<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
___________
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR QUARTERLY PERIOD ENDED MARCH 31, 1997
OR
[ ] TRANSACTION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
COMMISSION FILE NO. 0-21440
___________
PHYSICIAN CORPORATION OF AMERICA
(Exact name of Registrant as specified in its charter)
DELAWARE 48-1006287
(State or Other Jurisdiction of (IRS Employer
Incorporation or Organization) Identification No.)
6101 BLUE LAGOON DRIVE
MIAMI, FL 33126
(Principal Executive Offices, Including Zip Code)
Registrant's telephone number including area code: (305) 267-6633
___________
Indicate by check mark whether the Registrant (i) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding twelve months (or for such shorter period that the Registrant was
required to file such reports), and (ii) has been subject to such filing
requirements for the past ninety days.
Yes X No
---- ----
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether Registrant has filed all documents and reports
required to be filed by Section 12, 13 or 15(d) of the Securities Exchange Act
of 1934 subsequent to the distribution of securities under a plan confirmed by a
court.
Not Applicable X
----
APPLICABLE ONLY TO CORPORATE ISSUERS:
NUMBER OF SHARES OUTSTANDING
TITLE OF EACH CLASS AT MARCH 31, 1997
Common Stock 38,837,657
<PAGE>
PHYSICIAN CORPORATION OF AMERICA
QUARTERLY REPORT ON FORM 10-Q
FOR QUARTER ENDED MARCH 31, 1997
TABLE OF CONTENTS
PAGE
PART I. Financial Information
Item 1. Consolidated Financial Statements 1-7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 8-12
PART II. Other Information
Item 1. Legal Proceedings 13
Item 2. Changes in Securities 13
Item 3. Defaults Upon Senior Securities 13
Item 4. Submission of Matters to a Vote of Security Holders 13
Item 5. Other Information 13
Item 6. Exhibits and Reports on Form 8-K 13
Signature Page 14
<PAGE>
PHYSICIAN CORPORATION OF AMERICA AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
MARCH 31, 1997 AND DECEMBER 31, 1996
<TABLE>
<CAPTION>
(Unaudited)
March 31, December 31,
ASSETS 1997 1996
-------- ------------- ------------
(IN THOUSANDS)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 143,485 $ 134,011
Short term investments 146,455 130,788
Accounts receivable, net of allowance of approximately $51,674
and $52,351 at March 31, 1997 and December 31, 1996, respectively:
Trade (health and workers' compensation premiums,
and administrative service fees) 62,845 92,454
Reinsurance and other recoverables on paid and
unpaid losses 103,023 102,893
Other 20,631 20,340
Prepaid expenses, inventories and other
current assets 8,688 8,362
Income taxes receivable - 42,274
Deferred income tax benefit 19,690 23,280
------------- ------------
Total current assets 504,817 554,402
------------- ------------
Property and equipment 51,112 52,132
Long term investments 226,449 335,015
Reinsurance and other recoverables on unpaid losses 219,697 246,211
Statutory deposits and other assets 77,971 45,242
Intangible assets, net 120,182 121,985
------------- ------------
$ 1,200,228 $ 1,354,987
------------- ------------
------------- ------------
</TABLE>
1
<PAGE>
PHYSICIAN CORPORATION OF AMERICA AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS, CONTINUED
MARCH 31, 1997 AND DECEMBER 31, 1996
<TABLE>
<CAPTION>
(Unaudited)
March 31, December 31,
Liabilities and Stockholders' Equity (Deficit) 1997 1996
---------------------------------------------- ----------- -----------
(IN THOUSANDS)
<S> <C> <C>
Current liabilities:
Accounts payable, accrued expenses and other
current liabilities $ 69,910 $ 82,792
Health claims payable 165,817 182,206
Current portion of other claims payable, primarily
workers' compensation 209,863 230,476
Unearned premiums and service fees 16,320 51,562
Current portion of long-term debt and obligations
under capital leases 122,185 122,709
Income taxes payable 6,573 -
----------- -----------
Total current liabilities 590,668 669,745
Long-term debt and obligations under capital
leases, less current portion 9,746 10,344
Long-term portion of other claims payable,
primarily workers' compensation 625,438 699,299
Deferred income taxes 2,943 7,432
Deferred income and other long-term liabilities 35,625 32,999
----------- -----------
Total liabilities 1,264,420 1,419,819
----------- -----------
Stockholders' equity (deficit):
Preferred stock, $1.00 par value, 10,000,000 shares
authorized; none issued and outstanding -- --
Common stock, $.01 par value, authorized
200,000,000 shares; issued 38,837,657 and
38,829,456 shares at March 31, 1997 and
December 31, 1996, respectively 388 388
Additional paid-in capital 136,300 136,435
Accumulated deficit (189,004) (193,627)
Unrealized gain (loss) on investments (2,829) 1,182
Common stock held in treasury - at cost; 452,553 and 460,754
shares at March 31, 1997 and December 31, 1996,
respectively (9,047) (9,210)
----------- -----------
Total stockholders' equity (deficit) (64,192) (64,832)
Commitments and contingencies
----------- -----------
$ 1,200,228 $ 1,354,987
----------- -----------
----------- -----------
</TABLE>
2
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PHYSICIAN CORPORATION OF AMERICA AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 1997 AND 1996
<TABLE>
<CAPTION>
(UNAUDITED)
THREE MONTHS ENDED MARCH 31,
----------------------------
1997 1996
---------- -----------
(IN THOUSANDS, EXCEPT
PER SHARE DATA)
<S> <C> <C>
Revenues:
Health premiums $ 332,833 $ 318,209
Workers' compensation related revenues 23,916 49,363
Investment income 7,803 5,696
Other revenues 932 5,655
---------- ----------
Total revenues 365,484 378,923
Operating expenses:
Medical costs 289,937 277,965
Health administrative, marketing and other expenses 41,700 52,032
