<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 March 31, 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:
(717) 561-7890
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 April 30, 1999)
Transitional Small Business Disclosure Format:
Yes X No
----------- ---------
<PAGE>
PENNSYLVANIA PHYSICIAN HEALTHCARE PLAN, INC.
Consolidated Balance Sheets
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------------
March 31, December 31,
Assets 1999 1998
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 3,728,215 $ 2,608,269
Short-term investment securities 400,000 400,750
Accrued interest income 56,248 145,654
Premiums receivable, net 283,633 171,766
Income taxes receivable 28,853 28,853
Other assets 323,485 245,056
- -------------------------------------------------------------------------------------------------------------------------------
Total current assets 4,820,434 3,600,348
- -------------------------------------------------------------------------------------------------------------------------------
Long-term investment securities 4,891,379 6,860,624
Equipment (net of accumulated depreciation of $741,852
and $684,830, respectively) 599,376 571,911
- -------------------------------------------------------------------------------------------------------------------------------
Total assets 10,311,189 11,032,883
- -------------------------------------------------------------------------------------------------------------------------------
Liabilities and Stockholders' Equity
- -------------------------------------------------------------------------------------------------------------------------------
Current liabilities:
Medical claims liabilities 2,579,762 1,945,722
Accounts payable 120,349 152,558
Accrued expenses 56,162 44,350
Other liabilities 480,933 29,075
- -------------------------------------------------------------------------------------------------------------------------------
Total current liabilities 3,237,206 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 (14,135,206) (12,364,727)
Net unrealized gain on investment securities, net of taxes (11,640) 5,076
- -------------------------------------------------------------------------------------------------------------------------------
Total stockholders' equity 7,073,983 8,861,178
- -------------------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $ 10,311,189 $ 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
Ended Ended
March 31, 1999 March 31, 1998
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Revenues:
Premiums $ 4,976,586 $ 928,238
Investment income, net 118,680 180,688
- ------------------------------------------------------------------------------------------------------------------------
Total Revenue 5,095,266 1,108,926
- ------------------------------------------------------------------------------------------------------------------------
Expenses:
Health care services 5,196,094 713,076
Salary and benefits 981,286 687,780
Operating expenses 533,040 390,353
Professional services 87,660 77,864
Other taxes 10,643 2,485
Depreciation 57,022 99,133
- ------------------------------------------------------------------------------------------------------------------------
Total expenses 6,865,745 1,970,691
- ------------------------------------------------------------------------------------------------------------------------
Net loss $(1,770,479) $ (861,765)
- ------------------------------------------------------------------------------------------------------------------------
Other comprehensive income, net of income taxes:
Unrealized gain on investments (16,716) -
Comprehensive Loss (1,787,195) (861,765)
Net loss per common share $ (343.05) $ (166.98)
Weighted average common shares 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> <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 (1,770,479) (1,770,479)
Other Comprehensive Income
Unrealized losses on
investments (16,716) (16,716)
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, March 31, 1999 4,087 1,074 $ 41 $ 11 $ 21,220,777 $ (14,135,206) $ (11,640) $ 7,073,983
- ------------------------------------------------------------------------------------------------------------------------------------
</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
Ended Ended
March 31, 1999 March 31, 1998
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (1,770,479) $ (861,765)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation, amortization and accretion 61,457 99,133
Net loss on sale of invetment securities 22 -
Change in assets and liabilities:
Accrued interest income 89,406 6,032
Premiums receivable 171,766 9,421
Other assets (78,429) (7,357)
Medical claims liabilities 634,040 151,982
Accounts payable (32,209) (9,673)
Accrued expenses 11,812 (18,387)
Other liabilities 168,225 -
- ------------------------------------------------------------------------------------------------------------------------------------
Net cash used in operating activities (744,389) (630,614)
- ------------------------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Purchases of investment securities (2,151,194) -
Proceeds from maturities of investment securities 4,000,000 -
Proceeds from sale of investment securities 100,016 -
Purchases of equipment (84,487) (63,151)
- ------------------------------------------------------------------------------------------------------------------------------------
Net cash recieved from (used in) investing activities 1,864,335 (63,151)
- ----------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 1,119,946 (693,765)
Cash and cash equivalents, beginning of period 2,608,269 14,250,640
- ----------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of period $ 3,728,215 $ 13,556,875
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE>
PENNSYLVANIA PHYSICIAN HEALTHCARE PLAN, INC.
Notes to Consolidated Financial Statements for the Three Month Periods Ended
March 31, 1999 and 1998.
- --------------------------------------------------------------------------------
(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 month periods ended March 31,
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.
<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.
In June 1997, the FASB issued Statement No. 131, "Disclosures about
Segments of an Enterprise and Related Information," which became
effective in 1998. This statement establishes standards for reporting
selected information about operating segments in PPHP's interim and
annual financial statements. Adoption of this statement did not impact
the presentation of PPHP's financial information.
