December 31, 1998
and 1997
- --------------------------------------------------------------------------------
(5) Equipment
Equipment owned at December 31, 1998 and 1997 consists of the following:
<TABLE>
<CAPTION>
Useful lives 1998 1997
------------------------------------------------------------
<S> <C> <C> <C>
Capitalized software 3 years $ 574,793 $ 551,893
Data processing equipment 5 years 272,077 216,947
Furniture and office equipment 5 - 7 years 395,182 280,235
Leasehold improvements 5 years 14,689 13,373
------------------------------------------
Total equipment 1,256,741 1,062,448
Accumulated depreciation (684,830) (272,859)
------------------------------------------
Equipment (net) $ 571,911 $ 789,589
------------------------------------------
</TABLE>
Depreciation expense was $411,971 and $272,859 for the years ended December 31,
1998 and 1997, respectively.
(6) Medical Claims Liability
Activity in the medical claims liability consisted of the following for the
years ended December 31:
<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>
32
<PAGE>
PENNSYLVANIA PHYSICIAN HEALTHCARE PLAN, INC.
Notes to Consolidated Financial Statements for the Years Ended December 31, 1998
and 1997
- --------------------------------------------------------------------------------
(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 and $171,699 for the years ended December 31, 1998 and 1997,
respectively.
Future minimum rental payments under the terms of the operating leases at
December 31, 1998 are as follows:
1999 $ 258,076
2000 262,083
2001 269,597
2002 271,045
2003 46,084
------------------
Total $ 1,106,885
------------------
The Company's subsidiary, Pennsylvania Physicians Care Service Corp., has
entered into employment agreements with executive officers of the Company and
the Company's subsidiaries. With respect to these officers agreements, the total
minimum commitment level of the Company and its subsidiaries over the next two
years is approximately $340,000.
(9) Income Taxes
The net deferred amounts reported by the Company at December 31, 1998 and
December 31, 1997 are as follows:
33
<PAGE>
PENNSYLVANIA PHYSICIAN HEALTHCARE PLAN, INC.
Notes to Consolidated Financial Statements for the Years Ended December 31, 1998
and 1997
- --------------------------------------------------------------------------------
1998 1997
-----------------------------------
Deferred tax assets:
Start up costs $ 879,794 $ 1,148,518
Net operating loss carryforward 4,073,697 1,394,145
Other assets 35,958 19,548
-----------------------------------
Deferred tax asset 4,989,449 2,562,211
Valuation allowance (4,989,449) (2,562,211)
-----------------------------------
Net deferred tax asset $ - $ -
-----------------------------------
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 member 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
34
<PAGE>
PENNSYLVANIA PHYSICIAN HEALTHCARE PLAN, INC.
Notes to Consolidated Financial Statements for the Years Ended December 31, 1998
and 1997
- --------------------------------------------------------------------------------
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 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) Year 2000
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. 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.
The Company has undertaken a review of its systems infrastructure and operations
in order to determine the extent to which its computer systems will be
vulnerable to potential errors and system failures arising from the transition
of dates from 1999 to 2000. The Company's financial and operational computer
systems utilize computer software and hardware developed by outside vendors. The
Company has, through communication with its software and hardware vendors,
determined which internal information technology systems are Year 2000 compliant
and which systems need updating. Most systems, including the Company's main
system used to process enrollment, billing and accounts receivable,
authorizations, and claims payments, and the Company's local area network, have
been updated to process calendar dates beginning in the Year 2000. Updates on
the remaining systems are scheduled to be completed in July, 1999. Additionally,
the Company's 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 will begin in May, 1999.
The Company does not expect the costs associated with this upgrade to be
material to the Company's consolidated financial position, results of operations
or cash flows. However, the Company is currently unable to determine the
potential impact, if any, that could result from any of its vendors' failure to
address this issue adequately. Despite any of its vendors' efforts, the
Company's system infrastructure, software and hardware may still be materially
adversely impacted by the transition to Year 2000 through the inability to
accurately and timely process benefit claims, the inability to update customers'
accounts, the inability to process financial transactions, the inability to bill
customers, the inability to assess exposure to risks, the inability to determine
liquidity requirements or report accurate financial data to management,
shareholders, customers, regulators and others, business interruptions or
shutdowns, reputational harm, increased scrutiny by regulators, and litigation
related to Year 2000 issues, any of which events could have a material adverse
effect on the Company's business, results of operations and financial condition.
In addition, the Company has begun to develop contingency/recovery plans aimed
at ensuring the continuity
35
<PAGE>
PENNSYLVANIA PHYSICIAN HEALTHCARE PLAN, INC.
Notes to Consolidated Financial Statements for the Years Ended December 31, 1998
and 1997
- --------------------------------------------------------------------------------
of critical business functions before December 31, 1999. As part of that
process, the Company has begun to develop reasonably likely failure scenarios
for its critical information technology systems and external relationships. Once
these scenarios are identified, the Company will develop plans that are designed
to reduce the impact on the Company and provide methods for returning to normal
operations if one or more of those scenarios occur.
Year 2000 considerations may also have an effect on some third parties with whom
the Company does business and thus indirectly affect the Company. One or more of
the Company's physician providers, 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 the Company's
control. For example, the Company could be responsible if a hospital system
failed to adequately address its Year 2000 issues and a patient insured by the
Company were to suffer as a result of such failure. The Company has initiated
contact with many of its providers, contractors and suppliers to determine if
these third parties are appropriately responding to their Year 2000 issues. The
Company will 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 the cost to the Company with respect
to third parties with Year 2000 problems, although the Company does not
anticipate that it will have a material adverse effect on its business, results
of operations and financial condition.
(14) 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
36
<PAGE>
PENNSYLVANIA PHYSICIAN HEALTHCARE PLAN, INC.
Notes to Consolidated Financial Statements for the Years Ended December 31, 1998
and 1997
- --------------------------------------------------------------------------------
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.
37
<PAGE>
PART III
Item 1. Index to Exhibits
Exhibit
Number Document and Description
- ------ ------------------------
2.1 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)).
2.2 Amended and Restated Bylaws of Pennsylvania Physician
Healthcare Plan, Inc. dated as of October 3, 1998.*
3.2 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)).
6.1 Licensure/Business Development Phase Services Agreement
with Infinity Management Services, Inc., dated March 6,
1996 (incorporated by reference to Exhibit 6.1 to PPHP's
Form 10-SB filed April 30, 1996 (Commission File No.
0-28390)).
6.2 Executive Employment Agreement, dated September 3, 1996,
between PPHP Service Corp. and Richard A. Felice
(incorporated by reference to Exhibit 6.2 to PPHP's Form
10-KSB for the fiscal year ended December 31, 1996
(Commission File No. 0-28390)).
6.3 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)).
6.4 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)).
6.5 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)).
6.6 Executive Employment Agreement, dated February 28, 1997,
between Pennsylvania Physicians Care Service Corp. and
Jack J. Jaroh.*
6.7 Agreement of Lease, dated September 19, 1996, between
Pennsylvania Physician Healthcare Plan, Inc. and Union
Deposit Corporation.*
38
<PAGE>
6.8 Amendment No. 1 to Agreement of Lease, dated February 27,
1998, between Pennsylvania Physician Healthcare Plan, Inc.
and Union Deposit Corporation.*
27 Financial Data Schedule.*
- ---------------
*Filed herewith.
39
<PAGE>
S I G N A T U R E S
In accordance with Section 13 or 15(d) of the Exchange Act, the
registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
PENNSYLVANIA PHYSICIAN
HEALTHCARE PLAN, INC.
Date: March 26, 1999 By: /s/Richard A. Felice
-------------------------------------------
Richard A. Felice, President
(Chief Executive Officer)
In accordance with the Exchange Act, this report has been signed
below by the following persons on behalf of the registrant and in the capacities
and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/Richard A. Felice Principal Executive Officer March 26, 1999
- ---------------------------------- and Director
Richard A. Felice
/s/T. Clark Phillip Principal Financial and March 26, 1999
- ---------------------------------- Accounting Officer
T. Clark Phillip
/s/Gary C. Brown Director March 26, 1999
- ----------------------------------
Gary C. Brown, M.D.
/s/Darlene Ann M. Dunay Director March 26, 1999
- ----------------------------------
Darlene Ann M. Dunay, D.O.
/s/Gay D. Dunne Director March 26, 1999
- ----------------------------------
Gay D. Dunne, M.D.
/s/Edward W. Gerner Director March 26, 1999
- ----------------------------------
Edward W. Gerner, M.D.
/s/Larry E. Goldstein Director March 26, 1999
- ----------------------------------
Larry E. Goldstein, M.D.
- ---------------------------------- Director ________, 1999
Frank H. Guinn, D.O.
/s/Leonard P. Harman Director March 26, 1999
- ----------------------------------
Leonard P. Harman, D.O.
</TABLE>
40
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
/s/George R. Homa Director March 26, 1999
- ----------------------------------
George R. Homa, D.O.
/s/Lila Stein Kroser Director March 26, 1999
- ----------------------------------
Lila Stein Kroser, M.D.
/s/Alice McCormick Director March 26, 1999
- ----------------------------------
Alice McCormick, D.O.
/s/Richard J. Minehart Director March 26, 1999
- ----------------------------------
Richard J. Minehart, M.D.
/s/John J. Nevulis Director March 26, 1999
- ----------------------------------
John J. Nevulis, M.D.
/s/Mark A. Piaso Director March 26, 1999
- ----------------------------------
Mark A. Piasio, M.D.
/s/James G. Pitcavage Director March 26, 1999
- ----------------------------------
James G. Pitcavage, M.D.
/s/Robert S. Pyatt, Jr. Director March 26, 1999
- ----------------------------------
Robert S. Pyatt, Jr., M.D.
/s/Saad Sakkal Director March 26, 1999
- ----------------------------------
Saad Sakkal, M.D.
/s/Jay H. Shah Director March 26, 1999
- ----------------------------------
Jay H. Shah, M.D.
/s/Milton D. Soiferman Director March 26, 1999
- ----------------------------------
Milton D. Soiferman, J.D., D.O.
/s/Jay Anthony Townsend Director March 26, 1999
- ----------------------------------
Jay Anthony Townsend, M.D.
</TABLE>
41
<PAGE>
Exhibit 2.2
AMENDED AND RESTATED
BYLAWS
of
PENNSYLVANIA PHYSICIAN HEALTHCARE PLAN, INC.
Adopted October 3, 1998
ARTICLE I - OFFICES
1.1 Offices. The Corporation may have such offices as the
board of directors may from time to time determine or the business of the
Corporation may require.
ARTICLE II - SEAL
2.1 Corporate Seal. The corporate seal shall have inscribed
thereon the name of the Corporation, the year of its organization and the words
"Corporate Seal, Pennsylvania".
ARTICLE III - SHAREHOLDERS' MEETINGS
3.1 Location of Shareholders' Meetings. Meetings of
shareholders shall be held at the registered office of the Corporation or at
such other place as shall be determined by the board of directors.
3.2 Annual Meeting. The annual meeting of the voting
shareholders shall be held each year on such date and at such time between March
1 and June 30 as shall be determined by the board of directors for the purpose
of electing directors and for the transaction of such other business as may be
properly brought before the meeting. In each election of directors, the
candidates receiving the highest number of votes, up to the number of directors
to be elected in such election, shall be elected.
3.3 Quorum. The presence, in person or by proxy, of
shareholders entitled to cast at least one-third (1/3) of the votes
<PAGE>
which all shareholders are entitled to cast on the particular matter shall
constitute a quorum for the purpose of considering such matter. The shareholders
present at a duly organized meeting can continue to do business until
adjournment, notwithstanding the withdrawal of enough shareholders to leave less
than a quorum.
3.4 Action by Shareholders. Except as otherwise specified
herein or provided by law, whenever any action is to be taken by vote of the
shareholders, it shall be authorized upon receiving the affirmative vote of a
majority of the votes cast by all shareholders entitled to vote thereon.
3.5 Vote for Sale of Corporation. Any vote of shareholders
having the effect of the acquisition of substantially the entire business of the
Corporation by any person, whether a plan of merger, sale or other disposition
of all or substantially all the assets, or otherwise, shall require the
affirmative vote of ninety percent (90%)of the votes cast by all shareholders
entitled to vote thereon.
3.6 Notice of Meetings. Written notice of every meeting of the
shareholders shall be given to each shareholder of record entitled to vote at
the meeting at least ten days prior to the day named for a meeting called to
consider a fundamental change under Chapter 19 of the Business Corporation Law
of 1988, as amended, or at least five days prior to the day named for other
meetings, unless a greater period of notice is required in a particular case by
law.
3.7 Adjourned Meetings. When a meeting of shareholders is
adjourned, it shall not be necessary to give any notice of the adjourned meeting
or of the business to be transacted at an adjourned meeting, other than by
announcement at the meeting at which the adjournment is taken, unless the board
of directors fixes a new record date for the adjourned meeting.
