<PAGE>   1
                                   FORM 10-KSB

(Mark One)

/X/      ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
         OF 1934

For the fiscal year ended December 31, 1997

/ /      TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
         ACT OF 1934

                  For the transition period from               to

COMMISSION FILE NUMBER 000-22719

                  PHYSICIAN HEALTHCARE PLAN OF NEW JERSEY, INC.
                 (Name of small business issuer in its charter)

         New Jersey                                              22-3273637
(State or other jurisdiction of                               (I.R.S. Employer
incorporation or organization)                               Identification No.)

c/o The Pace Group, Inc., 12160 Abrams Road, Suite 409, Dallas, TX      75243
(Address of principal executive offices)                              (zip code)

Issuer's telephone number including area code:  (800) 422-5611

         Securities registered under Section 12(b) of the Exchange Act:

None

         Securities registered under Section 12(g) of the Exchange Act: Common
Stock, no par value

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 was no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosures will be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. /X/

State issuer's revenues for the most recent fiscal year: $11,118,557. 

There is no current market for this stock. However, the aggregate value of
voting stock held by non-affiliates, computed by reference to the book value 
at December 31, 1997 was $4,798,268.

As of December 31, 1997, there were 4,629 shares of Common Stock outstanding.

Transitional Small Business Disclosure Format (Check one): Yes / / No /X/

DOCUMENTS INCORPORATED BY REFERENCE

None
<PAGE>   2
PART I

ITEM 1: DESCRIPTION OF BUSINESS

OVERVIEW

Overview

         The Company is a New Jersey corporation, formed on January 10, 1994
under the sponsorship of private practicing physicians for the purpose of
developing a statewide physician-owned and directed health maintenance
organization. The Company's HMO and PPO operations were sold on December 19,
1997, as described below.

         In December 1994, the Company filed an application for a Certificate of
Authority ("COA") to operate as an HMO in five counties in New Jersey, which
application was approved effective August 28, 1995. The Company was not
permitted to solicit business until a Certificate of Authority was obtained. The
Company commenced marketing its HMO plans to persons living in the five county
area and issued its first policy in November 1995. In September 1995, the
Company filed an application to amend its Certificate of Authority to expand its
service area to cover the entire State of New Jersey. The amendment was approved
effective January 29, 1996. The Company received federal trademark registration
for its name, for the acronym PHPNJ and for the stylized "P" logo which contains
a cutout in the shape of New Jersey.

         On March 4, 1994, the Company commenced an initial offering for the
purpose of raising capital necessary to fund operations until the Company
received its Certificate of Authority and subsequently to fund operational
deficits until such time as the Company began operating at a profit. On November
9, 1995, the Company commenced a second offering for the purpose of expanding
the Company's existing network of physicians, expanding the Company's programs
and infrastructure and enhancing the Company's capital position. The initial
offering resulted in proceeds of approximately $17,500,000 and the second
offering resulted in proceeds of approximately $6,250,000.

         The Company devoted substantial efforts to developing and credentialing
its health care delivery network, and health plans particularly for the small
employer marketplace in New Jersey. As of December 19, 1997, the Company had
entered into approximately 1,400 Physician Participation Agreements with
physicians who have been credentialed, and 81 contracts with inpatient care
facilities. In addition, the Company had negotiated contracts for the provision
of certain ancillary services such as prescription benefits. The Company has
developed HMO, preferred provider organization ("PPO") and point-of-service
("POS") products. As of December 19, 1997, the Company had 6,257 members
enrolled in its plans, with approximately 80% of such members enrolled in a POS
plan.

         Since inception, the Company has engaged a management company to
provide substantially all management and administrative services, including but
not limited to, financial services, member and provider support services,
provider credentialing, and claims processing. Until July 1997, the Company was
managed by Medical Group Management, Inc. ("MGM"), a subsidiary of the New
Jersey State Medical Underwriters, Inc., which in turn is a subsidiary of
<PAGE>   3
the Medical Society of New Jersey. That arrangement with MGM terminated in July
1997 and the Company entered into a Management Agreement with Medigroup of New
Jersey, Inc. ("HMO Blue" or the "Purchaser") effective July 1, 1997. HMO Blue
managed the Company's operations until December 19, 1997, when it purchased the
Company's HMO and PPO operations pursuant to an Agreement dated as of June 26,
1997 (the "Agreement"). In addition, the Company has a contract with The Pace
Group, Inc. ("Pace") to provide management transition services and certain
corporate financial and reporting assistance not otherwise provided by the
Purchaser, such as assistance in making required filings with state insurance
regulators and with the Securities and Exchange Commission.

         Notwithstanding the Company's efforts to develop its healthcare plans
and a membership base, the Company has experienced significant competitive
pressures in its marketplace resulting in the Company's inability to become
profitable. In 1997, the Company added only 2,183 members.

Strategic Initiatives and Sale of Operations

         By April 1996, the Company's leadership recognized the impact of
changing market conditions, coupled with attendant network, pricing and product
issues, and acknowledged that membership goals were not being met and that
expenses were being incurred in excess of the Company's revenues. The Company
developed a three-part strategy to improve operating results. The components of
that strategy were: (a) capital preservation, (b) marketing and sales, and (c)
new product initiatives. To preserve capital, the Company implemented a new
staffing model which reduced monthly salaries and compensation expenses
beginning in September, 1996. Staffing was reduced and sales efforts were
shifted from a staff of sales employees to a broker-driven sales effort. In
addition, the Company reduced the amount of space it leased, effective October
1, 1996, and cut its monthly advertising budget by approximately two-thirds. The
Company proposed to develop special marketing arrangements with local medical
communities, and marketed one of its existing products under a marketing
arrangement called "Skyland Select".

         Notwithstanding the implementation of this strategy, the Company
continued to incur losses. Early in 1997, the Company's leadership charged the
Board of Directors' Due Diligence Committee with identifying strategic options
and recommending a course of action that would be most beneficial to the Company
and its stockholders, ultimately resulting in the negotiation of the Agreement
and Management Services Agreement with HMO Blue. In addition, the Company has
sold most of its fixed assets to MGM, sold certain equipment to HMO Blue, and
sold its automobiles to other parties.

         On December 19, 1997, the Company consummated the transfer and
assignment of certain provider and subscriber contracts constituting its HMO and
PPO operations to HMO Blue, the health maintenance organization affiliated with
Blue Cross Blue Shield of New Jersey, Inc. The Company received a cash payment
of $1,839,000 as consideration for the transfer and assignment. As of the date
of closing the Management Services Agreement dated as of June 26, 1997 between
the Company and HMO Blue terminated, and the parties entered into a new
Management Services Agreement pursuant to which HMO Blue will provide certain
limited management services until March 31, 1999. The Company will pay HMO Blue
an hourly fee of
<PAGE>   4
$75 for services provided under that agreement. The Company expects that it will
wind up its operations entirely over the next year and seek to dissolve early in
1999.

         Although the Company has sold its operations to HMO Blue, the Company
remains responsible for the payment of claims incurred prior to the December 19,
1997 date of the closing of the transaction with HMO Blue. The Company expects
that it will surrender its Certificate of Authority to New Jersey insurance
regulators at such time as the regulators approve, based on the regulators'
determination that the Company has satisfied its liabilities, expected in late
1998 or early 1999. After such surrender, it is expected that the Company will
be dissolved and assets remaining, if any, after satisfaction of the Company's
liabilities will be distributed to stockholders. Amounts distributed in respect
of each outstanding share of the Company's common stock are expected to be
substantially lower than the purchase price paid for such shares. However, the
Company is unable to determine the final amount, that would be available for
distribution. Dissolution would require additional stockholder action.

Health Plans and Healthcare Delivery System

         Until the sale of its HMO and PPO operations to HMO Blue, the Company
had entered into Physician Participation Agreements with credentialed
stockholders of the Company for the provision of physician services. In
addition, the Company entered into contracts with other physicians or physician
groups to provide services to the Company and its members, where the Company has
deemed such to be necessary to provide high quality patient care or to meet
competitive conditions. The Company also contracted with non-stockholder
physicians who have begun their private practices within the last two years.
Under the Physician Participation Agreements, participating physicians are paid
pursuant to a pre-established fee schedule. Such physicians are prohibited from
billing members for services provided under the plan, except for any applicable
co-payment or deductible.

         The Company contracted with acute care institutions. The Company
arranged for the delivery of necessary preventive, diagnostic, therapeutic, and
rehabilitation healthcare services to its members by contracting with qualified
non-physician providers. These contracts provide for reimbursement at
pre-determined rates on a discounted fee-for-service basis and prohibit these
providers from billing members for any services paid under the plan, except for
applicable co-payments or deductibles.

         The Company's health plans consisted of HMO and POS plans for the small
business marketplace (less than 50 employees) and the large business marketplace
(50 or more employees), offered on a fully-insured basis, subject to certain
co-payments, where the Company bears the risk for incurred medical costs in
exchange for premiums paid. Members receive comprehensive medical coverage for a
prepaid fixed monthly premium. The plans offered meet the standard benefit plan
requirements as set forth in New Jersey Laws and Regulations. Generally, the
products are distinguished from one another by the amount of the applicable
co-payment and prescription rider.

         Premium rates are fixed for a twelve-month period. Rate increases must
be submitted to the New Jersey Department of Banking and Insurance, and there
can be no assurance that rate increases will be accepted without objection. Such
increases are generally effective on the renewal date of the policyholder's
policy. Renewal dates vary among policyholder groups. The
<PAGE>   5
Company utilized a system of rating adjusted by class with respect to groups of
50 or more members and a community rating system for small groups (2 - 49
members) in determining its rates for various employers in the proposed service
area. Accordingly, rates could vary among employer groups for coverage under the
same Company plan. Proposed rates for basic health care coverage required by New
Jersey must be submitted to the New Jersey Department of Banking and Insurance
and the New Jersey Small Employer Health Benefit Board.

         Under the Company's prepaid health plans, each new member was required
to select a Primary Care Physician from a directory supplied by the Company. All
medical care thereafter received by the member, including specialist and
hospital care, is coordinated by the Primary Care Physician who is familiar with
the member's history. Pre-authorization is required for non-emergency hospital
admissions, diagnostic and selected outpatient procedures. Such
pre-authorization is obtained in accordance with pre-established guidelines
developed by management in conjunction with physicians in the respective
specialty areas. Variations from pre-established protocols are evaluated by peer
physicians. Except for co-payments and applicable deductibles, the Company
covered all other charges for treatment at emergency rooms of non-participating
hospitals in the event of a medical emergency or urgently needed services.

