<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[_] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934.
For the quarterly period ended March 31, 1998
----------------------------------------
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934.
For the transition period from to .
--------------- ---------------
Commission file number 333-26137
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Physicians Quality Care, Inc.
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(Exact Name of Registrant as Specified in its Charter)
Delaware 04-3267297
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(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
950 Winter Street, Suite 2410, Waltham, Massachusetts 02154
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(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code (617) 890-5560
--------------------------
Not Applicable
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(Former Name, Former Address and Former Fiscal Year, if Changed Since Last
Report)
Indicate by check (X) whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days Yes X No
----- -----
APPLICABLE ONLY TO CORPORATE ISSUERS:
The number of shares outstanding of issuer's common stock, as of May 10,
1998 was: 26,131,982 shares of Class A Common Stock, $.01 par value, 2,809,296
shares of Class B-1, $.01 par value, 1,790,704 shares of Class B-2 Common Stock,
$.01 par value, and 7,692,309 shares of Class C Common Stock, $.01 par value.
<PAGE>
PHYSICIANS QUALITY CARE, INC.
FORM 10-Q
TABLE OF CONTENTS
Page
Part I FINANCIAL INFORMATION ----
Item 1. Balance Sheets as of March 31, 1998 and
December 31, 1997.............................................. 1
Statements of Operations for the three months ended
March 31, 1998 and 1997........................................ 3
Statements of Cash Flows for the three months ended
March 31, 1998 and 1997........................................ 4
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations............................ 7
Part II OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K............................... 17
Signatures ............................................................... 18
<PAGE>
PART I
FINANCIAL INFORMATION
Item 1. Financial Statements.
Physicians Quality Care, Inc.
Balance Sheets
(Unaudited)
<TABLE>
<CAPTION>
March 31, 1998 December 31, 1997
-------------- -----------------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 3,549,861 $ 8,782,019
Prepaid expenses 15,658 35,175
Due from affiliated physician practices 11,209,680 5,719,421
Other current assets 146,447 69,868
-------------- ----------------
Total current assets 14,921,646 14,606,483
Investment in long term affiliation agreements, less
accumulated amortization of $1,879,778 and $1,394,987 in
1998 and 1997 (unaudited), respectively 57,009,957 57,340,059
Property and equipment, net 438,238 1,327,860
Other asset 225,617 136,181
-------------- ----------------
Total assets $72,595,458 $73,410,583
============== ================
Liabilities and stockholders' equity
Current Liabilities:
Accounts payable $ 868,350 $ 1,218,766
Accrued compensation 228,775 266,138
Accrued expenses 514,023 628,433
-------------- -----------------
Total current liabilities 1,611,148 2,113,337
Deferred taxes 746,062 746,062
Commitments and contingencies
Common stock, subject to put, 18,604,136 and 18,157,982 shares authorized, issued
and outstanding at March 31, 1998 (unaudited) and December 31, 1997, respectively 60,463,943 54,473,947
Stockholders' equity:
Class A common stock, $.01 par value, 75,000,000 shares authorized,
8,515,144 and 8,505,208 shares issued and 7,502,644 and 7,492,708
outstanding at March 31, 1998 (unaudited) and December 31, 1997,
respectively 85,151 85,052
Class B-1 common stock, $.01 par value, 15,367,915 shares authorized,
2,809,296 shares issued and outstanding at March 31, 1998 (unaudited) and
December 31, 1997 28,093 28,093
Class B-2 common stock, $.01 par value 9,732,085 shares authorized, 1,790,704
shares issued and outstanding at March 31, 1998 (unaudited) and December
31, 1993 17,907 17,907
Class C common stock, $.01 par value, 13,846,155 shares authorized, 7,692,309
shares issued and outstanding at March 31, 1998 (unaudited) and December
31, 1997 76,923 76,923
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
(Unaudited)
March 31, 1998 December 31, 1997
-------------- -----------------
<S> <C> <C>
Additional paid-in capital 50,033,254 49,846,913
Accumulated deficit (40,456,898) (33,967,526)
Less treasury stock, at cost, 1,012,500 shares (10,125) (10,125)
-------------- -----------------
Total stockholders' equity 9,774,305 16,077,237
-------------- -----------------
Total liabilities and stockholders' equity $72,595,458 $73,410,583
============== =================
</TABLE>
See accompanying notes to unaudited financial statements and management's
discussion and analysis of financial condition and results of operations.
2
<PAGE>
Physicians Quality Care, Inc.
Statements of Operations
(Unaudited)
<TABLE>
<CAPTION>
For the three months ended
March 31,
-------------------------------
1998 1997
-------------- --------------
<S> <C> <C>
Net patient service revenue $21,165,795 $ 10,554,041
Less: amounts retained by physician groups (6,548,848) (3,709,636)
-------------- --------------
Management fee revenue 14,616,947 6,844,405
Operating expenses:
Nonphysician salaries and benefits 6,775,619 3,067,292
Other practice expenses 6,213,378 2,751,243
Corporate and regional expenses 2,159,817 1,471,123
Deprecation and amortization 662,746 341,532
Provision for bad debts 688,328 273,262
-------------- --------------
Total expenses 16,499,888 7,904,452
Operating Loss (1,882,941) (1,060,047)
Other Income (expense):
Interest income 104,215 3,955
Interest expense (38,315) (30,724)
Loss of investment in subsidiary (132,842)
-------------- --------------
(66,942) (26,769)
-------------- --------------
Net loss $(1,949,883) $(1,086,816)
Net loss available to common stock $(6,489,379) $(1,086,816)
============== ==============
Net loss per common share-basic $(0.17) $(0.04)
============== ==============
Weighted average common shares outstanding 39,242,861 24,756,907
============== ==============
</TABLE>
See accompanying notes to unaudited financial statements and management's
discussion and analysis of financial condition and results of operations.
3
<PAGE>
Physicians Quality Care, Inc.
Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
For the Three Months Ended
March 31,
-----------------------------------------
1998 1997
----------------- -----------------
<S> <C> <C>
Operating Activities
Net Loss $(1,949,883) $(1,086,816)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation and amortization 662,746 341,532
Changes in operating assets and liabilities, net of effects of
business acquisitions:
Increase in due from affiliated physician practices (3,113,515) (1,095,755)
Increase (Decrease) in prepaid expenses and other assets (124,179) 37,753
Decrease in accounts payable, accrued compensation and
accrued expenses (502,189) (531,723)
Decreases in income taxes payable (22,319) (80,000)
----------------- -----------------
Net cash used in operating activities (5,049,339) (2,415,009)
Investing Activities
Purchase of property and equipment (324,259) (535,922)
Cash paid for affiliations (50,000) (1,039,419)
Decrease in deferred acquisition costs 98,238
----------------- -----------------
Net cash used in investing activities (374,259) (1,477,103)
Financing Activities
Proceeds from issuance of common stock, net of issuance costs 191,440 1,337,500
Proceeds from note payable 3,000,000
Decrease in deferred financing costs 18,196
Payments on capital lease obligations (203,818)
Cash paid for debt issuance cost (331,148)
----------------- -----------------
Net cash provided by financing activities 191,440 3,820,730
Net decrease in cash and cash equivalents (5,232,158) (71,382)
Cash and cash equivalents at beginning of period 8,782,019 136,926
----------------- -----------------
Cash and cash equivalents at end of period $ 3,549,861 $ 65,544
================= =================
</TABLE>
See accompanying notes to unaudited financial statements and management's
discussion and analysis of financial condition and results of operations.
4
<PAGE>
Physicians Quality Care, Inc.
Notes to Unaudited Financial Statements
Three Months Ended March 31, 1998 and 1997
(1) Basis of Presentation
---------------------
The accompanying unaudited financial statements of Physicians Quality Care,
Inc., a Delaware corporation (the "Company" or "PQC"), have been prepared in
accordance with generally accepted accounting principles and in accordance with
Rule 10-01 of Regulation S-X.
In the opinion of management, the unaudited interim financial statements
contained in this report reflect all adjustments, consisting of only normal
recurring accruals which are necessary for a fair presentation of the financial
position as of March 31, 1998 and the results of operations for the three months
ended March 31, 1998. The results of operations for the three month period ended
March 31, 1998 are not necessarily indicative of results for the full year.
These unaudited financial statements, footnote disclosures and other
information should be read in conjunction with the financial statements and
notes thereto included in the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1997.
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that effect the amounts reported in the accompanying financial
statements and notes. Actual results could differ from those estimates.
(2) Net Loss Per Common Share
-------------------------
Net loss per share of common stock is computed by dividing the net loss
available to common stock by the weighted-average number of shares of common and
common equivalent shares outstanding during each period presented. The net loss
available to common stock for the three months ended March 31, 1998 reflects the
accretion of common stock subject to put to fair value at March 31, 1998 of
$4,539,496. For the three months ended March 31, 1997 all common stock subject
to put was stated at fair value and no accretion was required. The effect of
options and warrants is not considered as it would be antidilutive. Fully
diluted loss per share is not presented because the effect would be
antidilutive.
In February 1997, the Financial Accounting Standards Board (the "FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 128 "Earnings Per
Share", which established standards for computing and presenting earnings per
share ("EPS") and applies to entities with publicly held common stock or
potential common stock. SFAS 128 is effective for financial statements issued
for both interim and annual periods ending after December 31, 1997 and requires
restatement of all prior period EPS data. Under the new requirements for
calculating
5
<PAGE>
Physicians Quality Care, Inc.
Notes to Unaudited Financial Statements
Three Months Ended March 31, 1998 and 1997
primary earnings per share, the dilutive effect of stock options will be
excluded. The Company has applied this standard in 1997.
(3) Affiliation
-----------
In February 1998, the Company entered into a long-term affiliation
agreement with two physicians located in the Baltimore/Annapolis Maryland area.
In connection with this transaction, the assets and liabilities of the physician
practices were transferred to a professional association affiliated with the
Company, Flagship Health II, P.A., a Maryland professional association
("Flagship II"). The aggregate consideration paid to the physicians was $1.5
million, of which $50,000 was paid in cash and $1,450,000 was paid by the
issuance of 446,154 shares of Class A Common Stock.
(4) Pending Accounting Standards
----------------------------
In June 1997, the FASB issued SFAS No. 130 "Reporting Comprehensive
Income," and SFAS No. 131, "Disclosures About Segments of an Enterprise and
Related Information." SFAS No. 130 establishes standards for reporting and
displaying comprehensive income and its components. SFAS No. 131 establishes
standards for public companies to report information about operating segments in
financial statements and supersedes SFAS No. 14 "Financial Reporting for
Segments of an Business Enterprise," but retains the requirements to report
information about major customers. SFAS No. 130 and SFAS No. 131 are effective
for the Company in 1998. The Company does not believe the adoption of these
Statements will have a significant effect on its financial statements.
(5) Contigency
----------
On June 12, 1997, Jay N. Greenberg, a founder and former executive vice
president of the Company, filed a complaint against the Company in Massachusetts
state court seeking damages of $1.4 million and a declaratory judgment that
843,750 of the shares registered in Mr. Greenberg's name (out of 1,012,500
shares of Class A Common Stock originally granted to Mr. Greenburg) have
"vested" under this Employment Agreement. The Company and Mr. Greenberg entered
into a Settlement Agreement in April 1998 pursuant to which the Company
confirmed Mr. Greenberg's ownership of 1,012,500 shares of Class A Common Stock
and Mr. Greenberg granted the Company an option to purchase all of such shares.
The purchase price is $1.3 million and increases (commencing effective October
1997) by $25,000 each three month period. The option expires on the earlier of
(i) October 14, 1999, (ii) upon a public offering of the capital stock of the
Company, or (iii) a change in control. No damages were awarded and mutual
releases were granted.
(6) Subsequent Event
----------------
In connection with the October 1997 acquisition of a 50% interest in
TLC Management Company, a medical managment company ("TLC"), and a 50% interest
in Total Quality Practice Managment, Inc., a practice management company
providing Medicare risk management services ("Total Quality"), the Company
issued a $1.0 million letter of credit in April 1998.
6
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
This Quarterly Report on Form 10-Q contains forward-looking statements
that involve a number of risks and uncertainties. There are a number of
important factors that could cause the Company's actual results to differ
materially from those indicated by such forward-looking statements. Factors that
might cause such a difference include, but are not limited to, those discussed
under "Factors Affecting Future Operating Results." The following discussion
should be read in conjunction with the Company's Unaudited Financial Statements
and Notes thereto included elsewhere in this document.