3.8 Judges of Election. In advance of any meeting of
shareholders, the board of directors may appoint judges of election, who need
not be shareholders, to act at such meeting or any adjournment thereof. If
judges of election are not so appointed, the presiding officer of any such
meeting may, and on
2
<PAGE>
the request of any shareholder shall, make such appointment at the meeting. The
number of judges shall be one or three. No person who is a candidate for office
shall act as a judge. The judge[s] of election may rely upon a certification by
the shareholder of record, in a form determined by the Corporation, as to
whether the holder of any share of stock eligible to vote at the meeting meets
the voting eligibility requirements set forth in the Corporation's Articles of
Incorporation, as amended.
3.9 Special Meetings. Except as otherwise provided by law,
special meetings of shareholders may be called by and held at such places as
shall be fixed by the Chairman, President or the board of directors. The
Secretary of this Corporation shall, within three business days after receipt of
a written request by persons who have duly called such meeting, fix the time of
the meeting, which shall be held not more than 60 days after receipt of the
request, and the Secretary or the President shall give notice thereof to the
shareholders. If the Secretary neglects or refuses, within such three business
days to fix the time of the meeting, then the President or the board of
directors may do so.
3.10 Record Date. The books of the Corporation shall not be
closed against transfers of shares. The record date for determining shareholders
for any purpose where such date has not been fixed by the board of directors or
by law, shall be at the close of business on the day on which the board of
directors adopts the resolution relating thereto.
3.11 Voting Eligibility. Only those persons eligible to hold
stock of the Corporation, as set forth in the Articles of Incorporation and
Article XIII of these bylaws shall be eligible to receive notice and vote at any
shareholders' meeting.
ARTICLE IV - DIRECTORS
4.1 Number of Directors; Election; Term. The business of this
Corporation shall be managed by a board of directors, consisting of not less
than 15 in number. All directors shall be natural persons of full age. A
director need not be a shareholder of the Corporation. At least two-thirds (2/3)
of the directors must be actively practicing medical doctors or doctors of
osteopathy. The directors shall be classified with respect to the time for
3
<PAGE>
which they shall severally hold office by dividing them into three (3) classes,
as nearly equal in number as possible. At each annual meeting of shareholders,
the successors to the class of directors whose term expires that year shall be
elected to hold office for terms of three (3) years, and until the director's
successor shall have been elected and qualified, or the director's earlier
resignation or removal. The number of directors to be elected by the
shareholders in any year shall be determined by the Board of Directors and
specified in the notice of the annual meeting. Within the limits stated in this
paragraph, the number of directors may be increased at any time by the board of
directors.
4.2 Quorum. One-third (1/3) of the directors in office shall
be necessary to constitute a quorum for the transaction of business and the acts
of a majority of the directors present at a meeting at which a quorum is present
shall be the acts of the board of directors.
4.3 Regular and Special Meetings-Timing, Location and Notice.
Regular and special meetings of the board of directors shall be held at such
times and places as shall be fixed by the board of directors. Special meetings
may be called by the President or Chairman of the Board of Directors. Notice of
every special meeting of the board of directors shall be given to each director
by telephone or in writing at least 24 hours (in the case of notice by
telephone, telex, TWX or telecopy) or 48 hours (in the case of notice by
telegraph, courier service or express mail) or five (5) days (in the case of
notice by first class mail) before the time at which the meeting is to be held.
Neither the business to be transacted at, nor the purpose of, any regular or
special meeting of the board need be specified in the notice of the meeting.
4.4 Committees Generally. The board of directors may, by
resolution adopted by a majority of the directors in office, establish one or
more committees, in addition to those established under the Bylaws at Section
4.6 below, each committee to consist of one or more of the directors. A
committee, to the extent provided in the resolution of the board of directors
creating it, shall have and may exercise all of the powers and authority of the
board of directors except that a committee shall not have any power or authority
regarding: (i) the submission to shareholders of any action requiring the
approval of shareholders under the
4
<PAGE>
Pennsylvania Business Corporation Law of 1988, as amended, (ii) the creation or
filling of vacancies in the board of directors, (iii) the adoption, amendment or
repeal of the bylaws, (iv) the amendment, adoption or repeal of any resolution
of the board that by its terms is amendable or repealable only by the board, or
(v) action on matters committed by the bylaws or resolution of the board to
another committee of the board. The board may designate one or more directors as
alternate members of any committee who may replace any absent or disqualified
member at any meeting of the committee or for the purposes of any written action
by the committee. In the absence or disqualification of a member and alternate
member or members of a committee, the member or members thereof present at any
meeting and not disqualified from voting, whether or not constituting a quorum,
may unanimously appoint another director to act at the meeting in the place of
the absent or disqualified member. Each committee of the board shall serve at
the pleasure of the board.
4.5 Committee Procedures. The term "board of directors" or "board,"
when used in any provision of these Bylaws relating to the organization or
procedures of or the manner of taking action by the board of directors, shall be
construed to include and refer to any executive or other committee of the board.
The board of directors shall appoint one member of each committee to serve as
chairman of that committee. Each chairman shall preside at all meetings of his
or her committee.
4.6 Specific Committees.
4.6.1. Executive Committee
Among other duties assigned to it by Board resolution, the Executive
Committee shall have and may exercise all the powers and authority of the Board
of Directors between meetings of the Board of Directors, except as restricted by
Section 4.4 of these bylaws, or as otherwise restricted by law.
4.6.2. Audit Committee
The Audit Committee, to the extent permitted by law or regulation
applicable to the Corporation, shall recommend the firm to be employed as the
Corporation's independent auditor, and review and approve the discharge of any
such firm. The Audit Committee
5
<PAGE>
shall also review and approve the independent auditor's compensation, the terms
of its engagement, and the independence of such auditor. The Audit Committee
shall, in consultation with the independent auditor: review the results of each
external audit of the Corporation, the report of the audit, any related
management letter and management's responses to recommendations made by the
independent auditor in connection with the audit, the Corporation's annual
financial statements, any certification, report, opinion, or review rendered by
the independent auditor in connection with those financial statements, and any
significant disputes between management and the independent auditor that arose
in connection with the preparation of those financial statements. In
consultation with the independent auditor, the Corporation's chief financial
officer and the chief internal auditor, if any, the Audit Committee shall
consider the adequacy of the Corporation's internal audit controls. The Audit
Committee shall also consider, when presented by the independent auditor, a
principal senior executive, or otherwise, material questions of choice with
respect to the appropriate auditing and accounting principles and practices to
be used in the preparation of the Corporation's financial statements.
ARTICLE V - ACTION BY WRITTEN CONSENT AND USE
OF CONFERENCE TELEPHONE
5.1 Actions by Unanimous Written Consent. Any action required
or permitted to be taken at any meeting of the shareholders or the directors, or
of any committee of directors, may be taken without a meeting if, prior or
subsequent to the action, a consent or consents thereto in writing setting forth
the action so taken is signed by all the shareholders who would be entitled to
vote at a meeting for such purpose, or by all of the directors in office, or by
all of the members of such committee in office, as the case may be, and is filed
with the Secretary of the Corporation.
5.2 Participation in Meetings by Conference Telephone. One or
more persons may participate in a meeting of the shareholders, of the directors,
or of any committee of directors, by means of conference telephone or similar
communications equipment by means of which all persons participating in the
meeting can hear each other. Such participation shall constitute presence in
person at the meeting.
6
<PAGE>
ARTICLE VI - OFFICERS
6.1 Officers; Term. The Corporation shall have a Chairman,
President, Secretary, and Treasurer and such other officers and assistant
officers as the board of directors shall authorize from time to time who shall
be elected or appointed by the board of directors each to serve for such term as
shall be determined by the board of directors, and until his or her successor is
chosen and shall have qualified or until his or her earlier resignation or
removal. Any of the foregoing offices may be held by the same person.
6.2 Authority and Duties of Officers. The officers shall have
such authority and perform such duties customarily associated with their
respective offices unless the board of directors shall determine otherwise.
Unless otherwise determined by a resolution of the board of directors, the Board
shall also fix the compensation of all officers of the Corporation.
6.3 Removal. Any officer or agent elected or appointed by the
board of directors may be removed by the board of directors with or without
cause, without prejudice to the contract rights, if any, of the person so
removed.
ARTICLE VII - SHARE CERTIFICATES
7.1 Execution of Share Certificates. Every share certificate
shall be executed by facsimile or otherwise, by or on behalf of the Corporation,
by the Chairman or President and countersigned by the Treasurer or an Assistant
Treasurer or by the Secretary or an Assistant Secretary. In the event any
officer who has signed, or whose facsimile signature has been placed upon any
share certificate shall have ceased to be such officer because of resignation,
removal or otherwise, before the certificate is issued, it may be issued by the
Corporation with the same effect as if the officer had not ceased to be such at
the date of issue.
7.2 Transfers of Shares. Transfers of shares shall be
made on the books of the Corporation upon surrender of the
certificates therefor, endorsed by the person named in the
7
<PAGE>
certificates. No transfer shall be made in a manner inconsistent with the
provisions of Article VIII of the Pennsylvania Uniform Commercial Code and its
amendments and supplements.
7.3 Lost Certificates. Any person claiming a share certificate
to be lost or destroyed shall be issued a new certificate after furnishing the
Corporation with a satisfactory affidavit that such certificate has been lost or
destroyed, and, if required by the board of directors, a bond of indemnity to
the Corporation with satisfactory surety to protect the Corporation or any
person injured by the issue of a new certificate from any liability or expense
by reason thereof.
ARTICLE VIII - INDEMNIFICATION AND LIMITATION
OF DIRECTOR LIABILITY
8.1 Indemnification. 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 the Corporation) by reason of the fact that the
person at any time is or shall have been a director or officer of the
Corporation or any of its subsidiaries, or is or shall have been serving at the
written request of the Corporation 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 the Corporation, 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 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.
8
<PAGE>
8.2 Advancing Expenses. Expenses (including attorneys' fees)
incurred in defending any action or proceeding referred to in Section 8.1 shall
be paid by the Corporation 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 the Corporation as authorized by these bylaws
or otherwise.
8.3 Contract Right. The right of a person covered by Section
8.1 hereof to be indemnified or to receive an advancement or reimbursement of
expenses pursuant to Section 8.2 hereof (1) may also be enforced as a contract
right pursuant to which the person entitled thereto may bring suit as if the
provisions hereof were set forth in a separate written contract between the
Corporation and such person, and (2) shall continue to exist, if this Article 8
is rescinded or restrictively modified, with respect to events, acts or
omissions occurring before such rescission or restrictive modification is
adopted.
8.4 Non-Exclusivity of Indemnification; Insurance. The
foregoing right of indemnification shall not be deemed 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 or under any bylaw, agreement, vote of
directors, or otherwise. The Corporation may purchase and maintain insurance on
behalf of any person to the full extent permitted by Pennsylvania law as in
effect at the adoption of this bylaw or as amended from time to time. The
Corporation may create a fund of any nature which may, but need not be, under
the control of a trustee, or otherwise secure or insure in any manner its
indemnification obligations under this bylaw.
8.5 Limitation of Director Liability. Each person who at any
time is or shall have been a director of this Corporation shall not be
personally liable for monetary damages as such for any action taken, or any
failure to take any action, unless: (1) such person as director has breached or
failed to perform the duties of his office under 15 Pa. C.S. Subchapter 17B, and
(2) the breach or failure to perform constitutes self dealing, willful
misconduct or recklessness. The provisions of this bylaw shall not apply to: (1)
responsibility or liability of such person as director pursuant to
9
<PAGE>
any criminal statute; or (2) the liability of a director for payment of taxes
pursuant to local, state or federal law. The provisions of this bylaw shall be
construed to limit the liability of such person as director in accordance with
and to the full extent permitted by Pennsylvania law as in effect at the time of
the adoption of this bylaw or as amended from time to time.
ARTICLE IX - NOTICE
9.1 Manner of Giving Notice. Except as otherwise specifically
provided in these bylaws, whenever the Corporation is required to give written
notice to any person under these bylaws or by statute, it may be given to such
person, either personally or by sending a copy thereof by first class or express
mail, postage prepaid, or by telegram (with messenger service specified), telex
or TWX (with answerback received), courier service (charges prepaid), or by
telecopier to his or her address (or to his or her telex, TWX, telecopier or
telephone number) appearing on the books of the Corporation or, in the case of
directors, supplied by the directors to the Corporation for the purpose of
notice. If the notice is sent by mail, telegraph or by courier service, it shall
be deemed to have been given to the person entitled thereto one (1) business day
after being deposited in the United States mail, with a courier service or with
a telegraph office for delivery to such person or, in the case of telex, TWX or
telecopy, when dispatched. Such notice shall specify the place, day and hour of
the meeting and, in the case of a special meeting of shareholders, the general
nature of the business to be transacted.
ARTICLE X - AMENDMENTS
10.1 Amendments to Bylaws. Except as otherwise provided in
this Section 10.1, the bylaws of the Corporation may be amended or repealed by a
majority vote of the members of the board of directors, unless otherwise
provided by law, subject always to the power of the shareholders entitled to
vote to change such action. Notwithstanding the foregoing or any of the other
provisions of these Bylaws, Section 3.5 of the Bylaws may not be amended or
repealed except by an affirmative vote of ninety percent (90%)of the votes cast
by all shareholders entitled to vote thereon.
