-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, SqINevigo3ZQnPLxcI47m6dFVfZWfHQz5azDbOp4QwF4mywDCJX6sqeobUjniRj2 7p3YMPqyX7aRg3kNpvIFXg== 0000950130-96-004423.txt : 19961118 0000950130-96-004423.hdr.sgml : 19961118 ACCESSION NUMBER: 0000950130-96-004423 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19960930 FILED AS OF DATE: 19961114 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: PHYSICIANS HEALTH SERVICES INC CENTRAL INDEX KEY: 0000867098 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-HEALTH SERVICES [8000] IRS NUMBER: 061116976 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-21098 FILM NUMBER: 96664415 BUSINESS ADDRESS: STREET 1: 120 HAWLEY LANE STREET 2: 1243 BROADRICK DRIVE CITY: TRUMBULL STATE: CT ZIP: 06611 BUSINESS PHONE: 2033816400 10-Q 1 FORM 10-Q ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (Mark One) X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE - --- ACT OF 1934 For the quarterly period ended September 30, 1996. ___ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission file number 0-21098. Physicians Health Services, Inc. (Exact name of registrant as specified in charter) Delaware 06-1116976 (State or other jurisdiction of (IRS employer incorporation or organization) identification number) 120 Hawley Lane 06611 Trumbull, Connecticut (Zip Code) (Address of principal executive offices) Registrant's telephone number, including area code (203) 381-6400 Not applicable ____________________________________________________________ (Former name, former address and former fiscal year, if changed since last report) Indicate by a check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ---- ---- There were 5,527,823 shares of Class A Common Stock ($0.01 par value) and 3,781,680 shares of Class B Common Stock ($0.01 par value) outstanding as of November 5, 1996. ================================================================================ PHYSICIANS HEALTH SERVICES, INC. AND SUBSIDIARIES TABLE OF CONTENTS PART I. FINANCIAL INFORMATION PAGE NO. ---------------------- -------- Item 1. Financial Statements Condensed Consolidated Balance Sheets at September 30, 1996 and December 31, 1995 3 Condensed Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 1996 and 1995 4 Condensed Consolidated Statements of Stockholders' Equity for the Nine Months Ended September 30, 1996 and 1995 5 Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 1996 and 1995 6 Notes to Condensed Consolidated Financial Statements 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 9 PART II. OTHER INFORMATION ----------------- Item 6. Exhibits and Reports on Form 8-K 12 Signatures 13 PHYSICIANS HEALTH SERVICES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
SEPTEMBER 30, DECEMBER 30, 1996 1995 ------------- ------------- (Unaudited) ASSETS: Current Assets Cash and Cash Equivalents $ 7,065 $ 7,536 Investments, Available for Sale at fair value: Fixed Securities - (amoritized cost - 83,035 102,130 1996 - $82,891 and 1995 - $101,181) Equity Securities - (amoritized cost - 1,335 1,355 1996 - $1,417 and 1995 - $1,417) Accounts Receivable Less Allowances (1996 - $1,172 and 1995 - $1,050) 38,443 31,548 Other Receivables 28,115 14,815 Advances to Participating Hospitals 1,254 5,903 Prepaid Expenses and Other 1,205 204 ------------- ------------- Total Current Assets 160,452 163,491 Property, Plant, and Equipment Land 8,822 3,322 Building and Improvements 27,204 14,645 Furniture and Equipment 41,351 29,817 ------------- ------------- 77,377 47,784 Less Accumulated Depreciation and Amoritization 14,006 11,028 ------------- ------------- Total Property, Plant, and Equipment 63,371 36,756 ------------- ------------- Other Assets 11,774 10,821 ------------- ------------- TOTAL ASSETS $ 235,597 $ 211,068 ============= ============= LIABILITIES AND STOCKHOLDERS' EQUITY: Current Liabilities Accrued Health Care Expenses $ 39,182 $ 23,878 Unearned Premiums 26,765 25,022 Amounts Due to IPA's, Physicians and other Providers 43,391 37,806 Accounts Payable and Accrued Expenses 6,665 14,199 Short Term Debt 18,000 - ------------- ------------- Total Current Liabilities 134,003 100,905 Non Current Liabilities Capitalized Leases 88 - Excess of Net Assets Over Cost of Company Acquired 1,192 1,282 Stockholders' Equity Class A Common Stock, Par Value $0.01 per Share - Authorized 13,000,000 Shares, Issued and Outstanding; 1996 - 5,521,823 shares; 1995 - 5,310,347 shares 55 53 Class B Common Stock, Par Value $0.01 per Share; non-transferable - authorized and issued 1996 - 3,874,080 shares; 1995 - 4,052,974 shares; voting rights - 10 per share 39 41 Additional Paid-In Capital 41,360 40,760 Unrealized Appreciation of Marketable Securities, Net of Tax 18 510 Retained Earnings 58,843 67,518 ------------- ------------- 100,315 108,882 Less cost of Class B Common Stock (86,400) Shares in Treasury 1 1 ------------- ------------- Total Stockholders' Equity 100,314 108,881 ------------- ------------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 235,597 $ 211,068 ============= =============
See Notes to Condensed Consolidated Financial Statements. 3 PHYSICIANS HEALTH SERVICES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS EXCEPT PER SHARE AMOUNTS) (UNAUDITED) THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, ---------------------- --------------------- 1996 1995 1996 1995 ---------------------- --------------------- REVENUES: Premiums $ 123,190 $ 85,703 $ 353,442 $ 243,961 Investment and Other Income 1,545 1,618 4,806 4,927 ---------- ---------- ---------- --------- 124,735 87,321 358,248 248,888 COSTS AND EXPENSES: Hospital Services 46,649 24,780 130,435 78,305 Physicians and Related Health Care Services 52,726 34,242 143,284 96,257 Other Health Care Services 10,167 4,712 30,663 12,431 Indemnity Costs - - 7,008 - Selling, General and Administrative Expenses 23,126 14,744 61,502 40,849 Guardian Joint Marketing Expense, Net 239 653 1,255 1,166 Proxy Defense Costs - (57) - 843 ---------- ---------- ---------- --------- 132,907 79,074 374,147 229,851 ---------- ---------- ---------- --------- Interest Expense 295 - 295 - Income (Loss) before Income Taxes (8,467) 8,247 (16,194) 19,037 Income Tax Expense (Benefit) (3,931) 3,061 (7,519) 7,047 ---------- ---------- ---------- --------- NET INCOME (LOSS) $ (4,536) $ 5,186 $ (8,675) $ 11,990 ========== ========== ========== ========= Net Income (Loss) Per Common Share $ (0.49) $ 0.55 $ (0.93) $ 1.28 ========== ========== ========== ========= Weighted Average Number of Common Shares Outstanding 9,306 9,288 9,298 9,381 ========== ========== ========== ========= See Notes to Condensed Consolidated Financial Statements. 