Workers' compensation related administrative marketing
and other expenses 19,261 42,518
Depreciation and amortization 4,365 6,234
Other operating expenses 61 4,781
---------- ----------
Total operating expenses 355,324 383,530
Operating income (loss) 10,160 (4,607)
Interest expense (5,203) (4,027)
Other income (expense) (15) 10
---------- ----------
Earnings (loss) before income taxes 4,942 (8,624)
Income tax benefit (expense) (319) 3,690
---------- ----------
Net earnings (loss) $ 4,623 $ (4,934)
---------- ----------
---------- ----------
Net earnings (loss) per common and common
equivalent share $ 0.12 $ (0.13)
---------- ----------
---------- ----------
Net earnings (loss) per common and common
equivalent share assuming full dilution $ 0.12 $ (0.13)
---------- ----------
---------- ----------
Number of common shares used in computation of
primary and fully diluted earnings per share 39,031,000 39,421,000
---------- ----------
---------- ----------
</TABLE>
3
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PHYSICIAN CORPORATION OF AMERICA AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 1997 AND 1996
<TABLE>
<CAPTION>
(UNAUDITED)
THREE MONTHS ENDED MARCH 31,
----------------------------
1997 1996
-------- ----------
(IN THOUSANDS)
<S> <C> <C>
Cash flows from operating activities:
Net earnings (loss) $ 4,623 $ (4,934)
Adjustments to reconcile net earnings (loss) to net
cash provided by operating activities:
Depreciation and amortization 4,365 6,234
Amortization of premium/accretion of discount 150 640
Deferred income taxes 1,482 (4,831)
Changes in working capital:
Accounts receivable 29,319 (38,773)
Reinsurance and other recoverables 26,384 2,764
Income taxes payable/receivable 48,855 998
Accounts payable, accrued expenses and
other current liabilities (3,245) 8,160
Claims payable (110,863) 83,412
Unearned premiums (35,242) (11,650)
Other changes in other assets and liabilities (7,328) (4,203)
-------- ----------
Net cash (used in) provided by operating activities (41,500) 37,817
-------- ----------
Cash flows from investing activities:
Purchase of investments (30,994) (180,624)
Proceeds from sale of investments 89,191 54,360
Purchase of property and equipment (1,545) (2,636)
Proceeds from sale of property and equipment 3 115
Statutory deposits and other assets (4,578) (28,192)
-------- ----------
Net cash provided by (used in) investing activities 52,077 (156,977)
-------- ----------
Cash flows from financing activities:
Proceeds from borrowings - -
Principal payments on debt and capital leases (583) (917)
Principal payments on covenants not-to-compete (540) (716)
Proceeds from issuance of common stock 20 758
-------- ----------
Net cash (used in) provided by financing
activities (1,103) (875)
-------- ----------
Net increase (decrease) in cash 9,474 (120,035)
Cash and cash equivalents at beginning of period 134,011 164,706
-------- ----------
Cash and cash equivalents at end of period $ 143,485 $ 44,671
-------- ----------
-------- ----------
</TABLE>
4
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PHYSICIAN CORPORATION OF AMERICA
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR QUARTER ENDED MARCH 31, 1997
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
NOTE A:
ORGANIZATION
The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information and the instructions to Form 10-Q and Rule 10-01 of
Regulation S-X. Accordingly, they do not include all information and footnotes
required by generally accepted accounting principles for annual financial
statements. In management's opinion, all adjustments, consisting only of normal
recurring adjustments, considered necessary for a fair presentation have been
included.
The consolidated balance sheet as of December 31, 1996 was derived from the
registrant's audited financial statements.
The results for the three months ended March 31, 1997 are not necessarily
indicative of the results to be expected for the full year.
NOTE B:
EARNINGS (LOSS) PER COMMON AND COMMON EQUIVALENT SHARE
Primary earnings (loss) per share were based on the weighted average number of
common and common equivalent shares outstanding during the periods presented.
Equivalent shares consist of those shares issuable upon the assumed exercise of
stock options calculated under the treasury stock method, based on average stock
market prices in the periods.
Fully diluted earnings (loss) per share were computed using the weighted average
number of common and common equivalent shares outstanding in the periods,
assuming exercise of stock options calculated under the treasury stock method,
based on the higher of average stock prices in the periods or the stock market
price at the end of the periods. In April 1997, the Company repriced certain of
its employee stock options to $7.625. This amount exceeded the market price of
its common stock by $3.125 on the date of repricing.
NOTE C:
DEBT
On April 22, 1997, the Company entered into an eighth amendment to modify its
$102,250 Credit Facility Agreement with its primary lenders. The significant
terms of the amendment include (i) extending the maturity date of the loan to
October 1, 1997, (ii) increasing the interest rate to prime plus 3% through July
31, 1997 and to prime plus 4% during August and September 1997, (iii) charging
an amendment fee at the
5
<PAGE>
PHYSICIAN CORPORATION OF AMERICA
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR QUARTER ENDED MARCH 31, 1997
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
NOTE C: (CONTINUED)
time of amendment of approximately $1,023 and, in certain circumstances, on
July 31, 1997 an additional fee of 1% of the then outstanding balance of
indebtedness, and (iv) customary financial covenants.
