<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-QSB
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File No.: 0-28390
PENNSYLVANIA PHYSICIAN HEALTHCARE PLAN, INC.
(Exact name of registrant as specified in its Charter)
Pennsylvania 23-2795795
(State of incorporation (I.R.S. Employer
or organization) Identification Number)
651 East Park Drive, Harrisburg, PA 17111
(Address of Principal Executive Offices)
Registrant's Telephone Number, including area code:
(800) 671-7747
Indicate by 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 the filing
requirements for at least the past 90 days.
Yes X No ,
------- -------
Indicate the number of shares outstanding of each of the Registrant's classes of
common stock, as of the latest practicable date:
4,087 shares of Class A common stock, $.01 par value per share
1,074 shares of Class B common stock, $.01 par value per share
(as of July 31, 1999)
Transitional Small Business Disclosure Format:
Yes X No
----- -----
<PAGE>
PENNSYLVANIA PHYSICIAN HEALTHCARE PLAN, INC.
Consolidated Balance Sheets
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------
June 30, December 31,
Assets 1999 1998
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 523,749 $ 2,608,269
Short-term investment securities 199,250 400,750
Accrued interest income 103,591 145,654
Premiums receivable, net 68,914 171,766
Income taxes receivable 28,853 28,853
Other assets 566,578 245,056
- ---------------------------------------------------------------------------------------------------------
Total current assets 1,490,935 3,600,348
- ---------------------------------------------------------------------------------------------------------
Long-term investment securities 6,061,082 6,860,624
Equipment (net of accumulated depreciation of $801,768
and $684,830, respectively) 557,368 571,911
- ---------------------------------------------------------------------------------------------------------
Total assets 8,109,385 11,032,883
- ---------------------------------------------------------------------------------------------------------
Liabilities and Stockholders' Equity
- ---------------------------------------------------------------------------------------------------------
Current liabilities:
Medical claims liabilities 3,845,484 1,945,722
Accounts payable 48,788 152,558
Accrued expenses 176,620 44,350
Other liabilities 193,000 29,075
- ---------------------------------------------------------------------------------------------------------
Total current liabilities 4,263,892 2,171,705
- ---------------------------------------------------------------------------------------------------------
Stockholders' Equity:
Class A common voting stock, $.01 par value, 40,000 shares
authorized; 4,087 shares issued and outstanding 41 41
Class B common non-voting stock, $.01 par value, 100,000 shares
authorized; 1,074 shares issued and outstanding 11 11
Additional paid in capital 21,220,777 21,220,777
Accumulated deficit (17,324,675) (12,364,727)
Net unrealized gain (loss) on investment securities, net of taxes (50,661) 5,076
- ---------------------------------------------------------------------------------------------------------
Total stockholders' equity 3,845,493 8,861,178
- ---------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $ 8,109,385 $ 11,032,883
- ---------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
2
<PAGE>
PENNSYLVANIA PHYSICIAN HEALTHCARE PLAN, INC.
Consolidated Statements of Income and Comprehensive Income
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
Three Months Three Months Six Months Six Months
Ended Ended Ended Ended
June 30, 1999 June 30, 1998 June 30, 1999 June 30, 1998
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues:
Premiums $ 5,757,343 $ 1,141,256 $ 10,733,929 $ 2,069,494
Consulting -- 65,000 -- 65,000
Investment income, net 114,700 156,861 233,380 337,549
- -----------------------------------------------------------------------------------------------------------------------------------
Total Revenue 5,872,043 1,363,117 10,967,309 2,472,043
- -----------------------------------------------------------------------------------------------------------------------------------
Expenses:
Health care services 7,386,398 1,287,491 12,582,492 2,000,567
Salary and benefits 886,681 662,554 1,867,967 1,350,334
Operating expenses 672,152 456,061 1,205,192 846,414
Professional services 55,815 135,480 143,475 213,344
Other taxes 549 1,072 11,192 3,557
Depreciation 59,917 100,608 116,939 199,741
- -----------------------------------------------------------------------------------------------------------------------------------
Total expenses 9,061,512 2,643,266 15,927,257 4,613,957
- -----------------------------------------------------------------------------------------------------------------------------------
Net loss $ (3,189,469) $ (1,280,149) $ (4,959,948) $ (2,141,914)
- -----------------------------------------------------------------------------------------------------------------------------------
Other comprehensive income, net of income taxes:
Unrealized (loss) on investments (39,021) -- (55,737) --
Comprehensive loss (3,228,490) (1,280,149) (5,015,685) (2,141,914)
Net loss per common share $ (617.99) $ (248.04) $ (961.04) $ (415.02)
Weighted average common shares 5,161 5,161 5,161 5,161
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE>
PENNSYLVANIA PHYSICIAN HEALTHCARE PLAN, INC.
Consolidated Statements of Changes In Stockholders' Equity
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Accumulated
Common Common Stock Additional Other
Stock Shares Par Value Paid In Accumulated Comprehensive
Class A Class B Class A Class B Capital Deficit Income Total
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1997 4,087 1,074 $ 41 $ 11 $21,220,777 $ (6,274,244) $ -- $14,946,585
Comprehensive Loss
Net loss (6,090,483) (6,090,483)
Other Comprehensive Income
Unrealized gains on
investments 5,076 5,076
- -----------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1998 4,087 1,074 41 11 21,220,777 (12,364,727) 5,076 8,861,178
- -----------------------------------------------------------------------------------------------------------------------------------
Comprehensive Loss
Net loss (4,959,948) (4,959,948)
Other Comprehensive Income
Unrealized losses on
investments (55,737) (55,737)
- -----------------------------------------------------------------------------------------------------------------------------------
Balance, June 30, 1999 4,087 1,074 $ 41 $ 11 $21,220,777 $(17,324,675) $ (50,661) $ 3,845,493
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE>
PENNSYLVANIA PHYSICIAN HEALTHCARE PLAN, INC.