         The Company established comprehensive utilization management protocols
and quality assurance standards. The Utilization Management Program is designed
to objectively monitor and evaluate the use, cost and quality of medical
services provided by the Company's physicians and other health care consultants
and facilities. The goal is to efficiently use available health care resources
and to ensure that care is medically appropriate. The Quality Assurance Program
includes policies and procedures for credentialing providers, assessing member
and provider satisfaction annually, and obtaining other quality measurement
data.

         Each participating physician is required to carry current malpractice
insurance coverage. The minimum acceptable level as set by the Company is $1
million per incident and $3 million in the aggregate for any given calendar
year. In addition, the Company carries contingent medical malpractice liability
coverage.

         Prior to the sale of its HMO and PPO operations to HMO Blue, the
Company used a number of marketing techniques to attract and retain members, key
elements of which were: advertising and public relations, brokerage sales, and
"Member Services" assistance. The Company's sales efforts were directed at
mid-sized businesses (50 - 500 employees) and small businesses (fewer than 50
employees), with a particular emphasis on the small business market. Sales were
handled primarily by brokers. During 1996, the Company shifted its sales
strategy from direct sales to broker-driven sales as part of the capital
preservation strategy to reduce expenses. Member Services provided customer
service to members, employers who are policyholders and brokers and consultants.

Competition

         Prior to the sale of its HMO and PPO operations to HMO Blue, the
Company was in competition with other prepaid health plans and with traditional
health insurers in its geographic area, as well as with self-insured programs,
physician practice associations and other managed care entities.
<PAGE>   6
         The Company believes the most significant differences among competing
health care plans are the extent of covered services, the cost of coverage, the
degree of access to health care providers, and the perception of the convenience
and quality of care delivered to enrollees. Premiums negotiated with employers,
fee schedules negotiated with hospitals, physicians and other providers, the
scope of benefits offered, unique benefit design and access to physicians and
hospitals constitute the principal methods of competition.

         Many of the Company's competitors have had significantly greater
financial and marketing resources than the Company. The Company has encountered
difficulty attracting members and group contracts because larger competitors
have been able to be more competitive in premium pricing. In addition, the
Company's short history of operations relative to its competitors has made it
difficult for the Company to attract group contracts, particularly from large
employers.

Government Regulation

         HMOs are subject to extensive regulation. In New Jersey, the Department
of Health and Senior Services and the Department of Banking and Insurance are
the governing regulatory authorities. Among areas regulated are the scope of
benefits required to be made available to members, reserves required to be
maintained, plan design, procedures for review of quality assurance, enrollment
requirements, the relationship between the HMO and its physicians and other
health care providers and the financial condition of the HMO. A Certificate of
Authority to operate as an HMO is required in New Jersey. An HMO is subject to
triennial review by state regulators and must submit certain annual and
quarterly reports to the state.

         Legislation enacted in New Jersey includes provisions to enroll
individuals and, to some extent, small groups or be subject to assessments if
market share quotas are not achieved. In addition, New Jersey has mandated
standard benefit packages to be sold to these markets and has regulated the
rates that may be charged as well as the methodology to be used in developing
the rates. The Company has designed products to meet these requirements. Other
provisions include guaranteed issue and renewability, without regard to
utilization, as well as minimum medical loss ratios, participation and
contribution requirements. Other restrictions and requirements could be imposed
that would affect HMO operations generally, the products offered by the Company
or other aspects of health care. Such restrictions might result in additional
burdens and costs to the Company.

         Under New Jersey law, an HMO must satisfy a minimum net worth
requirement of $1,000,000 to obtain a Certificate of Authority and must
establish a restricted deposit of $300,000 with the New Jersey Department of
Banking and Insurance. The deposit amount is adjusted annually based on the
HMO's net worth. In addition, a New Jersey HMO must maintain a reserve in an
amount to provide for all claims incurred plus continued health care services to
members. If the Company should fail to meet the foregoing deposit and minimum
net worth requirements, the Company's Certificate of Authority might be revoked.
The Company continued to meet these requirements as of December 31, 1997,
notwithstanding the sale of its HMO and PPO operations on December 19, 1997,
which transaction was approved by the New Jersey Department of Health and Senior
Services and the New Jersey Department of Banking and Insurance.
<PAGE>   7
         Both federal and New Jersey law prohibit physicians from paying or
receiving any remuneration, directly or indirectly, for the referral of a
patient. In addition, state law (with certain exceptions) and federal law, under
certain defined circumstances, prohibit referral by a physician to a health care
entity in which the physician or his immediate family has a financial interest.
The Company believes that neither the Company nor its physician stockholders are
in violation of either the federal or New Jersey law as a result of the
operation of or participation in the Company's HMO. To the extent that
physicians refer patients to other physicians, the referring physicians receive
no remuneration from such referral. Moreover, the Company does not require or
encourage physicians to refer patients to entities in which they have a
financial relationship.

         Antitrust concerns have become central issues in the new managed care
environment of the health care industry. Whenever physicians or other health
care providers join together to form ventures for the delivery of health care
services, antitrust issues may be present. The Company has attempted to take all
steps possible to minimize any antitrust risk. Nevertheless, the law in this
area is unsettled and very fact specific.

         It is impossible to predict whether further federal and/or state
legislation will be adopted or to quantify the impact that such legislation
might have on the healthcare delivery system and the Company.

         In the June 30, 1996 Quarterly Statement filed with the New Jersey
Department of Banking and Insurance, the Company reported a loss of $4.86
million for the six-month period then ended. State regulations require the
Department of Banking and Insurance to meet with management of any HMO reporting
two consecutive quarters of operating losses and to work with that management to
determine (a) the cause for the loss, (b) the strategy to reverse the loss, and
(c) the projected impact of that strategy on the HMO's net worth. The Company's
leadership met with the Department of Banking and Insurance in September 1996,
to discuss its strategies and projections for future operations.

         In March 1997, Company representatives met with personnel from the
Department of Banking and Insurance to review the Company's financial
performance for the preceding two fiscal quarters, and to provide the Department
with projected financial statements for the following four fiscal quarters.
After the March meeting, the Department required the following additional
reporting from the Company: (a) monthly profit and loss statements, (b)
quarterly itemized listings of all administrative costs greater than $10,000 per
quarter, to be filed with the Company's Quarterly Statements, and (c) pro forma
financial statements for the Company's proposed Medicare line of business,
including a description of assumptions used.

         The Company has filed all required information with the Department of
Banking and Insurance subsequent to the September 1996 and March 1997 meetings,
and the Company continued to report progress on its strategies to the Department
of Banking and Insurance until January 1998. After the March 1997 meeting, the
Company determined to put the development of a Medicare product on hold.
<PAGE>   8
Employees

         The Company presently has no employees. Under the previous management
agreement with MGM, and under the current Management Services Agreement with the
Purchaser and agreement with Pace, all management and administrative services
necessary for the operation of the Company have been provided by contract
personnel.
<PAGE>   9
ITEM 2. DESCRIPTION OF PROPERTY

Property

         Effective July 31, 1997, the Company vacated space that it previously
subleased from MGM in an office building located in Princeton Pike Corporate
Center, 1009 Lenox Drive, Building 4, in Lawrenceville, New Jersey. The
Company's obligation to pay rent for such space terminated on June 30, 1997. The
Company has no leased or owned real property.

ITEM 3. LEGAL PROCEEDINGS

         The Company is a defendant in an action entitled Beharie v. Physician
Healthcare Plan of New Jersey, et al, docket no. L-2397-97, in the Superior
Court of Morris County, New Jersey. In that action the plaintiff seeks to
recover unspecified compensatory and punitive damages together with interest and
litigation costs from the defendants for alleged wrongful termination of an
employment agreement alleged to exist between the plaintiff and the defendants
and for defamation, among other related causes of action. The Company believes
that it has excellent defenses which it intends to vigorously pursue. The case
is in the early stages of litigation and the Company cannot estimate the amount
of a potential loss at this time.

         In addition, the Company is a defendant in an action entitled Anthony 
Tonzola, M.D. v. Physician Healthcare Plan of New Jersey, docket no. 97-5939
(KSH). This is a class action lawsuit brought on behalf of the common
shareholders of Physician Healthcare Plan of New Jersey based on alleged
violations of Federal Securities laws, breach of fiduciary duty, fraud and
negligence. The  Company's counsel was informed by opposing counsel of the
plaintiff's intent to dismiss this case. As of this date the dismissal has not
taken place. If the case is not dismissed the Company intends to vigorously
defend this action.
 
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

         On December 9, 1997, the Company held a special meeting of shareholders
for the purpose of obtaining shareholder approval of the (a) execution, delivery
and performance by the Company of the Agreement with HMO Blue, as such agreement
was amended to comply with regulatory requirements, and such other instruments
and documents required to be executed and delivered by the Company as described
in the Agreement and (b) the consummation of the assignment and transfer of
certain of the Company's contracts as described in the Agreement. The proposal
was approved, and the results of voting were as follows:

                  FOR               1,818 shares voted
                  AGAINST           207 shares voted
                  ABSTAIN           99 shares voted

PART II

ITEM 5. MARKET FOR COMMON EQUITY AND RELATED SHAREHOLDER MATTERS

         There is no public market for the common stock of the Company. The
Company's shares may only be purchased by eligible purchasers, which are
physicians who are licensed to practice medicine and surgery in New Jersey and
who are actively practicing. Each eligible purchaser is limited to one share.
The By-Laws of the Company prohibit the transfer of stock to any person or
entity, to ensure that only physicians participating in the network maintain
ownership in the Company. However, the By-Laws do provide for mandatory
redemption by the Company in exchange for the book value of the stock upon the
occurrence of certain events, such as death, retirement, disability, loss of
medical license, cessation of practice in New Jersey and termination of an
effective Physician Participation Agreement. Discretionary redemption by the
Board of Directors is also permitted.