4 PHYSICIANS HEALTH SERVICES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (IN THOUSANDS) (UNAUDITED) NINE MONTHS ENDED SEPT. 30, SEPT. 30, 1996 1995 ----------- ----------- CLASS A COMMON STOCK Balance at Beginning of Period $ 53 $ 49 Conversion of Class B Common Stock into Class A Common Stock 2 3 ----------- ----------- Balance at End of Period $ 55 $ 52 =========== =========== CLASS B COMMON STOCK Balance at Beginning of Period $ 41 $ 45 Conversion of Class B Common Stock into Class A Common Stock (2) (3) ----------- ----------- Balance at End of Period $ 39 $ 42 =========== =========== ADDITIONAL PAID IN CAPITAL Balance at Beginning of Period $ 40,760 $ 40,514 Exercise of Stock Options 600 23 ----------- ----------- Balance at End of Period $ 41,360 $ 40,537 =========== =========== UNREALIZED APPRECIATION (DEPRECIATION) OF MARKETABLE SECURITIES, NET OF TAX Balance at Beginning of Period $ 510 $ (949) Unrealized Appreciation (Depreciation) (492) 1,406 ----------- ----------- Balance at End of Period $ 18 $ 457 =========== =========== RETAINED EARNINGS Balance at Beginning of Period $ 67,518 $ 51,548 Net Income (Loss) (8,675) 11,990 ----------- ----------- Balance at End of Period $ 58,843 $ 63,538 =========== =========== TREASURY STOCK ----------- ----------- Balance at Beginning and End of Period $ (1) $ (1) =========== =========== TOTAL STOCKHOLDERS' EQUITY Balance at Beginning of Period $108,881 $ 91,206 Exercise of Stock Options 600 23 Net Income (Loss) (8,675) 11,990 Unrealized Appreciation (Depreciation) of Marketable Securities (492) 1,406 ----------- ----------- Balance at End of Period $100,314 $104,625 =========== =========== See Notes to Condensed Consolidated Financial Statements. 5 PHYSICIANS HEALTH SERVICES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW (IN THOUSANDS) (Unaudited)
NINE MONTHS ENDED SEPT. 30, SEPT. 30, 1996 1995 --------- --------- OPERATING ACTIVITIES Net Income (Loss) $ (8,675) $ 11,990 Adjustments to Reconcile Net Income (Loss) to Net Cash Used by Operating Activities: Depreciation and Amortization 3,011 3,305 Provision for Doubtful Accounts 1,035 381 Amortization of Excess of Net Assets over Cost of Company Acquired (90) (90) Changes in Assets and Liabilities: Accounts Receivable - Trade (7,930) (3,072) Other Receivables (13,300) (3,834) Advances to Participating Hospitals 4,649 303 Prepaid Expenses and Other (979) 1,480 Accrued Health Care Expenses 15,304 (2,820) Unearned Premiums 1,743 1,041 Due to IPA's, Physicians and Other Providers 5,585 (8,740) Accounts Payable and Accrued Expenses (7,890) (9,945) --------- --------- Net Cash Used by Operating Activities (7,537) (10,001) INVESTING ACTIVITIES Purchases of Property, Plant, and Equipment (29,642) (7,930) Proceeds from Disposal of Equipment 16 65 Increase in Other Assets (953) (2,602) Purchases of Marketable Securities (186,802) (228,744) Proceeds from Sales and Maturities of Marketable Securities 205,759 228,216 --------- --------- Net Cash Used by Investing Activities (11,622) (10,995) FINANCING ACTIVITIES Proceeds from Revolving Credit Line 18,000 - Capital Lease 88 - Exercise of Stock Options 600 23 --------- --------- Net Cash Provided by Financing Activities 18,688 23 --------- --------- Decrease in cash and cash equivalents (471) (20,973) Cash and cash equivalents at beginning of period 7,536 28,467 --------- --------- Cash and cash equivalents at end of period $ 7,065 $ 7,494 ========= =========
See Notes to Condensed Consolidated Financial Statements. 6 PHYSICIANS HEALTH SERVICES, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 1996 (UNAUDITED) 1. Basis of Presentation The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting solely of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the nine month period ending September 30, 1996 are not necessarily indicative of the results that may be expected for the year ending December 31, 1996. For further information, refer to the consolidated financial statements and footnotes thereto included in the Physicians Health Services, Inc. and Subsidiaries' annual report on Form 10-K for the year ended December 31, 1995. Certain reclassifications were made to conform prior year amounts to current year presentation. 2. Stockholders' Equity and Per Share Data Pursuant to the Company's Certificate of Incorporation, upon conversion of Class B shares to Class A shares, such Class B shares are canceled and cannot be reissued. Per share data are based upon the weighted average number of common and common equivalent shares outstanding during the period. Common stock equivalent shares are excluded to the extent they have an antidilutive effect on per share data. 3. Tax Provision The effective tax rate for the quarter and nine months ended September 30, 1996 is a benefit of 46.4% compared to a tax provision of 37.1% and 37.0% for the third quarter and nine months ended September 30, 1995, respectively. The effective tax rate benefited from the favorable effect of income from tax exempt securities which increased the tax benefit available in 1996 and reduced the tax provisions in 1995. The Company is currently under examination by the Internal Revenue Service (IRS) for certain prior tax years. Management does not expect any proposed adjustments which may result from the IRS' audit to have a material adverse impact on the Company's financial position or results of operations. 