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
Three Months Three Months Six Months Six Months
Ended Ended Ended Ended
June 30, 1999 June 30, 1998 June 30, 1999 June 30, 1998
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net loss $ (3,189,469) $ (1,280,149) $ (4,959,948) $ (2,141,914)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation, amortization and accretion 62,641 100,608 124,098 199,741
Net loss on sale of invetment securities 198 -- 220 --
Change in assets and liabilities:
Accrued interest income (47,343) 11,053 42,063 17,085
Premiums receivable (68,914) 12,398 102,852 21,819
Other assets (243,093) 32,829 (321,522) 25,472
Medical claims liabilities 1,265,722 279,249 1,899,762 431,231
Accounts payable (71,561) 83,841 (103,770) 74,168
Accrued expenses 120,458 10,832 132,270 (7,555)
Other liabilities (4,300) (55,325) 163,924 (55,325)
- ----------------------------------------------------------------------------------------------------------------------------------
Net cash used in operating activities (2,175,661) (804,664) (2,920,051) (1,435,278)
- ----------------------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Purchases of investment securities (1,560,709) -- (3,711,902) --
Proceeds from maturities of investment securities 400,000 -- 4,400,000 --
Proceeds from sale of investment securities 149,812 -- 249,828 --
Purchases of equipment (17,908) (66,778) (102,395) (129,929)
- ----------------------------------------------------------------------------------------------------------------------------------
Net cash received from (used in) investing activities (1,028,805) (66,778) 835,531 (129,929)
- ----------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents (3,204,466) (871,442) (2,084,520) (1,565,207)
Cash and cash equivalents, beginning of period 3,728,215 13,556,875 2,608,269 14,250,640
- ----------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of period $ 523,749 $ 12,685,433 $ 523,749 $ 12,685,433
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE>
PENNSYLVANIA PHYSICIAN HEALTHCARE PLAN, INC.
Notes to Consolidated Financial Statements.
- -------------------------------------------------------------------------------
(1) Description of Business
Pennsylvania Physician Healthcare Plan, Inc. (the Company) was formed
as a Pennsylvania for-profit corporation on February 15, 1995, under
the direction of private practicing physicians to develop a physician
owned and controlled managed care organization in Pennsylvania.
The Company received a third party administrator (TPA) license in March
1997 and a license to operate a preferred provider organization (PPO)
in April 1997. The Company received a license to operate a health
maintenance organization (HMO) on March 22, 1999.
Through June 30, 1997 the Company was in the developmental stage and
activities consisted primarily of raising capital through a public
stock offering, hiring a management team, applying for the necessary
licenses to operate as a managed care organization and developing a
business plan. In the third quarter of 1997, the Company became
operational and, accordingly, all developmental stage references in the
accompanying financial statements were removed.
(2) Summary of Significant Accounting Policies
Unaudited Financial Statements
The unaudited consolidated financial statements should be read in
conjunction with the audited consolidated financial statements as of
December 31, 1998 and reflect, in the opinion of management, all
adjustments necessary to fairly state the results of operations for
such periods.
The results of operations for the three and six month periods ended
June 30, 1999 and 1998 are not necessarily indicative of the results of
operations expected for the full year.
The notes to the financial statements are condensed and may not include
all information that is required to be disclosed by generally accepted
accounting principles.
Principles of Consolidation
The consolidated financial statements include the financial statements
of Pennsylvania Physician Healthcare Plan, Inc. and its three
wholly-owned subsidiaries, Physicians Care HMO, Inc., Physicians Care
PPO, Inc., and Pennsylvania Physicians Care Service Corp. All
significant intercompany balances and transactions have been eliminated
in consolidation.
6
<PAGE>
Cash and Cash Equivalents
Cash and cash equivalents include cash and investments with maturities
of less than three months when purchased. The cost of these investments
approximates fair market value.
Investments
The investment securities portfolio is classified as
available-for-sale, and carried at fair value. Such fair value is based
upon values obtained from independent third parties or quoted market
prices of comparable instruments. Temporary changes in the fair value
of investments are reflected as a component of other comprehensive
income.
Premiums and discounts are amortized and accreted over the term of the
related securities using a method that approximates the interest
method, adjusted for prepayments. Realized gains and losses on the sale
of investment securities (determined by the specific identification
method) are shown separately in the consolidated statement of
operations. A decline in the fair value of any investment below cost
that is deemed other than temporary results in a reduction of the
carrying amount to fair value through a charge to income. Dividends and
interest income are recognized when earned.
Equipment
Equipment, consisting of furniture and office equipment, data
processing equipment, leasehold improvements and capitalized software,
is carried at cost. Depreciation is calculated on the accelerated cost
recovery method for both financial reporting and income taxes purposes
over the estimated useful lives of the assets.
When changes in business circumstances warrant, the Company reviews the
recoverability of long-lived assets to determine if there has been any
permanent impairment. This assessment is based on estimated future
undiscounted cash flows compared with the assets' carrying value. If
impairment is indicated, a write-down to fair value (normally measured
by discounting estimated cash flows) would be taken.
Medical Claims Liability
Medical claims liabilities consist of actual claims reported but not
paid and estimates of health care services incurred but not reported.
The estimated claims incurred but not reported are based on historical
data, current enrollment, health service utilization statistics, and
other related information. These accruals are continually monitored and
reviewed, and, as settlements are made or accruals adjusted,
differences are reflected in current operations. Changes in assumptions
for medical costs caused by changes in actual experience could cause
these estimates to change in the near term.
Revenue Recognition
Premiums are recorded as revenue in the month in which members are
entitled to service. Premiums collected in advance are recorded as
deferred revenue. Interest income is recorded in the period it is
earned.