         Additionally, the Physician Participation Agreement is expressly
conditioned on the physician being credentialed. If the physician is not
initially credentialed, the physician agrees that his or her stock shall be
redeemed by the Company for the purchase price paid, without interest. If the
Company has not made a decision regarding the initial credentialing of a
stockholder within twelve (12) months of the Company's receipt of such
stockholder's purchase
<PAGE>   10
price, upon request of such stockholder, the Company will redeem such stock for
the purchase price, without interest.

         The Company is not permitted to redeem a share if the Company is
insolvent or if doing so would cause the Company to be in a precarious financial
condition, as determined by the Board of Directors. In November 1996, the Board
of Directors adopted a resolution to the effect that discretionary redemptions
would not be made for a period of 12 months after the adoption of such
resolution. In July 1997, the Board of Directors adopted a resolution that
placed a moratorium on all redemptions, for any reason, to prevent a potentially
large redemption obligation from causing the Company to be in precarious
financial condition.

         The Company has not paid any dividends and does not intend to pay
dividends in the future. Additionally, the Company must obtain approval from the
New Jersey Department of Banking and Insurance prior to declaring any dividends.

         The Company expects that it will surrender its Certificate of Authority
to New Jersey insurance regulators at such time as the regulators approve,
expected in late 1998 or early 1999. After such surrender, it is expected that
the Company will be dissolved and assets remaining, if any, after satisfaction
of the Company's liabilities will be distributed to stockholders. Amounts
distributed in respect of each outstanding share of the Company's common stock
are expected to be substantially lower than the purchase price paid for such
share. However, the Company is unable to determine the final amount that would
be available for distribution. Dissolution would require additional stockholder
action.

ITEM 6. MANAGEMENT'S PLAN OF OPERATION

         The Company is a New Jersey corporation, formed on January 10, 1994
under the sponsorship of private practicing physicians for the purpose of
developing a statewide, physician-owned HMO. On December 19, 1997, the Company
consummated the transfer and assignment of certain provider and subscriber
contracts constituting its HMO and PPO operations to HMO Blue, the health
maintenance organization affiliated with Blue Cross Blue Shield of New Jersey,
Inc.

     Although the Company has sold its operations to HMO Blue, the Company
remains responsible for the payment of claims incurred prior to the December 19,
1997 date of the closing of the transaction with HMO Blue. The Company expects
that it will surrender its COA to New Jersey insurance regulators at such time
as the regulators approve, based on the regulators' determination that the
Company has satisfied its liabilities, expected in late 1998 or early 1999.
<PAGE>   11
         As of December 31, 1997, the number of shares outstanding from the
Company's 1994 initial offering and the 1996 second offering of common stock is
4,629, resulting in net paid-in capital of $23,794,634.

         During 1997 the Company generated substantially greater premium
revenues ($8,700,000 versus $2,200,000) as enrolled member-months increased 
from 18,891 to 72,412. Results for 1996 reflected limited sales due in part 
to the timing of the Company's Certificate of Authority ("COA") approval by the
Department in early 1996 resulting in the bulk of 1996 sales being recognized in
the 4th quarter. Little if any of the increase in 1997 was attributable to price
increases since the Company committed during 1996 to freezing premium levels
through July, 1997 as a competitive measure and new members were not enrolled
after that date. Declining investment balances are principally responsible for
the $169,146 or 26% decline in interest income from 1996. Revenues increased by
the Purchaser's payment of $1,839,000 after the transfer and assignment of
certain provider and subscriber contracts (the Company's HMO and PPO operations)
on December 19, 1997. 

     During 1997, the Company's medical costs increased approximately $7,500,000
from 1996, reflecting both the substantial membership increase reported earlier,
and the higher claims expense per member reported during 1997. As in prior
periods, the Company recorded its Incurred But Not Reported (IBNR) claims
reserve based on an evaluation of the Company's historical data by an
independent actuary. The claims reserve recorded by the Company at December 31,
1997 is at the high end of the actuary's suggested range, as in prior periods.

     The Company entered into a specific excess of loss reinsurance agreement
with an admitted AAA rated reinsurer with a retention limit of $35,000 per
member per year. Under the terms of the agreement, the Company pays a per member
per month premium in exchange for reimbursement of 70% of medical claims
exceeding the retention limit. The Company has not recorded any reinsurance
recoveries related to this agreement. In 1996, The Company entered into an
additional arrangement with a reinsurer to cover 100% of the out-of-network
claims incurred related to the POS product. Such arrangements are required by
New Jersey regulation as preconditions for underwriting POS products. As noted
in Note 10 of the Notes to Financial Statements at December 31, 1997, the
Company has renewed its reinsurance coverage to cover claims incurred through
December 19, 1997. The reinsurer has agreed to cover claims incurred through
that period and paid through December 19, 1998.

         During the twelve months ended December 31, 1997, all non-medical
expense categories decreased a total of approximately $2,700,000 from the
comparable 1996 fiscal period primarily reflecting substantial reduction in
operations including the layoff of the prior management company employees and
the transfer of management responsibilities to the purchaser,
<PAGE>   12
the elimination of the advertising program, and the termination of the
office space lease described earlier. With the Purchaser's assumption of
responsibility for management and administrative services through the
Management Agreement, the Company sold to MGM most of its fixed assets,
primarily furniture and computer equipment at its office location in
Lawrenceville, New Jersey. MGM paid approximately $300,000 for the Company's
fixed assets, based primarily on a series of appraisals obtained from
independent, third party appraisal firms. A $760,000 loss on sale of furniture
and equipment was reflected in general and administrative expenses in the 1997 
Statement of Operations.

         During the twelve months ended December 31, 1997, the Company incurred
a net loss of $4,380,226, with operations requiring the use of $1,800,000 in
cash. Prospectively the Company expects to use current cash and investment
balances to pay medical claims incurred prior to December 19, 1997 and other
payables as reported on the Company's December 31, 1997 balance sheet and other
such operating expenses which may be incurred prior to the time that the
Company surrenders its COA. The Company expects it will surrender its COA to
New Jersey regulators at such time as the regulators approve, based on the
regulators' determination that the Company has satisfied its liabilities
expected in late 1998 or early 1999. After such surrender, it is expected that
the Company will be dissolved and assets remaining, if any, after satisfaction
of the Company's liabilities will be distributed to stockholders. Amounts
distributed in respect of each outstanding share of the Company's common stock
are expected to be substantially lower than the purchase price paid for such
shares. However, the Company is unable to determine the final amount that would
be available for distribution. Dissolution would require additional 
stockholder action.

         No tax benefit for losses has been recognized in the financial
statements because the realization of such benefits would be dependent upon
achieving future operating profits which is highly unlikely.

ITEM 7. FINANCIAL STATEMENTS

The financial statements of the Company as required by this item are submitted
as a separate section of this report. Reference is made to the Index of
Financial Statements hereafter contained on page F-1.

ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

         No change in accountant and/or disagreements on any matter of
accounting principles or financial statement disclosures have occurred within
the last two years.
<PAGE>   13
PART III

ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS, COMPLIANCE
WITH SECTION 16(a) OF THE EXCHANGE ACT

Directors of the Registrant

         The following table lists the Company's current Board of Directors and,
their ages. The Company has no executive officers other than its Chairman,
President, and Treasurer. Employees of The Pace Group, Inc., with whom the
Company contracts for certain management services, serve as acting Chief
Executive Officer and Principal Accounting Officer.

<TABLE>
<CAPTION>
                                                              DATE ELECTED
NAME                            AGE      TITLE                AS DIRECTOR   TERM
<S>                             <C>   <C>                     <C>          <C>
Joseph Billotti, M.D             50   Chairman of the Board
                                      and President               12/95*   3 years
Bessie Sullivan, M.D             56   Treasurer and Director      12/95    3 years
Stanley Bloom, M.D               59   Director                    12/95    1 year*
William F. Brennan, D.O          50   Director                    12/95    3 years
Lee Hindin, M.D                  47   Director                    12/95    1 year*
Alexander R. Horowitz, M.D       55   Director                    12/95    2 years*
Louis Keeler, M.D                65   Director                    12/95    1 year*
Linda Korman, M.D                46   Director                    12/95    1 year*
Mark Levey, M.D                  60   Director                    12/95    1 year*
Martin S. Levine, D.O            43   Director                    12/95    1 year*
Nancy L. Mueller, M.D            48   Director                    12/95    2 years*
Mark T. Olesnicky, M.D           55   Director                    12/95    2 years*
Emmons G. Paine, M.D             68   Director                    12/95    3 years
Fred M. Palace, M.D              62   Director                    12/95    2 years*
Barry Prystowsky, M.D            43   Director                    12/95    2 years*
Thomas R.C. Reutter, Jr., D.O    58   Director                    12/95    2 years*
David L. Sirota, D.O             58   Director                    12/95    2 years*
Vincent J. Vivona, D.O., J.D     48   Director                    12/95    2 years*
</TABLE>

* Will serve until successor is elected and qualified. The Company did not hold
an annual meeting in 1996 or 1997.

JOSEPH BILLOTTI, M.D., has conducted a private medical practice in Orthopedic
Surgery in Bergen County, New Jersey since 1978. Dr. Billotti is a Diplomate of
the American Board of Orthopedic Surgery, Fellow of the American Academy of
Orthopedic Surgeons, and is a Fellow of the American and International College
of Surgeons. Dr. Billotti is a member of the Federal Health Care Financing
Administration Advisory Committee. He served as a Delegate for the State of New
Jersey Medical Society, and was a member of the Board of Directors of the New
Jersey State Orthopedic Society. Dr. Billotti was the Medical Director of the
Valley Regional Medical Center and a Clinical Assistant Professor of Orthopedic
Surgery at the University of Medicine and Dentistry of New Jersey. Dr. Billotti
is a member of the Bergen County Medical Society, the American Medical
Association, the Eastern Orthopaedic Society, and the American College of
Managed Care, Inc.
<PAGE>   14
BESSIE SULLIVAN, M.D., has conducted a private medical practice in Rheumatology,
Allergy and Immunology in Central New Jersey since 1974. She is a Diplomate of
the American Boards of Internal Medicine, Rheumatology, and Allergy and
Immunology. Dr. Sullivan is a Clinical Associate Professor of Medicine at the
University of Medicine and Dentistry of New Jersey. She is also a founding
Fellow of the American Rheumatology Association. She served as Vice President of
the New Jersey Chapter of the Arthritis Foundation, was a member of its
Executive Committee, and continues to serve on its Board of Governors and its
Medical and Scientific Committee, and she has served as Chairperson of several
of the Chapter's other committees. Dr. Sullivan served as President of the
Medical Staff at Muhlenberg Regional Medical Center from 1992-1993, has served
as Chairperson of Muhlenberg's Medical Records Committee, and as a member of its
Executive Committee and the Planning Committee of its Board of Trustees. She was
the Chairperson of the Legislative Council of the New Jersey Medical Society and
is currently a member of its House of Delegates, Consultant to the Board of
Trustees, and the Board's Strategic Planning Committee. From 1990-1991, she
served as President of the Union County Medical Society. Dr. Sullivan is a
member of the Board of Governors of the Medical Inter-Insurance Exchange of New
Jersey and serves on its Board's Strategic Planning and Audit Committees.