OVERVIEW
The Company affiliates with and operates multi-specialty medical
practice groups. The first physician affiliation was completed on August 30,
1996 with 32 physicians in the Springfield, Massachusetts and Enfield,
Connecticut area (the "Springfield Affiliated Group"). On December 11, 1996 the
Company consummated the affiliation with Flagship Health, P.A., a Maryland
professional association ("Flagship", and together with Flagship II, the
"Flagship Affiliated Group") which consisted of 59 physicians in Baltimore and
Annapolis, Maryland. On December 1, 1997, the Company entered into a long term
affiliation agreement with a physician practice consisting of 58 physicians in
the Baltimore/Annapolis, Maryland area. Additional physicians have been
subsequently added to the Springfield Affiliated Group and the Flagship
Affiliated Group (the "Affiliated Groups") during 1997 and 1998. In connection
with the affiliation transactions, the assets and liabilities of the physician
practices were transferred to newly formed professional corporations ("PCs") or
professional associations ("PAs") affiliated with the Company. The Company is
working with these groups of physicians to improve operating practices and to
obtain managed care contracts. On October 24, 1997, the Company also acquired a
50% interest in TLC and a 50% interest in Total Quality. Both Companies are
based in Atlanta, Georgia. As of March 31, 1998, the Company had affiliations or
independent provider association ("IPA") arrangements with the following
physicians:
<TABLE>
<CAPTION>
Affiliated Physicians
---------------------
Massachusetts/
--------------
Maryland Connecticut Georgia Total
-------- -------------- ------- -----
<S> <C> <C> <C> <C>
Primary Care 113 26 0 139
Specialist 44 15 0 59
-------- -------------- ------- -----
157 (1) 41 0 198
-------- -------------- ------- -----
<CAPTION>
IPA Physicians
--------------
Maryland Massachusetts/ Georgia(2) Total
-------- -------------- ---------- -----
Connecticut
-----------
<S> <C> <C> <C> <C>
Total 0 0 350 350
-------- ----------- ---------- -----
- -------------
</TABLE>
(1) Includes 13 non-physician medical professionals
(2) Reflects number of physicians in the IPA network in which the Company has a
50% interest
7
<PAGE>
Under the Company's contractual arrangements with its Affiliated
Groups, the Company can improve its management fee revenues by increasing the
patient care revenue of its Affiliated Groups, through improved billing and
operating efficiency, additional patient encounters, increased capitated
revenues and controlling the expenses of Affiliated Groups. To the extent that
patient revenue increases at a greater rate than practice expenses, the
Company's management fee will increase. Conversely, if PQC is not able to
control practice expenses or assist the Affiliated Groups in increasing patient
care revenue, the Company will earn no or only a limited management fee. Under
the arrangements with the physicians formally associated with Clinical
Associates (which became effective on December 1, 1997) the Company earns a fee
based, in part, upon increases in billings, net of bad debts and discounts,
above historical levels, and a reduction in the percentage of revenue needed to
pay practice expense. While this structure causes the Company's management fee
not to be as dependent upon controlling practice expenses, the Company believes
that increased revenues depend upon affiliated physicians being motivated
by competitive levels of compensation.
The Company's and its Affiliated Groups' revenues are derived from
governmental programs, managed care payors and traditional fee-for service
arrangements. The following table sets forth the approximate percentage of the
revenues received by the practices that were affiliated with the Company at and
during the three month period ended March 31, 1998:
Fee for Service Contracts 46.00%
Medicaid 24.00%
Capitated Managed Care Contracts 27.00%
Medicaid and Other 3.00%
-------
100.00%
=======
RESULTS OF OPERATIONS
Three Months Ended March 31, 1998 and Three Months Ended March 31, 1997
During January and February 1997, the Company affiliated with five
physicians in the Springfield, Massachusetts area. The assets and liabilities of
the Springfield physicians were transferred to a professional corporation
affiliated with the Company, Medical Care Partners, P.C., a Massachusetts
professional corporation ("MCP") and the physicians became employees of MCP. On
December 1, 1997, the Company entered into an affiliation agreement with a
physician practice consisting of 58 physicians located in the
Baltimore/Annapolis, Maryland area. The assets and liabilities of the
Baltimore/Annapolis physicians were transferred to Flagship II and the
physicians became employees of Flagship II.
8
<PAGE>
On February 12, 1998, the Company entered into an affiliation agreement with a
physician practice consisting of two physicians in the Baltimore/Annapolis,
Maryland area. The assets and liabilities of these physicians were transferred
to Flagship II and the physicians became employees of Flagship II.
The additional Baltimore and Springfield area affiliations contributed
to the Company having net patient revenues of approximately $21.2 million for
the three months ended March 31, 1998 compared to approximately $10.0 million
for the three month period ended March 31, 1997. The increase of approximately
$10.6 million in net revenues was primarily due to the increase in the number of
affiliated physicians. The revenues for the three month period ended March 31,
1997 were generated by approximately 91 physicians for the full period and from
5 physicians who affiliated with the Company during January and February 1997.
The revenues for the three month period ended March 31, 1998 were generated by
approximately 196 physicians for the full period and two physicians from
February 12, 1998 through March 31, 1998.
The source of revenue in 1998 shifted most notably between fee for
service contracts and capitated managed care contracts. Fee for service
decreased from approximately 55% of revenues for the three month period ended
March 31, 1997 to approximately 46% of revenues for the three month period ended
March 31, 1998. Capitated managed care contracts increased from approximately 5%
of revenues for the three months ended March 31, 1997 to approximately 27% for
the three month period ended March 31, 1998. The significant increase in
capitated managed care contracts is due to the Flagship II affiliation, which
was completed on December 1, 1997. Flagship II had approximately 51% or
approximately $5.0 million of its revenues for the three months ended March 31,
1998 under capitated managed care contracts.
During the three month period ended March 31, 1998 as compared to the
three month period ended March 31, 1997, the amounts retained by physician
groups, which represents physician salaries and benefits, increased
approximately $2.8 million. The increase is primarily due to the same factors
which caused the increase in revenues, namely the significant increase in
affiliated physicians from 1997 to 1998. As a percentage of net patient service
revenues, amounts retained by physician groups decreased from approximately
35.2% for the three month period ended March 31, 1997 to approximately 30.9% for
the three month period ended March 31, 1998. This decrease was primarily due to
the Flagship II affiliation, which has a lower physician compensation ratio to
net revenues than the prior Company affiliations as well as variances in the fee
and expense allocation arrangements between the Company and each affiliated
group.