Management is evaluating its alternatives to meet its obligations under this
indebtedness. These alternatives include: (i) completing a merger transaction
with another partner, (ii) raising equity capital or high-yield debt through a
private placement or a public offering, or (iii) completing the sale of certain
of the Company's assets. The Company is currently working towards completing
one or more of these refinancing alternatives by October 1, 1997. There can be
no assurance that the Company will be successful in completing an alternative
financing plan within such time period.
NOTE D:
WORKERS' COMPENSATION
As a result of the 1996 losses incurred by PCA/P&C, the State of Florida
Department of Insurance ("DOI") placed PCA/P&C under administrative supervision
in November 1996. In February 1997, the DOI obtained a Florida Circuit Court
order which required PCA/P&C to submit a corrective action plan by April 2, 1997
and attend a hearing on May 2, 1997 to show cause why the DOI should not place
PCA/P&C under State Rehabilitation. On May 2, 1997, the parties entered into,
and the court approved, a Consent Order and a Forbearance Agreement, under which
(i) PCA/P&C consented to the appointment of a receiver on or after June 2, 1997
if the DOI has not otherwise approved an agreement, recapitalization or other
transaction providing for the full and timely payment of PCA/P&C's liabilities,
(ii) the DOI obtained greater control over PCA/P&C in the interim, and (iii) the
DOI agreed to consider the Company's reinsurance and work-out proposals.
The Company continues to evaluate its alternatives to resolve the insolvent
condition of PCA/P&C. Accordingly, on April 28, 1997, the Company entered
into a letter of intent with a third-party reinsurance company ("Reinsurer")
whereby the Company would obtain excess reinsurance from Reinsurer in
exchange for a premium, a portion of which could be returned to the Company,
should PCA/P&C's future cash flow be sufficient to pay its liabilities as
anticipated.
Should PCA and Reinsurer be able to reach agreement on the terms of a
reinsurance agreement, any such agreement would be subject to approval by the
DOI. Meanwhile, the Company continues to seek other alternatives to resolve
the PCA/P&C statutory deficit. However, should all efforts to resolve the
matter be unsuccessful, the DOI would likely be appointed receiver of PCA/P&C
as early as June 2, 1997.
6
<PAGE>
PHYSICIAN CORPORATION OF AMERICA
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR QUARTER ENDED MARCH 31, 1997
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
NOTE D: (CONTINUED)
Should the DOI be appointed receiver of PCA/P&C, the Company expects to (i)
be unable to exercise control over day-to-day operations of PCA/P&C, (ii)
lose access to the assets and liabilities of the PCA/P&C, which approximated
$745,200 and $865,900, respectively, at March 31, 1997, and (iii) become
involved in disputes and perhaps litigation regarding PCA/P&C's deficit which
was approximately $120,700 at March 31, 1997. For example, DOI has claimed,
and the Company denies, that (i) the Company has an obligation to fund to PCA/
P&C approximately $22,000 related to federal income tax benefits, (ii) PCA
Solutions, Inc., the Company's workers' compensation third-party
administrator subsidiary, has been paid in full or in large part for
continuing future services to PCA/P&C and FB&E, a self-insured fund
previously administered by PCA Solutions, valued at approximately $38,000,
and (iii) PCA Solutions owes or should reimburse PCA/P&C approximately
$53,000 and owes FB&E approximately $38,000. These disputes relate to
intercompany accounts which, if resolved in the DOI's favor, would not result
in an additional income statement charge to the Company. Additionally, if the
Company were found responsible for the approximate $120,700 deficit, such
action would not result in any additional income statement charge to the
Company. However, should any of these matters be resolved in favor of the
DOI's position, the Company's liquidity position would be adversely impacted.
The Company's liquidity position, after consideration of the restrictions
imposed by regulators regarding distributions from its subsidiaries, is limited
and insufficient to provide immediately available cash to fund these disputes
and deficit, should that be required. Accordingly, although the Company
believes that the consequences of the DOI being appointed receiver of PCA/P&C
could have a material adverse effect upon the Company's liquidity, financial
condition and results of operations, such effect cannot be determined at this
time.
NOTE E:
SIGNIFICANT CONTRACTS
Effective April 1, 1997, the Company's Puerto Rico HMO (PCA/P.R.) was awarded an
additional contract to provide health services to approximately 145,000 (reform)
Medicaid members in the Southeastern region of Puerto Rico. This two-year
contract is in addition to the two-year renewal of the Company's 270,000 member
reform contract which was also effective April 1, 1997. In conjunction with
these contracts, PCA/P.R. pledged approximately $11 million of investments in
March 1997 to Puerto Rico insurance regulators. Such amount has been included
in statutory deposits and other assets in the accompanying consolidated balance
sheet.
7
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
THE DISCUSSION AND ANALYSIS PRESENTED BELOW PROVIDES MANAGEMENT'S ASSESSMENT OF
THE COMPANY'S RESULTS OF OPERATIONS AND FINANCIAL CONDITION AS OF AND FOR THE
THREE MONTHS ENDED MARCH 31, 1997. THIS INFORMATION SHOULD BE READ IN
CONJUNCTION WITH THE COMPANY'S MARCH 31, 1997 UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS AND NOTES THERETO.