7
<PAGE>
Reinsurance
Premiums paid to reinsurers are reported as health care services
expense and the related reinsurance recoveries, if any, are reported as
deductions from health care services expense.
Income Taxes
Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases and to operating loss and tax credit
carryforwards. Deferred tax assets and liabilities are measured using
enacted tax rates expected to apply to taxable income in the years in
which those temporary differences are expected to be recovered or
settled. The effect on deferred tax assets and liabilities of a change
in tax rates is recognized in income in the period that includes the
enactment date.
Earnings Per Common Share
Earnings per common share have been computed based upon the weighted
average number of common shares outstanding during each period.
Effective January 1, 1997, the Company adopted Statement of Financial
Accounting Standards Number 128 "Earnings Per Share" (FASB No. 128).
FASB No. 128 requires the presentation of basic earnings per share
(EPS), calculated by dividing income available to common shareholders
by the weighted-average number of common shares outstanding during the
period, and diluted EPS, calculated the same as basic EPS except that
the denominator is increased to include the number of additional common
shares that would have been issued if all dilutive potential common
shares had been issued. FASB No. 128 requires the restatement of EPS
for all periods presented. The adoption of FASB No. 128 had no effect
on the Company's calculation of earnings per share in the accompanying
financial statements.
Use of Estimates
Management has made a number of estimates and assumptions relating to
the reporting of assets and liabilities to prepare these consolidated
financial statements in conformity with generally accepted accounting
principles. Actual results could differ from those estimates.
New Accounting Standard
In June 1997, the Financial Accounting Standards Board (FASB) issued
FASB No. 130 "Reporting Comprehensive Income". This statement, which
establishes standards for reporting and disclosure of comprehensive
income, is effective for annual periods beginning after December 15,
1997. The adoption of FASB No. 130 has not had any material impact on
the Company's financial position or results of operations.
8
<PAGE>
In June 1997, the FASB issued Statement No. 131, "Disclosures about
Segments of an Enterprise and Related Information," which became
effective in 1998. This statement establishes standards for reporting
selected information about operating segments in the Company's interim
and annual financial statements. Adoption of this statement did not
impact the presentation of the Company's financial information.
In June 1998, the FASB issued Statement No. 133, "Accounting for
Derivative Instruments and Hedging Activities," which is effective for
the Company's fiscal year ending December 31, 2001. This statement
establishes accounting and reporting standards for derivative
instruments, including those embedded in other contracts, and for
hedging activities. It requires recognizing derivatives as assets or
liabilities at fair value on the balance sheet. Management is currently
evaluating the effects of FASB No. 133 on the Company's financial
condition and results of operations.
Year 2000
Costs incurred by the Company to address Year 2000 issues, to include
costs for assessment, renovation, testing, verification, and
implementation, are charged to expense as incurred.
(3) Going Concern Matters
The accompanying financial statements have been prepared on a going
concern basis, which contemplates the realization of assets and the
satisfaction of liabilities in the normal course of business. As shown
in the financial statements for the three month and six month periods
ended June 30, 1999, the Company incurred comprehensive losses of
$3,228,490 and $5,015,685, respectively. The Company's net worth at
June 30, 1999 was $3.8 million. Pennsylvania managed care laws require
that the Company possess an initial minimum net worth of $1,175,000 to
operate a PPO and an additional $1,500,000 for a HMO. These factors
among others may indicate that the Company will be unable to continue
as a going concern for a reasonable period of time.
The financial statements do not include any adjustments relating to the
recoverability and classification of liabilities that might be
necessary should the Company be unable to continue as a going concern.
The Company's continuation as a going concern is dependent upon its
ability to generate sufficient cash flow to meet its obligations on a
timely basis and to comply with the Pennsylvania managed care
requirements. The Company is actively seeking out alternative
opportunities that would likely involve a fundamental change in its
structure and ownership, including the sale of the Company or the
merger of the Company into another entity. Any such transaction would
require state and other regulatory approval, as well as, a two-thirds
vote of all shareholders entitled to vote in accordance with the
Company's bylaws.
9
<PAGE>
(4) Reinsurance
The Company has a reinsurance agreement for portions of the risk that
it has underwritten through its products. PPO risk was reinsured to
$2,000,000 per member per lifetime in excess of maximum loss retention
of $75,000 per member per year. Coinsurance ranges from 50% to 90%
depending on the type of service, age of the member, and service
facility.
There were no reinsurance recoveries for the six month periods ended
June 30, 1999 and 1998.
(5) Income Taxes
The net deferred amounts reported by the Company at June 30, 1999 and
December 31, 1998 are as follows:
<TABLE>
<CAPTION>
1999 1998
---------------------------------
<S> <C> <C>
Deferred tax assets:
Start up costs $ 767,582 $ 1,039,158
Net operating loss carryforward 5,071,597 2,377696
Other assets 8,022 27,293
---------------------------------
Deferred tax asset 5,847,201 3,444,147
Valuation allowance (5,847,201) (3,444,147)
---------------------------------
Net deferred tax asset $ -- $ --
---------------------------------
</TABLE>
The Company has Federal net operating losses of approximately
$12,492,000 available to offset future income before taxes, which
expire in the period from 2011 to 2019. Management recorded the
valuation allowance to reduce the deferred income tax benefit to its
estimated realizable value in light of the Company's lack of profitable
operating history.
(6) Recapitalization
At a Special Meeting of Shareholders held on January 9, 1999, the
holders of the Company's Class A voting common stock and Class B
non-voting common stock approved a Plan of Recapitalization and Amended
and Restated Articles of Incorporation of the Company. The
recapitalization changed the voting rights of the Class A shares,
created new classes of both common and preferred stock, provided for
the conversion of the outstanding Class A shares and Class B shares to
shares of a new class of voting common stock and simplified the shares
of the Company by eliminating the Class C common stock and Class D
common stock of the Company (no shares of which had been outstanding).