During the three month period ended March 31, 1998 as compared to the
three month period ended March 31, 1997, nonphysician salaries and benefits,
which represent salaries and benefits for staff engaged in physicians' practices
increased approximately $3.7 million and increased as a percentage of net
revenues from 29% for the three month period ended March 31, 1997 to 32% for the
three month period ended March 31, 1998. Other practice expenses, which
represent primarily all non-salary and benefits expense of physicians'
practices, increased approximately $3.5 million and increased as a percentage of
net revenues from 26.1% for the three month period ended March 31, 1997 to 29.4%
for the three month period ended March 31, 1998. These increases in physician
affiliated expenses are primarily due to the Flagship II affiliation, which had
approximately $3.2 million in non-physician salaries and benefits for the three
month period ended March 31, 1998 and approximately $3.2 million in other
practice expenses for the three month period ended March 31, 1998. The increase
in these physician affiliated expenses as a percentage of net revenues is
primarily a result of the Flagship II affiliation which has additional
infrastructure expenses as compared to prior Company affiliations such as a
billing department as well as a higher cost structure due to capitated costs
associated with capitated managed care revenues.
Provision for bad debt expense increased approximately $415,000 for the
three month period ended March 31, 1998 as compared to the three month period
ended March 31, 1997. In addition this expense increased as a percentage of net
revenues from 2.5% for the three month period ended March 31, 1997 to 3.3% for
the three month period ended March 31, 1998. The increase in this expense was
primarily due to the Flagship II affiliation which had $424,000 in bad debt
expense for the three month period ended March 31, 1998. Also Flagship II's
provision for bad debt expense as a percentage of net revenues is higher than
the Company's prior affiliations; approximately 4.4% as compared with a Company
average of approximately 2.5% for prior affiliations.
Corporate and regional expenses consist of all costs except
depreciation and amortization of the Company's corporate home office and
regional operations. The increase in corporate and regional expenses of
approximately $689,000 for the three month period ended March 31, 1998 as
compared to the three month period ended March 31, 1997 was primarily due to the
increase
9
<PAGE>
in home office and corporate regional operations staff and related expenses to
support the Company's growth. Corporate and regional expenses increased at a
slower rate than net patient service revenue, declining from approximately 13.9%
of revenues for the three month period ended March 31, 1997 to approximately
10.2% for the three month period ended March 31, 1998.
Depreciation and amortization expense consists primarily of
amortization of intangibles associated with affiliated practices. The increase
of approximately $321,000 for the three month period ended March 31, 1998 as
compared to the three month period ended March 31, 1997 was primarily due to the
Flagship II affiliation with 58 physicians which was completed on December 1,
1997.
On October 24, 1997 the Company acquired a 50% interest in TLC and a
50% interest in Total Quality. The Company has accounted for the transaction
using the equity method for accounting for investments in common stock. For the
three month period ended March 31, 1998, the Company's share of the net loss
was approximately $133,000.
The increase in interest income of approximately $100,000 for the three
month period ended March 31, 1998 as compared to the three month period ended
March 31, 1997 was primarily due to the higher level of invested cash in the
current period.
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal requirements for capital are payments to
physicians in connection with affiliation transactions with the Company and its
Affiliated Groups, transaction costs associated with such affiliation
transactions, working capital requirements for its Affiliated Groups and the
funding of operating losses. The Company anticipates that its liquidity and
capital resource requirements will be similar on a long-term and short-term
basis. Due to its start up status, the Company has incurred significant
operating losses to date and does not have operating cash flow to fund growth or
further losses. The Company's principal sources of capital to date have been the
issuance of Class B and Class C Common Stock to contain institutional investors,
issuance of Class A Common Stock to physician stockholders and private
investors, borrowings under a credit agreement with Bankers Trust Company (which
terminated on January 31, 1998) and cash generated by the operations of the
Affiliated Groups.
Since the Company continues to incur operating losses and to use more
cash than generated by its operations, working capital available to the Company
has continued to decrease. If the Company continues to incur operating losses as
the rate experienced during the first quarter of 1998, the Company will need to
find additional sources of cash during the third quarter of 1998. There can be
no assurance that the institutional investors who have previously been a
10
<PAGE>
source of capital to the Company will be prepared to continue to fund the
operations of the Company through the purchase of additional equity.
During 1998 and 1997 the Company paid an aggregate consideration of
approximately $1.5 and $23.6 million, respectively, in connection with
affiliation transactions. Of such amount approximately $50,000 in 1998 and $7.8
million in 1997 was paid in cash and approximately $1.5 million in 1998 and
$15.8 million in 1997 was paid in Class A Common Stock. The majority of such
payments were accounted for as an addition to intangible assets.
As of March 31, 1998, intangible assets net of amortization costs,
represented approximately $57.0 million of the Company's total assets of
approximately $72.6 million. The Company is amortizing the intangible assets
over 25 years.
Of the Company common stock outstanding at March 31, 1998, 18,604,136
shares of Class A Common Stock are subject to a put option which provides for
the put of the shares back to the Company at fair value upon the death or
disability of the holder. In addition, 1,029,749 of such shares are also subject
to a fair value put option back to the Company at the later of the stockholders'
retirement from the Company or June 1998. Consequently, these shares of Class A
Common Stock have been recorded at fair value outside of permanent equity in the
accompanying balance sheet. Under the Company's stockholder agreements as of
December 31, 1997, the Company has the right to purchase 15,471,063 shares of
Class A Common Stock for fair value if the stockholder's termination of
employment with the Company is without cause or is by resignation, and for the
lower of cost or fair value if termination is with cause. The terms of such
repurchase provision may not permit the Company to fully recover its affiliation
payments to the physician or reflect the cost of affiliation transactions at the
time of termination. To date, no Stockholder Physician has terminated an
employment agreement or repurchased any practice assets. All of the above put
and call provisions expire on the closing of a public offering of the Company's
common stock which results in net proceeds to the Company of at least $50.0
million and which meets certain other criteria. In addition to previously
discussed put options, the Flagship II physicians have the right to require the
Company to repurchase (in the form of a five year non-interest bearing note) 4.8
million shares of Class A Common Stock issued in the Flagship II affiliation at
a purchase price of $3.00 per hare if the Company has not completed an
underwritten initial public offering prior to December 1, 2001. Because the
Company's shares are subject to a number of restrictions in the stockholders'
agreements and will not trade until the occurrence of such an offering, the
Company believes it is a nonpublic entity for compensation accounting purposes
and, accordingly, has not recorded any compensation expenses for these puts and
calls.