10
<PAGE>
ARTICLE XI - FISCAL YEAR
11.1 Fiscal Year. The fiscal year of the Corporation shall be
fixed by the board of directors.
ARTICLE XII - CORPORATE DIVISION
12.1 Plan of Division. Any plan of division shall require
approval of the shareholders, in the manner provided in Section 3.4 hereof,
notwithstanding any provision in the Pennsylvania Business Corporation Law of
1988, as amended, to the contrary.
ARTICLE XIII - SHAREHOLDER ELIGIBILITY; SHARE TRANSFERS
13.1 Shareholder Eligibility. The following person shall be
eligible to acquire and hold stock of the Corporation of record:
(i) any health professional licensed in
Pennsylvania or elsewhere;
(ii) any retired, but formerly licensed, health
professional;
(iii) any professional corporation or other
practice group of health professionals;
(iv) any individual retirement account or other
retirement plan established by a person
eligible to be a shareholder or in which
such person is a participant; and
(v) any employee of the Corporation.
As used herein the term "health professional" shall include, without limitation:
physicians, podiatrists, dentists, oral surgeons, optometrists, chiropractors,
nurses, nurse practitioners, physical or occupational therapists, physicians'
assistants.
11
<PAGE>
13.2 Share Transfers.
13.2.1 A shareholder of record may not voluntarily
transfer for value any share of the Corporation except to a transferee who, in
accordance with the provisions of the Articles of Incorporation and these
bylaws, is a shareholder of record and who is entitled to vote such share.
13.2.2 The Corporation may rely upon a
certification of the transferee, in a form determined by the
Corporation, to establish the voting eligibility of the transferee.
13.2.3 For purposes of this Section, "voluntary
transfer for value" shall not include gifts, transfers by operation of law, or
any other involuntary transfer or involuntary disposition.
12
<PAGE>
Exhibit 6.6
EXECUTIVE EMPLOYMENT AGREEMENT
AGREEMENT made this 28 day of February, 1997, between
PENNSYLVANIA PHYSICIANS CARE SERVICE CORP., a Pennsylvania corporation
("Employer"), and JACK J. JAROH ("Executive").
The parties hereto, intending to be legally bound hereby,
agree upon the following terms of employment of Executive by Employer:
1. Employment and Term. Employer hereby employs Executive and
Executive hereby accepts employment for a term commencing March 17, 1997 and
ending March 16, 1998 (the "Initial Term"); subject to extension as provided
herein. (March 16, 1998, or the last day of any extended term as provided herein
is hereinafter called the "Termination Date.") This Agreement shall
automatically be extended for additional periods of one year ("Renewal Term"),
unless notification is given by one party to the other to the contrary by
providing written notice at least sixty (60) days prior to the Termination Date
in accordance with the procedures outlined in Section 12 regarding notice.
2. Duties. Employer is an affiliate of Pennsylvania Physician
Healthcare Plan, Inc. ("PPHP"). Executive shall perform the duties of Vice
President of Sales and Marketing for such managed care affiliates of PPHP as
Employer shall designate from time to time and such additional executive duties
for Employer and its affiliates as may be requested of Executive by Employer.
Executive's place of employment shall be at the principal offices of Employer,
now Harrisburg, Pennsylvania. Executive shall accept and perform the duties of
such offices and directorships of Employer and its affiliates to which Executive
may from time to time be elected or appointed.
3. Extent of Services. Executive shall devote his full time
and best efforts to the performance of his duties hereunder. He shall not engage
in any business or perform any services in any capacity whatsoever other than
for Employer and its affiliates.
4. Compensation.
a. Salary. For all duties to be performed by
Executive in any capacity hereunder, Executive shall receive an annual salary of
One Hundred and Forty Thousand Dollars ($140,000) per year ("Annual Salary")
payable in installments twice per month, in accordance with Employer's regular
practice for executive employees. Upon renewal of this contract in accordance
with Section 1 hereof, Executive's annual salary for such renewal term shall not
be less than the Annual Salary. A performance review and review of Executive's
Annual Salary will be performed annually and shared with Executive.
b. Commission. Executive shall be entitled to receive
commissions equal to $2.00 per member for each member enrolled in all of
Executive's managed care products, other than members enrolled pursuant to
self-insured employer agreements or arrangements. Commissions earned under this
Section 4b. shall be payable to Executive monthly.
<PAGE>
c. Vacation. Executive shall be entitled to three (3)
weeks paid vacation during each full year that this Agreement is in force.
d. Fringe Benefits. Executive shall be entitled to
receive (i) the insurance and pension benefits provided pursuant to the
provision of plans as established and revised by Employer from time to time and
generally made available to executives of Employer; (ii) an automobile expense
allowance of $500 per month; and (iii) all other fringe benefits made available
to Salaried employees generally from time to time by Employer.
e. Bonus. Executive shall be eligible for an annual
bonus of up to fifteen percent (15%) of Annual Salary, based on mutually agreed
performance criteria to be established within ninety (90) days of the
commencement of the term of this Agreement. The bonus shall be paid to Executive
within forty-five (45) days after each anniversary date of this Agreement. If
Executive's employment terminates for Good and Sufficient Cause, Executive shall
forfeit all rights to the bonus described in this Section 4d. A review of
Executive's bonus and bonus criteria will be performed annually and shared with
Executive.
f. Signing Bonus. If Executive commences employment
on or before March 17, 1997, he shall be paid a signing bonus of Twenty Thousand
Dollars ($20,000) within ten (10) days of the commencement of employment.
g. Expenses. It is understood that Executive will
from time to time incur reasonable expenses in conjunction with his employment.
Employer will reimburse him for any such expenses (including automobile expenses
of $.16 per mile incurred as a result of Executive's duties herein) in
accordance with Employer's regular practice for reimbursement of its executive
employees. In addition, Employer shall reimburse Executive for the following
expenses:
(1) reasonable expenses for one (1) trip to
Harrisburg, Pennsylvania for Executive and his spouse for the purpose of
identifying permanent housing opportunities;
(2) temporary living expenses in the amount of
$2,000 per month until permanent residence is secured;
(3) reasonable expenses of relocation of
Executive's belongings from Westerville, Ohio to Harrisburg, Pennsylvania upon
presentation of appropriate receipts, and Employer will make all arrangements
regarding such relocation after consultation with Executive, but Employer is
assuming no liability of whatever nature regarding such relocation or the making
of the arrangements therefor;
(4) payment of reasonable closing costs including
but not limited to the application fee, up to three (3) mortgage points, Title
Insurance and 1% Pennsylvania real estate transfer tax, upon presentment of
appropriate documentation, in connection with the purchase of a permanent
residence in Harrisburg, Pennsylvania or its immediate vicinity;
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(5) payment of reasonable closing costs, including
Realtor fees up to
6%, upon presentment of appropriate documentation, in connection with the sale
of Executive's current residence in Westerville, Ohio ("Current Residence");
(6) payment of an amount equal to the amount of
federal, state and Medicare income tax liability due by Executive on all
payments made for costs and expenses referred to in subparagraphs (4) and (5)
above, except those items which are ordinarily deductible for federal income tax
purposes.
h. Reduction of "Asking Price" for Current
Residence". Executive shall receive, within one week after closing on his
Current Residence, a payment of $20,000, plus an amount equal to the federal,
state and Medicare income tax liability due by Executive on such amount. The
purpose of this payment is to enable Executive to lower the "asking price" of
the Current Residence to the extent of such amount. The "asking price" shall be
an amount equal to the average of two (2) independent appraisals of the Current
Residence less $20,000. Each of Executive and Employer agree to obtain one such
appraisal at Employer's cost. In the event that Executive's Selling price
exceeds the "asking price" as determined hereunder, the amount to be paid
Executive pursuant to this Section 5h. shall be reduced on a dollar for dollar
basis to the extent of any such excess.
5. Termination.
a. Notwithstanding any other provisions hereof, this
Agreement shall be terminated immediately upon the death or Disability of
Executive or Executive's discharge by Employer upon Good and Sufficient Cause.
In such event, Employee shall not be entitled to any payment or benefit
hereunder or any other compensation, other than the portion of the applicable
Annual Salary accrued to the date of termination. Termination of employment
under this Section 5, or otherwise, shall not diminish the obligations of
Executive pursuant to Sections 6 and 7 hereof, except as otherwise provided
herein.
b. "Disability" shall mean inability of Executive due
to illness or accident to perform the duties required to be performed by him
pursuant hereto for a continuing period in excess of ninety (90) days.
c. "Good and Sufficient Cause" shall include but not
be limited to:
(1) any misconduct or dishonesty detrimental to
the best interests of Employer or any of its
affiliates;
(2) willful disloyalty to Employer or any of its
affiliates;
(3) willful or intentional neglect by
Executive to perform his duties and
responsibility hereunder;
(4) conviction of a felony or crimes of moral
turpitude;
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(5) failure to perform the duties under this
agreement or breach of any provisions of this
Agreement.
d. If Employer terminates the Agreement prior to the
end of the Initial Term or the first Renewal Term (ending March 16, 1999),
except for Good and Sufficient Cause, then Employer shall pay Executive, as
Executive's sole remedy and in full satisfaction of any and all payments or
damages due under any agreement, $140,000. Such payment shall be made in
installments over one (1) year in accordance with Employees regular payroll
schedule. If the Employer terminates the Agreement prior to the end of any
Renewal Term beginning on or after March 17, 1999, except for Good and
Sufficient Cause, then Employer shall pay Executive as Executive's sole remedy
and in full satisfaction of any or all payments or damages due under such
agreement an amount equal to one half of the Executive's base salary at time of
termination. Such payment shall be made in installments over six (6) months in
accordance with Employer's regular payroll schedule.
6. Disclosure of Information. Executive will not, during the
term of this Agreement or during the period of non-competition defined in
Section 7 hereof or during the period in which Executive is receiving payments
under Section 5d hereof, whichever is longer, without written authorization of
Employer, disclose to, or make use of for himself or for any person,
corporation, or other entity, any trade secret or other confidential or
proprietary information concerning the business, clients, methods, operations,
financing or services of Employer or its affiliates. Trade secrets and
confidential information shall mean information disclosed to Executive or known
by him as a consequence of his employment by Employer, whether or not pursuant
to this Agreement, and not generally known in the industry.
7. Covenant Not to Compete.
a. For a period of one year after the termination of
his employment if the cause of termination is pursuant to Section 5(a) hereof,
or for a period equal to the period Executive is receiving payments under
Section 5(d) hereof if the cause of termination is pursuant to such Section,
Executive agrees that he will not, within the Employer Territory (as defined
below), engage in any business or perform any Service, directly or indirectly,
in competition with or proposed to be in competition with the Business of
Employer, or have any interest, whether as proprietor, partner, employee,
principal, agent, consultant, director, officer or in any other similar capacity
or manner whatsoever, in any enterprise which shall so engage or is proposing to
so engage. "Employer Territory" shall mean any Pennsylvania county or county of
other state in which, at the time of the termination of Executive's employment,
the Employer or its affiliates is doing business or is licensed or has a license
application pending with an agency of the Commonwealth of Pennsylvania or other
state.
b. In furtherance of the foregoing, and not in
limitation thereof, Executive shall not, during the period of non-competition
and within the geographical area herein set forth, directly or indirectly:
(1) solicit or service in any way, on behalf of
himself or on behalf of or in conjunction with others, any client or customer,
or prospective client or customer, which has been solicited or serviced by
Employer or any affiliate of Employer within one year prior to the termination
of his employment; or
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(2) solicit for employment, employ or engage as an
independent contractor, any person who was employed by Employer or any affiliate
of Employer at the date of termination of employment of Executive, or induce any
such person to leave the employ of Employer or any such affiliate.
c. If Executive violates this restrictive covenant
and Employer brings legal action for injunctive or other relief, Employer shall
not, as a result of the time involved in obtaining such relief, be deprived of
the benefit of the full period of the restrictive covenant. Accordingly, the
restrictive covenant shall be deemed to have the duration specified in
subparagraph A hereof, computed from the date such relief is granted but reduced
by the time expired between the date the period of restriction began to run and
the date of the first violation of the covenant by Executive.
d. If any court shall determine that the duration or
geographical limits of any restriction contained in this paragraph are
unenforceable, it is the intention of the parties that the restrictive covenant
set forth herein shall not thereby be terminated, but shall be deemed amended to
the extent required to render it valid and enforceable, such amendment to apply
only with respect to the operation of this paragraph in the jurisdiction of the
court which has made Such adjudication. The covenants on the part of Executive
in this Section 7 shall be construed as an agreement independent of any other
provision in this Agreement, and the existence of any claim or cause of action
of Executive against Employer, whether predicated on this Agreement or
otherwise, shall not constitute a defense to the enforcement by Employer of
these covenants.
8. Remedies of Employer. As an executive of Employer,
Executive may have access to customer lists, trade secrets and other
confidential information of Employer. Moreover, his continued employment will be
instrumental to the continuity and development of Employer's business.