10
<PAGE>
The Class A shares and Class B shares were changed to permit the
voluntary conversion into a new class of voting common stock on or
after January 11, 1999 at the election of the holder and to require
conversion effective as of January 1, 2000. The conversion ratio is 400
shares of common stock for each Class A share and 100 shares of common
stock for each Class B share. The conversion ratio is subject to
adjustment in the event of a stock split, stock dividend, distribution
or other transaction affecting the common stock prior to conversion.
All Class A and Class B shares will also automatically convert to
shares of common stock on the day before the occurrence of any of the
following events:
o a reclassification or change of the outstanding common stock
(except a stock split or a combination of shares);
o a consolidation or merger of the Company (except a merger in
which the Company survives without a reclassification or
change of the Company's common stock, except for a split or
combination of shares); or
o the sale or conveyance (except if the sale or conveyance is
for cash followed by the immediate distribution of such cash
to the shareholders of the Company) to another corporation of
all or substantially all of the Company's property.
Holders who elect to convert their Class A shares or Class B shares to
common stock must convert all of such shares. As of June 30, 1999, no
Class A shares or Class B shares had been converted by the holders
thereof into shares of common stock.
(7) Restrictions on Cash
The Company received a license to operate an HMO on March 22, 1999,
which eliminated certain restrictions on its use of cash proceeds from
its 1995-1996 stock offering.
11
<PAGE>
Item 2. Management's Discussion and Analysis or Plan of Operation.
During the second quarter of 1999 the Company incurred significantly
larger underwriting losses than anticipated. These losses were primarily
the result of over-utilization of health care services by a relatively
small number of employer groups. These losses have threatened the
Company's viability. As a result of these losses and the anticipation of
future losses, the Company must obtain additional financing in an amount
in excess of $3 million to sustain its operations and fund its operation
losses through the foreseeable future. However, the Company's external
cash requirements exceed its internally generated cash by an amount in
excess of its ability to borrow or to access the capital markets.
Consequently, the Company is actively seeking out alternative
opportunities that would likely involve a fundamental change in its
structure and ownership, including the sale of the Company or the merger
of the Company into another entity. To date, however, no definitive
opportunities have been presented and the Company is unable to predict
whether such opportunities will be available to it before its financial
condition deteriorates to the point where it is required to cease
operations or seek protection from its creditors. Any such transaction
would likely be subject to state and other regulatory approvals.
Furthermore, the Company's bylaws require a two-thirds vote of all
shareholders entitled to vote to approve such a transaction. Receipt of
such approvals could be an extremely lengthy procedure.
The Company's net worth at June 30, 1999 was $3.8 million. Pennsylvania
managed care laws require that the Company possess an initial minimum
net worth of $1,175,000 to operate a preferred provider organization
(PPO) and an additional $1,500,000 for a health maintenance organization
(HMO). The Company is prevented from employing in its operations the
cash that makes up these reserves. If the Company becomes unable to meet
the foregoing deposit and net worth requirements its PPO and HMO
licenses may revoked.
Year 2000
The "Year 2000 issue" refers generally to the problem that some software
may have in determining the correct century for the year. For example,
software with date-sensitive functions that is not Year 2000 compliant
may not be able to distinguish whether "00" means 1900 or 2000. To the
extent that computer programs are unable to properly interpret calendar
dates beginning in the Year 2000, computers, as well as other
non-computer equipment using embedded technology, could shut down,
calculate dates or data based on dates incorrectly, or report
information inaccurately. Year 2000 issues affect virtually all
companies and organizations.
12
<PAGE>
The Company has undertaken a review of its systems infrastructure and
operations in order to determine the extent to which its computer
systems will be vulnerable to potential errors and system failures
arising from the transition of dates from 1999 to 2000. The Company's
financial and operational computer systems utilize computer software and
hardware developed by outside vendors. The Company has, through
communication with its software and hardware vendors, determined which
internal information technology systems are Year 2000 compliant and
which systems need updating. Most systems, including the Company's main
system used to process enrollment, billing and accounts receivable,
authorizations, and claims payments, and the Company's local area
network, have been updated to process calendar dates beginning in the
Year 2000. Updates on the remaining systems are scheduled to be
completed in August, 1999. Additionally, the Company's telephone system
has been updated to be Year 2000 compliant. Testing of the various
systems to verify that dates beginning in the Year 2000 will be
processed accurately began in June, 1999 and should be completed in
October, 1999.
The Company does not expect the costs associated with this upgrade to be
material to the Company's consolidated financial position, results of
operations or cash flows. However, the Company is currently unable to
determine the potential impact, if any, that could result from any of
its vendors' failure to address this issue adequately. Despite any of
its vendors' efforts, the Company's system infrastructure, software and
hardware may still be materially adversely impacted by the transition to
Year 2000 through the inability to accurately and timely process benefit
claims, the inability to update customers' accounts, the inability to
process financial transactions, the inability to bill customers, the
inability to assess exposure to risks, the inability to determine
liquidity requirements or report accurate financial data to management,
shareholders, customers, regulators and others, business interruptions
or shutdowns, reputational harm, increased scrutiny by regulators, and
litigation related to Year 2000 issues, any of which events could have a
material adverse effect on the Company's business, results of operations
and financial condition.
In addition, the Company has begun to develop contingency/recovery plans
aimed at ensuring the continuity of critical business functions before
December 31, 1999. As part of that process, the Company has begun to
develop reasonably likely failure scenarios for its critical information
technology systems and external relationships. Once these scenarios are
identified, the Company will develop plans that are designed to reduce
the impact on the Company and provide methods for returning to normal
operations if one or more of those scenarios occur.