Working capital existing at the date of affiliation has generally been
retained in the physician practices. Therefore, additional working capital
investment is generally only required to the extent billing processing is slowed
during payor administrative changes after an affiliation and also to fund growth
of revenues. The Company and its Affiliated Groups had total net accounts
receivable of $14.7 million and of $11.9 million at December 31, 1997 and March
31, 1998, respectively. The increase in net accounts receivable of $2.8 million
is the result of patient billing delays caused by patient account system
conversions at the Affiliated Groups. Management believes that the increases are
temporary and anticipates that the system conversions will be completed during
the three months ended September 30, 1998.
11
<PAGE>
The Company currently anticipates that its and the Affiliated Group's
capital expenditures during 1998 will be approximately $2.5 million.
The Company has executed a contract with HBO and Company that obligates
the Company to purchase $1.1 million of equipment and licenses pertaining to
practice management systems. The term of the contract is five years.
IMPACT OF YEAR 2000
The Company is aware of issues associated with the programming code in
existing computer systems as the year 2000 approaches. The "Year 2000" problem
is pervasive and complex, as virtually every computer operation will be affected
in the same way by the rollover of the two digit year value to 00. The issue is
whether computer systems will properly recognize date sensitive information when
the year changes to 2000. Systems that do not properly recognize such
information could generate enormous data or cause a system to fall.
The Company is utilizing both internal and external resources to
identify, correct or reprogram, and test its systems for Year 2000 compliance.
It is currently anticipated that all reprogramming efforts will be completed by
July 31, 1999, allowing adequate time for testing. A preliminary assessment has
indicted that some of the Company's older personal computers and ancillary
software programs may not be Year 2000 compatible. The Company intends to either
replace or modify these computers and programs. The cost of this replacement in
not expected to be material as the shelf life of the Company's personal
computers is three to five years. The present financial systems are all Year
2000 compliant. The practice management system is 80% compliant and the Company
plans to move to a new version of the software which is 100% compliant as part
of its reprogramming efforts which will be completed by July 31, 1999. This
upgrade is provided under the Company's current software maintenance agreement
with its software vendor. All new software purchased will be 100% compliant.
The Company is also obtaining confirmations from the Company's primary
vendors that plans are already in place to address processing of transactions in
the Year 2000. However, there can be no assurance that the systems of other
companies on which the Company's systems rely also will be converted in a timely
fashion or that any such failure to convert by another company would not have an
adverse effect on the Company's systems. Management is in the process of
completing the assessment of the Year 2000 compliance costs. However, based on
currently available information (excluding the possible impact of vendor systems
which management currently is not in a position to evaluate) as noted above,
management does not believe that these costs will have a material effect on the
Company's earnings.
FACTORS AFFECTING FUTURE OPERATING RESULTS
Lack of Operating History; History of Operating Losses
The Company's historical financial condition and results of operations
may not be indicative of the Company's results of operations and financial
condition for future periods. The Company has incurred losses of each of its
fiscal years through 1997. The Company expects to incur operating losses for at
least the immediate future and to fund such operating losses through the
issuance of additional equity and debt securities. See "-- Need for Substantial
Additional Capital." There can be no assurance that the Company will achieve or
maintain profitability.
Need for Substantial Additional Capital
The Company will require substantial capital resources to obtain the
necessary scale to become profitable and to fulfill its business plan.
Additional funds will be required to fund the acquisition, integration,
operation and expansion of affiliated practices, capital expenditures including
the development of the information systems to manage such practices, operating
losses and general corporate purposes.
The Company has no committed external sources of capital. Without the
consent of the director elected by the stockholders of the Class B-1 Common
Stock (the "Class B-1 Director"), the director elected by the stockholders of
the Class B-2 Common Stock (the "Class B-2 Director," and together with the
Class B-1 Director of the "Class B Directors") and the directors elected by the
holders of Class C Common Stock (the "Class C Directors"), the Company may not
obtain additional financing through external borrowings or the issuance of
additional securities. The issuance of additional capital stock could have an
adverse effect on the value of the shares of common stock held by the then
existing stockholders. There can be no assurance that the Class B Directors and
Class C Directors will approve such capital raising activities or that the
Company will be able to raise additional capital when needed on satisfactory
terms or at all. The failure to obtain additional financing when needed and on
appropriate terms could hae a material adverse effect on the Company.
Risk that Future Affiliation Transactions Will Not Be Consummated;
Costs of Affiliation Transactions
There can be no assurance that any future affiliation transactions will
be consummated. In consummating future affiliation transactions, the Company
will rely upon certain representations, warranties and indemnities made by
sellers with respect to the affiliation transaction, as well as its own due
diligence investigation. There can be no assurance that such representations and
warranties will be true and correct, that the Company's due diligence will
uncover all material adverse facts relating to the operations and financial
condition of the affiliated medical practices or that all of the conditions to
the Company's obligations to consummate these future affiliations will be
12
<PAGE>
satisfied. Any material misrepresentations could have a material adverse effect
on the Company's financial condition and results of operations.
The Company has incurred approximately $2.9 million and $567,000 during
1996 and 1997, respectively, in accounting, legal and other costs in developing
its affiliation structure and completing its initial affiliation transactions.
The Company's ability to enter into affiliation transactions with a significant
number of physicians and to achieve positive cash flow will be adversely
affected unless it is able to reduce the expenses associated with future
transactions. There can be no assurance that the Company will be able to reduce
transaction costs on a per affiliated physician basis in the future.
Dependence upon Affiliated Medical Practices
Although the Company does not and will not employ physicians or control
the medical aspects of the practices of the physicians employed by the
Springfield Affiliated Group, the Flagship Affiliated Group or similar
Affiliated Groups, the Company's revenue and profitability are directly
dependent on the revenue generated by the operation and performance of and
referrals among the affiliated medical practices. The compensation to the
Company under its Services Agreements with the Affiliated Groups is based upon a
percentage of the profits of revenues generated by the Affiliated Groups'
practices with a substantial portion of the profits or revenues being allocated
to the physicians until threshhold levels of income or revenues, based upon the
physicians' historical compensation or billings, are achieved. Accordingly, the
performance of affiliated physicians affects the Company's profitability and the
success of the Company depends, in part, upon an increase in net revenues from
the practice of affiliated physicians compared to historical levels. The
inability of the Company's Affiliated Groups to attract and retain patients, to
manage patient care effectively and to generate sufficient revenue or a material
decrease in the revenues of the Affiliated Groups would have a material adverse
effect on the financial performance of the Company. To the extent that the
physicians affiliated with the Company are concentrated in a limited number of
target markets, as is currently the case in western Massachusetts and Maryland,
deterioration in the economies of such markets could have a material adverse
effect upon the Company.