Executive, therefore, acknowledges that the restrictions contained in Sections 6
and 7 of this Agreement are a reasonable and necessary protection of the
legitimate interests of Employer, that any violation of them would cause
substantial injury to Employer, and that Employer would not have entered into
this Agreement with Executive without receiving the additional consideration of
Executive's binding himself to said restrictions. In the event of any actual or
threatened violation of the said restrictions, Employer shall be entitled, in
addition to any other remedy, to preliminary and permanent injunctive relief.
9. Surrender of Books and Records. Executive acknowledges that
all lists, books, records, literature, products and any other materials owned by
Employer or its affiliates or used by them in connection with the conduct of
their business, shall at all times remain the property of Employer and its
affiliates and that upon termination of employment hereunder, irrespective of
the time, manner or cause of said termination, Executive will surrender to
Employer and its affiliates all such lists, books, records, literature, products
and other materials.
10. Business of Employer. "Business of Employer" Referred to
in this Agreement shall mean all business of Employer and its affiliates,
whether presently conducted or hereafter engaged in by Employer or any affiliate
at any time during the term of this Agreement.
11. Severability. If any provision of this Agreement shall be
held invalid or unenforceable, the remainder of this Agreement shall,
nevertheless, remain in full force and effect. If any
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provision is held invalid or unenforceable with respect to particular
circumstances, it shall, nevertheless, remain in full force and effect in all
other circumstances.
12. Notice. All notices required to be given under the terms
of this Agreement shall be in writing, shall be effective upon receipt (except
that if delivery of certified mail is refused, delivery shall be deemed made
Five (5) days after the date of mailing), and shall be delivered to the
addressee in person or mailed by certified mail, return receipt requested:
If to Employer, addressed to the Chief Executive Officer,
at the principal office of Employer with a copy to Pelino & Lentz, P.C., One
Liberty Place, 32nd Floor, 1650 Market Street, Philadelphia, Pennsylvania
19103-7393, Attention: Cristina G. Cavalieri, Esquire; and if to Executive,
addressed to the last known address on the records of Employer; or to such other
address as a party shall have designated by notice given in accordance with this
paragraph.
13. Representations of Executive. Executive represents
covenants and warrants to Employer that as of the date hereof and during the
term of this Agreement:
a. Neither the execution and delivery of this Agreement
nor the performance by Executive of his obligations under this Agreement will
constitute a default under any term or provision, including any
covenant-not-to-compete, of any agreement to which Executive is a party, nor any
statute, administrative interpretation, regulation or decision of any court,
administrative agency or tribunal to which Executive is subject.
b. Executive has retained and has the benefit of counsel
of Garth Cox, Esquire, as his attorney, who has fully explained to Executive the
provisions of this Agreement. Executive acknowledges that he has received
independent legal advice from such counsel of his own selection and has been
fully informed as to his legal rights and obligations under this Agreement.
14. Benefit. This Agreement shall inure to and shall be
binding upon the parties hereto, the successors and assigns of Employer and the
heirs and personal representatives of Executive.
15. Waiver. The waiver by either party of any breach or
violation of any provision of this Agreement shall not operate or be construed
as a waiver of any subsequent breach or violation hereof.
16. Governing Law. This Agreement has been negotiated and
executed in the Commonwealth of Pennsylvania and the law of that state shall
govern its construction and validity. Any legal actions concerning this
Agreement shall be brought in the Court of Common Pleas of Dauphin County,
Pennsylvania or the United States District Court for the Middle District of
Pennsylvania; the parties submit to the jurisdiction of such courts and waive
any right they may have to transfer or change the venue of any litigation
brought therein by either of them.
17. Entire Agreement. This Agreement contains the entire
agreement between the parties hereto. No change, addition, or amendment shall be
made except by written agreement signed by the parties hereto.
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18. Definition of Affiliates. For purposes of this Agreement,
"affiliate" shall mean any entity controlling, controlled by, or under common
control with Employer.
IN WITNESS WHEREOF, the parties hereto have executed this
Agreement on the date and year first above written.
PENNSYLVANIA PHYSICIANS CARE SERVICE CORP.
By: /s/ Richard A. Felice
-------------------------------------------
"Employer"
By: /s/ Jack J. Jaroh
-------------------------------------------
"Executive"
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Exhibit 6.7
AGREEMENT OF LEASE
Multi-Tenant Building
THIS AGREEMENT OF LEASE by and between Union Deposit Corporation, agent
for Union Deposit Limited Partnership organized and existing under the laws of
Pennsylvania (herein called "Landlord") and Pennsylvania Physician Healthcare
Plan, Inc. organized and existing under the laws of Pennsylvania (herein called
"Tenant").
WITNESSETH:
1. Premises. As used herein the term "Building" shall mean the Building
containing approximately 43,850 square feet on a tract of land (herein called
the "Lot") located at 651 East Park Drive, Lower Paxton Township, Dauphin
County, PA (the Building, the Lot and any other improvements thereon being
herein collectively called the "Property"). Landlord does hereby demise and let
unto Tenant and Tenant does hereby lease and take from Landlord for the term and
upon the terms, covenants, conditions and provisions set forth herein all that
certain portion of the Building as outlined on Exhibit "A" hereto which shall be
completed in accordance with Article 2 hereof having a street address of 651
East Park Drive, Harrisburg, PA 17111 (herein called the "Premises") together
with the right, in common with other occupants of the Building, to use
driveways, sidewalks, and loading and parking areas.
2. Completion by Landlord. The Premises shall be completed in
accordance with the plans attached hereto as Exhibit "B" (herein called the
"Plans"). All necessary construction shall be commenced promptly and shall be
substantially completed ready for use and occupancy by Tenant on the date set
forth in Article 3. Provided, however, that the time for substantial completion
of the Premises shall be extended for additional periods of time equal to the
time lost by Landlord or Landlord's contractors, subcontractors or suppliers due
to strikes or other labor troubles, governmental restrictions and limitations,
scarcity, unavailability or delays in obtaining fuel, labor or materials, war or
other national emergency, accidents, floods, defective materials, fire damage or
other casualties, adverse weather conditions, or any cause similar or dissimilar
to the foregoing beyond the reasonable control of Landlord or Landlord's
contractors, subcontractors or suppliers. All construction shall be done in a
good and workmanlike manner and shall comply at the time of Completion with all
applicable and lawful laws, ordinances, regulations and orders of the federal,
state, county or other governmental authorities having jurisdiction thereof.
Tenant and its authorized agents, employees and contractors shall have the
right, at Tenant's own risk, expense and responsibility, at all reasonable times
prior to the Commencement Date as hereinafter deemed, to enter the Premises for
the purpose of taking measurements and installing its furnishings and equipment
provided that Tenant, in so doing, shall not interfere with or delay the work to
be performed hereunder by Landlord, and Tenant shall use contractors and workmen
compatible with the contractors and workmen engaged in the
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work to be performed hereunder by Landlord, and Tenant shall have obtained
Landlord's written consent prior to installing any furnishings or equipment.
Tenant is permitted to install computer and telephone wiring during and after
Tenant build-out.
3. Term. The term of this lease shall commence on the date when the
Premises and the improvements required to be constructed by Landlord under
Article 2 hereof shall have been substantially completed (herein called the
"Commencement Date"). If the date of substantial completion is delayed as a
result of changes requested by Tenant, the term of the lese shall commence as if
the Premises were substantially complete on the originally scheduled date, as
extended for reasons other than those caused by Tenant. Unless sooner terminated
in accordance with the terms hereof, the term of this lease shall end without
the necessity for notice from either party to the other at 12:01 a.m. local time
on the fifth(5th) anniversary of the first day of the first full calendar month
during the term (herein called the "Expiration Date").
4. Use of Premises. Tenant shall occupy the Premises throughout the
term and shall use the same for and only for a general offices.
5. Rent.
(a) Minimum Annual Rent. Tenant shall pay a minimum annual
rent, without notice or demand, and without setoff, in advance, on the first day
of each calendar month during the term of this lease in accordance with the
minimum annual rent schedule herein below. Provided, however that rent for the
first full month shall be paid upon the signing of this lease. If the
Commencement Date shall fall on a day other than the first day of a calendar
month, the rent shall be apportioned pro rata on a per diem basis for the period
between the Commencement Date and the first day of the following calendar month
and such apportioned sum shall be paid on such Commencement Date. In addition,
Tenant shall pay Landlord without setoff the additional rent as hereinafter set
forth. Unless otherwise specifically provided, all sums shall be paid to
landlord at the address given in Article 31 hereof.
Monthly Installment Schedule
of
Minimum Annual Rent
Months Monthly Installment
- ------ -------------------
Month 1 until commencement of Phase 2 $ 5,741.67
Commencement of Phase 2 until commencement of Phase 3 $ 9,016.58
Commencement of Phase 3 thru Month 23 $11,941.58
Month 24 thru Month 36 $12,529.48
Month 37 thru Month 48 $13,034.70
Month 49 thru Month 60 $13,558.29
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(b) Base Operating Cost. In addition to the minimum annual rent
Tenant shall pay Base operating Costs in equal monthly installments in
accordance with the Base Operating Cost Schedule herein below, which sums shall
be applied to payment of the costs owed to Landlord by Tenant for the taxes and
impositions pursuant to Article 6, insurance pursuant to Article 7 and 16 and
the management, repairs and maintenance pursuant to Article 8. Landlord shall
cause the actual amount of such costs to be certified to Tenant within one
hundred twenty (120) days following the end of each calendar year, and Landlord
or Tenant, as the case may be, shall, within thirty (30) days of the mailing of
the certification, pay to the other the amount of any deficiency or overpayment
then due from one to the other. In lieu thereof, at Landlord's option, Landlord
may credit Tenant's account for any overpayment. Tenant shall be provided
itemized expense list at time of billing or crediting. Tenants share of Base
Operating Costs will be the proportionate share as defined in Paragraph 30(f) of
this lease.
Monthly Installment Schedule
of
Base Operating Cost
Months Monthly Installment
- ------ -------------------
Month 1 until commencement of Phase 2 $2,208.33
Commencement of Phase 2 until Commencement of Phase 3 $3,467.92
Commencement of Phase 3 thru Month 60 $4,558.33
6. Taxes and Other Impositions.
(a) Payment. Pursuant to 5.b. hereinabove and as additional
rent hereunder, at least thirty (30) days before any fine, penalty, interest or
cost may be added thereto for the non-payment thereof (or sooner if elsewhere
herein required), Tenant shall pay throughout the term of this lease all levies,
taxes, assessments, water and sewer rents and charges, liens, license and permit
fees, charges for public utilities and all other charges, imposts or burdens of
whatsoever kind and nature, general or special, foreseen or unforeseen, whether
or not particularized by name, ordinary or extraordinary , which are applicable
to the term of this lease, and which are created, levied, assessed, conformed,
adjudged, imposed or charged by any federal, state or municipal government or
public authority, or under any law, ordinance or regulation thereof, or pursuant
to any recorded covenants or agreements (all of which are hereinafter referred
to as "Impositions") upon or with respect to the Premises, the Lot or any
improvements made thereto, any part of the foregoing, any appurtenances thereto,
or directly upon this lease or the rent payable hereunder or amounts payable by
any subtenants or other
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occupants of the Premises, or upon this transaction or any related documents to
which Tenant is a party or successor in interest, or against landlord because of
landlord's estate or interest herein. Additionally, Tenant shall pay as
aforesaid a proportionate share as defined in paragraph 30(f) of any Imposition
which is not imposed upon the Premises as a separate entity but which is imposed
upon the Lot, the Building or the Property or upon the appurtenances, leases,
rents, transactions or documents relating to the Lot, the Building or the
Property.
(b) New Methods of Taxation. Nothing herein contained shall be
interpreted as requiring Tenant to pay any income, excess profits, corporate
capital stock, or franchise tax imposed or assessed upon Landlord, unless such
tax or any similar tax is levied or assessed in lieu of all or any part of any
Imposition or an increase in any Imposition. If under the requirements of any
state or local law with respect to such new method of taxation, Tenant is
prohibited from paying such new tax, Landlord may, at its election, terminate
this lease by giving written notice thereof to Tenant.
(c) Contest by Landlord. Landlord may bring proceedings to
contest the validity or amount of any Imposition or to recover payments
therefor. Tenant shall cooperate with landlord with respect to such proceedings
to the extent reasonably necessary and shall pay landlord a proportionate share
of all reasonable costs, fees and expenses incurred in connection with such
proceedings as additional rent promptly upon being billed therefor.
7. Insurance.
(a) Insurance. Landlord shall maintain and keep in effect
throughout the term of this lease insurance against loss or damage to the
Building or the Property by fire and such other casualties as may be included
within either fire an extended coverage insurance or all-risk insurance and such
other insurance as or as may reasonably be required from time to time by any
mortgagee or as may be required generally by mortgage lending institutions.
Pursuant to Article 5.b. hereinabove, Tenant shall pay to landlord as additional
rent its proportionate share of premiums to be paid by landlord for insurance
promptly upon being billed therefor.