Year 2000 considerations may also have an effect on some third parties
with whom the Company does business and thus indirectly affect the
Company. One or more of the Company's physician providers, other health
care providers or other contractors or suppliers may encounter errors
and system failures arising from the transition of dates from 1999 to
2000, which would be beyond the Company's control. For example, the
Company could be responsible if a hospital system failed to adequately
address its Year 2000 issues and a patient insured by the Company were
to suffer as a result of such failure. The Company has initiated contact
with many of its providers, contractors and suppliers to determine if
these third parties are appropriately responding to their Year 2000
issues. The Company will also review regulatory filings or audited
financial statements for information on these third parties' state of
readiness as it relates to Year 2000 issues. It is not possible to
quantify the cost to the Company with respect to third parties with Year
2000 problems, although the Company does not anticipate that it will
have a material adverse effect on its business, results of operations
and financial condition.
13
<PAGE>
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
10.a Second Amendment to Executive Employment Agreement of
Richard A Felice
10.a Executive Employment Agreement of T. Clark Phillip
27 Financial Data Schedule
(b) Reports on Form 8-K
None
SIGNATURES
In accordance with the requirements of the Exchange Act, the Registrant
caused this report to be filed on its behalf be the undersigned, thereunto duly
authorized:
Pennsylvania Physician Healthcare Plan, Inc.
(Registrant)
Date: August 13, 1999 By: /s/ Richard A. Felice
------------------- --------------------------------------
Richard A. Felice, President and Chief
Executive Officer
Date: August 13, 1999 By: /s/ T. Clark Phillip
------------------- --------------------------------------
T. Clark Phillip, Treasurer and Chief
Financial Officer
14
<PAGE>
EXHIBIT 10
SECOND AMENDMENT TO EXECUTIVE EMPLOYMENT AGREEMENT
THIS SECOND AMENDMENT TO EXECUTIVE EMPLOYMENT
AGREEMENT made and entered into as of this ___ day of July, 1999 (the
"Agreement") by and between PENNSYLVANIA PHYSICIANS CARE SERVICE CORP., a
Pennsylvania corporation (the "Employer"), and Richard A. Felice, an individual
residing at 6 Foxfield Court, Mechanicsburg, PA 17055 (the "Executive").
W I T N E S S E T H
WHEREAS, Employer is a wholly-owned subsidiary of Pennsylvania
Physician Healthcare Plan, Inc., a Pennsylvania corporation ("PPHP");
WHEREAS, Pursuant to that certain Executive Employment Agreement, dated
September 3, 1996, between the Employer and the Executive, the Executive has
been employed by the Employer;
WHEREAS, Pursuant to that certain Amendment to Executive Employment
Agreement, dated September 2, 1997, certain of the terms and provisions of the
Executive Employment Agreement were amended (as so amended, the Employment
Agreement");
WHEREAS, it was the express understanding and intention of the parties
that amounts payable to the Executive in respect of severance be directly based
upon the Executive's annual salary as then in effect, and the parties past
behavior has been predicated upon this understanding;
WHEREAS, the Employment Agreement contained an inadvertent
typographical error which failed to reflect this understanding;
WHEREAS, the Employer recognizes that the Executive's experience,
knowledge, background and position are valuable attributes in the successful
operation of the Employer's business; and
WHEREAS, the Employer and the Executive desire to further amend the
Employment Agreement, all in accordance with the terms, conditions, and
covenants hereinafter contained.
<PAGE>
NOW, THEREFORE, in consideration of the premises and the mutual
covenants and promises hereinafter contained, and other good and valuable
consideration, the sufficiency of which is hereby acknowledged, the parties
hereto intending to be legally bound hereby agree as follows:
ARTICLE I
AMENDMENT
1.01 Section 4a. Section 4a of the Employment Agreement is hereby
amended by deleting the first sentence thereof in its entirety and substituting
in lieu thereof the following:
"For all duties to be performed by Executive in any capacity hereunder,
Executive shall receive an annual salary of Two Hundred and Forty-Six
Thousand Seven Hundred and Fifty Dollars ($246,750) per year ("Annual
Salary") payable in installments twice per month, in accordance with
Employer's regular practice for executive employees."
1.02 Section 5d. Section 5d of the Employment Agreement is hereby
amended by deleting the first sentence thereof in its entirety and substituting
in lieu thereof the following:
"If Employer terminates the Agreement prior to the end of the Initial
Term or any Renewal Term, except for Good and Sufficient Cause, or if
Employer provides notice, pursuant to Section 1 hereof, of its election
not to enter into any of the Renewal Terms commencing September 3,
1997, September 3, 1998, September 3, 1999 or September 3, 2000, then
Employer shall pay Executive, as Executive's sole remedy and in full
satisfaction of any and all payments or damages due under any
agreement, $252,750, plus all amounts in respect of accrued salary and
vacation pay to the date of termination."
1.03 Section 5e(1). Section 5e(1) of the Employment Agreement is hereby
amended by deleting such section in its entirety and substituting in lieu
thereof the following:
"(1) In the event that one or more of the affiliates of Employer shall
be restructured (herein "Restructured Corporation") by (i) merger or
consolidation with any "Other Entity," or by (ii) transfer of all or
substantially all of its or their assets to any Other Entity so that
Executive is no longer Chief Executive Officer of such affiliate(s) by
<PAGE>
reason of Executive's not being offered to continue in such position by
such Restructured Corporation, or if so offered, Employee does not
accept such position, Executive shall have the right to terminate this
Agreement within thirty (30) days of the effective date of such
restructuring and Corporation shall then become obligated to pay
Executive $252,750, plus all amounts in respect of accrued salary and
vacation pay to the date of termination, as severance in addition to
the severance payable to Executive pursuant to Section 5d hereof. Such
payments shall be payable in installments over one (1) year in
accordance with Employer's regular payroll schedule. In the event that
Executive shall accept a position with the Restructured Corporation, or
its affiliates, at an annual salary less than that provided for in
Section 4a hereof, Employer shall pay Executive the difference between
such annual salary and the amount provided for under Section 4a hereof
for a period of twenty-four (24) months. Such payments shall be payable
in installments over such twenty-four(24) month period in accordance
with Employer's regular payroll schedule. Notwithstanding the
foregoing, all payments hereunder shall be reduced to the extent
required so that such payments shall not be a parachute payment within
the meaning of Section 280G(b) of the Internal Revenue Code of 1986, as
amended, and the regulations promulgated thereunder, or successor
provisions of similar import, such determination to be made by the
principal independent accounting firm then servicing PPHP."