7 PHYSICIANS HEALTH SERVICES, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 1996 (UNAUDITED) 4. Agreements with The Guardian Life Insurance Company of America Under the Company's profit sharing arrangement with the Guardian in Connecticut, cumulative profits and losses are calculated separately for the managed care and indemnity business written. If both businesses are profitable, the profits are shared equally. If both businesses are unprofitable, each party retains its losses. If only one part of the business is profitable, the profits of the one are applied against the losses of the other. If the profits exceed the losses, the excess is shared equally. If the losses exceed the profits, the balance of the losses is retained by the business which incurred the loss. Based on current estimates for the third quarter of 1996 and the first nine months of 1996, both businesses were unprofitable. Accordingly, for the third quarter and nine months ended September 30, 1996, the Company recognized approximately $1.4 million and $3.6 million, respectively, in after-tax losses related to managed care business under the Connecticut Guardian arrangement. The Company and the Guardian have discussed replacing the profit sharing agreement in Connecticut with a reinsurance agreement similar to the arrangements in effect in New York and New Jersey. The reinsurance agreement would only cover the managed care products and would exclude indemnity business going forward. However, no assurance can be given that such a change in the Connecticut arrangement will be concluded or what the final terms will be. 5. Subsequent Events In June 1996, the Company entered into a five-year, $30.0 million revolving credit agreement. At September 30, 1996, there was $18.0 million outstanding under this line which represented funds borrowed to purchase the Company's new headquarters building. As of September 30, 1996, the Company's liability under this agreement was classified as short term debt since the Company repaid the debt in its entirety in October 1996 and terminated the revolving credit agreement. In October 1996, the Guardian canceled its warrant, issued by the Company in 1995, which originally provided for the purchase of one million shares of the Company's Class A common stock, once certain operating conditions had been met. Based upon a subsequent agreement with the Guardian, the number of shares available for purchase under the warrant at the time it was canceled had been substantially reduced as a result of the Guardian's purchase of shares of the Company's Class A common stock on the open market. The Company had not recognized any expense related to the warrant as the conditions to its exercisability had not been met, nor was it deemed probable that they would be met up to the date of cancellation. 8 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS - --------------------- QUARTER ENDED SEPTEMBER 30, 1996 VERSUS SEPTEMBER 30, 1995 NINE MONTHS ENDED SEPTEMBER 30, 1996 VERSUS SEPTEMBER 30, 1995 Premium revenue increased 43.7% to $123.2 million in the third quarter of 1996 from $85.7 million for the comparable 1995 quarter. For the nine months ended September 30, 1996, premium revenue increased 44.9% to $353.4 million from $244.0 million for the comparable 1995 period. Enrollment at September 30, 1996 was 355,402, an increase of 47.8% from enrollment of 240,539 at September 30, 1995. Overall premium revenues increased at a slightly lower rate than the growth in enrollment primarily due to competitive conditions which depressed pricing flexibility and a shift in product mix to lower revenue yielding and lower margin products, such as the gatekeeper products, Healthcare Solutions products and Medicaid. Also, enrollee statistics include 100% of the enrollees in the New York Healthcare Solutions products (which accounted for 35% of the enrollment growth from 1995) while premium revenue includes only the Company's 50% share of revenues derived from the NY Healthcare Solutions products. This arrangement became effective July 1, 1995. The Company expects that the growth in premium revenue may continue to lag the growth in enrollment to the extent that the current competitive conditions and demand for lower margin products continue. Investment income declined 4.5% and 2.5% for the third quarter and nine months, respectively, from the comparable 1995 periods due to a decline in invested assets and lower investment yields due to lower interest rates on tax exempt securities. Health care expenses as a percentage of premium revenues (medical loss ratio) increased to 90.2% for the third quarter of 1996 as compared to 75.9% for the comparable 1995 quarter. For the nine months ended September 30, 1996, the medical loss ratio was 89.4% compared to 77.5% for the first nine months of 1995. Total health care expenses increased $45.8 million to $109.5 million in the third quarter of 1996 from $63.7 million for the comparable 1995 quarter. On a year to date basis, total health care expenses increased $124.4 million to $311.4 million for the first nine months of 1996 from $187.0 million for the same 1995 period. As a result of the competitive market conditions and demand for the Company's lower margin products referred to above, and since a substantial portion of the Company's premium revenue is on a calendar year renewal cycle, the Company expects that the medical loss ratios in 1996 will continue to be higher than those reported for the respective year earlier periods. Hospital services expense increased 88.3% to $46.6 million for the third quarter of 1996 from $24.8 million for the third quarter of 1995. Hospital services expense for the first nine months of 1996 totaled $130.4 million, up 66.6% from $78.3 million in the first nine months of 1995. The increase in hospital services expense is due primarily to the increase in fully-insured membership. Additionally, the increase in hospital expenses for the third quarter when compared to the same quarter in the prior year was exacerbated by the fact that prior year results reflect favorable reserve developments not experienced in the current year. Inpatient hospital utilization for fully-insured commercial enrollees increased slightly to 274 days per thousand members for the quarter ended September 30, 1996 from 272 days per thousand members for the comparable 1995 period. This increase is due, in part, to legislation which requires certain minimum hospital stays for maternity patients, which are greater than recent historical averages. For the nine months ended September 30, 1996, bed days per thousand members declined 8.0% to 277 days in 1996 from 301 days in 1995. Offsetting this favorable trend is an increase in outpatient costs which is attributable to an increase in the cost and complexity of outpatient procedures as more procedures are shifted from inpatient to outpatient settings. 