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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1995
Commission File Number: 33-8686
PARTNERS HEALTH PLAN OF PENNSYLVANIA, INC.
(Exact name of registrant as specified in its charter)
Pennsylvania 25-1536040
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
5700 Corporate Drive
Suite 300
P.O. Box 101769
Pittsburgh, Pennsylvania 15237
(Address of principal executive offices) (Zip Code)
(412) 366-9000
(Registrant's telephone number, including area code)
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 such
filing requirements for the past 90 days. Yes X No
----- -----
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date:
As of April 30, 1995, 6,081 shares of the registrant's Common Stock, no par
value, were issued and outstanding.
This is the first page of 13 consecutive numbered pages.
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PARTNERS HEALTH PLAN OF PENNSYLVANIA, INC.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION PAGE
- ------- --------------------- ----
<S> <C> <C>
Item 1. FINANCIAL STATEMENTS.
CONSOLIDATED BALANCE SHEETS
As of March 31, 1995 and December 31, 1994 3
CONSOLIDATED STATEMENTS OF OPERATIONS
For the three months ended March 31, 1995 and 1994 4
CONSOLIDATED STATEMENTS OF STOCKHOLDERS'
DEFICIENCY
For the three months ended March 31, 1995 and 1994 5
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the three months ended March 31, 1995 and 1994 6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 7-9
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS. 10-11
PART II. OTHER INFORMATION
- -------- -----------------
Item 1. LEGAL PROCEEDINGS. 12
Item 6. EXHIBITS AND REPORTS ON FORM 8-K. 12
SIGNATURES 13
- ----------
</TABLE>
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PART I.
Item 1. FINANCIAL STATEMENTS
PARTNERS HEALTH PLAN OF PENNSYLVANIA, INC.
AND SUBSIDIARIES
Consolidated Balance Sheets
As of March 31, 1995 and December 31, 1994
<TABLE>
<CAPTION>
March 31, December 31,
1995 1994
---- ----
Assets (unaudited)
-------
<S> <C> <C>
Cash and cash equivalents $10,968,931 $ 8,051,632
Debt securities available for sale, at fair value (amortized cost
$1,004,657 at December 31, 1994) - 1,006,497
Receivables:
Premiums, less allowance for doubtful accounts of $80,597
and $69,422 at March 31, 1995 and December 31, 1994, respectively 150,471 170,940
Reinsurance - 52,338
Interest 9,069 -
Other current assets 8,831 -
Restricted investments 235,642 216,998
Deferred Federal income tax receivable 292,679 258,812
----------- -----------
Total assets $11,665,327 $ 9,757,217
=========== ===========
Liabilities and Stockholders' Deficiency
----------------------------------------
Health care claims payable $ 6,011,114 $ 5,463,119
Unearned premiums 711,397 328,765
Accounts payable and accrued liabilities 1,006,784 719,194
Due to affiliate 320,373 9,388
Federal income tax payable 422,118 387,929
Note payable to related party 412,017 412,017
Redeemable preferred stock 2,955,000 2,955,000
----------- -----------
Total liabilities 11,838,803 10,275,412
Stockholders' deficiency:
Common stock, no par value, $0.10 stated value, 100,000 shares
authorized, 6,081 shares issued and outstanding at
March 31, 1995 and December 31, 1994 609 609
Additional paid-in capital 2,976,403 2,976,403
Net unrealized capital gains - 1,196
Accumulated deficiency (3,150,488) (3,496,403)
----------- -----------
Total stockholders' deficiency (173,476) (518,195)
Commitments and contingencies - -
----------- -----------
Total liabilities and stockholders' deficiency $11,665,327 $ 9,757,217
=========== ===========
Stockholders' deficiency per common share $ (28.53) $ (85.22)
=========== ===========
</TABLE>
See notes to the consolidated financial statements.
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PARTNERS HEALTH PLAN OF PENNSYLVANIA, INC.