Risks Related to Expansion of Operations
Integration Risks. The Company has completed affiliation transactions
with the Springfield Affiliated Group and the Flagship Affiliated Group, and is
seeking to enter into Affiliations with additional physicians. In the
Springfield and Greater Baltimore-Annapolis areas and in other potential
affiliation markets, the Company is integrating physician practice groups that
have previously operated independently. The Company is still in the proces of
integrating its affiliated practices. The Company may encounter difficulties in
integrating the oeprations of such physician practice groups and the benefits
expected from such affiliations may not be realized. Any delays or unexpected
costs incurred in connection with integrating such operations could have an
adverse effect on the Company's business, operating results or financial
condition.
While each Affiliation conforms to PQC's overall business plan, the
profitability, location and culture of the physician practices that have been
combined into Affiliated Groups are different in some respects. PQC's management
faces a significant challenge in its efforts to integrate and expand the
business of the Affiliated Groups. The need for management to focus upon such
integration and future Affiliations may limit resources available for the day-
to-day management of the Company's business. While management of the Company
believes that the combination of these practices will serve to strengthen the
Company, there can be no assurance that management's efforts to integrate the
operations of the Company will be successful. The profitability of the Company
is largely dependent on its ability to develop and integrate networks of
physicians from the affiliated practices, to manage and control costs and to
realize economies of scale. There can be no assurances that there will not be
substantial costs associated with such activities or that there will not be
other material adverse effects on the financial results of the Company as a
result of these integration and affiliation activities.
The Company intends to continue to pursue an aggressive growth strategy
through affiliations and internal development for the foreseeable future. The
Company's ability to pursue new growth opportunities successfully will depend on
many factors, including, among others, the Company's ability to identify
suitable growth opportunities and successfully integrate affiliated or acquired
businesses and practices. There can be no assurance that the Company will
anticipate all of the changing demands that expanding operations will impose on
its management, management information systems and physician network. Any
failure by the Company to adapt its systems and procedures to those changing
demands could have a material adverse effect on the operating results and
financial condition of the Company.
Need to Hire and Retain Additional Physicians
The success of the Company is dependent upon its ability to affiliate
with a significant number of qualified physicians and the willingness of such
affiliated physicians to maintain and enhance the productivity of their
practices following affiliation with PQC. The market for affiliation with
physicians is highly competitive, and the Company expects this competition to
increase. The Company competes for physician affiliations with many other
entities, some of which have substantially greater resources, greater name
recognition and a longer operating history than the Company and some of which
offer alternative affiliation strategies which the Company may not be able to
offer. In addition, under current law the Company has no or only limited ability
to enforce restrictive covenants in the employment agreements with the
physicians with whom the Company affiliates. The Company is subject to the risk
that physicians who receive affiliation payments may discontinue such
affiliation with the Company, resulting in a significant loss to the Company and
13
<PAGE>
a decrease in the patient base associated with such affiliated physicians. There
can be no assurance that PQC will be able to attract and retain a sufficient
number of qualified physicians. If the Company were unable to affiliate with and
retain a sufficient number of physicians, the Company's operating results and
financial condition would be materially adversely affected. A material increase
in costs of affiliations could also adversely affect PQC and its stockholders.
Risk of Inability to Manage Expanding Operations
The Company is seeking to expand its operations rapidly, which, if
successful, will create significant demands on the Company's administrative,
operational and financial personnel and systems. There can be no assurance that
the Company's systems, procedures, controls and staffing will be adequate to
support the proposed expansion of the Company's operations. The Company's future
operating results will substantially depend on the ability of its officers and
key employees to integrate the management of the Affiliated Groups, to implement
and improve operational, financial control and reporting systems and to manage
changing business conditions.
Dependence Upon the Growth of Numbers of Covered Lives
The Company is also largely dependent on the continued increase in the
number of covered lives under managed care and capitated contracts. This growth
may come from affiliation with additional physicians, increased enrollment with
managed care payors currently contracting with the Affiliated Groups and
additional agreements with managed care payors. A decline in covered lives or an
inability to increase the number of covered lives under contractual arrangement
with managed care or capitated payors could have a material adverse effect on
the operating results and financial condition of the Company.
Potential Regulatory Restraints Upon the Company's Operations
The healthcare industry is subject to extensive federal and state
regulation. Changes in the regulations or interpretations of existing
regulations could have a material adverse effect on the Company's business,
financial condition and results of operations.
Risks of Capitated Contracts
The physician groups with which the Company is affiliated and proposes
to affiliate are parties to certain capitated contracts with third party payors,
such as insurance companies. The Company intends to seek to expand the capitated
patient base of its Affiliated Groups, particularly for Medicare enrollees. In
general, risk contracts pay a flat dollar amount per enrollee in exchange for
the physician's obligation to provide or arrange for the provision of a broad
range of healthcare services (including in-patient care) to the enrollee. A
significant difference between a full risk capitated contract and traditional
managed care contracts is that the physician is sometimes responsible for both
professional physician services and many other healthcare services, e.g.,
hospital, laboratory, nursing home and home health. The physician is not only
the "gatekeeper" for enrollees, but is also financially at risk for over-
utilization and for the actuarial risk that certain patients may consume
significantly more healthcare resources than average for patients of similar age
and sex (such patients are referred to herein as "high risk patients").