9 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS (CONT.) - --------------------- Physician and related health care expenses increased by 54.0% from $34.2 million for the third quarter of 1995 to $52.7 million for the third quarter of 1996. For the nine months ended September 30, 1996, physician and related health care expenses increased 48.9% to $143.2 million from $96.2 million for the same 1995 period. The increase reflects the increase in membership as well as an increase in non-capitated expenses, including costs for out-of-network physician services. Other health care expenses increased by $5.5 million in the third quarter of 1996 and by $18.2 million on a year to date basis. The increase is almost entirely due to higher prescription drug costs resulting primarily from an increase in the number of members covered by prescription drug riders, as well as from a shift in membership to drug riders that offer greater benefits, lower generic drug utilization and unfavorable mix of medications being prescribed. Indemnity costs reflect the medical costs associated with the indemnity business assumed under the New York reinsurance agreement with the Guardian. As a result of continuing adverse experience related to this business, the Company began negotiations in the second quarter of 1996 with the Guardian to reduce the Company's participation in the assumption of the indemnity business. As a result of the negotiations, the Company and the Guardian amended the New York reinsurance agreement to reduce the Company's share of the indemnity business being assumed from 50% to 10%, retroactive to January 1, 1996. The impact of this retroactive adjustment was to reduce the after tax loss associated with the indemnity business by approximately $900 thousand, which was recorded in the second quarter of 1996. The amendment also provides that the Company will assume no further indemnity business in New York after July 1, 1996. As a result of the amendment, the Company is not participating in the experience of the New York indemnity business after June 30, 1996 under the Joint Marketing Arrangement with the Guardian. For the third quarter and nine months ended September 30, 1996, the Company recognized approximately $1.4 million and $3.6 million, respectively, in after- tax losses relating to the managed care business under the Guardian Connecticut arrangement. Refer to Note 4 to the Condensed Consolidated Financial Statements for further details. The Company and the Guardian have discussed replacing the profit sharing agreement in Connecticut with a reinsurance agreement similar to the arrangements in effect in New York and New Jersey. The reinsurance agreement would only cover the managed care products and would exclude indemnity business going forward. However, no assurance can be given that such a change in the Connecticut arrangement will be concluded or what the final terms will be. Selling, general and administrative expenses increased by 56.9% or $8.4 million in the third quarter of 1996 from the comparable 1995 period. For the nine months ended September 30, 1996, selling, general and administrative expenses are up 50.6% or $20.7 million over the prior year. Selling, general and 10 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS (CONT.) - --------------------- administrative expenses as a percentage of premium revenue increased to 18.8% for the third quarter of 1996 as compared to 17.1% for the third quarter of 1995. On a year to date basis, selling, general and administrative expenses as a percentage of premium revenue totaled 17.4% and 17.1% for the nine months ended September 30, 1996 and 1995, respectively. The increase in both periods is due primarily to the continuing resource requirements needed to support the geographic expansion and the enrollment growth and product diversification. The Company's effective tax rate for the third quarter and nine months ended September 30, 1996 is a benefit of 46.4% as compared to a tax provision of 37.1% for the third quarter of 1995 and 37.0% for the first nine months of 1995. The effective tax rate benefited from the favorable effect of income from tax exempt securities which increased the tax benefit available in 1996 and reduced the tax provisions in 1995. LIQUIDITY AND CAPITAL RESOURCES - ------------------------------- Cash and cash equivalents decreased $471 thousand at September 30, 1996 from December 31, 1995. For the nine months ended September 30, 1996, $7.5 million was used by operating activities, primarily as a result of the loss for the period. Additionally, the net cash used for the period relates primarily to the timing of claim payments and collection of amounts due from the Guardian. During the first nine months, $18.0 million was provided from a revolving credit line which was used to fund the purchase of the Company's new corporate headquarters building in the second quarter. Approximately $19.0 million of net cash was provided from the sales and maturities of investments, some of which was used to fund the enhancement of the Company's computer systems and also to fund the risk retention payments made in March, 1996 under the Company's agreements with its IPAs in respect of 1995. In October 1996, the Company repaid the entire amount outstanding under the revolving credit line, including accrued interest. Given the Company's losses during the year and the terms of the credit facility, the Company terminated the credit line because it would not have had any near term borrowing capability under the credit line and could not justify the ongoing expenses of the facility. Stockholders' equity declined to $100.3 million during the first nine months of 1996 from $108.9 million at December 31, 1995 due primarily to the net losses. The Company expects to spend additional capital, principally in computer and technology systems enhancements and building improvements over the next several years. The Company is presently exploring its alternatives to replace the revolving credit agreement and, although it can provide no assurances in this regard, believes that in addition to its current capital resources and internally generated funds, it will be able to obtain financing, if necessary, sufficient for its continued operations, the funding of geographical and product expansions, system enhancements and its additional space requirements. 