AND SUBSIDIARIES
Consolidated Statements of Operations
For the three months ended March 31, 1995 and 1994
<TABLE>
<CAPTION>
March 31, March 31,
1995 1994
---- ----
(unaudited) (unaudited)
<S> <C> <C>
Revenue:
Health care premiums $7,467,322 $8,988,765
Interest 143,981 65,511
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Total revenue 7,611,303 9,054,276
---------- ----------
Expenses:
Health care:
Health care claims 5,828,756 7,092,323
Reinsurance premiums, less recoveries of $63 and $37,870
for 1995 and 1994, respectively 96,213 126,995
---------- ----------
Total health care expenses 5,924,969 7,219,318
Management fees 986,460 1,354,346
Marketing, general and administrative 167,697 163,435
Depreciation and amortization - 493
---------- ----------
Total expenses 7,079,126 8,737,592
---------- ----------
Income before federal income taxes 532,177 316,684
Federal income tax expense 186,262 110,840
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Net income $ 345,915 $ 205,844
========== ==========
Net income per weighted average common share $ 56.88 $ 33.83
========== ==========
Weighted average number of common shares outstanding 6,081 6,084
========== ==========
</TABLE>
See notes to the consolidated financial statements.
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PARTNERS HEALTH PLAN OF PENNSYLVANIA, INC.
AND SUBSIDIARIES
Consolidated Statements of Stockholders' Deficiency
For the three months ended March 31, 1995 and 1994
(Unaudited)
<TABLE>
<CAPTION>
Net
Common Stock Unrealized Total
---------------- Additional Capital Accumulated Stockholders'
Shares Amount Paid in Capital Gains/(Losses) Deficiency Deficiency
------ ------ --------------- -------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1993 6,084 $ 609 $ 2,981,959 $ 2,196 $ (4,833,940) $ (1,849,176)
Net income - - - - 205,844 205,844
Net unrealized capital losses - - - (3,496) - (3,496)
----- ----- ----------- -------- ------------ ------------
Balance at March 31, 1994 6,084 $ 609 $ 2,981,959 $ (1,300) $ (4,628,096) $ (1,646,828)
===== ===== =========== ======== ============ ============
Balance at December 31, 1994 6,081 $ 609 $ 2,976,403 $ 1,196 $ (3,496,403) $ (518,195)
Net income - - - - 345,915 345,915
Net unrealized capital losses - - - (1,196) - (1,196)
----- ----- ----------- -------- ------------ ------------
Balance at March 31, 1995 6,081 $ 609 $ 2,976,403 $ - $ (3,150,488) $ (173,476)
===== ===== =========== ======== ============ ============
</TABLE>
See notes to the consolidated financial statements.
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PARTNERS HEALTH PLAN OF PENNSYLVANIA, INC
AND SUBSIDIARIES
Consolidated Statements of Cash Flows
For the three months ended March 31, 1995 and 1994
<TABLE>
<CAPTION>
March 31, March 31,
1995 1994
------------ ------------
(unaudited) (unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net income $ 345,915 $ 205,844
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization - 493
Provision for bad debts 23,148 17,000
Changes in operating assets and liabilities:
(Increase) decrease in premiums receivable (2,679) 238,942
Decrease in reinsurance receivable 52,338 10,300
(Increase) decrease in other receivables (9,069) 14,498
Decrease in due from affiliates - 142,753
(Increase) decrease in other current assets (8,831) 5,145
Increase in deferred Federal income tax receivable (33,571) (23,184)
Increase in health care claims payable 547,995 222,636
Increase in unearned premiums 382,632 223,121
Increase in accounts payable and accrued liabilities 287,590 42,442
Increase in due to affiliates 310,985 -
Increase in Federal income tax payable 34,189 104,025
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Net cash provided by operating activities 1,930,642 1,204,015
----------- ----------
Cash flows from investing activities:
Sale of debt securities available for sale, net 1,005,301 4,205,845
Purchase of restricted investments (18,644) (1,749)
----------- ----------
Net cash provided by investing activities 986,657 4,204,096
----------- ----------
Net increase in cash and cash equivalents 2,917,299 5,408,111
Cash and cash equivalents at beginning of period 8,051,632 261,055
----------- ----------
Cash and cash equivalents at end of period $10,968,931 $5,669,166
=========== ==========
Supplemental disclosures of cash flow information:
Income taxes paid $ 185,000 $ 30,000
=========== ==========
</TABLE>
See notes to the consolidated financial statements.