FROM TIME TO TIME, THE COMPANY MAY MAKE CERTAIN STATEMENTS THAT CONTAIN
"FORWARD-LOOKING" INFORMATION (AS DEFINED IN THE PRIVATE SECURITIES LITIGATION
REFORM ACT OF 1995). WORDS SUCH AS "ANTICIPATE", "ESTIMATE", "PROJECT" AND
SIMILAR EXPRESSIONS ARE INTENDED TO IDENTIFY SUCH FORWARD-LOOKING STATEMENTS.
FORWARD-LOOKING STATEMENTS MAY BE MADE BY MANAGEMENT ORALLY OR IN WRITING,
INCLUDING, BUT NOT LIMITED TO, IN PRESS RELEASES, AS PART OF THIS MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION AND AS
PART OF OTHER SECTIONS OF THIS QUARTERLY REPORT ON FORM 10-Q AND THE COMPANY'S
OTHER FILINGS WITH THE SECURITIES AND EXCHANGE COMMISSION UNDER THE SECURITIES
ACT OF 1933 AND THE SECURITIES EXCHANGE ACT OF 1934.
SUCH FORWARD-LOOKING STATEMENTS ARE SUBJECT TO CERTAIN RISKS, UNCERTAINTIES AND
ASSUMPTIONS, INCLUDING WITHOUT LIMITATION THOSE IDENTIFIED BELOW. SHOULD ONE OR
MORE OF THESE RISKS OR UNCERTAINTIES MATERIALIZE, OR SHOULD ANY OF THE
UNDERLYING ASSUMPTIONS PROVE INCORRECT, ACTUAL RESULTS OF CURRENT AND FUTURE
OPERATIONS MAY VARY MATERIALLY FROM THOSE ANTICIPATED, ESTIMATED OR PROJECTED.
READERS ARE CAUTIONED NOT TO PLACE UNDUE RELIANCE ON THESE FORWARD-LOOKING
STATEMENTS, WHICH SPEAK ONLY AS OF THEIR RESPECTIVE DATES.
AMONG THE FACTORS THAT HAVE A DIRECT BEARING ON THE COMPANY'S RESULTS OF
OPERATIONS AND FINANCIAL CONDITION ARE THE ABILITY OF PCA/P&C TO SUBMIT A
DETAILED CORRECTIVE PLAN TO REMEDY ITS CAPITAL DEFICIENCY THAT IS ACCEPTABLE TO
THE DOI, PCA/P&C'S RELATED CONSENT GIVEN TO THE APPOINTMENT OF THE DOI AS
RECEIVER FOR PURPOSES OF REHABILITATION OR LIQUIDATION ANYTIME ON OR AFTER JUNE
2, 1997, IF THE DOI IS NOT SATISFIED WITH THE CORRECTIVE PLAN, THE ABILITY OF
THE COMPANY TO REFINANCE THE CREDIT FACILITY BY ITS MATURITY DATE OF OCTOBER 1,
1997, THE ABILITY OF SIERRA TO CALL PCA'S DEMAND PROMISSORY NOTE PAYABLE TO
SIERRA, SIERRA'S SUCCESS IN ANY ACTION BROUGHT TO ENFORCE ITS DEMANDS FOR
EXPENSES IN CONNECTION WITH THE TERMINATED MERGER AGREEMENT, MEDICARE AND
MEDICAID PREMIUM RATES SET BY STATE AND FEDERAL GOVERNMENT AGENCIES CHANGING
UNEXPECTEDLY, ACTIONS BY TEXAS, FLORIDA OR PUERTO RICO REGULATORS AND OTHER
FACTORS DISCUSSED HEREIN.
Physician Corporation of America ("the Company") is a managed health care
company that provides comprehensive health care services through its health
maintenance organizations ("HMOs") and workers compensation administrative
management services through its workers' compensation third party administration
companies ("TPAs"). The Company conducts all of its business in the
Southeastern United States and Puerto Rico.
8
<PAGE>
In the first quarter 1997, the Company continued to increase health premium
revenues and membership in its health plans. The following sets forth certain
financial and operating information pertaining to the Company's results for the
quarter ended March 31, 1997 compared to the same period in 1996:
(Unaudited)
-------------------------
Three Months Ended,
-------------------------
March 31, March 31,
1997 1996
--------- ---------
(IN THOUSANDS, EXCEPT
OPERATING STATISTICS)
Health Premiums:
Commercial $127,802 $142,556
Medicaid 104,308 91,325
Medicare 85,660 76,187
Indemnity 15,063 8,141
--------- ---------
Total health premiums $332,833 $318,209
--------- ---------
--------- ---------
Operating Statistics and Data:
Medical loss ratio (1) 87.1% 87.4%
Health administrative, marketing and
other expenses ratio (2) 12.5% 16.4%
Period ending membership:
HMO:
Commercial 398,000 450,000
Medicaid 456,000 376,000
Medicare 60,000 58,000
--------- ---------
Total HMO 914,000 884,000
Health Indemnity and PPO 82,000 34,000
--------- ---------
Total HMO and Insured Health Membership 996,000 918,000
--------- ---------
--------- ---------
(1) Medical costs as a percentage of health premiums.
(2) Health administrative, marketing and other expenses, including allocations
of corporate overhead as a percentage of health premiums.
THREE MONTHS ENDED MARCH 31, 1997 COMPARED TO THREE MONTHS ENDED MARCH 31, 1996
The Company earned a $4.6 million after tax profit for the three months ended
March 31, 1997 as compared to a net loss of $4.9 million in 1996. The increase
was primarily due to a $8.4 million increase in profitability of the Company's
HMOs in 1997 as compared to the same period in 1996.