<PAGE>
In June 1998, the FASB issued Statement No. 133, "Accounting for
Derivative Instruments and Hedging Activities," which is effective for
PPHP's fiscal year ending December 31, 2000. This statement establishes
accounting and reporting standards for derivative instruments,
including those embedded in other contracts, and for hedging
activities. It requires recognizing derivatives as assets or
liabilities at fair value on the balance sheet. Management is currently
evaluating the effects of FASB No. 133 on PPHP's financial condition
and results of operations.
Year 2000
Costs incurred by the Company to address Year 2000 issues, to include
costs for assessment, renovation, testing, verification, and
implementation, are charged to expense as incurred.
(3) 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.
(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 three month periods ended
March 31, 1999 and 1998.
<PAGE>
(5) Income Taxes
The net deferred amounts reported by the Company at March 31, 1999 and
December 31, 1998 are as follows:
1999 1998
------------- -------------
Deferred tax assets:
Start up costs $ 835,476 $ 879,794
Net operating loss carryforward 4,842,454 4,073,697
Other assets 18,015 35,958
------------- -------------
Deferred tax asset 5,695,945 4,989,449
Valuation allowance (5,695,945) (4,989,449)
------------- -------------
Net deferred tax asset $ - $ -
------------- -------------
The Company has Federal net operating losses of approximately
$11,927,000 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).
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 March 17, 1999, no
Class A shares or Class B shares had been converted by the holders
thereof into shares of common stock.
<PAGE>
Item 2. Management's Discussion and Analysis on Plan of Operation.
There have been no material changes in Registrant's plan of operations
as set forth in the December 31, 1998 form 10-KSB.
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.
The Company has undertaken a review of its systems infrastructure and
operations in order to determine the extent to which its computer
systems will be vulnerable to potential errors and system failures
arising from the transition of dates from 1999 to 2000. The Company's
financial and operational computer systems utilize computer software
and hardware developed by outside vendors. The Company has, through
communication with its software and hardware vendors, determined which
internal information technology systems are Year 2000 compliant and
which systems need updating. Most systems, including the Company's main
system used to process enrollment, billing and accounts receivable,
authorizations, and claims payments, and the Company's local area
network, have been updated to process calendar dates beginning in the
Year 2000. Updates on the remaining systems are scheduled to be
completed in July, 1999. Additionally, the Company's telephone system
has been updated to be Year 2000 compliant. Testing of the various
systems to verify that dates beginning in the Year 2000 will be
processed accurately will begin in May, 1999.
The Company does not expect the costs associated with this upgrade to
be material to the Company's consolidated financial position, results
of operations or cash flows. However, the Company is currently unable
to determine the potential impact, if any, that could result from any
of its vendors' failure to address this issue adequately. Despite any
of its vendors' efforts, the Company's system infrastructure, software
and hardware may still be materially adversely impacted by the
transition to Year 2000 through the inability to accurately and timely
process benefit claims, the inability to update customers' accounts,
the inability to process financial transactions, the inability to bill
customers, the inability to assess exposure to risks, the inability to
determine liquidity requirements or report accurate financial data to
management, shareholders, customers, regulators and others, business
interruptions or shutdowns, reputational harm, increased scrutiny by
regulators, and litigation related to Year 2000 issues, any of which
events could have a material adverse effect on the Company's business,
results of operations and financial condition.
<PAGE>
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.
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
27 Financial Data Schedule
(b) Reports on Form 8-K
None
<PAGE>
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:
<TABLE>
<CAPTION>
Pennsylvania Physician Healthcare Plan, Inc.
(Registrant)
<S> <C> <C>
Date: May 14, 1999 By: /s/ Richard A. Felice
----------------------------------- --------------------------------------------
Richard A. Felice, President and Chief
Executive Officer
Date: May 14, 1999 By: /s/ T. Clark Phillip
----------------------------------- --------------------------------------------
T. Clark Phillip, Treasurer and Chief
Financial Officer
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED
FROM THE BALANCE SHEET AND STATEMENT OF OPERATIONS AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SAID FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 3,728,215
<SECURITIES> 5,291,379
<RECEIVABLES> 312,486
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 4,820,434
<PP&E> 1,341,228
<DEPRECIATION> 741,852
<TOTAL-ASSETS> 10,311,189
<CURRENT-LIABILITIES> 3,237,206
<BONDS> 0
0
0
<COMMON> 52
<OTHER-SE> 7,073,931
<TOTAL-LIABILITY-AND-EQUITY> 10,311,189
<SALES> 0
<TOTAL-REVENUES> 5,095,266
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 6,865,745
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (1,770,479)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,770,479)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,770,479)
<EPS-PRIMARY> (343.05)
<EPS-DILUTED> 0
</TABLE>