(b) Liability. Tenant, at Tenant's sole cost and expense, shall
maintain and keep in effect throughout the term insurance against liability for
bodily injury (including death) or property damage in or about the Premises or
the Property under a policy of comprehensive general public liability insurance,
with such limits as to each as may be reasonably required by Landlord from time
to time, but not less than $500,000 for each person and $1,000,000 for each
occurrence of bodily injury (including death) and $500,000 for property damage.
The policies of comprehensive general public liability insurance shall name
Landlord and Tenant as the insured parties. Each such policy shall provide that
it shall not be cancelable without at least thirty (30) days prior written
notice to Landlord and to any mortgagee named in an endorsement thereto and
shall be issued by an insurer and in a form satisfactory to Landlord.
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At least ten (10) days prior to the Commencement Date, a certificate of
insurance shall be delivered to Landlord. If Tenant shall fail, refuse or
neglect to obtain or to maintain any insurance that it is required to provide or
to furnish Landlord with satisfactory evidence of coverage on any such policy,
Landlord shall have the right to purchase such insurance. All such payments made
by landlord shall be recoverable by Landlord from Tenant, together with interest
thereon, as additional rent promptly upon being billed therefor.
(c) Waiver of Subrogation. Each of the parties hereto hereby
releases the other, to the extent of the releasing party's insurance coverage,
from any and all liability for any loss or damage covered by such insurance
which may be inflicted upon the property of such party even if such loss or
damage shall be brought about by the fault or negligence of the other party, its
agents or employees; provided, however, that this release shall be effective
only with respect to loss or damage occurring during such time as the
appropriate policy of insurance shall contain a clause to the effect that this
release shall not affect said policy or the right of the insured to recover
thereunder. If any policy does not permit such a waiver, and if the party to
benefit therefrom requests that such a waiver be obtained, the other party
agrees to obtain an endorsement to its insurance policies permitting such waiver
of subrogation if it is available. If an additional premium is charged for such
waiver, the party benefiting therefrom agrees to pay the amount of such
additional premium promptly upon being billed therefor.
(d) Increase of Premiums. Tenant will not do anything or fail
to do anything which will cause the cost of Landlord's insurance to increase or
which will prevent Landlord from procuring policies (including but not limited
to public liability) from companies and in a form satisfactory to Landlord. If
any breach of this Paragraph (d) by Tenant shall cause the rate of fire or other
insurance to be increased, Tenant shall pay the amount of such increase as
additional rent promptly upon being billed therefor.
8. Repairs and Maintenance.
(a) Except as specifically otherwise provided in Paragraphs
(b), (c), and (d) of this Article, Tenant, at its sole cost and expense and
throughout the term of this lease, shall keep and maintain the Premises in good
order and condition, free of accumulation of dirt and rubbish, and shall
promptly make all repairs made necessary by Tenant's use of or installations
upon the Premises. Tenant shall not use or permit the use of any portion of the
Property for outdoor storage.
(b)Landlord, throughout the term of this lease and at
Landlord's sole cost and expense, shall make all necessary repairs to the
footings and foundations and the structural steel columns and girders forming a
part of the Premises provided, however, that Landlord shall have no
responsibility to make any repair unless and until Landlord receives written
notice of the need for such repair.
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(c) Landlord, throughout the term of this lease, shall make all
necessary repairs to the roof, walls, exterior portions of the Premises and the
Building, utility lines, equipment, HVAC systems, and other utility facilities
in the Building, which serve more than one tenant of the Building, and to any
driveways, sidewalks, curbs, loading, parking and landscaping areas, and other
exterior improvements on the Property provided, however, that Landlord shall
have no responsibility to make any repairs unless and until Landlord receives
written notice of the need for such repair. Pursuant to Article 5.b.
hereinabove, Tenant shall pay its proportionate share of the cost of all repairs
to be performed by Landlord pursuant to this paragraph (c) as additional rent
promptly upon being billed therefor. The cost of capital improvements, as
defined by generally accepted accounting principals, shall be reimbursed to
Landlord on the basis of such costs being amortized over the usable life of the
improvement.
(d) Landlord shall manage and administer the Property, provide
daily janitorial service, and maintain all common areas of the Property and any
sidewalks, parking areas, curbs and access ways adjoining the Property in a
clean and orderly condition, free of accumulation of dirt, rubbish, snow and
ice, and shall keep and maintain all landscaped areas in a neat and orderly
condition. Pursuant to Article 5.b. hereinabove, Tenant shall pay its
proportionate share of the cost of all work to be performed by Landlord pursuant
to this Paragraph (d).
(e) Notwithstanding anything herein to the contrary, repairs to
the Premises and the Property made necessary by Tenant's use, manner of use or
occupancy of the Property or by Tenant's installations in or upon the Property
or by any act or omission of Tenant or any employee, agent, contractor, or
invitee of Tenant shall be made at the sole cost and expense of Tenant. Tenant
shall not bear the expense of any repairs to the Premises or the Property
arising out of or caused by any other tenant's use, manner of use or occupancy
of the Property or by any other tenant's installations in or upon the Property,
or by any act or omission of any other tenant or any other tenant's employees,
agents, contractors or invitees.
9. Utility Charge. Pursuant to Article 5.b. hereinabove, Tenant shall
be solely responsible for and shall pay promptly all rents, costs and charges
for water service, sewer service, gas, electricity, light, heat, steam, power,
telephone and other communication services, and any and all other utilities or
services rendered or supplied upon or in connection with the Premises. Tenant
shall directly contract for and pay for all telephone and communication services
provided to the Premises.
10. Net Lease. Except for the obligations of Landlord expressly set
forth herein, this lease is a "net lease" and Landlord shall receive the minimum
annual rent as hereinabove provided as net income from the Premises, not
diminished by any Imposition or any expenses or charges required to be paid to
maintain and carry the Premises and the Property or to continue the ownership of
Landlord other than payments under any mortgages now existing or
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hereafter created by Landlord and Landlord is not and shall not be required to
render any services of any kind to Tenant.
11. Governmental Regulations. Throughout the term of this lease and at
its sole cost and expense, Tenant shall: (i) comply promptly with all laws,
ordinances, notices, orders, rules, regulations and requirements of all federal,
state and municipal governments and all departments, commissions, boards and
officers thereof, and of the national board of Fire Underwriters or any other
body now or hereafter constituted exercising similar functions; and (ii) keep in
force at all times all licenses, consents and permits necessary for the lawful
use of the Premises for the purposes herein provided; and (iii) comply with the
requirements of all public liability, fire, and other policies of insurance
covering the Premises whether any of the foregoing are foreseen or unforeseen,
ordinary or extraordinary. Provided, however, that Tenant shall not be required
to comply with the foregoing laws, ordinances and notices with respect to the
footings and foundations and the structural steel columns and girders forming a
part of the Premises unless the need for such compliance arises out of or is
caused by Tenant's use, manner of use or occupancy of the Premises, or by
Tenant's installations in or upon the Premises or by any act or omission of
Tenant or any employee, agent, contractor or invitee of Tenant.
12. Signs. Except for signs which are located wholly within the
interior of the Premises and which are not visible from the exterior of the
Premises, no signs shall be placed, erected, maintained or painted at any place
upon the Premises or the Property without the prior written consent of Landlord
as to the size, design, color, location, content, illumination, composition or
material and mobility thereof. All signs shall be maintained by Tenant in good
condition during the term of this lease, and Tenant shall remove all signs at
the termination of this lease and shall repair and restore any damage caused by
the installation or removal thereof.
13. Alterations, Additions and Fixtures.
(a) Subject to the provisions of Article 14 hereof, Tenant
shall have the right to install in the Premises any trade fixtures from time to
time during the term of this lease; provided, however, that no such installation
or removal thereof shall affect the structural portion of the Premises and that
Tenant shall repair and restore any damage or injury to the Premises or the
Property caused thereby.
(b) Tenant shall not make or permit to be made any alterations,
improvements or additions to the Premises or Property without on each occasion
first presenting to Landlord plans and specifications therefor and obtaining
Landlord's prior written consent thereto; except that Tenant may make minor
nonstructural changes to the interior of the Premises without the consent of
Landlord provided that: (i) Tenant supplies Landlord with plans and
specifications and any necessary permits therefor at least ten (10) days in
advance of commencing construction thereof; (ii) such alterations and
improvements do not impair the
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structural strength of the Building or any other improvements or reduce the
value of the Property; (iii) Tenant shall take or cause to be taken all steps
that are required by Article 14 hereof and that are required or permitted by law
in order to avoid the imposition of any mechanic's, laborer's or materialman's
lien upon the Premises, Building or Lot and (iv) the occupants of the Building
and of any adjoining real estate are not annoyed or disturbed by reason thereof.
Any and all alterations, improvements and additions to the Property which are
constructed, installed or otherwise made by Tenant shall be the property of
Tenant until the expiration or sooner termination of this lease; at that time
all such alterations and additions shall remain on the Property and become the
property of Landlord without payment therefor by Landlord unless, upon the
termination of this lease, Landlord shall give written notice to Tenant to
remove the same; in which event Tenant will remove such alterations,
improvements and additions, and repair and restore any damage to the Property
caused by the installation or removal thereof.
14. Mechanics' Liens. Tenant shall promptly pay any contractors and
materialmen who supply labor, work or materials to Tenant at the Premises or the
Property so as to minimize the possibility of a lien attaching to the Premises
or the Property. Tenant shall take all steps permitted by law in order to avoid
the imposition of any mechanic's, laborer's or materialman's lien upon the
Premises, the Property or the Lot. Should any such lien or notice of lien be
filed for work performed for Tenant, other than by Landlord, Tenant shall bond
against or discharge the same within fifteen (15) days after the lien or claim
is filed or formal notice of said lien or claim has been issued regardless of
the validity of such lien or claim. Nothing in this lease is intended to
authorize Tenant to do or cause any work or labor to be done or any materials to
be supplied for the account of Landlord, all of the same to be solely for
Tenant's account and at Tenant's risk and expense. Throughout this lease the
term "mechanic's lien" is used to include any lien, encumbrance or charge levied
or imposed upon the Premises or the Property or any interest therein or income
there from on account of any mechanic's, laborer's or materialman's lien or
arising out of any debt or liability to or any claim or demand of any
contractor, mechanic, supplier, materialman or laborer and shall include without
limitation any mechanic's notice of intention given to Landlord or Tenant, any
stop order given to Landlord or Tenant, any notice of refusal to pay naming
Landlord or Tenant and any injunctive or equitable action brought by any person
entitled to any mechanic's lien.
15. Landlord's Right to Entry.
(a) Tenant shall permit Landlord and the authorized
representatives of Landlord and of any mortgagee or any prospective mortgagee to
enter the Premises at all reasonable times for the purpose of (i) inspecting
them or (ii) making any necessary repairs thereto or to the Property and
performing any work therein. During the progress of any work on the Premises or
the Property Landlord will attempt not to inconvenience Tenant, but shall not be
liable for inconvenience, annoyance, disturbance, loss of business or other
damage to Tenant by
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reason of making any repair or by bringing or storing materials, supplies, tools
and equipment in the Premises during the performance of any work, and the
obligations of Tenant under this lease shall not be thereby affected in any
manner whatsoever.
(b) Landlord shall have the right at all reasonable times to
enter and to exhibit the Premises for the purpose of sale or mortgage, and,
during the last twelve (12) months of the term of this lease, to enter and to
exhibit the Premises to any prospective tenant. Landlord shall whenever possible
provide notice to Tenant of his intent to enter space.
16. Damage by Fire or Other Casualty.
(a) If the Premises or Building shall be damaged or destroyed
by fire or other casualty, Tenant shall promptly notify Landlord, and Landlord,
subject to any mortgagee's consent and to the conditions set forth in this
Article 16, shall repair, rebuild or replace such damage and restore the
Premises to substantially the same condition in which they were immediately
prior to such damage or destruction; provided, however, that Landlord shall only
be obligated to restore such damage which is covered by the fire and other
extended coverage insurance policies.
(b) The work shall be commenced promptly and completed with due
diligence, taking into account the time required by Landlord to effect a
settlement with, and procure insurance proceeds from, the insurer, and for
delays beyond Landlord's reasonable control.
(c) The net amount of any insurance proceeds (excluding
proceeds received pursuant to a rental coverage endorsement) recovered by reason
of the damage or destruction of the Property in excess of the cost of adjusting
the insurance claim and collecting the insurance proceeds (such excess amount
being hereinafter called the "net insurance proceeds") shall be applied towards
the reasonable cost of restoration. If in Landlord's sole opinion the net
insurance proceeds will not be adequate to complete such restoration, Landlord
shall have the right to terminate this lease and all the unaccured obligations
of the parties hereto by sending a written notice of such termination to Tenant,
the notice to specify a termination date no less then ten (10) days after its
transmission; provided, however, that except during the last two (2) years of
the term, Tenant may require Landlord to withdraw the notice of termination by
agreeing to pay the cost of restoration in excess of the net insurance proceeds
and by giving Landlord adequate security for such payment prior to the
termination date specified in Landlord's notice of termination. If the net
insurance proceeds are more than adequate, the amount by which the net insurance
proceeds exceed the cost of restoration will be retained by Landlord or applied
to repayment of any mortgage secured by the Property.