Health premium revenues for the three months ended March 31, 1997 as compared to
1996 increased by $14.6 million or 4.6%. Of the increase, $29.8 million was
due to a 9.4% increase in the average number of members during the period offset
by a $15.2 million decrease due to an 4.4% decrease in the weighted average
health premium rate per member. Total membership at March 31, 1997 increased by
approximately 78,000 members from membership at March 31, 1996 (52,000 decrease
in Commercial, 80,000 increase in Medicaid, 2,000 increase in Medicare and
48,000 in indemnity and PPO members). The decrease in Commercial membership is
primarily due to the Company selling its HMO operations in Georgia and Alabama
which had approximately 37,500 Commercial members at March 31, 1996. The
premium rate decrease period to period was attributable to the fact that in the
9
<PAGE>
quarter ended March 31, 1997, (i) the Company provided health care to
approximately 456,000 Medicaid members (273,000 of which are members of the
Reform Program which began in December 1995 in Puerto Rico at an average premium
rate of approximately $49 per member per month) while (ii) weighted average
Medicare premium rates increased by approximately 6.7% for the quarter ended
March 31, 1997 vs. 1996.
Workers' compensation related revenues for the three month period ended March
31, 1997 decreased by $25.5 million to $23.9 million from $49.4 million for the
three month period ended March 31, 1996. This decrease is primarily due to the
Company ceasing writing new and renewal workers' compensation insurance in
November 1996. Accordingly, workers' compensation related insurance premiums
decreased by $28.7 million, while workers' compensation TPA fees increased by
$3.2 million during the three months ended March 31, 1997, compared to the same
period in 1996. The increase in workers' compensation related TPA service fees
is attributable to the Company expanding its non-affiliated customer base. This
is directly resultant from PCA Solutions entering into a five-year TPA agreement
with an A.M. Best A-Rated insurance company, effective November 1996.
Medical costs for the three months ended March 31, 1997 as compared to 1996
increased by $12.0 million or 4.3%. Of the increase, $26.0 million was due to a
9.4% increase in the average number of members during the period offset by a
$14.0 million decrease due to a 4.6% decrease in the weighted average medical
cost per member. This decrease in the weighted average medical cost per member
was due primarily to an increase in Medicaid members (which have a lower than
average per member medical cost) and a decrease in Commercial members for the
three months ended March 31, 1997 versus 1996. As a result of these factors,
the Company's medical loss ratio decreased to 87.1% from 87.4% in 1996.
Health related administrative, marketing and other expenses for the three months
ended March 31, 1997 as compared to 1996 decreased by $10.3 million or 19.9% to
$41.7 million. This decrease was due to $2.8 million in costs incurred in 1996
by subsidiaries sold by the Company subsequent to March 31, 1996. The remaining
$7.5 million decrease is almost entirely the result of lower administrative
costs incurred by the Company's Florida HMOs which resulted from employee
reductions and office consolidations in the second and third quarters of 1996.
The Company's health administrative ratio improved to 12.5% for the three months
ended March 31, 1997 from 16.4% in 1996.
Workers' compensation related administrative, marketing and other expenses for
the three months ended March 31, 1997 as compared to 1996 decreased by $23.3
million or 55% to $19.3 million. This decrease is entirely attributable to and
consistent with the $28.7 million decrease in workers' compensation related
insurance premiums, as noted above.
Depreciation and amortization for the three months ended March 31, 1997 as
compared to 1996 decreased by $1.9 million or 30% which is attributable
primarily to lower amortization of intangibles relating to the Company's
workers' compensation TPA following the $39.0 million write-off of intangibles
in the fourth quarter of 1996.
Income tax expense for the three months ended March 31, 1997 was $0.3 million
compared to a $3.7 million income tax benefit in 1996. This income tax expense
in 1997 resulted primarily from tax incurred on the Company's income generated
by its subsidiaries in Puerto Rico. The tax expense attributable to the
Company's other operations was eliminated as a result of the utilization of net
operating loss carryforwards. Accordingly, the approximate 6.5% effective income
tax rate in 1997 is lower than the 35% statutory rate for such period, primarily
due to the nondeductibility of goodwill amortization for income tax purposes
10
<PAGE>
arising from the acquisition of HMOs and workers compensation companies offset
by tax exempt investment income and the utilization of net operating loss
carryforwards.
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 1997, the Company had a working capital deficit of $85.9 million.
Cash and cash equivalents were $143.5 million at March 31, 1997, an increase of
$9.5 million from $134.0 million at December 31, 1996 and short term investments
were $146.5 million at March 31, 1997, an increase of $15.7 million from a
$130.8 million balance at December 31, 1996. The increase in cash and cash
equivalents is primarily the result of cash generated from operations offset by
cash used in investing and financing activities. The Company's cash and cash
equivalents do not include statutory cash deposits segregated as required by
various regulatory authorities.
Net cash used in operating activities for the three months ended March 31, 1997
was $41.5 million compared to cash of $37.8 million provided by operating
activities for the three months ended March 31, 1996. The cash provided by
operating activities for 1997 was principally the result of the following
factors: (i) net income of $4.6 million, (ii) decrease in claims payable in the
amount of $110.9 million, (iii) increase in income taxes payable in the amount
of $48.9 million resulting from income tax refunds received, (iv) decrease in
unearned premiums in the amount of $35.2 million, (v) $29.3 million increase in
accounts receivable, (vi) a decrease in accounts payable, accrued expenses and
other current liabilities of $3.2 million, and (vii) an increase in reinsurance
and other receivables of $26.4 million.