STANLEY BLOOM, M.D., has conducted a private medical practice in Urology in
Essex County, New Jersey since 1970. He is a Board Certified Urologist and a
Fellow of the American College of Surgeons. Dr. Bloom is a member of the Essex
County Medical Society, the American Urological Association and the Society of
Endolaparoscopic Surgeons. He is also past Chairman of the Department of Surgery
at East Orange General Hospital, and of the Departments of Urology at St.
Barnabas Medical Center and East Orange General Hospital.

WILLIAM F. BRENNAN, D.O., has conducted a private medical practice in Family
Medicine in Gloucester County since 1980. Dr. Brennan is Board Certified in
Family Practice by the American Osteopathic College of Family Practice. In 1995,
Dr. Brennan was appointed Clinical Associate Professor of Family Practice at the
University of Medicine and Dentistry of New Jersey - School of Osteopathic
Medicine. Dr. Brennan is a Delegate to the New Jersey Osteopathic House of
Delegates. In addition to his private practice, Dr. Brennan formerly served as
Medical Director of the Gloucester County's Sheriff's Medical Department. Dr.
Brennan has also served as school physician for the Cherry Hill school district
and as a medical officer in the United States Navy.

LEE HINDIN, M.D., conducted a private practice in psychiatry in Essex County
from 1982-1995. Since 1995 his practice has been in Passaic County. Prior to
that, he was an instructor at the University of Medicine and Dentistry of New
Jersey. He is Board Certified in Psychiatry by the American Board of Psychiatry
and Neurology. He is a member of the American Psychiatric Association, the New
Jersey Psychiatric Associates, American Society of Addiction Medicine, and
American Academy of Psychiatrists in Alcoholism and Addictions. He is founder
and Medical Director of Creative Intervention for Mental Health and Chemical
Dependency. He has been the Associate Medical Director of the Department of
Psychiatry, Medical Director of the Division of Drug and Alcohol Services, and
is currently on the Medical Board of St. Barnabas Medical Center.

ALEXANDER R. HOROWITZ, M.D., has conducted a private practice in Pediatrics in
Madison, New Jersey since 1977. Dr. Horowitz is a Diplomate of the American
Board of Pediatrics and the
<PAGE>   15
American Board of Quality Assurance and Utilization Review Physicians. He is
past Chairman of the Pediatric Audit Committee at Overlook Hospital and the
Joint Patient Care Committee at Morristown Memorial Hospital. He has served as a
utilization reviewer at both institutions. He is an Instructor of Clinical
Pediatrics at the College of Physicians and Surgeons, Columbia University, New
York. He holds and has held multiple positions in the Morris-Somerset IPA.

LOUIS KEELER, M.D., has conducted a private practice in Urology in Camden County
since 1967. He is Board Certified and a member of the American Urologic
Association. He is immediate past President of the Medical Society of New
Jersey. Dr. Keeler is a Clinical Associate Professor of Urology at Thomas
Jefferson University in Philadelphia. He has been President of the Camden County
Medical Society and President of the Medical Staff of Our Lady of Lourdes
Medical Center in Camden, New Jersey.

LINDA KORMAN, M.D., has conducted a private practice in Internal Medicine in
Central New Jersey since 1985. She practices Internal Medicine in Edison with an
emphasis on preventative medicine. She is Board Certified in Internal Medicine
by the American Board of Internal Medicine. She served on the Board of Trustees
of the Middlesex County Medical Society. Dr. Korman was recently appointed Vice
President of their Public Relations Committee. She is a member of the American
Medical Association and the American Board of Internal Medicine. The SUNY Health
Science Center appointed Dr. Korman as Clinical Assistant Professor of Medicine.
She is Medical Director of Family Medical Group and has also been Medical
Director and Consultant for several wellness programs.

MARK LEVEY, M.D., has conducted a private medical practice in Otolaryngology in
Essex County, New Jersey since 1969. Dr. Levey is a Fellow of the American
Academy of Facial, Plastic and Reconstructive Surgery, the American Academy of
Ophthalmology and Otolaryngology, the American College of Surgeons, and the
American Society for Head and Neck Surgery. He is currently an Associate
Clinical Professor of Surgery at the Robert Wood Johnson Medical School. Dr.
Levey has served as Treasurer of the Medical Staff at Saint Barnabas Medical
Center, and currently serves as Director of MetroWest IPA.

MARTIN S. LEVINE, D.O., has conducted a Family and Sports Medicine practice in
Jersey City, New Jersey since 1983. Dr. Levine is currently President of the New
Jersey Association of Osteopathic Physicians and Surgeons. He is the past
National and New Jersey Delegate of the American College of Osteopathic Family
Practitioners. Dr. Levine is the Assistant Clinical Professor of the Department
of Family Practice at the University of Medicine and Dentistry of New Jersey
School of Osteopathic Medicine.

NANCY L. MUELLER, M.D., has conducted a private medical practice in Neurology in
Englewood, New Jersey since 1982. Dr. Mueller is Board Certified by the American
Board of Quality Assurance and Utilization Review Physicians, and is Board
eligible with the American Board of Psychiatry and Neurology. She has been an
active member of the Utilization Review Committee of the Englewood Hospital
since 1983. She is currently President-Elect of the Bergen County Medical
Society and has been a member of its Board of Trustees since 1990. She has been
a delegate to the Medical Society of New Jersey since 1988. She was appointed to
the Transition Committee for the State of New Jersey Department of Health. She
is a member of the State Medical Service Committee, as well as a reviewer and
expert for the Professional Review Organization of New Jersey. She is a member
of the American Academy of Neurology, the
<PAGE>   16
American College of Physicians and the American Women's Medical Association. She
has been part of the National Health Care Advisory Board and is currently
working as a bipartisan member of the Committee on National Healthcare for the
Democratic National Committee. Dr. Mueller is presently serving on the Executive
Board of Princeton Preferred.

MARK T. OLESNICKY, M.D., has conducted a private practice in Internal Medicine
in Essex County, New Jersey since 1975. He is currently President of the Medical
Staff of Saint Barnabas Medical Center, Livingston, New Jersey. He also serves
as Trustee of the Medical Society of New Jersey as well as an Alternate Delegate
to the American Medical Association. He is a Diplomat of the American Board of
Quality Assurance and Utilization Review Physicians. Dr. Olesnicky has also
served as President of the Essex County Medical Society and President of the
Essex County Health Organization.

EMMONS G. PAINE, M.D., has conducted a private medical practice in Cardiology in
Camden County, New Jersey since 1962. He has been past-president of the Camden
County Medical Society, and has served on its Executive Committee for several
years. Dr. Paine is a Diplomate of the American Board of Internal Medicine and
is a Fellow of the American College of Cardiology. Dr. Paine has served on the
Governor's Committee for Mobile Intensive Care Units from 1972 to 1975. He
recently ended an eleven-year period as Chief of Cardiology of the West Jersey
Health System, and he served as Chairman of West Jersey Hospital's Medical
Subcommittee for Quality Assurance for nine years. Dr. Paine has also served on
the Board of Trustees of West Jersey Hospital.

FRED M. PALACE, M.D., is an Attending Radiologist at Morristown Memorial
Hospital, Morristown, New Jersey. He is Board Certified by the National Board of
Medical Examiners, the American Board of Radiology and the American Board of
Nuclear Medicine. He is a Fellow of the American College of Radiology and the
American College of Nuclear Physicians. Dr. Palace is a former President of the
Radiology Society of New Jersey. He is a past-President of the Medical Society
of New Jersey. He is also a member of the Board of Directors of The New Jersey
State Medical Underwriters and current Chairman of its Strategic Planning
Committee.

BARRY PRYSTOWSKY, M.D., has conducted a private practice in Pediatrics in
Nutley, New Jersey since 1984. Dr. Prystowsky is a Diplomate of the American
Board of Pediatrics. Dr. Prystowsky is President of the New Jersey Pediatrics
Society. He is on the Council of the American Academy of Pediatrics, New Jersey
Chapter. Dr. Prystowsky has served as the Chairman of the New Jersey Medical
Society Subcommittee on Violence Prevention. Dr. Prystowsky has also served as
Chairman of the New Jersey Academy of Pediatrics Practice Management Committee.
Dr. Prystowsky served on the Pediatric Clinical Advisory Committee at the New
Jersey Department of Health. In addition, he currently serves on medical
advisory committees for Blue Cross - Blue Shield, First Option, Pru-Care, and
the Credential Committee for HMO Blue. He is Secretary of the Primary Care
Physician of NJ IPA. Dr. Prystowksy also serves as a Clinical Assistant
Professor of Pediatrics at the University of Medicine and Dentistry of New
Jersey and has been appointed to the Governor's Task Force on Child Abuse.

THOMAS R.C. REUTTER, JR., D.O., has conducted a Family and Sports Medicine
Practice in Gloucester County, New Jersey since 1969. He is a past President of
the New Jersey Association of Osteopathic Physicians and Surgeons, and of the
American Academy of Family Practice of New Jersey in Osteopathic Medicine. He
sits on the Board of Executive Peer Review of New
<PAGE>   17
Jersey. He is a Fellow of the Academy of Family Practice, and a Board member of
the Southern New Jersey Individual Practice Association. Dr. Reutter is a
Clinical Assistant Professor in Family Practice at the University of Medicine
and Dentistry of New Jersey School of Osteopathic Medicine. He is also the
physician for Logan Township and Westville schools. In addition, Dr. Reutter is
the team physician for Rowan College.