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PARTNERS HEALTH PLAN OF PENNSYLVANIA, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Note 1- Organization
PARTNERS Health Plan of Pennsylvania, Inc. (the "Company") and its subsidiaries,
Aetna Health Plans of Western Pennsylvania, Inc. (the "Plan") and Physicians
Health Plan Preferred, Inc. (the "PPO") are for-profit Pennsylvania
corporations. The Plan is a federally qualified health maintenance organization
("HMO") licensed to conduct business in the state of Pennsylvania. The Plan
provides a specified range of comprehensive medical services to an enrolled
population through contracted providers. Most of the Plan's member groups are
located in western Pennsylvania, including the metropolitan area of Pittsburgh,
Pennsylvania. The PPO had no operations for the periods ending March 31, 1995
and 1994.
As of March 31, 1995, the Company is owned 81% by AHP Holdings, Inc. ("AHP
Holdings"), and 19% by participating physicians. AHP Holdings is wholly-owned
by Aetna Life Insurance Company ("ALIC"), which is wholly-owned by Aetna Life
and Casualty Company ("Aetna").
Note 2 - Basis of Presentation
The accompanying consolidated financial statements have been prepared in
accordance with generally accepted accounting principles and are unaudited.
These interim statements necessarily rely heavily on estimates, including
assumptions as to annualized tax rates. In the opinion of management, all
adjustments necessary for a fair statement of results for the interim periods
have been made. All such adjustments are of a normal recurring nature.
Note 3 - Related Party Transactions
The Plan has a management agreement with Aetna Health Management, Inc. ("AHM"),
which provides substantially all management, marketing, financial, and
administrative services to the Plan. Fees for these services are based upon a
percentage of net premiums (as defined in the agreement) and interest revenue.
Fees under this agreement were $986,460 and $1,354,346 for the three months
ended March 31, 1995 and 1994, respectively. Included in current liabilities at
March 31, 1995 and December 31, 1994 were $320,373 and $9,388, respectively,
which were related to the unpaid portion of management fees.
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PARTNERS HEALTH PLAN OF PENNSYLVANIA, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
In February, 1992, the Plan amended its Articles of Incorporation to authorize
10,000 shares of redeemable preferred stock with no par value. Under the terms
of the redeemable preferred stock, 33% of the available earnings of the Plan at
the end of each calendar year must (subject to regulatory approval) be used (1)
to pay up to $250,000 per year of the accrued interest under the note payable to
AHP Holdings (see description following) and (2) after all such accrued interest
has been paid, to redeem shares of the redeemable preferred stock at $1,000 per
share.
"Available earnings" are defined for this purpose as excess earnings of the Plan
for the year after subtraction of that amount necessary to continue to meet
statutory net equity requirements and before declaration of common stock
dividends. A review of available earnings for 1994 as defined, will be
completed in second quarter 1995. At that time a determination will be made on
the interest payment to be made to AHP Holdings during 1995. Based on
available earnings for 1993 as defined, an interest payment of $250,000 was made
to AHP Holdings in 1994. At any time on or after March 1, 2002, the holders of
the redeemable preferred stock may convert their shares into shares of common
stock of the Plan having an aggregate value of $1,000 per share, calculated on
the basis of the net equity of the Plan as of the conversion date. Shares
redeemed, converted or otherwise acquired by the Plan shall not be reissued, and
all such shares shall be canceled.