While physicians often purchase reinsurance to cover some of the
actuarial risk associated with high risk patients, such insurance typically does
not apply with respect to the risk of over-utilization until a relatively high
level of aggregate claims has been experienced and therefore does not completely
protect against any capitation risk assumed. If over-utilization occurs with
respect to a given physician's enrollees (or the physician's panel of enrollees
includes a disproportionate share of high risk patients not covered by
reinsurance), the physician is typically penalized by failing to receive some or
all of the physician's compensation under the contract that is contingent upon
the attainment of negotiated financial targets, or the physician may be required
to reimburse the payor for excess costs. In addition, a physician may be liable
for over-utilization by other physicians in the same "risk pool" and for
utilization of ancillary, in-patient hospital and other services when the
physician has agreed contractually to manage the use of those services. Neither
the Company nor the Affiliated Groups currently maintain any reinsurance
arrangement and, to date, the Affiliated Groups have not experienced losses from
participation in risk pools or incurred any material penalties or obligations
with respect to excess costs under capitated contracts. The Company is pursuing
a strategy of seeking increased participation in capitated contracts for all of
its affiliated physicians. As the percentage of the Company's revenues derived
from capitated contracts increases, the risk of the Company experiencing losses
under capitated contracts increases. As the revenues from capitated contracts
became of increasing importance to PQC and its Affiliated Groups, the Company
will review the financial attractiveness of reinsurance arrangements.
Medical providers, such as the Affiliated Groups, are experiencing
increasing pricing pressure in negotiating capitated contracts while facing
increased demands on the quality of their services. If these trends continue,
the costs of providing physician services could increase while the level of
reimbursement could grow at a lower rate or decrease. Because the Company's
financial results are dependent upon the profitability of such capitated
contracts, the Company's results will reflect the financial risk associated with
such capitated contracts. Liabilities or insufficient revenues under capitated
and other risk-sharing arrangements could have a material adverse effect on the
Company.
Risks of Changes in Payment for Medical Services
The profitability of the Company may be adversely affected by Medicare
and Medicaid regulations, cost containment decisions of third party payors and
other payment factors over which PQC and its Affiliated Groups have no control.
The federal Medicare program has undergone significant legislative and
14
<PAGE>
regulatory changes in the reimbursement and fraud and abuse areas, including the
adoption of the resource-based relative value scale schedule for physician
compensation under Medicare, which may have a negative impact on PQC's revenue.
Efforts to control the cost of healthcare services are increasing. PQC's
Affiliated Groups contract with provider networks, managed care organization and
other organized healthcare systems, which often provided fixed fee schedules or
capitation payment arrangements which are lower than standard charges. Future
profitability in the changing healthcare environment, with differing methods of
payment for medical services, is likely to be affected significantly by
management of healthcare costs, pricing of services and agreements with payors.
Because PQC derives its revenues from the revenues generated by its affiliated
physician groups, further reductions in payment to physicians generally or other
changes in payment for healthcare services could have an adverse effect on the
Company.
Exposure to Professional Liability; Liability Insurance
In recent years, physicians, hospitals and other participants in the
healthcare industry have become subject to an increasing number of lawsuits
alleging medical malpractice, negligent credentialing of physicians, and related
legal theories. Many of these lawsuits involve large claims and substantial
defense costs. There can be no assurance that the Company will not become
involved in such litigation in the future. Through its management of practice
locations and provision of non-physician healthcare personnel, the Company could
be named in actions involving care rendered to patients by physicians or other
practitioners employed by Affiliated Groups. In addition, to the extent that
affiliated physicians are subject to such claims, the physicians may need to
devote time to defending such claims, adversely affecting their financial
performance for the Company, and potentially having an adverse effect upon their
reputations and client base. The Company and the Affiliated Groups maintain
professional and general liability insurance, which is currently maintained at
$1 million per occurrence and $3 million annually for each affiliated physician.
Nevertheless, certain types of risks and liabilities are not covered by
insurance, and there can be no assurance that the limits of coverage will be
adequate to cover losses in all instances.
Certain Federal Income Tax Considerations
Physician groups which operated as PCs in Springfield prior to
affiliating with the Company were merged into the Springfield Affiliated Group,
with stockholders of each PC receiving shares of Class A Common Stock of the
Company and cash in exchange for their capital stock in the PC. Physician groups
which operated as PAs in the greater Baltimore-Annapolis area prior to
affiliating with the Company were similarly merged into the Flagship Affiliated
Group, with stockholders of each PA receiving shares of Class A Common Stock of
the Company and cash in exchange for their capital stock in the PA. Each such
merger is intended to qualify as a "reorganization" under Section 368(a) of the
Internal Revenue Code of 1986, as amended, in which case no gain or loss would
generally be recognized by the PC or PA or the stockholders (other than as cash
received) of the PC or PA. The Company has not sought or obtained a ruling from
the Internal Revenue Service or an opinion of counsel with respect to the tax
treatment of the mergers of PCs or PAs into the Springfield or Flagship
Affiliated Groups. The Company does not believe that the Internal Revenue
Service is issuing rulings at this time on transactions using the Company's
affiliation structure. If a merger were not to so qualify, the exchange of
shares would be taxable to the stockholders of the PC or PA, and the
consideration (net of asset basis) issued in connection with the merger would be
taxable to the Affiliated Group into which such PC or PA was merged. Because of
such tax liability, failure of a merger or mergers to qualify as tax-free
reorganizations could have a material adverse effect on the applicable
Affiliated Group and the Company. Also, the inability to structure future
Affiliations on a tax deferred basis may adversely affect the Company's ability
to attract additional physicians.
New Management; Dependence on Key Personnel
The current management structure and the senior management team of the
Company have been in place for a relatively short time. The Company's future
success depends, in large part, on the continued service of Jerilyn P. Asher,
the Chief Executive Officer, and on PQC's ability to continue to attract,
motivate and retain highly qualified senior management and employees. The
Company has an employment agreement with Ms. Asher. The Company does not
maintain key person life insurance with respect to Ms. Asher. As a development
stage company, PQC has experienced some turnover in staff, including two of the
founding officers. Although the Company has entered into employment agreements
with certain of its other executives that contain covenants not to compete with
the Company, there can be no assurance that the Company will be able to retain
such key executives or its senior managers and employees. The inability to hire
and retain qualified personnel or the loss of the services of personnel could
have a material adverse effect upon the Company's business and future business
prospects.
Risk of the Unavailability of the Equity Facility
The remaining amount under the Class B and Class C Stock Purchase
Agreement (the "Equity Facility") with certain institutional inventors
("Institutional Investors") is only available with the consent of the
Institutional Investors and there can be no assurance that the Institutional
Investors will be willing to provide additional capital when needed by the
Company. The Equity Facility also restricts the sources of capital available to
the Company without the consent of the Institutional Investors. Except for the
Equity Facility, the Company has no committed external sources of capital.