DAVID L. SIROTA, D.O., has conducted a private medical practice in General
Practice in Passaic and Essex Counties in New Jersey since 1972. He is currently
Medical Director of the Out-Patient Department and Occupational Health Services
at Holy Name Hospital. Dr. Sirota is a past President of the New Jersey
Association of Osteopathic Physicians and Surgeons. He is an active member of
the American Osteopathic Association and the New Jersey Association of
Osteopathic Physicians and Surgeons. He was Director of Medical Education at
Saddlebrook Hospital and is active in peer review activities.

VINCENT J. VIVONA, D.O., J.D., has conducted a private medical practice in
Cardiology in Ocean County, New Jersey since 1979. Dr. Vivona is a Diplomate of
the Board of Internal Medicine (1996). He is also a lawyer currently admitted to
the New Jersey and Pennsylvania bars. He is a Fellow of the American College of
Legal Medicine and an Adjunct Instructor in Healthcare Law at Ocean County
College.

The Company presently has no full-time employees. The Pace Group, Inc. provides
certain services pursuant to an agreement with the Company. Its employees serve
as acting Chief Executive Officer and Principal Accounting Officer.

Notwithstanding these arrangements with The Pace Group, Inc., the Company's
operations were managed by MGM from January - June 1997, and by HMO Blue from
July - December 1997 pursuant to management agreements. HMO Blue purchased the
Company's operations on December 19, 1997. The Pace Group, Inc. continues to
provide certain administrative and corporate services to the Company.

         There are no familial relationships among the directors of the Company.

ITEM 10. EXECUTIVE COMPENSATION

         No director of the Company receives any remuneration for serving as a
director.

         The Company has no employees.

ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

         With the exception of the Class F and G Director(s), each of the
directors of the Company owns one share of stock of the Company. As a group,
directors own 0.4% of outstanding stock.

ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
<PAGE>   18
         Each shareholder of the Company executed a Physician Participation
Agreement for the provision of healthcare services to the Company's Members. On
December 19, 1997, the Company consummated the transfer of its provider
contracts to the Purchaser as previously described. The shareholders of the
Company receive compensation in an amount equal to the predetermined rates for
physician services provided.

On March 13, 1997, the Company agreed to reimburse the former Chairman of the
Board of Directors $100,000 for his loss of income and out of pocket expenses
incurred during his term as Chairman.

ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K

(A) EXHIBITS

         Reference is made to the Index of Exhibits hereinafter contained on
page E-1.
<PAGE>   19
(B) REPORTS ON FORM 8-K

         The Company filed a Form 8-K on December 29, 1997, reporting that the
Company had consummated the transfer and assignment to the Purchaser of certain
provider and subscriber contracts constituting its HMO and PPO operations.
<PAGE>   20
SIGNATURES

         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.

                           PHYSICIAN HEALTHCARE PLAN OF NEW JERSEY, INC.

                           BY :     /s/JOSEPH BILLOTTI, MD
                                    Joseph Billotti, M.D.
                                    Chairman

/s/BARRY MASSEY
Barry Massey
         Senior Consultant of The Pace Group, Inc.
         (Acting in the capacity of Principal Accounting
         Officer and Principal Financial Officer of the Registrant)

DATED:  April 27, 1998

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.

SIGNATURE                           TITLE                         DATE

JOSEPH BILLOTTI, M.D.               Chairman of the Board and     April 27, 1998
Joseph Billotti, M.D.               President

BESSIE SULLIVAN, M.D.               Treasurer and Director        April 27, 1998
Bessie Sullivan, M.D.

STANLEY BLOOM, M.D.                 Director                      April 27, 1998
Stanley Bloom, M.D.

/s/WILLIAM F. BRENNAN, D.O.         Director                      April 27, 1998
William F. Brennan, D.O.
<PAGE>   21
SIGNATURE                           TITLE                         DATE

/s/LEE HINDIN, M.D.                 Director                      April 27, 1998
Lee Hindin, M.D.

ALEXANDER R. HOROWITZ, M.D.         Director                      April 27, 1998
Alexander R, Horowitz, M.D.

LOUIS KEELER, M.D.                  Director                      April 27, 1998
Louis Keeler, M.D.

LINDA KORMAN, M.D.                  Director                      April 27, 1998
Linda Korman, M.D.

/s/MARK LEVEY, M.D.                 Director                      April 27, 1998
Mark Levey, M.D.

/s/MARTIN S. LEVINE, D.O.           Director                      April 27, 1998
Martin S. Levine, D.O.

NANCY L. MUELLER, M.D.              Director                      April 27, 1998
Nancy L. Mueller, M.D.

/s/MARK T. OLESNICKY, M.D.          Director                      April 27, 1998
Mark T. Olesnicky., M.D.

EMMONS G. PAINE, M.D.               Director                      April 27, 1998
Emmons G. Paine, M.D.

/s/FRED M. PALACE, M.D.             Director                      April 27, 1998
Fred M. Palace, M.D.

BARRY PRYSTOWSKY, M.D.              Director                      April 27, 1998
Barry Prystowsky, M.D.

THOMAS R.C. REUTTER, JR., D.O.      Director                      April 27, 1998
Thomas R.C. Reutter, Jr., D.O.

DAVID L. SIROTA, D.O.               Director                      April 27, 1998
David L. Sirota, D.O.

/s/VINCENT J. VIVONA, D.O., J.D.    Director                      April 27, 1998
Vincent J. Vivona, D.O., J.D.
<PAGE>   22
                  Physician Healthcare Plan of New Jersey, Inc.

                              Financial Statements

                                December 31, 1997

CONTENTS

Report of Independent Auditors ..............                                F-2
Balance Sheets ..............................                                F-3
Statements of Operations ....................                                F-4
Statements of Shareholders' Equity ..........                                F-5
Statements of Cash Flows ....................                                F-6
Notes to Financial Statements ...............                                F-7


F-1
<PAGE>   23

Report of Independent Auditors

The Board of Directors
Physician Healthcare Plan of New Jersey, Inc.

We have audited the accompanying balance sheets of Physician Healthcare Plan of
New Jersey, Inc. as of December 31, 1997 and 1996, and the related statements of
operations, shareholders' equity and cash flows for the years then ended. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these 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.

As described in Note 1 to the financial statements, the shareholders of
Physician Healthcare Plan of New Jersey, Inc. approved the sale and
discontinuance of all HMO and PPO operations on December 19, 1997. As a result, 
Physician Healthcare Plan of New Jersey, Inc. changed its basis of accounting 
from the going concern basis to a liquidation basis.

In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Physician Healthcare Plan of
New Jersey, Inc. at December 31, 1997 and 1996, and the results of its
operations and its cash flows for the years then ended in conformity with
generally accepted accounting principles.

                                                      ERNST & YOUNG LLP

Hackensack, New Jersey
April 22, 1998


F-2
<PAGE>   24
                  PHYSICIAN HEALTHCARE PLAN OF NEW JERSEY, INC.
                                 BALANCE SHEETS

<TABLE>
<CAPTION>
                                                                                DECEMBER 31
                                                                            1997            1996
                                                                        ------------    ------------
<S>                                                                     <C>             <C>         
ASSETS
   Current Assets
         Cash and cash equivalents                                      $  1,504,664    $  5,563,345
         Short-term investments                                            6,529,250       1,307,185
         Advances to management company                                                      430,929
         Premium Receivable                                                  424,211         195,534
         Other assets                                                        179,698         126,180
                                                                        ------------    ------------
                  Total current assets                                     8,637,823       7,623,173
         Investments                                                                       2,651,139
         Furniture and equipment, net                                                      1,320,867
         Other assets                                                                         18,107
                                                                        ------------    ------------
                  Total assets                                          $  8,637,823    $ 11,613,286
                                                                        ============    ============
Liabilities and Shareholders' Equity
   Liabilities
         Claims Payable                                                 $  3,000,000    $  1,544,647
         Accounts payable and accrued expenses                               839,555         782,428
         Other liabilities                                                                   114,468
                                                                        ------------    ------------
                  Total Liabilities                                     $  3,839,555    $  2,441,543
   Shareholders' Equity
         Common Stock, subject to redemption
            (no par; 20,000 authorized; and 4,629 and 4,634 issued
            and outstanding)                                              23,724,922      23,750,222
         Paid in capital                                                      69,712          43,214
         Net unrealized (loss) gain on investments                                77          (5,476)
         Retained deficit                                                (18,996,443)    (14,616,217)
                                                                        ------------    ------------
                  Total shareholders' equity                            $  4,798,268    $  9,171,743
                                                                        ------------    ------------
                           Total liabilities and shareholders' equity   $  8,637,823    $ 11,613,286
                                                                        ============    ============
</TABLE>

                             See accompanying notes.


F-3
<PAGE>   25
                  PHYSICIAN HEALTHCARE PLAN OF NEW JERSEY, INC.

                            STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
                                                     YEAR ENDED DECEMBER 31
                                                    1997                1996
                                                ------------       ------------
<S>                                             <C>                <C>         
REVENUE
   Premiums, net of reinsurance                 $  8,699,498       $  2,167,345
   Interest income, net                              472,723            641,869
   Gain on sale of HMO and PPO operations          1,839,000
   Other revenue                                     107,336             51,429
                                                ------------       ------------
         Total revenue                            11,118,557          2,860,643
EXPENSES
   Medical costs                                   9,534,813          2,012,747
   Professional services                           2,668,299          3,345,965
   Compensation and benefits                         731,786          3,195,984
   General and administrative                      2,359,965          1,923,002
   Insurance                                         203,920            192,712
                                                ------------       ------------
         Total expenses incurred                  15,498,783         10,670,410
                                                ------------       ------------
Net Loss                                        $ (4,380,226)      $ (7,809,767)
                                                ============       ============
     Net loss per common share                  $       (946)      $     (1,846)
                                                ============       ============
</TABLE>

                             See accompanying notes.


F-4
<PAGE>   26
                  PHYSICIAN HEALTHCARE PLAN OF NEW JERSEY, INC.