1.04 Section 5e(2). Section 5e(2) of the Employment Agreement is hereby
amended by deleting the first paragraph thereof in its entirety and substituting
in lieu thereof the following:
"(2) For purposes of this section, "Other Entity" shall mean an entity
of which 50% or more of the combined voting power of its outstanding
voting securities entitled to vote generally in the election of
directors is held by persons who were not stockholders of Corporation
immediately prior to such event."
ARTICLE II
GENERAL PROVISIONS
2.01 Employment Agreement. Except as set forth herein, all other terms
of the Employment Agreement shall remain in full force and effect and shall be
deemed unmodified and unchanged by reason of this Agreement.
2.02 Amendment and Waiver. This Agreement may not be changed or
terminated orally. No waiver of compliance with any provision or condition
hereof, and no consent
<PAGE>
provided for herein shall be effective unless evidenced by an instrument in
writing duly executed by the party hereto sought to be charged with such waiver
or consent.
2.03 Headings; Governing Laws; Counterparts. The Article or Section
headings of this Agreement are for convenience of reference only and do not form
a part hereof and do not in any way modify, interpret or construe the intentions
of the parties. This Agreement may be executed in one or more counterparts and
all such counterparts shall constitute one and the same instrument. This
Agreement shall be governed by and construed in accordance with the laws of the
Commonwealth of Pennsylvania without giving effect to the conflict of laws
principles thereof.
2.04 Binding Effect; Benefits. This Agreement shall inure to the
benefit of and be binding upon the parties hereto and their respective
successors.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
signed on the day and year first above written.
PENNSYLVANIA PHYSICIANS
CARE SERVICE CORP.
By: /s/ Gary C. Brown, M.D.
--------------------------------
Name: Gary C. Brown, M.D.
Title: Chairman of the Board
/s/ Richard A. Felice
--------------------------------
Richard A. Felice
4
<PAGE>
EXHIBIT 10.1
EXECUTIVE EMPLOYMENT AGREEMENT
AGREEMENT made this 1st day of August, 1999 between PENNSYLVANIA
PHYSICIANS CARE SERVICE CORP., a Pennsylvania corporation ("Employer"), and T.
CLARK PHILLIP ("Executive").
WHEREAS, the Employer and its affiliates are engaged in the business of
managed care and related services;
WHERE, the Executive has been employed by the Employer since November
1996;
WHEREAS, the Employer recognizes that the Executive's experience,
knowledge, background and position are valuable attributes in the successful
operation of the Employer's business;
WHEREAS, it was the express understanding and intention of the parties
that the relationship between the Employer and the Executive be memorialized and
the parties past behavior has been predicated upon this understanding;
WHEREAS, at the April 30, 1999 meeting of the Board of Directors of the
Employer, the Board noted that no agreement memorializing the relationship
between the Executive and the Employer had been executed to date and restated
its desire to memorialize the relationship;
WHEREAS, the Executive is desirous of continuing to make the
Executive's services available to the Employer, and the Employer is desirous of
continuing to avail itself of the Executive's services as an employee;
WHEREAS, the Company and the Executive desire to consummate the
transactions contemplated by this Agreement and to memorialize the relationship
and understandings upon which the parties past behavior has been predicated.
NOW, THEREFORE, in consideration of the premises and the mutual
covenants and promises hereinafter contained, and other good and valuable
consideration, the sufficiency of which is hereby acknowledged, the parties
hereto intending to be legally bound hereby agree as follows:
1. Employment and Term. Employer hereby employs Executive and Executive
hereby accepts employment for a term commencing August 1, 1999 and ending August
31, 2000 (the "Initial Term"); subject to extension as provided herein. (August
31, 2000, or the last day of any extended term as provided herein is hereinafter
called the "Termination Date.") This Agreement shall automatically be extended
for additional periods of one year ("Renewal Term"), unless notification is
given by one party to the other to the contrary by providing written notice at
least
1
<PAGE>
sixty (60) days prior to the Termination Date in accordance with the procedures
outlined in Section 12 regarding notice.
2. Duties. Employer is an affiliate of Pennsylvania Physician
Healthcare Plan, Inc. ("PPHP"). Executive shall perform the duties of Treasurer
and Chief Financial Officer for such managed care affiliates of PPHP as Employer
shall designate from time to time and such additional executive duties for
Employer and its affiliates as may be requested of Executive by Employer.
Executive's place of employment shall be at the principal offices of Employer,
now Harrisburg, Pennsylvania. Executive shall accept and perform the duties of
such offices and directorships of Employer and its affiliates to which Executive
may from time to time be elected or appointed.
3. Extent of Services. Executive shall devote his full time and best
efforts to the performance of his duties hereunder. He shall not engage in any
business or perform any services in any capacity whatsoever other than for
Employer and its affiliates.