11 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K - ------------------------------------------ (a) Exhibits required by Item 601 of Regulation S-K EXHIBIT NO. DESCRIPTION OF DOCUMENT ----------- ----------------------- 10(a) Agreement dated October 21, 1996 between The Guardian Life Insurance Company of America and Physicians Health Services, Inc. relinquishing rights to purchase common stock pursuant to warrant dated November 28, 1995. 10(b) Employment agreement dated October 29, 1996 between Robert L. Natt and Physicians Health Services, Inc. 10(c) Amendment dated August 28, 1996 to the Employment Agreement dated December 17, 1995 between Michael E. Herbert and Physicians Health Services, Inc. (b) Reports on Form 8-K There was one report, pertaining to Items 5 and 7 of Form 8-K, filed on August 27, 1996 during the three months ended September 30, 1996. 12 SIGNATURES ---------- Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. PHYSICIANS HEALTH SERVICES, INC. -------------------------------- (Registrant) Date: November 14, 1996 /s/ James L. Elrod, Jr. --------------------- ---------------------------------- James L. Elrod, Jr. Chief Financial Officer Date November 14, 1996 /s/ Robert L. Natt --------------------- ---------------------------------- Robert L. Natt President 13 EXHIBIT INDEX EXHIBIT NO. DESCRIPTION OF EXHIBIT SEQUENTIAL PAGE ----------- ---------------------- --------------- 10(a) Agreement dated October 21, 1996 between The Guardian Life Insurance Company of America and Physicians Health Services, Inc. relinquishing rights to purchase common stock pursuant to warrant dated November 28, 1995. 10(b) Employment Agreement dated October 29, 1996 -- between Robert L. Natt and Physicians Health Services, Inc. 10(c) Amendment dated August 28, 1996 to the Employment Agreement dated December 17, 1995 between Michael E. Herbert and Physicians Health Services, Inc. EX-10.(A) 2 AGREEMENT BET. GUARDIAN LIFE & PHYSICIANS HEALTH Exhibit 10(a) [LETTERHEAD OF THE GUARDIAN] October 21, 1996 Physicians Health Services, Inc. 120 Hawley Lane Trumbull, CT 06611 Dear Sirs: The Guardian Life Insurance Company of America ("Guardian") is the holder of a warrant dated November 28, 1995 (the "Warrant") to purchase one million (1,000,000) shares of Class A Common Stock ("Common Stock") of Physicians Health Services, Inc., a Delaware corporation ("PHS"). Guardian hereby advises you that, as of the date hereof, it is irrevocably relinquishing its rights under the Warrant to purchase three hundred ninety five thousand, three hundred (395,300) shares of Common Stock, the remaining shares of Common Stock available for purchase by Guardian under the Warrant. Prior to the date hereof, Guardian relinquished the right to purchase six hundred four thousand, seven hundred (604,700) shares of Common Stock under the Warrant. As a result, no shares of Common Stock remain available under the Warrant for purchase by Guardian. Very truly yours, THE GUARDIAN LIFE INSURANCE COMPANY OF AMERICA By: /s/ ------------------------ Name: Title: PHS acknowledges that, as of the date hereof, Guardian has relinquished its right under the Warrant to purchase three hundred ninety five thousand, three hundred (395,300) shares of Common Stock. PHS further acknowledges that Guardian has previously relinquished its right under the Warrant to purchase six hundred four thousand, seven hundred (604,700) shares of Common Stock and that no shares of Common Stock remain available under the Warrant for purchase by Guardian. PHYSICIANS HEALTH SERVICES, INC. By: /s/ ------------------------ Name: Title: EX-10.(B) 3 EMPLOYMENT AGREEMENT OF ROBERT NATT Exhibit 10(b) HIGHLY CONFIDENTIAL ------------------- EMPLOYMENT AGREEMENT -------------------- BETWEEN ------- PHYSICIANS HEALTH SERVICES, INC. -------------------------------- AND --- ROBERT L. NATT -------------- AMENDED AND RESTATED EMPLOYMENT AGREEMENT ------------------------ AGREEMENT, made as of the __th day of October, 1996, by and between Physicians Health Services, Inc., a corporation organized under the laws of the State of Delaware (hereinafter referred to as "PHS"), and Robert L. Natt an individual residing at 51 Tuckahoe Road, Easton, CT 06612 (hereinafter referred to as "Employee"). WITNESSETH: ----------- WHEREAS, PHS and Employee are parties to an Employment Agreement dated as of December 19, 1995 pursuant to which Employee was employed as the Company's Executive Vice President and Chief Operating Officer; and WHEREAS, PHS now desires that Employee serve in the capacity of President and Co-Chief Executive Officer of the Company; and Employee desires to accept such employment on the terms and conditions hereafter set forth. NOW, THEREFORE, in consideration of the premises and of the mutual covenants and other good and valuable considerations hereinafter set forth, the parties hereto agree as follows: 1. EMPLOYMENT AND DUTIES. --------------------- (a) PHS hereby employs Employee as its President and Co-Chief Executive Officer on the terms and conditions set forth in this Agreement, to perform such services and to discharge such duties as may be assigned to him from time to time by the President of PHS. (b) Employee accepts such employment as above stated and for the compensation hereinafter provided, and agrees that during the term of this Agreement, he will serve PHS faithfully to the best of his ability and, under the direction of the Board of Directors of PHS and shall devote his full business time, energy and skills to his duties hereunder. (c) Without limiting the generality or scope of the services and duties which may be assigned to him, Employee's duties shall include the duties outlined in Employee's job description, as on file with PHS. (d) Employee agrees to do such traveling and to attend such educational and associational conferences and seminars as may be from time to time directed or approved. Reasonable travel, lodging, registration and/or attendance fees incurred and required in connection with such travel, conferences and seminars shall be either paid by PHS or reimbursed by PHS to Employee. 