                       STATEMENTS OF SHAREHOLDERS' EQUITY

                     YEARS ENDED DECEMBER 31, 1997 AND 1996

<TABLE>
<CAPTION>
                                        Common            Paid in               Net             Retained            Total
                                        Stock             Capital            Unrealized          Deficit         Shareholders'
                                                                            (Loss) Gain                             Equity
                                                                                on
                                                                            Investments
                                    ---------------    ---------------    ---------------    ---------------    ---------------
<S>                                 <C>                <C>                <C>                <C>                <C>            
Balance at January 1, 1996          $    17,575,000    $        24,838    $        21,645    $    (6,106,450)   $    11,515,033
Common stock issued, net                  6,250,222                                                 (700,000)         5,550,222
Common stock redeemed (15 shares)           (75,000)            18,376                                                  (56,624)
Net unrealized losses                                                             (27,121)                              (27,121)
Net loss                                                                                          (7,809,767)        (7,809,767)
                                    ---------------    ---------------    ---------------    ---------------    ---------------
Balance at December 31, 1996        $    23,750,222    $        43,214    $        (5,476)   $   (14,616,217)   $     9,171,743
Common stock redeemed (5 shares)            (25,300)            26,498                                                    1,198
Net unrealized gains                                                                5,553                                 5,553
Net loss                                                                                          (4,380,226)        (4,380,226)
                                    ---------------    ---------------    ---------------    ---------------    ---------------
Balance at December 31, 1997        $    23,724,922    $        69,712    $            77    $   (18,996,443)   $     4,798,268
                                    ===============    ===============    ===============    ===============    ===============
</TABLE>

                             See accompanying notes.


F-5
<PAGE>   27
                  PHYSICIAN HEALTHCARE PLAN OF NEW JERSEY, INC.

                            STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
                                                                                   Year ended December 31
                                                                                    1997           1996
                                                                                 -----------    -----------
<S>                                                                              <C>            <C>         
Cash flows from operating activities:
   Net Loss                                                                      $(4,380,226)   $(7,809,767)
   Adjustment to reconcile net loss to net cash used for
      operating activities:
         Depreciation and amortization                                               236,006        569,007
         Loss on disposal of furniture and equipment                                 760,000          1,356
         Changes in operating assets and liabilities:
            Advances to management company                                           430,929       (407,206)
            Other assets                                                             (35,411)       134,340
            Premium receivable                                                      (228,677)      (195,534)
            Claims payable                                                         1,455,353      1,542,785
            Accounts payable and accrued expenses                                     57,127       (49,427)
            Other liabilities                                                       (113,270)        99,035
                                                                                 -----------    -----------
   Net cash used in operating activities                                          (1,818,169)    (6,115,411)
                                                                                 -----------    -----------
Cash flows from investing activities:
Purchase of equipment                                                                              (282,562)
Proceeds from sale of furniture and equipment                                        324,861          6,699
Cost of investments acquired                                                      (7,833,901)    (3,197,444)
Proceeds from investments matured                                                  5,268,528      3,900,000
                                                                                 -----------    -----------
Net cash (used in) provided by investing activities                               (2,240,512)       426,693
                                                                                 -----------    -----------
Cash flows from financing activities:
Proceeds from stock issuance                                                                      6,250,222
Offering costs                                                                                     (250,000)
Redemption of common stock                                                                          (56,624)
                                                                                 -----------    -----------
   Net cash provided by financing activities                                                      5,943,598
                                                                                 -----------    -----------
Net change in cash and cash equivalents                                           (4,058,681)       254,880
Cash and cash equivalents, beginning of year                                       5,563,345      5,308,465
                                                                                 -----------    -----------
Cash and cash equivalents, end of year                                           $ 1,504,664    $ 5,563,345
                                                                                 ===========    ===========
</TABLE>

                             See accompanying notes.


F-6
<PAGE>   28
         Physician Healthcare Plan of New Jersey, Inc.
         Notes to Financial Statements.
         December 31, 1997

1. ORGANIZATION AND RELATED MATTERS

Physician Healthcare Plan of New Jersey, Inc. (the "Company"), a New Jersey
Corporation, was formed January 10, 1994, under the sponsorship of private
practicing physicians for the purpose of developing a statewide, physician-owned
Health Maintenance Organization ("HMO"). The Company's Certificate of Authority
("COA") to operate as an HMO in five counties in New Jersey was approved on
August 28, 1995. In September 1995, the Company filed an amendment to its COA to
operate in the remaining counties in New Jersey, which was approved January 29,
1996. The Board of Directors, comprised solely of shareholders, oversees the
operations of the Company.

The Company's health plans consist of HMO plans and point-of-service (POS)
plans, offered on a fully-insured basis, whereby members receive comprehensive
medical coverage for a fixed monthly premium. Medical services are provided
through discounted fee-for-service participation agreements with physicians and
various per diem or fee-for-service contracts with hospitals and other
providers. Under regulations adopted in April 1996, the Company filed a
comprehensive small group POS product which the Company began marketing upon
filing of policy forms approved by the New Jersey Department of Banking and
Insurance.

On March 4, 1994, the Company had an initial offering to physicians both
practicing and residing in New Jersey, for the purpose of raising capital
necessary to fund its operations until the Company received its COA and
subsequently to fund operational deficits until such time as the Company begins
to operate at a profit. See Note 5 for a further description of the initial
offering.

The Company's registration statement for the second offering was filed with the
Securities and Exchange Commission (the "SEC") and declared effective on
November 9, 1995. The second offering of shares to. physicians practicing in the
State of New Jersey was for the purpose of expanding the Company's existing
network of physicians, expanding the Company's programs and infrastructure and
enhancing the Company's equity position. See Note 5 for a further description of
the second offering.

On December 19, 1997, the Company consummated the transfer and assignment of
certain provider and subscriber contracts constituting its HMO and PPO
operations (the "Transaction") to HMO Blue, the health maintenance organization
affiliated with Blue Cross Blue Shield of New Jersey, Inc. The Company received
a cash payment of $1,839,300 as consideration for the transfer and assignment.

Although the Company has sold its operations to HMO Blue, the Company remains
responsible for the payment of claims incurred prior to the December 19, 1997
date of the closing of the transaction with HMO Blue. The Company expects that
it will surrender its COA to New Jersey insurance regulators at such time as the
regulators approve, based on the regulators' determination that the Company has
satisfied its liabilities, expected in late 1998 or early 1999. After such
surrender, it is expected that the Company will be dissolved and assets
remaining, if any, after satisfaction of the Company's liabilities will be
distributed to stockholders. Amounts distributed in respect of each outstanding
share of the Company's common stock are expected to be substantially lower than
the purchase price paid for such shares. However, the Company is unable to
determine the final amount that would be available for distribution.
Dissolution would require additional stockholder action.


F-7
<PAGE>   29
         Physician Healthcare Plan of New Jersey, Inc.

         Notes to Financial Statements (continued)

2. SIGNIFICANT ACCOUNTING POLICIES

BASIS OF PRESENTATION

The financial statements have been prepared in conformity with generally
accepted accounting principles ("GAAP"). The preparation of financial statements
in conformity with GAAP requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosures of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenue and expenses during the reporting period. Actual
results could differ from those estimates.

As a result of the sale of its operations to HMO Blue on December 19, 1997, the
Company has changed from a going concern basis of accounting to a liquidation
basis of accounting effective December 31, 1997.

INVESTMENTS

SFAS No. 115, Accounting for Certain Investments in Debt & Equity Securities,
requires that securities be classified in one of three categories. Debt
securities that the Company has the intent and ability to hold to maturity would
be classified as held to maturity and reported at amortized cost. Debt
securities that are held for resale would be classified as trading securities
and reported at fair value with unrealized gains and losses included in
earnings. Debt securities not so classified are considered available for sale
and reported at fair value with unrealized gains and losses included in
shareholders' equity. The Company's investments in debt securities are
classified as available-for-sale and are carried at fair value.

Investment income, net of investment expenses and amortization of bond premium
and discount, is recognized in income when earned.


F-8
<PAGE>   30
         Physician Healthcare Plan of New Jersey, Inc.

         Notes to Financial Statements (continued)

2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

FURNITURE AND EQUIPMENT

Furniture and equipment is carried at cost less accumulated depreciation.
Depreciation is calculated using the straight-line method over the useful lives
of the depreciable assets which range from three to five years. As of December
31, 1996, accumulated depreciation on furniture and equipment was $838,015.
Depreciation expense totaled $236,006 and $710,658 for the years ended December
31, 1997 and 1996, respectively. In 1997, the majority of the Company's
furniture and equipment was sold. All furniture and equipment not sold was
fully depreciated at December 31, 1997.

OFFERING COSTS

In 1996, costs incurred in connection with the second offering amounting to
$700,000 were reflected as a reduction of the actual proceeds from the second
offering.

REVENUE RECOGNITION

Premiums from members for prepaid health care are recognized as income in the
period in which the enrollees are entitled service. Premiums collected in
advance are recorded as advance premiums and are included in other liabilities
on the balance sheets.

MEDICAL COSTS

Medical costs consist of medical claims costs which are accrued in the period
that services are provided to members. Medical costs include estimates for
claims incurred by the Company and which have not yet been reported ("IBNR").
Such estimates are continually monitored and reviewed and, as settlements are
made or estimates adjusted, the resulting differences will be reflected in the
current period of operations. Despite the variability inherent in such
estimates, management believes that the liability for medical claims payable is
adequate.


F-9
<PAGE>   31
         Physician Healthcare Plan of New Jersey, Inc.

         Notes to Financial Statements (continued)

2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

ADVERTISING

The Company expenses advertising costs as they are incurred. In 1997 and 1996,
advertising expense was approximately $5,000 and $1,100,000, respectively.

INCOME TAXES

The Company accounts for income taxes in accordance with SFAS No. 109,
Accounting for Income Taxes. SFAS No. 109 prescribes an asset and liability
method for accounting for deferred taxes, the objective of which is to recognize
an asset or liability for the expected future tax effects due to temporary
differences between financial reporting and tax basis of assets and liabilities,
based on enacted tax rates and other provisions of the tax law. The principal
items giving rise to such differences are net operating loss carryforwards,
start-up and organizational costs and furniture and equipment. Under SFAS No.
109, deferred tax assets are recognized unless it is more likely than not that
some portion of the deferred tax assets may not be realized.

NET LOSS PER COMMON SHARE

Net loss per common share is based upon the weighted average number of shares
outstanding during the year, which is in accordance with SFAS No. 128.