4. Compensation.
a. Salary. For all duties to be performed by Executive in any
capacity hereunder, Executive shall receive an annual salary of One Hundred and
Thirty-One Thousand Two Hundred and Fifty Dollars ($131,250) per year ("Annual
Salary") payable in installments twice per month, in accordance with Employer's
regular practice for executive employees. Upon renewal of this contract in
accordance with Section 1 hereof, Executive's annual salary for such renewal
term shall not be less than the Annual Salary. A performance review and review
of Executive's Annual Salary will be performed annually and shared with
Executive.
b. Vacation. Executive shall be entitled to three (3) weeks paid
vacation during each full year that this Agreement is in force.
c. Fringe Benefits. Executive shall be entitled to receive (i) the
insurance and pension benefits provided pursuant to the provision of plans as
established and revised by Employer from time to time and generally made
available to executives of Employer and (ii) all other fringe benefits made
available to salaried employees generally from time to time by Employer.
d. Bonus. Executive shall be eligible for an annual bonus of up to
fifteen percent (15%) of Annual Salary, based on mutually agreed performance
criteria to be established within ninety (90) days of the commencement of the
term of this Agreement. The bonus shall be paid to Executive within forty-five
(45) days after each anniversary date of this Agreement. If Executive's
employment terminates for Good and Sufficient Cause (as hereinafter defined),
Executive shall forfeit all rights to the bonus described in this Section 4d. A
review of Executive's bonus and bonus criteria will be performed annually and
shared with Executive.
2
<PAGE>
e. Expenses. It is understood that Executive will from time to time
incur reasonable expenses in conjunction with his employment. Employer will
reimburse him for any such expenses (including automobile expenses of $.16 per
mile, or such other amount as shall be made available to salaried employees
generally from time to time by Employer, incurred as a result of Executive's
duties herein) in accordance with Employer's regular practice for reimbursement
of its executive employees.
5. Termination.
a. Notwithstanding any other provisions hereof, this Agreement shall
be terminated immediately upon the death or Disability (as hereinafter defined)
of Executive or Executive's discharge by Employer upon Good and Sufficient Cause
(as hereinafter defined). In such event, Executive shall not be entitled to any
payment or benefit hereunder or any other compensation, other than the portion
of the applicable Annual Salary accrued to the date of termination. Termination
of employment under this Section 5, or otherwise, shall not diminish the
obligations of Executive pursuant to Sections 6 and 7 hereof, except as
otherwise provided herein.
b. "Disability" shall mean inability of Executive due to illness or
accident to perform the duties required to be performed by him pursuant hereto
for a continuing period in excess of ninety (90) days.
c. "Good and Sufficient Cause" shall include but not be limited to:
(1) any misconduct or dishonesty detrimental to the best
interests of Employer or any of its affiliates;
(2) willful disloyalty to Employer or any of its affiliates;
(3) willful or intentional neglect by Executive to perform his
duties and responsibility hereunder;
(4) conviction of a felony or crimes of moral turpitude;
(5) failure to perform the duties under this Agreement or breach
of any provisions of this Agreement.
d. If Employer, or its successor, terminates the Agreement prior to
the end of the Initial Term or any Renewal Term, except for Good and Sufficient
Cause, then Employer, or its successor, shall pay Executive as Executive's sole
remedy and in full satisfaction of any or all payments or damages due under such
agreement an amount equal to the Executive's Annual Salary at the time of
termination. Such payment shall be made in installments over twelve (12) months
in accordance with Employer's regular payroll schedule.
3
<PAGE>
6. Disclosure of Information. Executive will not, during the term of
this Agreement or during the period of non-competition defined in Section 7
hereof or during the period in which Executive is receiving payments under
Section 5d hereof, whichever is longer, without written authorization of
Employer, disclose to, or make use of for himself or for any person,
corporation, or other entity, any trade secret or other confidential or
proprietary information concerning the business, clients, methods, operations,
financing or services of Employer or its affiliates. Trade secrets and
confidential information shall mean information disclosed to Executive or known
by him as a consequence of his employment by Employer, whether or not pursuant
to this Agree ment, and not generally known in the industry.
7. Covenant Not to Compete.
a. For a period of one year after the termination of his
employment if the cause of termination is pursuant to Section 5a hereof, or for
a period equal to the period Executive is receiving payments under 5d hereof,
Executive agrees that he will not, within the Employer Territory (as hereinafter
defined), engage in any business or perform any service, directly or indirectly,
in competition with or proposed to be in competition with the Business of
Employer (as hereinafter defined), or have any interest, whether as proprietor,
partner, employee, principal, agent, consultant, director, officer or in any
other similar capacity or manner whatsoever, in any enterprise which shall so
engage or is proposing to so engage; provided, however, that the foregoing shall
not prevent the Executive from acquiring the securities of or an interest in any
business, provided such ownership of securities or interest represents at the
time of such acquisition, but including any previously held ownership interest,
less than two percent (2%) of any class or type of securities of, or interest
in, such business. "Employer Territory" shall mean any Pennsylvania county or
county of other state in which, at the time of the termination of Executive's
employment, the Employer or its affiliates is doing business or is licensed or
has a license application pending with an agency of the Commonwealth of
Pennsylvania or other state.
b. In furtherance of the foregoing, and not in limitation thereof,
Executive shall not, during the period of non-competition and within the
geographical area herein set forth, directly or indirectly:
(1) solicit or service in any way, on behalf of himself or on
behalf of or in conjunction with others, any client or customer, or prospective
client or customer, which has been solicited or serviced by Employer or any
affiliate of Employer within one year prior to the termination of his
employment; or
(2) solicit for employment, employ or engage as an independent
contractor, any person who was employed by Employer or any affiliate of Employer
at the date of termination of employment of Executive, or induce any such person
to leave the employ of Employer or any such affiliate.