2. COMPENSATION ------------ (a) SALARY ------ (i) For all services rendered by Employee under this Agreement, PHS shall, for the period commencing upon November 1, 1995, pay to Employee the annual sum of $260,000 Dollars, payable in bi-weekly installments in accordance with PHS's standard payroll policies. Retroactive adjustments shall be payable in a lump sum payment promptly upon processing a salary adjustment. (ii) For the remainder of the term of this Agreement, PHS shall set Employee's salary at an annual sum which shall not be less than the base salary in effect for the first year of the Agreement, adjusted by the percentage increase or decrease, if any, during that period of the Federal Bureau of Labor Statistics CPI-U All Cities Index. Nothing in this Agreement shall preclude PHS from increasing Employee's compensation by an amount greater than any percentage increase in this Paragraph 2(a)(ii). (b) ADDITIONAL COMPENSATION ----------------------- (i) In advance of the commencement of each twelve (12) month calendar period during the term of this Agreement, PHS and the Employee shall establish annual performance objectives with respect to Employee's duties and obligations hereunder. These objectives shall form the basis of an incentive compensation program which will permit Employee to earn up to an additional 60 percent of his base compensation as additional compensation in addition to his regular annual compensation hereunder, as approved by the Compensation Committee of the Board of Directors. (ii) PHS's Board of Directors or its Compensation Committee, may also, from time to time and in its discretion, direct PHS to pay or provide additional compensation to Employee beyond the compensation specified above in Paragraph 2(a)(i) and 2(b)(i), in such amounts and in such form as the Board shall deem fit. (c) FRINGE BENEFITS --------------- (i) Employee shall be entitled to the amount of annual vacation in accordance with the policies then in effect at PHS. (ii) Employee shall be entitled to participate in any qualified pension plan, qualified profit-sharing plan, medical or dental reimbursement plan, group term life insurance plan, or any other employee or fringe benefit plan that is currently in effect at PHS or that may be established in the future by PHS. Employee's right to participate in such plans shall be subject to the respective terms of the particular plans involved. (iii) Employee shall be entitled to compensation provided hereunder during the periods of actual illness or other incapacity which exceed his accrued sick leave up to a total of 90 days. (iv) Subject to such reasonable guidelines as may be adopted and approved by the Board of Directors, PHS shall pay any necessary business expenses incurred by Employee in direct furtherance of the business and affairs of PHS. (v) Employee shall be entitled to the use of a company owned or leased automobile commensurate with other PHS employees at his grade level. PHS shall reimburse Employee for reasonable maintenance, operating and insurance expenses incurred with respect to use of such automobile in connection with PHS's business affairs. (vi) Employee shall be entitled to a group term life insurance policy, purchased by PHS and with premiums paid by PHS, in an amount equal to two times Employee's base salary, as it may be adjusted from time to time, up to $750,000 (subject to insurability requirements of the insurer). 3. NO COMPETING BUSINESS --------------------- Notwithstanding any other term or provision herein contained, Employee shall not, during the term of this Agreement, compete, directly or indirectly, with PHS or any subsidiary of PHS without the prior written consent of PHS. 4. TIME DEVOTED TO OTHER ACTIVITIES: FEES --------------------------------------- (a) Except as the Board of Directors of PHS may otherwise designate and authorize, or as is provided in PHS's Personnel Policies Manual, Employee shall not render any service or engage in any activity not directly related to the business of PHS, its subsidiaries, or physicians and other health care providers with which is contracts for services. (b) It is understood and agreed that during the term of this Agreement, PHS may from time to time direct Employee to engage in certain specified activities, solely on behalf of PHS. All fees and other compensation payable with respect to such activities as may be so specified, designated, authorized or approved shall be the property of and payable to PHS. All fees and other compensation which may be payable with respect to activities or services which Employee engaged in with the approval of PHS and in accordance with PHS's Personnel Policies Manual, but which are not on behalf of PHS, shall be the property of Employee. 5. TERM ---- This Agreement shall be effective as of January 1, 1996 (hereinafter referred to as the "Commencement Date"), and shall continue in full force and effect until December 31, 2000, unless sooner terminated as hereinafter provided (hereinafter referred to as the "Termination Date"). This Agreement shall be automatically extended for another twelve (12) months, unless notification to terminate or renegotiate it is made by PHS or the Employee at any time prior to six (6) months prior to Termination Date. This Agreement shall supersede all previous agreements between the parties, whether written or oral, and all such Agreements are hereby rescinded. 6. TERMINATION ----------- (a) TERMINATION BY PHS FOR CAUSE ---------------------------- PHS shall have the right to terminate Employee's employment hereunder prior to the expiration of the term hereof, without liability to it, but only for Cause as defined in Paragraph 6(e). (b) TERMINATION BY PHS WITHOUT CAUSE -------------------------------- PHS shall have the right to terminate Employee's employment hereunder without cause at any time, with liability to it as provided pursuant to Paragraph 6(d). (c) TERMINATION BY EMPLOYEE ----------------------- Employee may terminate his employment hereunder, without liability to him, by giving PHS notice thereof three (3) months in advance of the effective date of such termination or at an earlier date if mutually agreed upon by both PHS and Employee. Employee shall have no obligation to mitigate damages to PHS if he terminates employment pursuant to this Paragraph 6(c). (d) EFFECT OF TERMINATION --------------------- In the event PHS terminates this Agreement pursuant to Paragraph 6(b), PHS shall pay to Employee an amount equal to the sum of the payments due for the remainder of this Agreement or eighteen (18) months' of annual compensation, whichever is greater, at the rate in effect on the date of termination. In addition, the medical insurance benefits noted in Paragraph 2(c)(ii) will continue in effect for a period of twelve (12) months following the effective date of termination. The provisions of Paragraph 3 