Except with the consent of the director elected by the Institutional Investors,
the Company may not obtain additional financing through external borrowings or
the issuance of additional securities. The Institutional Investors also have
15
<PAGE>
received warrants to purchase a substantial number of shares of Class A Common
Stock. These warrants are exercisable at $2.50 or $3.25 per share, which
exercise price may be substantially below the fair market value of the Class A
Common Stock at the time of exercise. Any additional equity issuance could have
an adverse effect on the value of the shares of Class A Common Stock held by the
then existing stockholders.
Risks from Put and Other Rights Held by Certain Stockholders
Each physician and management stockholder who is a party to the
Stockholders Agreement, dated as of August 30, 1996 (the "Stockholder's
Agreement"), has the right to require PQC to purchase the Common Stock owned by
such stockholder at fair market value upon their death or disability. Pursuant
to the Stockholders Agreement, fair market value, as determined by the Board of
Directors, reflects an arms-length private sale. In determining the fair market
value, the Board is to consider recent arms-length sales by the Company and the
stockholders, as well as other factors considered relevant. While the
Stockholders Agreement does not limit the Board's discretion, such other factors
may include changes, since the last arms-length sale, in the Company's financial
conditions or prospects and any valuation studies conducted by management of the
Company or independent valuation experts. Under the Stockholder Agreement, the
Board is not permitted to discount the fair market value of the Common Stock to
reflect the fact that the Common Stock being sold constitutes less than a
majority of the outstanding shares. The put option is only triggered by death or
disability (and in a few instances retirement) and will terminate upon the
completion of a public offering which results in at least $50.0 million in gross
revenues to the Company and which meets certain other criteria. The physician
affiliated with Clinical Associates have the right to require the Company to
repurchase their Common Stock at $3.00 per share (in the form of a five year,
non-interest bearing note) in the event that the Company has not completed an
underwritten initial public offering within four years. The exercise of such
right could have a material adverse effect upon the Company. To the extent that
the "put options" are likely to be exercised, the Company expects to fund such
repurchases from working capital, the Equity Facility or other sources.
Amortization of Intangible Assets
In connection with its affiliations, the Company has recorded, and is
expected to continue to record, a significant amount of intangible assets as the
consideration paid to physicians exceeds the value of the practice assets. At
December 31, 1997, the Company had intangible assets of approximately $57.3
million reflected on its balance sheet as long-term affiliation agreements. The
Company amortizes such intangible assets over a 25 year period. See the Notes to
the Company's Financial Statements. The amortization of these intangible assets,
while not affecting the Company's cash flow, has an ongoing negative impact upon
the Company's earnings. During the year ended December 31, 1997, amortization of
intangible assets contributed approximately $1,292,000 to the Company's net loss
of $5.7 million.
16
<PAGE>
PART II
OTHER INFORMATION
Item 1. Legal Proceedings.
On June 12, 1997, Jay N. Greenberg, a founder and former executive
vice president of the Company, filed a complaint against the Company in
Massachusetts state court seeking damages of $1.4 million and a declaratory
judgment that 843,750 of the shares registered in Mr. Greenberg's name (out of
1,012,500 shares of Class A Common Stock originally granted to Mr. Greenberg)
have "vested" under this Employment Agreement. The Company and Mr. Greenberg
entered into a Settlement Agreement in April 1998 pursuant to which the Company
confirmed Mr. Greenberg granted the Company an option to purchase all of such
shares. The purchase price is $1.3 million and increases (commencing effective
October 1997) by $25,000 each three month period. The option expires on the
earlier of (i) October 14, 1999, (ii) upon a public offering of the capital
stock of the Company, or (iii) a change in control. No damages were awarded and
mutual releases were granted.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
27 Financial Data Schedule
(b) Reports on Form 8-K: None
17
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
Date: May 15, 1998 PHYSICIANS QUALITY CARE, INC.
By: /s/ Samantha J. Trotman
----------------------------------
Samantha J. Trotman
Chief Financial Officer and Vice President
18
<PAGE>
EXHIBIT INDEX
Exhibits
27 Financial Data Schedule
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE AUDITED
FINANCIAL STATEMENTS OF THE COMPANY FOR THE YEARS ENDED DECEMBER 31, 1996 AND
1997, RESPECTIVELY, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS. AS MORE FULLY DESCRIBED IN NOTE 2 TO THE UNAUDITED
FINANCIAL STATEMENTS, THE COMPANY ADOPTED SFAS 128 "EARNINGS PER SHARE" IN 1997.
THE ADOPTION OF SFAS 128 DID NOT IMPACT THE EARNINGS PER SHARE CALCULATIONS FOR
1996 AND 1995.
</LEGEND>
<S> <C> <C>
<PERIOD-TYPE> YEAR YEAR
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1997
<PERIOD-START> JAN-01-1998 JAN-01-1997
<PERIOD-END> MAR-31-1998 DEC-31-1997
<CASH> 3,549,861 8,782,019
<SECURITIES> 0 0
<RECEIVABLES> 0 0
<ALLOWANCES> 0 0
<INVENTORY> 0 0
<CURRENT-ASSETS> 14,921,646 14,606,483
<PP&E> 504,000 1,548,068
<DEPRECIATION> 65,762 220,208
<TOTAL-ASSETS> 72,595,458 73,410,583
<CURRENT-LIABILITIES> 1,611,148 2,113,337
<BONDS> 0 0
60,463,943 54,473,947
0 0
<COMMON> 208,074 207,975
<OTHER-SE> 9,566,231 15,869,262
<TOTAL-LIABILITY-AND-EQUITY> 72,595,458 73,410,583
<SALES> 21,165,795 46,037,234
<TOTAL-REVENUES> 21,270,010 46,535,329
<CGS> 0 0
<TOTAL-COSTS> 15,811,560 36,078,855
<OTHER-EXPENSES> 132,842 98,269
<LOSS-PROVISION> 688,328 1,105,616
<INTEREST-EXPENSE> 38,315 161,938
<INCOME-PRETAX> (1,949,883) (6,505,511)
<INCOME-TAX> 0 (795,281)
<INCOME-CONTINUING> (1,949,883) (5,710,230)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (1,949,883) (5,710,230)
<EPS-PRIMARY> (0.17) (0.41)
<EPS-DILUTED> 0 0
</TABLE>