In 1997, net cash provided by investment activities increased to $52.1 million,
from $157.0 million used in investment activities in 1996. The net cash
provided by investing activities was primarily the result of the $1.5 million
purchase of property and equipment, the net proceeds from sale of investments of
$58.1 million. The Company believes it will be able to finance all capital
expenditures for the foreseeable future from cash generated from operations and
amounts available from cash. The Company has utilized capital leases to finance
certain equipment additions in the past and expects to continue to do so in the
future.
In 1997, net cash used in financing activities for the three months ended March
31, 1997 increased to $1.1 million compared to $0.9 million cash provided in the
three months ended March 31, 1996. The cash used in financing activities was
primarily the result of $1.1 million of long-term debt principal and covenant
payments.
The Company believes that cash on hand and cash flow generated from operations
will not be sufficient to meet its Credit Facility and debt obligations which
become due in October 1997. The Company anticipates that it will be able to
effect one or more of the following alternatives by October 1, 1997, in order to
meet its obligations under the Credit Facility indebtedness: (i) completing a
merger or sale transaction with another partner, (ii) raising equity capital or
high-yield debt through a private placement or a public offering, or (iii)
completing the sale of certain of the Company's assets. In the past, the
Company has received indications of interest from third parties related to each
of these four possible alternatives. The Company is currently working towards
completing one or more of these refinancing alternatives by October 1, 1997;
however, there can be no assurance that it will be successful in such endeavor.
The Company is significantly restricted in its ability to utilize the working
capital or the operating cash flows of its regulated subsidiaries. These
restrictions include requirements to maintain a certain level of statutory
11
<PAGE>
equity in each regulated subsidiary and to obtain prior consent to declare
any dividend. At March 31, 1997, the Company's regulated HMO and insurance
subsidiaries (excluding PCA/P&C) had approximately $23.2 million in excess
statutory equity. The Company's Florida HMOs incurred operating losses in
1996 and the Company has submitted a corrective action plan to regulators
under which these HMOs will operate until profitability is obtained.
Additionally, the PCA/P&C subsidiary had a deficit of approximately $120.7
million as of March 31, 1997, which, pursuant to a corrective action plan in
process, will be replenished through collection of non-admitted assets and
future investment earnings. As a result, the Company will not have access to
the cash flow from PCA/P&C which is expected from its estimated 1997 pretax
earnings to be $11.5 million to $15.0 million and will pay approximately $2.0
million in income tax obligations from other cash flow sources or the
utilization of net operating loss carryforwards. The Company expects that
this deficit will be reduced by actual future earnings and the collection of
non-admitted assets, including certain intercompany balances if required, the
largest component of which is an income tax receivable of approximately $22.0
million from PCA.
As described in Note D to the March 31, 1997 consolidated financial statements,
the Company believes that should the Company be found to be responsible for the
deficit of PCA/P&C, its liquidity position would be adversely impacted, and its
cash on hand and cash flow generated from operations would not be sufficient to
fund such deficit on a current basis. The impact of this inability on the
Company's financial condition and results of operations cannot be determined.
Additionally, as a result of being awarded the new and renewal contracts to
provide health services to an aggregate of approximately 415,000 Medicaid
(reform) members in Puerto Rico (see Note E to the March 31, 1997
consolidated financial statements), the Company has committed to increasing
its investment in PCA/P.R. and pledging assets to the Puerto Rico insurance
regulators. Accordingly, the Company has made additional capital
contributions to PCA/P.R. of approximately $4.3 million and PCA/P.R. has
pledged assets of approximately $11.0 million to the Puerto Rico insurance
regulators during the first quarter of 1997. Furthermore, the Company
anticipates it will be able to fund the additional P.R. equity requirements,
during the foreseeable future as needed, from operations of PCA/P.R. and from
capitalizing management fees and income taxes otherwise payable to PCA
Corporate.
12
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
As a result of the deterioration of PCA/P&C's financial position,
in November 1996, the Florida DOI placed PCA/P&C under regulatory
supervision. In February 1997, after the Company announced it
expected further losses in its PCA/P&C subsidiary, the Florida DOI
obtained a Florida circuit court order requiring PCA/P&C to submit
a detailed corrective action plan setting forth a program to remedy
the capital deficiency in PCA/P&C. Additionally, this plan was to
be the basis for the evaluation of whether the DOI should place
PCA/P&C under statutory rehabilitation at a hearing to take place
on May 2, 1997. The May 2, 1997 hearing has been rescheduled to
June 2, 1997. See note D to the Company's March 31, 1997
consolidated financial statements. The Company cannot predict the
outcome of this matter.
Item 2. Changes in Securities
Not Applicable
Item 3. Defaults Upon Senior Securities
Not Applicable
Item 4. Submission of Matters to a Vote of Security Holders
Not Applicable
Item 5. Other Information
Not Applicable
Item 6. Exhibits and Reports on Form 8-K
(A) Exhibits furnished as part of the Report:
(1) Financial Statements, See PART I, Item 1
(2) Exhibits:
10.1 Eighth Amendment to Credit Agreement between the Company
and Citibank, N.A. dated April 22, 1997 (filed herewith).
99.1 Consent Order between PCA Property & Casualty Insurance
Company and the Florida Department of Insurance dated
May 2, 1997 (filed herewith).
99.2 Forbearance Agreement between PCA Property & Casualty
Insurance Company and the State of Florida, ex re., the
Department of Insurance, joined by Physician Corporation
of America and PCA Solutions, Inc. dated May 2, 1997
(filed herewith).