CASH FLOW REPORTING

For purposes of reporting cash flows, cash and cash equivalents includes all
cash on deposit, money market accounts and investments purchased with an
original remaining maturity of three months or less.

RECLASSIFICATION

Certain balances presented in the 1996 financial statements have been
reclassified to conform to the 1997 presentation.

3. MANAGEMENT AGREEMENTS

Since inception, the Company has engaged a management company to provide
substantially all management and administrative services, including but not
limited to, financial services, member and provider support services, provider
credentialing, and claims processing. Until July 1997, the Company was managed
by Medical Group Management, Inc. ("MGM"), a subsidiary of the New Jersey State
Medical Underwriters, Inc., which in turn is a subsidiary of the Medical Society
of New Jersey. The Company incurred and paid $350,000 and $600,000 of management
fees to MGM for the years ended December 31, 1997 and 1996, respectively.


F-10
<PAGE>   32
         Physician Healthcare Plan of New Jersey, Inc.

         Notes to Financial Statements (continued)

3. MANAGEMENT AGREEMENTS (CONTINUED)

That arrangement with MGM terminated in July 1997 and the Company entered into a
Management Agreement with HMO Blue effective July 1, 1997. HMO Blue managed the
Company's operations until December 19, 1997, when it purchased the Company's
HMO and PPO operations pursuant to an Agreement dated as of June 26, 1997. The
Company incurred and paid $567,230 of management fees to HMO Blue for the year
ended December 31, 1997. In addition, the Company has a contract with The Pace
Group, Inc. (Pace) to provide management transition services and certain
corporate financial and reporting assistance not otherwise provided by the
Purchaser, such as assistance in making required filings with state insurance
regulators and with the Securities and Exchange Commission.

As of the transition date of closing, (December 19, 1997) the Management
Services Agreement dated as of June 26, 1997 between the Company and HMO Blue
terminated, and the parties entered into a new Management Services Agreement
("Management Services") pursuant to which HMO Blue will provide
certain limited management services until March 31, 1999. The Company will pay
HMO Blue an hourly fee of $75 for services provided under that agreement. The
Company expects that it will wind up its operations entirely over the next year
and seek to dissolve early in 1999.

With the Purchaser's assumption of responsibility for management and
administrative services through the Management Agreement, the Company sold to
MGM most of its fixed assets, primarily furniture and computer equipment at its
office location in Lawrenceville, New Jersey. MGM paid approximately $300,000
for the Company's fixed assets, based primarily on a series of appraisals
obtained from independent third party appraisal firms. A $760,000 loss on sale
of furniture and equipment was reflected in the 1997 Statement of Operations in
general and administrative expense.

4. COMMITMENTS AND CONTINGENCIES

OPERATING LEASES

The Company leased office facilities and office equipment. Effective October 1,
1996, NJSMU assumed the Company's obligation under the office facilities lease
and subleased 33% of the facility back to the Company under terms consistent
with the original lease. As of the July 31, 1997 effective date of the
termination of the MGM management agreement, the Company terminated its
month-to-month lease and the Company will have no further obligation under such
lease. Upon such termination, the Company no longer occupies any space at any
location.

LEGAL PROCEEDINGS

The Company is a defendant in an action entitled Beharie v. Physician
Healthcare Plan of New Jersey, et al., docket no. L-2397-97, in the Superior
Court of Morris County, New Jersey. In that action the plaintiff seeks to
recover unspecified compensatory and punitive damages together with interest
and litigation costs from the defendants for alleged wrongful termination of an
employment agreement alleged to exist between the plaintiff and the defendants
and for defamation, among other related causes of action. The Company believes
that it has excellent defenses which it intends to vigorously pursue. The case
is in the early stages of litigation and the Company cannot estimate the amount
of a potential loss at this time.

In addition, the Company is a defendant in an action entitled Anthony Tonzola,
M.D. v. Physician Healthcare Plan of New Jersey, docket no. 97-5939 (KSH). This
is a class action lawsuit brought on behalf of the common shareholders of
Physician Healthcare Plan of New Jersey based on alleged violations of Federal
Securities laws, breach of fiduciary duty, fraud and negligence. The  Company's
counsel was informed by opposing counsel of the plaintiff's intent to dismiss
this case. As of this date the dismissal has not taken place. If the case is not
dismissed the Company intends to vigorously defend this action.

ADMINISTRATIVE CONTRACTS

Since May 30, 1995, the Company operated under a letter of intent with Acordia
of Southern California ("Acordia") to provide the Company's administrative and
management information systems. Under the terms of the new Management Agreement
described in Note 3, the Purchaser is providing the Company management and
administrative services necessary for the operation of the Company including,
but not limited to, claims processing and financial services.


F-11
<PAGE>   33
         Physician Healthcare Plan of New Jersey, Inc.

         Notes to Financial Statements (continued)

OTHER

As of December 31, 1997, the Company's investments include restricted assets
of approximately $378,000 on deposit with the State of New Jersey for solvency
protection. In addition, the Company had a letter of credit relating to its
leased office space which was collateralized with a certificate of deposit in
the amount of $250,000. This letter of credit was released in November 1997.

5. SHAREHOLDERS' EQUITY AND DIVIDEND RESTRICTIONS

On March 4, 1994, the Company sought to raise capital through an initial
offering of up to 15,000 shares of stock at a price of $5,000 per share to
physicians who were eligible purchasers. Only physicians who both practiced and
resided in the State of New Jersey were eligible purchasers. The Company issued
3,569 shares as a result of this Offering, representing $17,845,000 in initial
capital.

The Company's registration statement was filed with the SEC and declared
effective November 9, 1995. The purpose of the second offering to physicians who
practice in the State of New Jersey was to raise additional capital of up to
10,000 shares of stock at a price of $5,500 per share. All shares have the same
rights and privileges. In 1996, the Company issued 1,136 shares as a result of
this offering, representing $6,250,222 of additional capital.

In order to ensure the Company operates as a physician-owned HMO whereby
shareholders represent participating physicians in the HMO, the Articles of
Incorporation and By-Laws provide certain restrictions on this stock. It is
non-transferable and can only be redeemed by the Company. Circumstances
requiring redemption of stock at current book value in order to preserve the
integrity of the network include death, retirement, disability, loss of license
to practice medicine in New Jersey and termination of an effective Physician
Participation Agreement with the Company. In addition, physicians who fail to
become credentialed by the Company must redeem their shares at the original
purchase price without interest. Physicians who otherwise wish to redeem their
shares may do so at the sole discretion of the Board of Directors at current
book value. After approval, the Board may take up to six months to redeem such
shares. The Company shall not be required to redeem a shareholder's stock if the
Company is insolvent, if doing so would cause the Company to become insolvent,
or if the Company is, or the redemption would cause the Company to be, in a
precarious financial condition.

On July 15, 1997, the Board of Directors of the Company approved a resolution to
place a moratorium on redemptions of the Company's common stock for any reason,
including reasons set forth in the Company's by-laws, because of the prospect
that the satisfaction of all prospective redemption obligations could cause the
Company to be in "precarious financial condition" as that term is defined in the
Company's registration statement on Form SB-2. As a result the Company will not
be required to redeem a stockholder's shares of the Company's common stock in
the event that the stockholder requests such redemption in connection with an
event described in the Company's by-laws, or in connection with the failure of
the Company to credential the stockholder as a provider under the Company's
health care plans, or for any other reason.

The Company is required to file its Annual Statement prepared in accordance with
accounting practices prescribed or permitted by the New Jersey State Insurance
Department (statutory basis). Such accounting practices vary in certain respects
from generally accepted accounting principles (GAAP).


F-12
<PAGE>   34
         Physician Healthcare Plan of New Jersey, Inc.

         Notes to Financial Statements (continued)

5. SHAREHOLDERS' EQUITY AND DIVIDEND RESTRICTIONS (CONTINUED)

The following is a reconciliation of the net income and shareholders' equity of
the Company as determined in accordance with statutory accounting practices to
the amounts reported in accordance with GAAP:

<TABLE>
<CAPTION>
                                                        1997            1996
                                                     -----------    -----------
<S>                                                  <C>            <C>         
Net loss - statutory basis, as reported              $(4,106,708)   $(8,000,373)
   Deferred offering costs                                    --        250,000
   Decrease in prepaid expenses                         (145,953)       (59,394)
   Other                                                (127,565)             --
                                                     -----------    -----------
Net loss - GAAP                                      $(4,380,226)   $(7,809,767)
                                                     ===========    ===========
Capital and surplus - statutory basis, as reported   $ 4,914,645    $ 8,674,736
   Furniture, fixtures, and equipment                         --        345,119
   Prepaid expenses                                           --        107,362
   Security deposit                                           --         50,000
   Other                                                (116,377)        (5,474)
                                                     -----------    -----------
Shareholders' equity - GAAP                          $ 4,798,268    $ 9,171,743
                                                     ===========    ===========
</TABLE>

New Jersey state law provides that dividends or other distributions may be paid
only from retained earnings and to the extent statutory capital and surplus is
in excess of the minimum net worth requirement of $1,000,000. The Company has
not paid and does not intend to pay any dividends.

6. EMPLOYMENT COSTS

The Company currently has no employees. All persons providing services on behalf
of the Company were employees of MGM or NJSMU through July 31, 1997. MGM
provided a comprehensive benefits package for these employees, the amount of
which is included in total compensation and benefits costs. From June 30, 1997
to December 31, 1997, HMO Blue has provided management services on a contract
basis. In addition, Pace continues to provide certain management transition
services and certain corporate, financial and reporting assistance not otherwise
provided by the Purchaser, as previously described. The costs of the HMO Blue
and Pace services are included in professional services on the statement of
operations.

7. RELATED PARTY TRANSACTIONS

The shareholders and directors of the Company are physicians who have entered
into participating provider agreements with the Company. Accordingly, a large
portion of the claims payable and incurred medical costs are due to
shareholders.

On March 13, 1997, the Company agreed to reimburse the former Chairman of the
Board of Directors $100,000 for his loss of income and out of pocket expenses
incurred during his term as Chairman. Such amount has been reflected in the 1996
Statement of Operations.


F-13
<PAGE>   35
         Physician Healthcare Plan of New Jersey, Inc.