Effective June, 1992, the Plan entered into a Stock Subscription Agreement (the
"Agreement") with AHP Holdings pursuant to which AHP Holdings acquired 2,955
shares of the redeemable preferred stock in exchange for the entire principal
amount of the note payable due to AHP Holdings. Each share was exchanged for
the forgiveness of $1,000 of the note payable principal balance. This
transaction has been accounted for as a non-cash transaction for purposes of the
Consolidated Statements of Cash Flows. In addition, the Agreement suspends
accrual of interest on the note payable from and after December 31, 1991.
Therefore, no interest was accrued in 1995 or 1994. Notes payable to affiliates
of $412,017 at March 31, 1995 and December 31, 1994 represents accrued interest
on the note payable.
The Plan has entered into a reinsurance agreement with ALIC. Premiums paid
under this agreement were $96,276 and $164,865 for the three months ended March
31, 1995 and 1994, respectively. There were no reinsurance receivables at March
31, 1995. Reinsurance receivables due from ALIC were $52,338 at December 31,
1994.
The Plan's benefit package is offered to Aetna for its employees. Premiums for
health care services received by the Plan from Aetna were approximately $226,000
and $215,000 for the three months ended March 31, 1995 and 1994, respectively.
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PARTNERS HEALTH PLAN OF PENNSYLVANIA, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Certain contracted health care providers are also owners of the Plan. Health
care expenses include approximately $741,000 and $1,200,000 for the three months
ended March 31, 1995 and 1994, respectively, for these providers.
Note 4 - Income Taxes
The Company is included in the consolidated Federal income tax return of Aetna.
Pursuant to a tax sharing agreement between the Company and Aetna, the Company
incurs expenses or receives benefits relating to the use of its taxable income
or losses in the consolidated tax return. This agreement also allows for the
recognition of deferred taxes based upon the tax position of the consolidated
group.
The current Federal income tax payable to Aetna of $422,118 and $387,929 at
March 31, 1995 and December 31, 1994, respectively, represent amounts owed to
Aetna for Federal income tax expenses in excess of amounts already paid.
Note 5 - Net Income Per Common Share
Net income per common share is computed using net income divided by the weighted
average number of common shares outstanding. The Company does not currently
have common stock equivalents or convertible preferred stock which would
otherwise be included in the calculation of fully diluted earnings per share.
There is not a significant difference between primary and fully diluted earnings
per share.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.
Results of Operations. The Company's net income for the three months ended
March 31, 1995 was $345,915 ($56.88 per share) improving over net income of
$205,844 ($33.83 per share) for the three months ended March 31, 1994. The
increase in net income for the three months ended March 31, 1995 was primarily
due to a decrease in management fees and an increase in interest income. These
favorable factors were partially offset by a decrease in premium revenue.
Operating income (health care premiums less health care expenses) decreased 13%
to $1,542,353 for the three months ended March 31, 1995 as compared to
$1,769,447 for the three months ended March 31, 1994. The decrease in operating
income reflects a decrease in premium revenues due to the reduction in
membership. This revenue decrease was offset in part by the decrease in the
medical cost ratio (total cost of health care expenses divided by total health
care premiums), which was 79% for the three months ended March 31, 1995 compared
to 80% for the three months ended March 31, 1994.
Revenue decreased by 16% in the first three months of 1995 to $7,611,303
compared to $9,054,276 for the three months ended March 31, 1994. The revenue
decrease in first quarter 1995 was attributable to a decrease in membership.
Membership decreased 16% to 18,249 at March 31, 1995 compared to 21,810 at March
31, 1994. The decrease in membership levels from first quarter 1994 to first
quarter 1995 was due to market demand that continues to shift some members to
Aetna's point of service (POS) products (which are not offered by the HMO) and a
loss of other members to various competitors in the market. These factors more
than offset the addition of new groups and additional market penetration in
existing groups.