13
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Report to be signed on its behalf by the
undersigned thereunto duly authorized.
PHYSICIAN CORPORATION OF AMERICA
(Registrant)
By: /s/ E. Stanley Kardatzke, M.D.
-----------------------------------
E. Stanley Kardatzke, M.D.,
Chairman of the Board and CEO
(Principal Executive Officer)
By: /s/ Clifford W. Donnelly
-----------------------------------
Clifford W. Donnelly
Senior Vice President of Finance
and Chief Financial Officer
By: /s/ Jay M. Grobowsky
-----------------------------------
Jay M. Grobowsky
Vice President of Finance
Date: May 14, 1997
14
<PAGE>
EXHIBIT 10.1
EIGHTH AMENDMENT TO CREDIT AGREEMENT
EIGHTH AMENDMENT TO CREDIT AGREEMENT dated as of April 22, 1997 (this
"Amendment") among Physician Corporation of America (the "Borrower"), the banks
listed on the signature pages hereof (the "Lenders"), Citibank, N.A., as issuing
bank (the "Issuing Bank"), and Citibank, N.A., as agent for the Lenders and
Issuing Bank (the "Agent").
PRELIMINARY STATEMENTS:
1. The Borrower, the Lenders, the Issuing Bank and the Agent are
parties to that certain Revolving Credit Agreement dated as of October 27, 1994,
as amended by an Amendment to Credit Agreement and Consent to Acquisition dated
as of September 22, 1995, by a Second Amendment to Credit Agreement dated as of
March 29, 1996, by a Third Amendment to Credit Agreement dated as of April 5,
1996, by a Fourth Amendment and Consent Agreement dated as of June 10, 1996, by
a Fifth Amendment and Waiver Agreement dated as of November 25, 1996, by a Sixth
Amendment and Waiver Agreement dated as of January 8, 1997 and by a Seventh
Amendment to Credit Agreement dated as of February 14, 1997, (such Revolving
Credit Agreement, as so amended and as further amended, supplemented or
otherwise modified and in effect from time to time being the "Credit
Agreement"). Capitalized terms defined in the Credit Agreement and not
otherwise defined herein are used herein as therein defined; and capitalized
terms defined in Section 1 hereof are used elsewhere herein as so defined
(without regard to the conditions to effectiveness in Section 4 hereof).
2. The Borrower has requested that the Issuing Bank and the Lenders
amend the Credit Agreement to, among other things, extend the Termination Date,
on the terms and subject to the conditions hereof.
3. The Issuing Bank and the Lenders are willing to agree to such
amendments requested by the Borrower, on the terms and subject to the conditions
hereof.
NOW, THEREFORE, in consideration of the premises and mutual agreements
set forth herein, the parties hereto agree as follows:
SECTION 1. AMENDMENTS TO CREDIT AGREEMENT. (a) (i) The definition
of "Applicable Base Rate Margin" set forth in Section 1.01 of the Credit
Agreement is hereby amended in its entirety so as to read in full as follows:
"'APPLICABLE BASE RATE MARGIN' means (i) at all times during the
period from April 1, 1997 through July 31, 1997, 3% and (ii) at all
times thereafter, 4%."
<PAGE>
2
(ii) The definition of "Fifth Amendment Termination Date" set forth in
Section 1.01 of the Credit Agreement is hereby deleted in its entirety.
(iii) The definition of "Termination Date" set forth in Section
1.01 of the Credit Agreement is hereby amended in its entirety so as to
read in full as follows:
"'TERMINATION DATE" means (x) October 1, 1997 or (y) such earlier
date of declaration of the Advances, the Notes, all interest thereon
and all other amounts payable hereunder to be forthwith due and
payable pursuant to Section 7.01 or otherwise."
(iv) The definition of "Loan Documents" set forth in Section 1.01 of
the Credit Agreement is hereby amended in its entirety so as to read in
full as follows:
"'LOAN DOCUMENTS' means this Agreement, the Notes, the Fee
Letter, the Second Amendment, the Borrower Pledge Agreement
(including, without limitation, the Amendment to Borrower Pledge
Agreement delivered pursuant to the Fourth Amendment), each of the
Guaranties, Security Agreements and other documents delivered by the
Borrower or any of its Subsidiaries pursuant to Section 6 of the
Second Amendment, the Fourth Amendment, the PFI Consideration Pledge
Agreement (including, without limitation, the Amendment to Borrower
Security Agreement delivered pursuant to the Fifth Amendment), the PFI
Consideration Consent Agreement, the Fifth Amendment, the Sixth
Amendment, the Seventh Amendment, the Eighth Amendment and any
document delivered by the Borrower for the benefit of the Lenders,
Issuing Bank or Agent in connection with the Sierra Subordinated Note,
in each case as amended, supplemented or otherwise modified from time
to time."
(b) Section 1.01 of the Credit Agreement is hereby amended by the addition
of the following definitions thereto:
"ACHA CONTRACT" means the contract, effective July 1, 1996, between
PCA Family Health Plan, Inc. and the State of Florida's Agency for Health
Care Administration.
"ASES CONTRACTS" means the contracts, dated November 9, 1995 and March
10, 1997, between PCA Health Plans of Puerto Rico, Inc. and the Puerto Rico
Health Insurance Administration.
"EIGHTH AMENDMENT" means the Eighth Amendment to Credit Agreement
dated as of April 22, 1997 among the Borrower, the Lenders parties thereto,
the Issuing Bank and the Agent.