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(d) Landlord's obligation or election to restore the Premises
under this Article shall not include the repair, restoration or replacement of
the fixtures, improvements, alterations, furniture or any other property owned,
installed, made by, or in the possession of Tenant.
(e) Landlord shall maintain, and Tenant shall, pursuant to
Article 5.b. hereinabove, pay its proportionate share of, a rental coverage
endorsement or other comparable form of coverage as part of its fire an extended
coverage or all-risk insurance policy. Tenant will receive an abatement of its
minimum annual rent to the extent of payments received by Landlord from the
carrier providing the rental coverage endorsement.
17. Non-Abatement of Rent. Except as otherwise expressly provided as to
damage by fire or by any other casualty in Paragraph 16(e) and as to
condemnation in Paragraphs 19(a) and (b) there shall be no abatement or
reduction of the minimum rent, additional rent or other sums payable hereunder
for any cause whatsoever, and this lease shall not terminate, and Tenant shall
not be entitled to surrender the Premises. However, if space in untenantable for
more than 12 months. Tenant may terminate by providing written notices to
Landlord. Landlord will advise Tenant of Landlord's intentions and
reconstruction timing within 90 days of the date of casualty.
18. Indemnification of Landlord. Tenant will indemnify Landlord and
save Landlord harmless from and against any and all claims, actions, damages,
liability and expense (including without limitation fees of attorneys,
investigators and experts) in connection with loss of life, personal injury or
damage to property caused to any person in or about the Premises or arising out
of the occupancy or use by tenant of the Premises or occasioned wholly or in
part by any act or omission of Tenant, its agent, contractors employees,
licensees or invitees; unless such loss, injury or damage was caused by the
negligence of Landlord, its agents, employees, licensees or invitees. Without
limiting the foregoing, Tenant will forever release and hold Landlord harmless
from all claims arising out of damage to Tenant's property unless such damage
occurs as a result of Landlord's negligent failure to make repairs after having
received written notice of the need for such repairs. In case any such claim,
action or proceeding is brought against Landlord, upon notice from Landlord and
at Tenant's sole cost and expense, Tenant shall resist or defend such claim,
action or proceeding or shall cause it to be resisted or defended by an insurer.
19. Condemnation.
(a) Termination. (i) If all of the Premises are covered by a
condemnation; or (ii) if any part of the Premises is covered by a condemnation
and the remainder thereof is insufficient for the reasonable operation therein
of Tenant's business; or, (iii) subject to the provisions of Paragraph (b)(i)
hereof, if any of the Property is covered by a condemnation
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and, in Landlord's sole opinion, it would be impractical or the condemnation
proceeds are insufficient to restore the remainder of the Property; then, in any
such event, this lease shall terminate and all obligations hereunder shall cease
as of the date upon which possession is taken by the condemnor and the rent
herein reserved shall be apportioned and paid in full by Tenant to Landlord to
that date and all rent prepaid for periods beyond that date shall be repaid by
Landlord to Tenant.
(b) Partial Condemnation.
(i) If there is a partial condemnation and Landlord
decides to terminate pursuant to Paragraph (a) hereof, except during the last
two (2) years of the term, Tenant may require Landlord to withdraw its notice of
termination by: [A] giving Landlord written notice thereof within ten (10) days
from transmission of Landlord's notice to Tenant of Landlord's intention to
terminate, [B] agreeing to pay the cost of restoration in excess of the
condemnation proceeds reduced by those sums expanded by Landlord in collecting
the condemnation proceeds, and [C] giving Landlord adequate security for such
payment within such ten (10) day period.
(ii) If there is a partial condemnation and this lease
has not been terminated pursuant to Paragraph (a) hereof, Landlord shall restore
the Building and the improvements which are part of the Premises to a condition
and size as nearly comparable as reasonably possible to the condition and size
thereof immediately prior to the date upon which possession shall have been
taken by the condemnor. If the condemnation proceeds are more than adequate to
cover the cost of restoration and the Landlord's expenses in collecting the
condemnation proceeds, any excess proceeds shall be retained by Landlord or
applied to repayment of any mortgage secured by the Premises.
(iii) If there is a partial condemnation and this lease
has not been terminated on the date upon which the condemnor shall have obtained
possession, the obligations of Landlord and Tenant under the lease shall be
unaffected by such condemnation except that there shall be an equitable
abatement for the balance of the term of the minimum annual rent according to
the value of the Premises before and after the date upon which the condemnor
shall have taken possession. In the event that the parties are unable to agree
upon the amount of such abatement, either party may submit the issue to
arbitration.
(c) Award. In the event of a condemnation affecting Tenant,
Tenant shall have the right to make a claim against the condemnor for removal
expenses, business dislocation damages and moving expenses; provided and to the
extent, however, that such claims or payments do not reduce the sums otherwise
payable by the condemnor to Landlord. Except as aforesaid, Tenant hereby waives
all claims against Landlord and against the condemnor, and Tenant hereby assigns
to Landlord all claims against the condemnor including, without
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limitation, all claims for leasehold damages and diminution in value of Tenant's
leasehold interest.
(d) Temporary Taking. If the condemnor should take only the
right to possession for a fixed period of time or for the duration of an
emergency or other temporary condition, then, notwithstanding anything
hereinabove provided, this lease shall continue in full force and effect without
any abatement of rent, but the amounts payable by the condemnor with respect to
any period of time prior to the expiration or sooner termination of this lease
shall be paid by the condemnor to Landlord and the condemnor shall be considered
a subtenant of Tenant. Landlord shall apply the amount received from the
condemnor applicable to the rent due hereunder net of costs to Landlord for the
collection thereof, or as much thereof as may be necessary for the purpose,
toward the amount due from Tenant as rent for that period; and, Tenant shall pay
to Landlord any deficiency between the amount paid by the condemnor and the
amount of the rent, or Landlord shall pay to Tenant any excess of the amount of
the award over the amount of the rent.
20. Quiet Enjoyment. Tenant, upon paying the minimum rent, additional
rent and other charges herein provided for, and observing and keeping all
covenants, agreements and conditions of this lease on its part to be kept, shall
quietly have and enjoy the Premises during the term of this lease without
hindrance or molestation by anyone claiming by or through Landlord, subject,
however, to the exceptions, reservations and conditions of this lease.
21. Assignment and Subletting.
(a) Restricted Assignment. Tenant shall not assign, mortgage,
pledge or encumber this lease, or sublet the whole or any part of the Premises,
without the prior written consent of Landlord which consent shall not be
unreasonably withheld. This prohibition against assigning or subletting shall be
construed to include a prohibition against any assignment or subletting by
operation of law, and/or a transfer by any person or persons controlling Tenant
on the date of the lease of such control to a person or persons not controlling
Tenant on the date of the lease. In the event of any assignment of this lease
made with or without Landlord's consent, Tenant nevertheless shall remain liable
for the performance of all of the terms, conditions and covenants of this lease
and shall require any assignee to execute and deliver to Landlord an assumption
of liability agreement in form satisfactory to Landlord, including an assumption
by the assignee of all of the obligations of Tenant and the assignee's
ratification of and agreement to be bound by all the provisions of this lease.
Landlord shall be entitled to, and Tenant shall promptly remit to Landlord, any
profit which may inure to the benefit of Tenant as a result of any subletting of
the Premises or assignment of this lease, whether or not consented to by
Landlord.
(b) Percentage Agreements. It is agreed that Tenant shall not
enter into any assignment, sublease, license, concession or other agreement for
use, occupancy or utilization of
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the whole or any part of the Premises with or without landlord's consent, which
provides for rental or other payment for such use occupancy or utilization
based, in whole or in part on the net income or profits derived by any person or
entity from the space leased used, occupied or utilized (other than an amount
based on a fixed percentage or percentages of receipts or sales), and any such
purported assignment, sublease, license, concession or other agreement shall be
absolutely void and ineffective as a conveyance of any right or interest in the
possession, use, occupancy or utilization of any part of the Premises.
22. Subordination. This lease and Tenant's rights hereunder shall be
subject and subordinate at all times in lien and priority to any first mortgage
or other primary encumbrance now or hereafter placed upon or affecting the
Premises and to any second mortgage or encumbrance with the consent of the first
mortgagee, and to all renewals, modifications, consolidations and extensions
thereof without the necessity of any further instrument or act on the part of
Tenant. Tenant shall execute and deliver upon demand any further instrument or
instruments confirming the subordination of this lease to the lien of any such
first mortgage or to the lien of any other mortgage if requested to do so by
Landlord with the consent of the first mortgagee, and any further instrument or
instruments of attornment that may be desired by any such mortgagee or Landlord.
Notwithstanding the foregoing, any mortgagee may at any time subordinate its
mortgage to this lease, without Tenant's consent, by giving notice in writing to
Tenant, and thereupon this lease shall be deemed prior to such mortgage without
regard to their respective dates of execution and delivery, and in that event
such mortgagee shall have the same rights with respect to this lease as though
this lease had been executed prior to the execution and delivery of the mortgage
and had been assigned to such mortgagee. Landlord to give Tenant right of quiet
enjoyment.
23. Memorandum of Lease; Tenant's Certificate.
(a) Tenant, at any time and from time to time and within five
(5) days after Landlord's written request, shall execute acknowledge and deliver
to Landlord a short form or memorandum of this lease for recording purposes.
(b) Tenant, at any time and from time to time and within five
(5) days after Landlord's written request, so long as there are no material and
substantial defects in the Premises which Landlord is obligated to remedy and
which Landlord is not proceeding to remedy, and so long as Landlord is not
otherwise in default of this lease, shall execute, acknowledge and deliver to
Landlord a written instrument in recordable form certifying that this lease is
unmodified and in full force and effect (or, if there have been modifications,
that it is in full force and effect as modified and stating the modifications);
stating that the improvements required by Article 2 hereof have been completed
certifying that Tenant has accepted possession of the Premises stating the date
on which the term of the lease commenced and the dates to which minimum rent,
additional rent and other charges have been paid in advance, if any; stating
that to
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the best knowledge of the signer of such instrument Landlord is not in default
of this lease; stating any other fact or certifying any other condition
reasonably requested by Landlord or required by any mortgagee or prospective
mortgagee or purchaser of the Premises or any interest therein; and stating that
it is understood that such instrument may be relied upon by any mortgagee or
prospective mortgagee or purchaser of the Premises or any interest therein or by
any assignee of Landlord's interest in this lease or by any assignee of any
mortgagee. The foregoing instrument shall be addressed to Landlord and to any
mortgagee, prospective mortgagee, purchaser or other party specified by
landlord.
24. Curing Tenant's Defaults. If Tenant shall be in default in the
performance of any of its obligations hereunder landlord, without any obligation
to do so, in addition to any other rights it may have in law or equity, may
elect to cure such default on behalf of Tenant after written notice (except in
the case of emergency) to Tenant. Tenant shall reimburse Landlord upon demand
for any sums paid or costs incurred by Landlord in curing such default,
including interest thereon from the respective dates of Landlord's making the
payments and incurring such costs, which sums and costs together with interest
thereon shall be deemed additional rent payable within 30 days of being billed
therefor.
25. Surrender.
(a) Subject to the terms of Paragraphs 13(b) and 16(a) and (c)
hereof at the expiration or earlier termination of the term hereof, Tenant shall
promptly yield up, clean and neat, and in the same condition, order and repair
in which they are required to be kept throughout the term hereof, the Premises
and all improvements, alterations and additions thereto, and all fixtures and
equipment servicing the Building, ordinary wear and tear excepted.
(b) If Tenant or any person claiming through Tenant, shall
continue to occupy the Premises after the expiration or earlier termination of
the term of any renewal thereof, such occupancy shall be deemed to be under a
month-to-month tenancy under the same terms and conditions set forth in this
lease; except however, that the minimum annual rent during such continued
occupancy shall be double the amount set forth in Paragraphs 5(a) and (b)
hereof. Anything to the contrary notwithstanding, any holding over by Tenant
without Landlord's prior written consent shall constitute a default hereunder
and shall be subject to all the remedies set forth in Article 26 hereof.
26. Default and Remedies.
(a) Defaults. It shall be an event of default:
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(i) If Tenant does not pay in full when due and without
demand any and all installments of minimum rent or additional rent or any other
charges or payments whether or not herein included as rent; or
(ii) If Tenant violates or fails to perform or otherwise
breaches any agreement, term, covenant or condition herein contained; or
(iii) If Tenant abandons the Premises or removes or
attempts to remove Tenant's goods or property therefrom other than in the
ordinary course of business without having first paid to Landlord in full all
minimum rent, additional rent and other charges that may have become due as well
as all which will become due thereafter; or
(iv) If Tenant becomes insolvent or bankrupt in any
sense or makes an assignment for the benefit of creditors or offers a
composition or settlement to creditors, of if a petition in bankruptcy or for
reorganization or for an arrangement with creditors under any federal or state
law is filed by or against Tenant, or a bill in equity or other proceeding for
the appointment of a receiver, trustee, liquidator, custodian, conservator or
similar official for any of Tenant's assets is commenced, or if any of the real
or personal property of Tenant shall be levied upon by any sheriff, marshal or
constable; provided, however, that any proceeding brought by anyone other than
the parties to this lease under any bankruptcy, reorganization arrangement,
insolvency, readjustment, receivership or similar law shall not constitute a
default until such proceeding, decree, judgment or order has continued unstayed
for more than sixty (60) consecutive days; or
(v) If any of the events enumerated in Paragraph (a)(iv)
of this Article shall happen to any guarantor of this lease;
(b) Remedies. Then, and in any such event, landlord shall have
the following rights:
(i) to charge a late payment penalty of ten (10%)
percent of any amount owed to Landlord pursuant to this lease which is not paid
within thirty (30) days of the date which is set forth in the lease if a date is
specified, or, if a date is not specified, within thirty (30) days of the
mailing of a bill therefor by Landlord. If Landlord incurs a penalty in
connection with any payment which Tenant has failed to make within the times
required in this lease, Tenant shall pay Landlord, in addition to such sums, the
full amount of such penalty incurred by Landlord.