Health care expenses decreased 18% to $5,924,969 ($108.16 per member per month)
for the three months ended March 31, 1995, compared to $7,219,318 ($110.60 per
member per month) for the three months ended March 31, 1994. The decrease in
health care expenses in first quarter 1995 was primarily attributable to the
decrease in membership levels and favorable medical experience.
Management fees decreased $367,886 or 27% from the first three months in 1994 to
the first three months in 1995. The decrease is primarily due to the decrease
in the Plan's net premium revenue. Under the management contract with AHM, fees
for management services are based on a percentage of premium revenue and
interest revenue. Effective October 1, 1994, the management fee percentage paid
by the Company was reduced, also contributing to the decline. Fees under this
agreement were $986,460 and $1,354,346 for the three months ended March 31, 1995
and 1994, respectively.
Interest revenue was $143,981 ($2.63 per member per month) for the first three
months of 1995 as compared to $65,511 ($1.00 per member per month) for the three
months ended March 31, 1994. The increase in interest revenue from 1994 to 1995
reflects; (1) an increase in interest-yielding assets due to the Plan's
continued profitable position and (2) the general rise in interest rates, which
has resulted in higher yields and greater return on investments.
The outlook for the Company is heavily dependent upon its ability to effectively
manage health care costs for customers. The Company attempts to achieve this
through a combination of negotiated contracts with health care providers,
development and implementation of guidelines for appropriate utilization of
health care resources and by working with health care providers to review
treatment patterns in order to improve consistency and quality.
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Legislative proposals to change the health insurance system have been prominent
at both the state and national levels. Aetna has actively supported proposals
designed to enhance managed care and to expand access to health care coverage
through private sector competition. State legislative action is expected to
intensify in 1995. Although anti-managed care legislation is expected to be
proposed broadly, to date such legislation has been enacted in only a few states
and has been limited in its scope. Management is not able to predict the
outcome of various state and federal initiatives and the effect any such
legislation would have on the Company.
Liquidity and Capital Resources. Cash, cash equivalents and short-term
investments at March 31, 1995 and December 31, 1994 were $10,968,931 and
$9,058,129, respectively. Operations were funded with cash generated primarily
from premium revenues and interest earnings on cash, cash equivalents and
short-term investments. The Company does not anticipate making any material
capital expenditures in the foreseeable future. The Company believes that its
existing capital resources, together with funds generated from operations, will
be sufficient to meet its normal working capital requirements and capital
commitments for the foreseeable future.
The Plan is required to maintain a minimum amount of net equity as defined by
regulation and statute. A Pennsylvania regulation, effective January 1, 1993,
requires an operational HMO to have as minimum net equity the greater of
$1,000,000 or three months uncovered health care expenditures for Pennsylvania
enrollees as reported on the most recent financial statement filed with the
Commonwealth of Pennsylvania. An existing HMO has four years to meet the net
equity requirements in increments of $250,000 by January 1st of each year. As
of March 31, 1995, the minimum net equity requirement as defined was $750,000.
The Plan's net equity, including redeemable preferred stock, as defined by
regulation and statute was $2,480,310 at March 31, 1995.
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PART II.
ITEM 1. LEGAL PROCEEDINGS.
There are no legal proceedings pending against the Company, the PPO, or the HMO
which, if successful, would materially adversely affect the operations or
financial condition of the Company.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
a. Exhibits
None
b. Reports on Form 8-K
None
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Company
has duly caused this Report to be signed on its behalf by the undersigned,
thereunto duly authorized.
PARTNERS HEALTH PLAN OF
PENNSYLVANIA, INC.
Date: May 11, 1995 /s/ Steven W. Jones
------------------------------------
Steven W. Jones, President
(Principal Executive Officer)
Date: May 11, 1995 /s/ Joseph F. Brislin
------------------------------------
Joseph F. Brislin
Assistant Vice President of Aetna
Life Insurance Company
(acting in the capacity of Principal
Accounting Officer and Principal
Financial Officer of the Company)
13