hereof shall continue in effect for a period of one year from the Termination Date, but only within the geographic area served by PHS or any subsidiary thereof. In the event employment is terminated as a result of the death of Employee, PHS shall pay all amounts accrued and unpaid to the date of termination to the estate of Employee (including credit for any vacation earned but not taken and the amount, if any, of any bonus for a past fiscal year which has not been awarded or paid to Employee). (e) CAUSE ----- (i) Termination for Cause as defined herein may only occur after the expiration of a period of five business days following delivery of a written notice from PHS to Employee setting forth the determination of the Board of Directors made in good faith to terminate his employment and specifying in reasonable detail the facts and circumstances claimed to provide the basis for PHS's right of termination pursuant to Paragraph 6(a). (ii) So long as no "change of control" (as defined in the Conditional Employment Agreement between PHS and Employee dated March 13, 1995 (the "Conditional Employment Agreement") shall have occurred and be continuing, the term "Cause" as used herein shall mean: (a) fraud, dishonesty or theft involving PHS; (b) Employee's being convicted in a criminal proceeding (excluding motor vehicle misdemeanors); (c) habitual intoxication, or abuse of any substance that impairs Employee's performance of his duties hereunder; (d) illegal business conduct; (e) breach of this Agreement not corrected within the five business days notice period specified in Paragraph 6(e)(i); (f) failure of Employee for any reason, within 24 hours after receipt by his written notice thereof from PHS, to correct, cease or otherwise alter any insubordination, failure to comply with instructions, or other omission to act that materially adversely affects, or is likely to materially adversely effect, PHS's business or operations; (g) gross negligence or willful misconduct of Employee related to PHS's business. After any Change of Control of PHS has occurred (as defined in the Conditional Employment Agreement), "Cause" as used herein shall have the meaning specified in the Conditional Employment Agreement. 7. ORAL NEGOTIATIONS SUPERSEDED: AMENDMENT ---------------------------------------- This Agreement sets forth the entire Agreement of the parties and supersedes all oral negotiations and prior writings with respect to the subject matters hereof. This Agreement may not be amended or modified in any manner, including the provision against oral amendment or modification, except by an instrument in writing signed by the parties hereto. 8. BINDING EFFECT -------------- This Agreement shall inure to the benefit of and be binding upon PHS and its respective successors, permitted assigns, executors and administrators. 9. PARAGRAPH HEADINGS ------------------ Paragraph headings used herein are for convenience only and shall not affect construction of this Agreement. 10. GOVERNING LAW ------------- This Agreement shall be governed by and construed under the laws of the State of Connecticut. 11. COUNTERPARTS ------------ This Agreement may be executed in two or more counterparts which, taken together, shall constitute one document. 12. SEVERABILITY ------------ In the event that any provision hereof shall be declared invalid or unenforceable by any court, such invalidity shall not affect the validity or enforceability of the remainder of this Agreement. 13. ARBITRATION ----------- Any controversy or claims arising out of or relating to this Agreement, or the breach thereof, shall be settled in Bridgeport, Connecticut pursuant to the rules of the American Arbitration Association; and judgment upon the award rendered by the Arbitrator(s) may be entered in any court having jurisdiction thereof. IN WITNESS WHEREOF, the parties hereto have affixed their hands and seals as of the day and year first above written. Physicians Health Services, Inc. By: __________________________ __________________________ _____________________________ Robert L. Natt EX-10.(C) 4 EMPLOYMENT AGREEMENT OF MICHAEL HERBERT EXHIBIT 10(c) HIGHLY CONFIDENTIAL ------------------- EMPLOYMENT AGREEMENT -------------------- BETWEEN ------- Physicians Health Services, Inc. -------------------------------- AND --- Michael E. Herbert ------------------ AGREEMENT, made as of the 28th day of August, 1996, by and between Physicians Health Services, Inc., a corporation organized under the laws of the State of Delaware (hereinafter referred to as "PHS") and Michael E. Herbert, an individual residing at 30 Applegate Lane, Trumbull, CT 06611 (hereinafter referred to as "Employee"). WITNESSETH: ----------- WHEREAS, PHS and the Employee are parties to an Employment Agreement dated December 19, 1995 (the "Employment Agreement"); and WHEREAS, PHS desires to make certain changes in the Employment Agreement and Employee is willing to accept such changes. NOW, THEREFORE, in consideration of the premises and other good and valuable consideration, receipt of which is hereby acknowledged, the parties hereto agree as follows: 1. Paragraph 1(a) of the Employment Agreement is hereby amended in its entirety to provide as follows: (a) PHS hereby employs Employee as its Third Vice Chairman and Co- Chief Executive Officer on the terms and conditions set forth in this Agreement, to perform such services and to discharge such duties, consistent with his position as a member of senior management of PHS as more fully described in the Position Description set forth in Exhibit A attached hereto, as may be assigned to him from time to time by the Board of Directors of PHS. 2. Paragraph 1(c) of the Employment Agreement is hereby amended in its entirety to provide as follows: (c) Employee's duties shall be those set forth in the Position Description set forth in Exhibit A attached hereto, which Position Description shall govern Employee's activities on behalf of PHS and its subsidiaries; Employee shall serve as a vice chairman of the subsidiaries of PHS. PHS shall provide Employee with such resources as are reasonably deemed necessary by PHS to enable Employee to perform his job responsibilities. PHS confirms that it has no immediate plans to make any change in Employee's office location and agrees that consideration will be paid to his title and position in connection with any relocation of his office in the future. The Chairman of the Board of PHS will hold himself available to mediate any specific problems that may hereafter arise relating to Employee's duties or conditions of employment. 