(ii) To accelerate the whole or any part of the rent for
the entire unexpired balance of the term of this lease, as well as all other
charges, payments, costs and expenses herein agreed to be paid by Tenant, and
any rent or other charges, payment costs and expenses if
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so accelerated shall, in addition to any and all installments of rent already
due and payable and in arrears, and any other charge or payment herein reserved,
included or agreed to be treated or collected as rent and any other charge,
expense or cost herein agreed to be paid by Tenant which may be due and payable
as if, by the terms and provisions of this lease, such accelerated rent and
other charges, payments, costs and expenses were on that date payable in
advance.
(iii) To enter the Premises and without further demand
or notice proceed to distress and sale of the goods, chattels and personal
property there found and to levy the rent and other charges herein payable as
rent, and Tenant shall pay all costs and officers' commissions which are
permitted by law, including watchmen's wages and sums chargeable to Landlord,
and further including commission(s) charged by the constable or other person
making the levy, and in such case all costs, officers' commissions and other
charges shall immediately attach and become part of the claim of Landlord for
rent, and any tender of rent without said costs, commissions and charges made
after the issuance of a warrant of distress, shall not be sufficient to satisfy
the claim of Landlord.
(iv) To re-enter the Premises, together with all
additions, alterations and improvements, and, at the option of Landlord, remove
all persons and all or any property therefrom, either by summary dispossess
proceedings or by any suitable action or proceeding at law or by force or
otherwise, without being liable for prosecution or damages therefor, and
repossess and enjoy the Premises. Upon recovering possession of the Premises as
a result of a default on the part of Tenant, Landlord may, at Landlord's option
either terminate this lease or make such alterations and repairs as may be
necessary in order to relet the Premises and relet the Premises or any part or
parts thereof, either in Landlord's name or otherwise, for a term or terms which
may, at Landlord's option be less than or exceed the period which would
otherwise have constituted the balance of the term of this lease and at such
rent or rents and upon such other terms and conditions as in Landlord's sole
discretion may seem advisable and to such person or persons as may in Landlord's
discretion seem best; upon each such relating all rents received by Landlord
from such relating shall be applied: first, to the payment of any costs and
expenses of such relating, including brokerage fees and attorney's fees and all
costs of such alteration and repairs; second, to the payment of any indebtedness
other than rent due hereunder from Tenant to Landlord third, to the payment of
rent due and unpaid hereunder, and the residue, if any, shall be held by
Landlord and applied in payment of future rent as it may become due and payable
hereunder. If such rentals received from such relating during any months shall
be less than that to be paid during that month by Tenant, Tenant shall pay any
such deficiency to Landlord. Such deficiency shall be calculated and paid
monthly. No such re-entry of taking possession of the Premises or the making of
alternations or improvements thereto or the relating thereof shall be construed
as an election on the part of Landlord to terminate this lease unless written
notice of such intention be given to Tenant. Landlord shall in no event be
liable in any way whatsoever for failure to relet the Premises or, in the event
that the Premises or any part or parts thereof are relet, for failure to collect
the rent under such relating. Tenant, for Tenant and Tenant's
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successors and assigns, hereby irrevocably constitutes and appoints Landlord
Tenant's and their agent to collect the rents due and to become due under all
subleases of the Premises or any parts thereof without in any way affecting
Tenant's obligation to pay any unpaid balance of rent due or to become due
hereunder. Notwithstanding any such relating without termination, Landlord may
at any time thereafter elect to terminate this lease for such previous breach.
(v) To terminate this lease and the term hereby created
without any right on the part of Tenant to waive the forfeiture by payment of
any sum due or by other performance of any condition, term or covenant broken.
Whereupon landlord shall be entitled to recover, in addition to any and all sums
and damages for violation of Tenant's obligations hereunder in existence at the
time of such termination, damages for Tenant's default in an amount equal to the
amount of the rent reserved for the balance of the term of this lease, as well
as all other charges, payments, costs and expenses herein agreed to be paid by
Tenant, all discounted at the rate of six percent (6%) per annum to their then
present worth, less the fair rental value of the Premises for the remainder of
said term, also discounted at the rate of six percent (6%) per annum to its then
present worth, all of which amount shall be immediately due and payable from
Tenant to landlord.
(vi) When this lease and the term or any extension or
renewal thereof shall have been terminated on account of any default by Tenant,
or when the term hereby created or any extension or renewal thereof shall have
expired, it shall be lawful for any attorney of any court of record to appear as
attorney for Tenant as well as for all persons claiming by, through or under
Tenant, and to sign an agreement for entering in any competent court an amicable
action in ejectment and judgment against Tenant and all persons claiming by,
though or under Tenant and therein confess judgment for the recovery by Landlord
of possession of the Premises, for which this lease shall be his sufficient
warrant; thereupon, if Landlord so desires, an appropriate writ of possession
may issue forthwith, without any prior writ or proceeding whatsoever, and
provided that if for any reason after such action shall have been commenced it
shall be determined and possession of the Premises remain in or be restored to
Tenant, Landlord shall have the right for the same default and upon any
subsequent default or defaults, or upon the termination of this lease or
Tenant's right of possession as hereinbefore set forth, to bring one or more
further amicable action or actions as hereinbefore set forth to recover
possession of the Premises and confess judgment as hereinbefore provided.
(vii) If Tenant shall default in the payment of the rent
herein reserved or in the payment of any other sums due hereunder by Tenant,
Tenant hereby authorized and empowers any prothonotary or attorney of any court
of record to appear for Tenant in any and all actions which may be brought for
said rent and said other sums; and to sign for Tenant an agreement for entering
in any competent court an amicable action or actions for the recovery of said
rental and other sums; and in said suits or in said amicable action or actions
to confess judgment against Tenant for all or any part of said rental and said
other sums, including, but not
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limited to, the amounts due from Tenant to Landlord under Paragraphs (b)(i),
(ii), (iii) or (iv) above; and for interest and costs, together with an
attorney's commission for collection of five percent (5%). Such authority shall
not be exhausted by one exercise thereof, but judgment may be confessed as
aforesaid from time to time as often as any of said rental and other sums shall
fall due or be in arrears, and such powers may be exercised as well after the
expiration of the initial term of this lease and during any extended or renewal
term of this lease and after the expiration of any extended or renewal term of
this lease.
(c) Non-Waiver. No waiver by Landlord of any breach by Tenant
of any of Tenant's obligations, agreements or covenants herein shall be a waiver
of any subsequent breach or of any obligation, agreement or covenant, nor shall
any forbearance by Landlord to seek a remedy for any breach by Tenant be a
waiver by Landlord of any rights and remedies with respect to such or any
subsequent breach.
(d) Grace Period. Notwithstanding anything hereinabove stated,
except in the case of emergency as set forth in Article 24 and except in the
event of any default enumerated in Paragraphs (a)(iii), (iv) and (v) of this
Article, neither party hereto will exercise any right or remedy provided for in
this lease or allowed by law because of any default of the other, except those
remedies contained in Paragraph (b)(i) of this Article, unless such party shall
have first given ten (10) days written notice thereof to the defaulting party,
and the defaulting party shall have failed to cure the default within such
period; provided, however, that if the default consists of something other than
the failure to pay money which cannot reasonably be cured within ten (10) days,
neither party hereto will exercise any such right or remedy if the defaulting
party begins to cure the default within ten (10) days and continues actively and
diligently in good faith to completely cure said default; and further provided
that Landlord shall not be required to give such ten (10) days notice more than
two (2) times during any twelve (12) month period.
(e) Rights and Remedies Cumulative. No right or remedy herein
conferred upon or reserved to Landlord is intended to be exclusive of any other
right or remedy provided herein or by law, but each shall be cumulative and in
addition to every other right or remedy given herein or now or hereafter
existing at law or in equity or by statute.
27. Condition of Title and of Premises. Tenant represents that the
Property, the Lot and the Premises, the zoning thereof, the street or streets,
sidewalks, parking areas, curbs and access ways adjoining them, any surface and
sub-surface conditions thereof, and the present uses and non-uses thereof, have
been examined by Tenant, and Tenant accepts them in the condition or state in
which they now are, or any of them now is, without relying on any
representation, covenant or warranty, express or implied, in fact or in law, by
Landlord and without recourse to Landlord, the appurtenances thereto, the
nature, condition or usability thereof or the use or uses to which the Premises
and the Property or any part thereof may be put, except as to work to be
performed by Landlord pursuant to Article 2 hereof.
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28. Tenant's Environmental Responsibility. Tenant covenants and agrees
to maintain and operate the Premises strictly in accordance with all applicable
federal, state, and local environmental protection laws, regulations, rules and
orders, including but not limited to those laws relating to the storage,
disposal, use and presence of hazardous substances, disposal of solid waste,
release or emission of pollutants or hazardous substances into the air or soil
or into groundwater or other waters, (collectively "Environmental Laws"). Tenant
covenants that is has either acquired theretofore or shall acquire, prior to or
at the time required by applicable law, all environmental permits and licenses
required by any Environmental Law in connection with the maintenance and
operation of Tenant's business upon the Premises. Tenant covenants that it shall
indemnify, defend and hold Landlord, its successors, assigns, directors,
officers, employees, agents and lenders secured by an interest in the Building
harmless from all response costs, remediation, costs, losses, injuries, costs,
damages, expenses, claims, fines and penalties incurred by Landlord, its
successors, assigns, directors, officers, employees, agents and lenders as the
result of any violation by Tenant of any Environmental Law, or as the result of
any necessary repair, cleanup, closure or detoxification of the property upon
which the Building is located or upon land in the vicinity of the Building if
due to the acts of omissions of Tenant, or as a result of a misrepresentation
made by Landlord based upon incorrect or incomplete information supplied by
Tenant to Landlord. These provisions in this section shall survive the
termination of this lease. Tenant shall not be responsible for any conditions
existing prior to its occupancy, or that are caused by Landlord or other Tenant.
29. Interpretation.
(a) Captions. The captions in this lease are for convenience
only and are not a part of this lease and do not in any way define, limit,
describe or amplify the terms and provisions of this lease or the scope or
intent thereof.
(b) Entire Agreement. This lease represents the entire
agreement between the parties hereto and there are no collateral or oral
agreements or understandings between Landlord and Tenant with respect to the
Premises or the Property. No rights, easements or licenses are acquired in the
Property or any land adjacent to the Property by Tenant by implication or
otherwise except as expressly set forth in the provisions of this lease. This
lease shall not be modified in any manner except by an instrument in writing
executed by the parties. Tenant agrees to make such changes to this lease as are
required by any mortgagee, provided such changes do not substantially affect
Tenant's rights and obligations hereunder. The masculine (or neuter) pronoun,
singular number, shall include the masculine, feminine and neuter genders and
the singular and plural number.
(c) Exhibits. Each writing or plan referred to herein as being
attached hereto as an Exhibit or otherwise designated herein as an Exhibit
hereto is hereby made a part hereof.
19
<PAGE>
(d) Covenants. The terms, covenants and obligations set forth
herein all constitute conditions and not covenants of this lease.
(e) Arbitration. Wherever arbitration is set forth herein as
the appropriate resolution of a dispute, issues shall be submitted for
arbitration to the American Arbitration Association in the city nearest to the
Premises in which offices of the American Arbitration Association are located.
Landlord and Tenant will comply with the rules then obtaining of the American
Arbitration Association and the determination of award rendered by the
arbitrators shall be final, conclusive and binding upon the parties and not
subject to appeal, and judgment thereon may be entered in any court of competent
jurisdiction.
(f) Interest. Wherever interest is required to be paid
hereunder, such interest shall be at the highest rate permitted under law but
not in excess of fifteen percent (15%).
30. Definitions.
(a) "Landlord". The word "Landlord" is used herein to include
the Landlord named above as well as its heirs, successors and assigns, each of
whom shall have the same rights, remedies, powers, authorities and privileges as
he would have had had he originally signed this lease as Landlord. Any such
person, whether or not named herein, shall have no liability hereunder after he
ceases to hold title to the Premises except for obligations which may have
theretofore accrued. Neither Landlord nor any principal of Landlord nor any
owner of the Building or the Lot, whether disclosed or undisclosed, shall have
any personal liability with respect to any of the provisions of this lease or
the Premises, and if Landlord is in breach or default with respect to Landlord's
obligations under this lease or otherwise, Tenant shall look solely to the
equity of Landlord in the Premises for the satisfaction of Tenant's claims.