         Notes to Financial Statements (continued)

8. INVESTMENTS

DEBT SECURITIES

The following summarizes the amortized cost and the estimated fair value of the
Company's investments in debt securities as of December 31, 1997 and 1996. The
estimated fair values for the Company's investments in debt securities are based
on quoted market prices.

<TABLE>
<CAPTION>
                                           Amortized       Gross Unrealized        Estimated
                                              Cost        Gains        Losses     Fair Value
                                           ----------   ----------   ----------   ----------
<S>                                        <C>          <C>          <C>          <C>       
1997
US Treasury and other governmental units   $6,529,173   $      312   $      235   $6,529,250
                                           ----------   ----------   ----------   ----------
Total investments                          $6,529,173   $      312   $      235   $6,529,250
                                           ==========   ==========   ==========   ==========
1996
US Treasury and other governmental units   $3,713,800   $      381   $    5,857   $3,708,324
Other debt securities                         250,000                                250,000
                                           ----------   ----------   ----------   ----------
Total investments                          $3,963,800   $      381   $    5,857   $3,958,324
                                           ==========   ==========   ==========   ==========
</TABLE>

The following summarizes the amortized cost and estimated fair value of the
Company's investments in debt securities by contractual maturity as of December
31, 1997:

<TABLE>
<CAPTION>
                                                     AMORTIZED        ESTIMATED
                                                       COST           FAIR VALUE
                                                     ----------       ----------
<S>                                                  <C>              <C>       
Maturity
   Within one year                                   $  500,000       $  499,765
   After one year through five years                  6,029,173        6,029,485
                                                     ----------       ----------
Total investments                                    $6,529,173       $6,529,250
                                                     ==========       ==========
</TABLE>

The Company's investments in debt securities are comprised of investment grade
securities, with the highest credit ratings assigned by Standard & Poor's (AAA)
or Moody's (Aaa;P-1), respectively.

9. INCOME TAXES

The Company has not provided for any current or deferred income taxes for the
years ended December 31, 1997 or 1996.


F-14
<PAGE>   36
         Physician Healthcare Plan of New Jersey, Inc.

         Notes to Financial Statements (continued)

9. INCOME TAXES (CONTINUED)

The income tax provision differs from the amount computed by applying the
statutory federal income tax rate to the net loss. The reasons for the
difference and the tax effect of each are as follows for the years ended
December 31, 1997 and 1996:

<TABLE>
<CAPTION>
                                                              % of Pre-Tax Net Loss
                                                                 1997     1996
                                                                 ----     ----
<S>                                                              <C>      <C>    
Tax based on statutory federal income tax rate                   (34.0%)  (34.0%)
Deduct:
   Valuation allowance to reduce deferred tax asset              34.0     36.5
   Other                                                           --     (2.5)
                                                                 ----     ----
Total income taxes                                                0.0%     0.0%
                                                                 ====     ====
</TABLE>

The components of deferred taxes as of December 31, 1997 and 1996 are as
follows:

<TABLE>
<CAPTION>
                                                  1997                  1996
                                               -----------          -----------
<S>                                            <C>                  <C>        
Net operating loss                             $ 6,123,000          $ 4,597,000
Other                                               51,000              104,000
Depreciation                                                             52,000
                                               -----------          -----------
Net deferred tax assets                          6,174,000            4,753,000
Valuation allowance                             (6,174,000)          (4,753,000)
                                               -----------          -----------
Net deferred tax assets                        $         0          $         0
                                               ===========          ===========
</TABLE>

The valuation allowance has been recorded due to the uncertainty of the
realization of the deferred tax assets since the realization of such benefits
would be dependent upon achieving future operating profits which cannot be
reasonably assured.

At December 31, 1997, net operating loss carryforwards are approximately
$18,000,000. Of the net operating loss carryforwards, $4,480,000, $7,498,000,
$5,189,000 and $833,000 expire in 2012, 2011, 2010 and 2009, respectively.

10. REINSURANCE

The Company entered into a specific excess of loss reinsurance agreement with an
admitted AAA rated reinsurer with a retention limit of $35,000 per member per
year. Under the terms of the agreement, the Company pays a per member per month
premium in exchange for reimbursement of 70% of medical claims exceeding the
retention limit. The Company has not recorded any reinsurance recoveries related
to this agreement. In the event of the Company's insolvency, the reinsurer will
continue to pay for services for the duration of the contract period for which
payment has been made, not to exceed 31 days or until the time of discharge for
members confined in an inpatient facility on the date of insolvency.


F-15
<PAGE>   37
         Physician Healthcare Plan of New Jersey, Inc.

         Notes to Financial Statements (continued)

10. REINSURANCE (CONTINUED)

In 1996, the Company entered into an additional arrangement with a reinsurer to
cover 100% of the out-of-network claims incurred related to the POS product.
Such arrangements are required by New Jersey regulations as preconditions for
underwriting POS products. At December 19, 1997, approximately 80% of the
Company's direct premiums earned are from POS products. The Company has renewed
its reinsurance coverage to cover claims incurred through December 19, 1997 and
paid within one year from that date.

Amounts recorded in 1997 and 1996 related to the above arrangements are
summarized as follows:

<TABLE>
<CAPTION>
                                                           1997          1996
                                                        ----------    ----------
<S>                                                     <C>           <C>       
Premiums ceded, net of experience refund earned         $1,404,317    $  537,129
Ceded loss recoveries                                   $  363,383    $  300,000
Ceding commission income                                $  372,685    $   75,232
</TABLE>

For both arrangements discussed above, the Company remains primarily liable as
the direct insurer on all risks reinsured. In addition, all of the Company's
reinsurance is placed with a single reinsurer.

11.  MEDICAL CLAIMS

During 1997, the Company paid claims of approximately $8,080,000 including
$980,000 for medical services provided to members in 1996. Also during 1997,
the Company recorded medical costs, net of reinsurance, of $9,535,000,
which was net of $416,000 for favorable development of claims related to 1996.

In 1996, due to a lack of historical claims data, the Company provided for
medical claims using an industry "average" loss ratio. The favorable
development reflects the Company's actual experience in 1997, which was better
than expected. 

F-16
<PAGE>   38
INDEX TO EXHIBITS

      EXHIBIT NO.                   EXHIBIT

         3.1      Amended and restated Certificate of Incorporation
                  (incorporated by reference to Exhibit 3.1 to the Registrant's
                  Registration Statement on Form SB-2)

         3.2      Amended and restated By-Laws (incorporated by reference to
                  Exhibit 3.2 to the Registrant's Registration Statement on Form
                  SB-2)

         4.1      Secondary Offering Prospectus, as approved by the Securities
                  Exchange Commission on November 9, 1995, detailing rights of
                  security holders (incorporated by reference to the
                  Registrant's Registration Statement on Form SB-2)

         10.1     Physician Participation Agreement with Registrant, and
                  amendment thereto (incorporated by reference to the
                  Registrant's Annual Report on Form 10-KSB for the year ended
                  December 31, 1995)

         10.2     Hospital Letter of Agreement with Registrant (incorporated by
                  reference to Exhibit 10.2 to the Registrant's Registration
                  Statement on Form SB-2)

         10.3     Hospital Participation Agreement with Registrant (incorporated
                  by reference to Exhibit 10.3 to the Registrant's Form 8-K
                  filed on December 29, 1997)

         10.4     Revised Management Agreement by and between Medical Group
                  Management, Inc. and the Registrant (incorporated by reference
                  to Exhibit 10.8 to the Registrant's Registration Statement on
                  Form SB-2)

         10.5     Capital Management Agreement between New England Asset
                  Management and Registrant (incorporated by reference to
                  Exhibit 10.9 to the Registrant's Registration Statement on
                  Form SB-2)

         10.6     Letter of Intent between Acordia of Southern California and
                  Medical Group Management, Inc. (incorporated by reference to
                  Exhibit 10.10 to the Registrant's Registration Statement on
                  Form SB-2)

         10.7     Lease for Registrant's facility (incorporated by reference to
                  Exhibit 10.11 to the Registrant's Registration Statement on
                  Form SB-2)

         10.8     Assignment and Assumption of Lease Agreement dated February
                  11, 1997 (incorporated by reference to Exhibit 10.8 in the
                  Registrant's Registration Statement Form SB-2)
<PAGE>   39
         10.9     Agreement between the Registrant and Medigroup of New Jersey,
                  Inc. dated as of June 26, 1997 (incorporated by reference to
                  Exhibit 10.9 to the Registrant's Form 10-QSB for quarter ended
                  June 30, 1997)

         10.10    Management Services Agreement between the Registrant and
                  Medigroup of New Jersey, Inc. dated as of June 26, 1997
                  (incorporated by reference to Exhibit 10.9 to the Registrant's
                  Form 10-QSB for quarter ended June 30, 1997)

         10.11    Termination and Release Agreement by and between Medical Group
                  Management, Inc. and Physician Healthcare Plan of New Jersey,
                  Inc., dated as of July 31, 1997 (incorporated by reference to
                  Exhibit 10.11 to the Registrant's Form 10-QSB for quarter
                  ended September 30, 1997)

         10.12    Letter Agreement between Medigroup of New Jersey, Inc. and
                  Physician Healthcare Plan of New Jersey., dated as of August
                  26, 1977, relating to the sale of certain fixed assets
                  (incorporated by reference to Exhibit 10.12 to the
                  Registrant's Form 10-QSB for quarter ended September 30, 1997)

         10.13    Services Agreement between The Pace Group, Inc. and Physician
                  Healthcare Plan of New Jersey, Inc., dated as of August 1,
                  1997 (incorporated by reference to Exhibit 10.13 to the
                  Registrant's Form 10-QSB for quarter ended September 30, 1997)

         10.14    Agreement between Medigroup of New Jersey, Inc. and Physician
                  Healthcare Plan of New Jersey, Inc., dated July 25, 1997,
                  relating to the use of certain computer equipment
                  (incorporated by reference to Exhibit 10.14 to the
                  Registrant's Form 10-QSB for quarter ended September 30, 1997)

         10.15    Management Services Agreement dated as of December 19, 1997
                  between Physician Healthcare Plan of New Jersey, Inc. and
                  Medigroup of New Jersey, Inc. (incorporated by reference to
                  Exhibit 99.3 to the Registrant's Form 8-K filed December 29,
                  1997)

         27       Financial Data Schedule