4
<PAGE>
c. If Executive violates this restrictive covenant and Employer
brings legal action for injunctive or other relief, Employer shall not, as a
result of the time involved in obtaining such relief, be deprived of the benefit
of the full period of the restrictive covenant. Accordingly, the restrictive
covenant shall be deemed to have the duration specified in subparagraph a
hereof, computed from the date such relief is granted but reduced by the time
expired between the date the period of restriction began to run and the date of
the first violation of the covenant by Executive.
d. If any court shall determine that the duration or geographical
limits of any restriction contained in this paragraph are unenforceable, it is
the intention of the parties that the restrictive covenant set forth herein
shall not thereby be terminated, but shall be deemed amended to the extent
required to render it valid and enforceable, such amendment to apply only with
respect to the operation of this paragraph in the jurisdiction of the court
which has made such adjudication. The covenants on the part of Executive in this
Section 7 shall be construed as an agreement independent of any other provision
in this Agreement, and the existence of any claim or cause of action of
Executive against Employer, whether predicated on this Agreement or otherwise,
shall not constitute a defense to the enforcement by Employer of these
covenants.
8. Remedies of Employer. As an executive of Employer, Executive may
have access to customer lists, trade secrets and other confidential information
of Employer. Moreover, his continued employment will be instrumental to the
continuity and development of Employer's business. Executive, therefore,
acknowledges that the restrictions contained in Sections 6 and 7 of this
Agreement are a reasonable and necessary protection of the legitimate interests
of Employer, that any violation of them would cause substantial injury to
Employer, and that Employer would not have entered into this Agreement with
Executive without receiving the additional consideration of Executive's binding
himself to said restrictions. In the event of any actual or threatened violation
of the said restrictions, Employer shall be entitled, in addition to any other
remedy, to preliminary and permanent injunctive relief.
9. Surrender of Books and Records. Executive acknowledges that all
lists, books, records, literature, products and any other materials owned by
Employer or its affiliates or used by them in connection with the conduct of
their business, shall at all times remain the property of Employer and its
affiliates and that upon termination of employment hereunder, irrespective of
the time, manner or cause of said termination, Executive will surrender to
Employer and its affiliates all such lists, books, records, literature, products
and other materials.
10. Business of Employer. "Business of Employer" Referred to in this
Agreement shall mean all business of Employer and its affiliates, whether
presently conducted or hereafter engaged in by Employer or any affiliate at any
time during the term of this Agreement.
11. Severability. If any provision of this Agreement shall be held
invalid or unenforceable, the remainder of this Agreement shall, nevertheless,
remain in full force and
5
<PAGE>
effect. If any provision is held invalid or unenforceable with respect to
particular circumstances, it shall, nevertheless, remain in full force and
effect in all other circumstances.
12. Notice. All notices required to be given under the terms of this
Agreement shall be in writing, shall be effective upon receipt (except that if
delivery of certified mail is refused, delivery shall be deemed made five (5)
days after the date of mailing), and shall be delivered to the addressee in
person or mailed by certified mail, return receipt requested:
If to Employer, addressed to the Chief Executive Officer, at the
principal office of Employer with a copy to Pelino & Lentz, P.C., One Liberty
Place, 32nd Floor, 1650 Market Street, Philadelphia, Pennsylvania 19103-7393,
Attention: Cristina G. Cavalieri, Esquire; and if to Executive, addressed to the
last known address on the records of Employer; or to such other address as a
party shall have designated by notice given in accordance with this paragraph.
13. Representations of Executive. Executive represents covenants and
warrants to Employer that as of the date hereof and during the term of this
Agreement that neither the execution and delivery of this Agreement nor the
performance by Executive of his obligations under this Agreement will constitute
a default under any term or provision, including any covenant-not-to-compete, of
any agreement to which Executive is a party, nor any statute, administrative
interpretation, regulation or decision of any court, administrative agency or
tribunal to which Executive is subject.
14. Benefit. This Agreement shall inure to and shall be binding upon
the parties hereto, the successors and assigns of Employer and the heirs and
personal representatives of Executive.
15. Waiver. The waiver by either party of any breach or violation of
any provision of this Agreement shall not operate or be construed as a waiver of
any subsequent breach or violation hereof.
16. Governing Law. This Agreement has been negotiated and executed in
the Commonwealth of Pennsylvania and the law of that state shall govern its
construction and validity. Any legal actions concerning this Agreement shall be
brought in the Court of Common Pleas of Dauphin County, Pennsylvania or the
United States District Court for the Middle District of Pennsylvania; the
parties submit to the jurisdiction of such courts and waive any right they may
have to transfer or change the venue of any litigation brought therein by either
of them.
17. Entire Agreement. This Agreement contains the entire agreement
between the parties hereto. No change, addition, or amendment shall be made
except by written agreement signed by the parties hereto.
18. Definition of Affiliates. For purposes of this Agreement,
"affiliate" shall mean any entity controlling, controlled by, or under common
control with Employer.
6
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this
Agreement on the date and year first above written.
PENNSYLVANIA PHYSICIANS CARE
SERVICE CORP.
By: /s/ Gary C. Brown, M.D.
------------------------------
Gary C. Brown, M.D.
Chairman of the Board
/s/ T. Clark Phillip
------------------------------
T. Clark Phillip
7
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE BALANCE
SHEET AND STATEMENT OF OPERATIONS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SAID FINANCIAL STATEMENTS
</LEGEND>
<S> <C>
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<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 523,749
<SECURITIES> 6,260,332
<RECEIVABLES> 201,358
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 1,490,935
<PP&E> 1,359,136
<DEPRECIATION> 801,768
<TOTAL-ASSETS> 8,109,385
<CURRENT-LIABILITIES> 4,263,892
<BONDS> 0
0
0
<COMMON> 52
<OTHER-SE> 3,845,741
<TOTAL-LIABILITY-AND-EQUITY> 8,109,385
<SALES> 0
<TOTAL-REVENUES> 10,967,309
<CGS> 0
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<OTHER-EXPENSES> 15,927,257
<LOSS-PROVISION> 0
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<INCOME-PRETAX> (4,959,948)
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