(b) "Tenant". The word "Tenant" is used herein to include the
Tenant named above as well as its successors and assigns, each of which shall be
under the same obligations, liabilities and disabilities and each of which shall
have the same rights, privileges and powers as it would have possessed had it
originally signed this lease as Tenant. Each and every of the persons named
above as Tenant shall be bound formally and severally by the terms, covenants
and agreements contained herein. However, no such rights, privileges or powers
shall inure to the benefit of any assignee of Tenant immediate or remote, unless
the assignment to such assignee is permitted or has been approved in writing by
Landlord. Any notice required or permitted by the terms of this lease may be
given by or to any one of the persons named above as Tenant, and shall have the
same force and effect as if given by or to all thereof.
(c) "Mortgage" and "Mortgagee". The word "mortgage" is used
herein to include any lien or encumbrance on the Premises or the Property or on
any part of or interest in or appurtenance to any of the foregoing, including
without limitation any ground rent or ground
20
<PAGE>
lease if Landlord's interest is or becomes a leasehold estate. The word
"mortgagee" is used herein to include the holder of any mortgage, including any
ground lessor if Landlord's interest is or becomes a leasehold estate. Wherever
any right is given to a mortgagee, that right may be exercised on behalf of such
mortgagee by any representative or servicing agent of such mortgagee.
(d) "Person". The word "person" is used herein to include a
natural person, a partnership, a corporation, an association, and any other form
of business association or entity.
(e) "Date of this Lease". The "date of this lease" shall be the
date upon which this lease has been fully executed by both parties.
(f) "Proportionate Share". Tenant's "proportionate share" of
any Imposition, cost, charge, rent, expenses or payment herein designated as
additional rent shall be calculated by multiplying the relevant sum by a
fraction, the numerator of which shall be the square foot area of the Premises,
as occupied by the Tenant for the relevant period of the calculation, and the
denominator of which shall be the square foot area of the Building as set forth
in Article 4 hereof; providing that such calculation shall be adjusted to avoid
allocating to any vacant space those specific costs which were not incurred for
such space.
31. Notices. All notices, demands, requests, consents, certificates and
waivers required or permitted hereunder from either party to the other shall be
in writing and sent by United States certified mail, return receipt requested,
postage prepaid. Notices to Tenant shall be addressed to the Premises. Notices
to Landlord shall be addressed to Union Deposit Corporation, 651 East Park
Drive, P.O. Box 4153, Harrisburg, PA 17111 with a copy to any mortgagee or other
party designated by Landlord. Either party may at any time, in the manner set
forth for giving notices to the other, specify a different address to which
notices to it shall be sent.
32. Security Deposit. At the time of signing this lease Tenant shall
deposit with Landlord the sum of Seven thousand nine hundred fifty-00/xx Dollars
($7,950.00) to be retained by Landlord as cash security for the faithful
performance and observance by Tenant of the covenants, agreements and conditions
of this lease. Notwithstanding anything to the contrary contained in any law or
statute not existing or hereafter passed (i) Tenant shall not be entitled to any
interest whatever on the cash security, (ii) Landlord shall not be obligated to
hold the cash security in trust or in a separate account, and (iii) Landlord
shall have the right to commingle the cash security with its other funds.
Landlord may use, apply or retain the whole or any part of the cash security to
the extent required for the payment of any minimum rent, any additional rent or
any other sums payable hereunder as to which Tenant is in default or to the
extent required for the reimbursement to Landlord of any sum which Landlord may
expend or may be required to expend by reason of Tenant's default in respect to
any of the covenants, agreements or conditions of this lease. If Tenant shall
fully and faithfully comply with all of the covenants, agreements and conditions
of this lease, the cash security shall be returned to Tenant after the
Expiration
21
<PAGE>
Date and surrender of the Premises to Landlord. If the Premises are sold to a
bona fide purchaser, Landlord shall have the right to transfer the aforesaid
cash security to such purchaser, by which transfer Landlord shall be released
from all liability and Tenant shall look solely to the new landlord for the
return thereof.
33. Option to Renew. Tenant shall have the right and option,
exercisable by giving Landlord prior written notice thereof more than twelve
(12) months in advance of the Expiration Date of this lease to extend the term
of this lease under the same terms and conditions as herein set forth except for
Minimum Annual Rent, for one (1) additional term of five (5) years, beginning on
the next day following the Expiration Date of the initial term. The Minimum
Annual Rent for each year of the extended term shall, beginning with the first
(1st) year of the extended term, be increased by 3% over the previous lease
year's minimum annual rent.
34. If during the original or renewal term of this Lease, Tenant has a
requirement to expand and Landlord cannot accommodate Tenant's expansion
requirement, at Tenant's option, Landlord and Tenant agree to enter into good
faith negotiations regarding Landlord's construction of a new building, for
Tenant, on Landlord's (or a related entity's) property in the East Park Drive
area.
35. Tenant has right of first refusal for additional space, subject to
prior rights of existing tenants for such additional space.
IN WITNESS WHEREOF, and in consideration of the mutual entry into this
lease and for other good and valuable consideration, and intending to be legally
bound, each party hereto has caused this agreement to be duly executed under
seal.
Date signed: 9/19/96 Landlord: UNION DEPOSIT CORPORATION
-----------------
By: /s/ Paul L. Mahoney
--------------------------------
PAUL L. MAHONEY
Attest: /s/ Mindy Sue Nese
---------------------------
Date signed: 9/13/96 Tenant: PENNSYLVANIA PHYSICIAN
----------------- -----------------------
HEALTHCARE PLAN, INC.
-----------------------
By: /s/ Richard A. Felice
--------------------------------
Witness: /s/ Frank P. O'Connor
---------------------------
22
<PAGE>
EXHIBITS
--------
Exhibit "A" - First Floor Plan (drawing omitted)
Exhibit "B" - Plans
Exhibit "C" - Drawing of Plans (omitted)
The Company will furnish a copy of any omitted exhibit upon request.
23
<PAGE>
EXHIBIT "A"
-----------
"Phase 1". Original Premises (5300 square feet) - Tenant's occupancy
commences as provided in lease. Provided that Tenant has
signed lease by September 13th, 1996, Landlord will
substantially complete Phase 1 improvements by October 11,
1996.
"Phase 2". Tenant's occupancy for this Additional Space (3,023 square
feet) shall be after the commencement date, but subject to (i)
the vacating thereof by the present Tenant and (ii) the
substantial completion of Landlord's improvements in Phase II.
Provided Tenant has signed lease by September 13th, 1996,
Landlord will substantially completed Phase II improvements by
February 28, 1997. Lease commences upon substantial completion
of improvements.
"Phase 3." Tenant's occupancy for the Additional Space (2,700 square
feet) shall be after the Commencement Date, but subject to (i)
the vacating thereof by the present Tenant and (ii) the prior
completion of Landlord's improvements in Phase III, all of
which shall not be later than nine months after the
Commencement Date.
24
<PAGE>
EXHIBIT "B"
-----------
PLANS
-----
Both Landlord and Tenant agree, in writing, to specific improvements to be
completed by Landlord. It is contemplated by both parties that the scope of
improvements shall be:
1. Provide a total of eleven (11) private offices (including some existing in
Phase 1).
2. Reduce size of existing kitchen/break area by removing existing hallway wall
and constructing new wall.
3. Remove 2 small existing offices and install carpet to match existing, show
Exhibit C.
4. Possible reduction in size of existing conference room.
5. Prior taking Phase 3 Landlord will remove 1 office, in rear of space, and
front wall and provide sidelights to all existing offices.
6. Prior to Tenant taking Phase 2 Landlord shall remove walls as shown on
Exhibit C.
25
<PAGE>
Exhibit 6.8
Pennsylvania Physician
Healthcare Plan, Inc.
Amendment No. 1 to
Agreement of Lease
AMENDMENT NO. 1 TO AGREEMENT OF LEASE
THIS AMENDMENT made this 27 day of February, 1998 is attached to and
made a part of the Agreement of Lease by and between Union Deposit Corp., agent
for Union Deposit Limited Partnership having its office at P.O. Box 4153,
Harrisburg, PA 17111 ("Landlord") and Pennsylvania Physician Healthcare Plan,
Inc. ("Tenant") dated September 19, 1996.
The Agreement of Lease is hereby modified and supplemented in
accordance with the terms of this Amendment. Wherever there is any conflict
between this Amendment and the Agreement of Lease, the provisions of this
Amendment are paramount and the Agreement of Lease shall be construed
accordingly.
1. Premises. The Premises are amended by inserting the following: "The
Premises shall include an additional 2,100 square feet ("Additional Space") as
shown on Exhibit A attached hereto which replaces Exhibit A attached to the
Agreement of Lease which contains a total rentable area of 13,123 square feet
(the "Premises")."
2. Completion by Landlord. The Additional Space shall be delivered to
tenant in an "as is" condition.
3. Term. Insert the following: "The Term as to the Additional Space
shall commence on March 1, 1998. Delete "the fifth (5th) anniversary" in the
last line and insert "February 28, 2003".
5. Rent. (a) Minimum Annual Rent. Delete the Monthly Installment
Schedule of Minimum Annual Rent and insert the following: "The Monthly
Installment Schedule of Minimum Annual Rent shall be set forth on Exhibit C
attached and made a part hereof."
(c) Base Operating Cost. Delete the Monthly Installment
Schedule of Base Operating Cost and insert the following: "The Monthly
Installment Schedule of Base Operating Cost shall be set forth on Exhibit C
attached and made a part hereof."
33. Option to Renew. Delete the last sentence and insert the following:
"The Minimum Annual Rent and Base Operating Cost for each year of the extended
term shall be as set forth on Exhibit D attached hereto and made a part hereof."
<PAGE>
Exhibit 6.8
Except as set forth herein, the Agreement of Lease remains in full
force and effect.
IN WITNESS WHEREOF, the parties hereto intending to be legally bound
have executed this Amendment as of the day and year first above written.
ATTEST: LANDLORD: Union Deposit Corp.,
agent for Union Deposit Limited
Partnership
/s/ Cindy L. Klinger By: /s/ Paul L. Mahoney (SEAL)
- -------------------- --------------------------
Paul L. Mahoney, Executive V.P.
WITNESS: TENANT: Pennsylvania Physician
Healthcare Plan, Inc.
/s/ T. Clark Phillip By: /s/ Richard A. Felice (SEAL)
- --------------------- --------------------------
<PAGE>
Exhibit 6.8
EXHIBITS
Exhibit "A" - First Floor Plan of Additional Space (omitted)
Exhibit "C" - Chart of Monthly Installment Schedule of Minimum
Annual Rent and Base
Operating Cost (omitted)
Exhibit "D" - Minimum Annual Rent and Base Operating Cost
The Company will furnish a copy of any omitted exhibit upon request.
<PAGE>
Exhibit 6.8
EXHIBIT "D"
UNION DEPOSIT CORPORATION, AGENT FOR UNION DEPOSIT LIMITED PARTNERSHIP
AND
PENNSYLVANIA PHYSICIANS CARE
FOR
SPRING CREEK PLAZA - 651 EAST PARK DRIVE
HARRISBURG, PENNSYLVANIA
RENT
Option Period
Lease Year
03/01/03 to 02/28/04 $211,637.06 $17,636.42
03/01/04 to 02/28/05 $217,986.17 $18,165.51
03/01/05 to 02/28/06 $224,525.76 $18,710.48
03/01/06 to 02/28/07 $231,261.53 $19,271.79
03/01/07 to 02/28/08 $238,199.38 $19,849.95
BASE OPERATING COST
ESCROW
Option Period
Lease Year
03/01/03 to 02/28/04 $ 73,161.68 $ 6,096.81
03/01/04 to 02/28/05 $ 75,356.53 $ 6,279.71
03/01/05 to 02/28/06 $ 77,617.23 $ 6,468.10
03/01/06 to 02/28/07 $ 79,945.74 $ 6,662,15
03/01/07 to 02/28/08 $ 82,344.12 $ 6,862.01
One (1) successive renewal option of five (5) years, one (1) year's notice
Escalations: 3% per annum option period
Square Feet: 13,123
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE BALANCE
SHEET AND STATEMENT OF OPERATIONS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SAID FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 2,608,269
<SECURITIES> 7,261,374
<RECEIVABLES> 317,420
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 3,600,348
<PP&E> 1,256,741
<DEPRECIATION> 684,830
<TOTAL-ASSETS> 11,032,883
<CURRENT-LIABILITIES> 2,171,705
<BONDS> 0
0
0
<COMMON> 52
<OTHER-SE> 8,861,126
<TOTAL-LIABILITY-AND-EQUITY> 11,032,883
<SALES> 0
<TOTAL-REVENUES> 7,335,663
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 13,426,146
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (6,090,483)
<INCOME-TAX> 0
<INCOME-CONTINUING> (6,090,483)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (6,090,483)
<EPS-PRIMARY> (1,180.10)
<EPS-DILUTED> 0
</TABLE>