3. Paragraph 4(b) of the Employment Agreement is hereby amended by adding the following sentence at the end thereof: PHS acknowledges that Employee has been elected to serve as Chairman of the American Association of Health Plans (AAHP) from June 1996 to June 1998 and that service in such position is an appropriate activity for his position with PHS. Such service shall be deemed on behalf of PHS for purposes of this Paragraph. PHS agrees that, provided Employee continues to be Chairman of AAHP, PHS will continue to be a member of AAHP until June 1998, and provided further that the positions of AAHP are consistent with those of PHS. 4. The first sentence of Paragraph 5 of the Employment Agreement is hereby amended in its entirety to provide as follows: This Agreement shall be effective as of January 1, 1996 (hereinafter referred to as the "Commencement Date"), and shall continue in full force and effect until January 31, 1999, unless sooner terminated as hereinafter provided (hereinafter referred to as the "Termination Date"); provided, however, that if PHS terminates -------- ------- this Agreement pursuant to Paragraph 6(b) prior to January 31, 1999, the second calendar date referred to in this sentence shall be deemed, for purposes of Paragraph 6(d) hereof, to be December 31, 2000. 5. The Employment Agreement is hereby amended by adding the following additional paragraphs: 14. DISCUSSIONS WITH THIRD PARTIES ------------------------------ During the term of this Agreement, Employee shall not, without the express prior approval of the Board of Directors of PHS, or the Chairman of the Board thereof, engage in any discussions with any third party relating to any transaction that would result in either the acquisition of PHS (by way of merger or otherwise) by a third party or the acquisition by a third party, other than in ordinary brokerage transactions or other than by a third party that is registered as an investment company under the Investment Company Act of 1940, - 2 - as amended, of any shares of stock of PHS that are, for purposes of Section 16(a) of the Securities Exchange Act of 1934, as amended, deemed to be beneficially owned by Employee. Nothing contained herein shall limit Employee from (a) engaging in any discussion with persons who are, and are acting in their capacity as, officers or directors of PHS, (b) engaging in discussions with a charitable organization with respect to unconditional and unrestricted gifts that he proposes to make to such charitable organization or (c) engaging in discussions with members of his family concerning gifts that he proposes to make to them. 15. PUBLIC COMMENTS --------------- During the term of this Agreement, (a) PHS agrees not to make any disparaging remarks to the public about Employee, and (b) Employee agrees not to make any disparaging remarks to the public about PHS or the other members of the management of PHS. 6. PHS agrees to pay Employee's legal expenses in connection with the negotiation of this Agreement in an amount not to exceed $15,000. 7. PHS agrees that, except as required by applicable law, rule or regulation, it will maintain, and will cause its directors, officers and employees to maintain, in confidence this Agreement and the confidential information that was provided to PHS by Employee in connection with the negotiation hereof. Employee acknowledges that he is bound by the terms of a Confidentiality Agreement dated February 16, 1995, between PHS and Employee. IN WITNESS WHEREOF, the parties hereto have affixed their hands and seals as of the day and year first above written. Physicians Health Services, Inc. By: /s/ David Grayer ----------------------------- Its: Chairman of the Board /s/ Michael E. Herbert ------------------------------- Michael E. Herbert - 3 - EXHIBIT A --------- Position Description -------------------- THIRD VICE CHAIRMAN AND CO-CHIEF EXECUTIVE OFFICER, PHYSICIANS HEALTH SERVICES, - ------------------------------------------------------------------------------- INC.: The Third Vice Chairman and Co-Chief Executive Officer, Physicians Health - ---- Services Inc. reports to the Board of Directors and the Chairman of the Board, and, as more fully described below, is principally responsible for community relations and advising the Company on strategic issues. Specific Responsibilities: Subject to the direction and control of the Board of - ------------------------- Directors and/or the Chairman of the Board of Physicians Health Services, Inc., the Third Vice Chairman and Co-Chief Executive Officer's responsibilities include: 1. Represents the Company on various state and national trade associations, including the American Association of Health Plans. 2. Responsible for community relations in the State of Connecticut and, upon request of the Board of Directors or the Chairman of the Board, shall be responsible for the Company's sponsorship or support of community activities in additional service areas of the Company. 3. Responsible for government relations activities at the national level and, upon the request of the Board of Directors or the Chairman of the Board, shall be responsible for certain state government relations activities. These activities may include monitoring legislation, development of corporate/industry positions, lobbying activities, and testifying before appropriate legislative bodies. 4. As a member of senior management, represents the Company at industry meetings of senior executives of companies in the managed care industry. 5. Responsible for advising the Company as requested concerning industry trends and emerging best practices. 6. Remains available to the Company, at its reasonable request, to provide other services that are generally commensurate with the prior responsibilities at the Company of the Vice Chairman and Co-Chief Executive Officer. 5629\01\empamend.v3 A:\EMPAMEND.V3 - 4 - EX-27 5 FINANCIAL DATA SCHEDULE
5 9-MOS DEC-31-1996 JAN-01-1996 SEP-30-1996 7,065 83,035 38,443 1,172 0 160,452 63,371 14,006 235,597 134,003 0 0 0 94 100,220 235,597 353,442 358,248 311,390 374,147 62,757 0 295 (16,194) (7,519) (8,675) 0 0 0 (8,675) (.93) (.93)
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