<PAGE>
3
"MEDICARE CONTRACTS" means the contracts, dated January 1, 1997,
between PCA Health Plans of Florida, Inc. and the Department of Health and
Human Services and PCA Health Plans of Texas, Inc. and the Department of
Health and Human Services:
(c) Section 2.07(b) of the Credit Agreement is hereby amended in its
entirety so as to read in full as follows:
"(b) DEFAULT INTEREST. Upon the occurrence and during the continuance
of an Event of Default set forth in Section 7.01(a), (e) or (m) of the
Credit Agreement, the Borrower shall pay interest on the unpaid principal
amount of each Advance owing to each Lender and, to the fullest extent
permitted by law, on the unpaid amount of all interest, fees and other
amounts payable hereunder and under the other Loan Documents, payable in
arrears on demand by the Agent and on the date such amount shall be paid in
full, at a rate per annum equal at all times to 5% per annum above the
interest rate then applicable to Base Rate Advances (computed on the basis
of a year of 360 days for the actual number of days (including the first
day but excluding the last day) occurring during the period for which such
interest in payable), and upon the occurrence and during the continuance of
any other Event of Default, the Borrower shall pay interest on the unpaid
principal amount of each Advance owing to each Lender and, to the fullest
extent permitted by law, on the unpaid amount of all interest, fees and
other amounts payable hereunder and under the other Loan Documents, payable
in arrears on demand by the Agent and on the date such amount shall be paid
in full, at a rate per annum equal at all times to 2% per annum above the
interest rate then applicable to Base Rate Advances (computed on the basis
of a year of 360 days for the actual number of days (including the first
day but excluding the last day) occurring during the period for which such
interest is payable)."
(d) Section 6.03(a) of the Credit Agreement is hereby amended in its
entirety so as to read in full as follows:
"(a) NET WORTH. Permit the Consolidated Net Worth of the Borrower and
its Subsidiaries on any date of determination after March 31, 1997 to be
less than the sum of (A) ($63,239,000) (exclusive of any change from any
unrealized gain or loss in investments) plus (B) an amount equal to 75% of
the aggregate amount of the Consolidated Net Income of the Borrower and its
Subsidiaries for each calendar month ending after March 31, 1997 but before
such date of determination (the amount such Consolidated Net Income to be
computed without regard to any net loss in any month)."
(e) Section 6.03(e) of the Credit Agreement is hereby amended in its
entirety so as to read in full as follows:
"(e) EBITDA. Permit the Consolidated EBITDA of the Borrower and its
Subsidiaries for any month as determined as at the end of such month (i)
<PAGE>
4
for each month ending to and including June 30, 1997, to be less than an
amount that allows the Interest Coverage Ratio for such calendar month to
be 1.00 to 1.00 or greater and (ii) for each month ending thereafter, to be
less than an amount that allows the Interest Coverage Ratio for such
calendar month to be 2.00 to 1.00 or greater."
(f) Section 7.01(e) of the Credit Agreement is amended by adding at the
end thereof before "or" the following proviso:
"PROVIDED, HOWEVER, an Event of Default shall not be deemed to occur
if any proceeding shall be instituted by PCIC or Solutions or by the
State of Florida Department of Insurance against either PCIC or
Solutions seeking liquidation, reorganization, protection, relief or
composition of it or its debts under any law relating to bankruptcy,
insolvency or reorganization or relief of debtors, or the entry of an
order for relief or the appointment of a receiver, transfer or similar
official for it or any substantial part of its property"
(g) Section 7.01(f) of the Credit Agreement is amended by adding at the
end thereof before "or" the following proviso:
"PROVIDED, HOWEVER, notwithstanding the foregoing, an Event of Default
shall be deemed to occur in the event any judgment or order is
rendered against the Borrower or any of its Subsidiaries (other than
PCIC or Solutions) for the benefit of the State of Florida Department
of Insurance"
(h) Section 7.01(q) of the Credit Agreement is amended by adding "or"
after the semicolon at the end of such subsection and adding a new subsection
(r) after such subsection (q) to read as follows:
"(r) Any of the ACHA Contract, ASES Contracts or Medicare Contracts
shall terminate or be amended or modified (without appropriate
material consideration to the Borrower for such amendment or
modification) so as to materially increase the respective obligations
thereunder of the Borrower's Subsidiary party thereto or materially
reduce the respective benefits thereunder to which the Borrower's
Subsidiary party thereto is entitled;"
SECTION 2. REPRESENTATIONS AND WARRANTIES. The Borrower hereby
represents and warrants as follows:
(a) All representations and warranties of the Borrower contained in
the Credit Agreement, both before and after giving effect to Section 1
hereof, are true in all material respects (except for any such
representation or warranty (or portion thereof) that is qualified by
reference to a specific materially standard, in which case such
representation or warranty is true in all respects).
<PAGE>
5
(b) Without limiting the representations and warranties made in
subsection (a) above or in the Credit Agreement, no authorization, consent,
approval or other action by, and no notice to or filing with, any HMO
Regulator or Insurance Regulator is required for, and no HMO Event,
Insurance Event or violation of the HMO Regulations or Insurance
Regulations would result from, the due execution, delivery or performance
by the Borrower or any Loan Party of this Amendment or any of the Loan
Documents and other documents to be delivered to be delivered in connection
herewith.
SECTION 3. REFERENCE TO AND EFFECT ON LOAN DOCUMENTS. (a) On and
after the date hereof, each reference in the Credit Agreement to "this
Agreement", "hereunder", "hereof", "herein", or words of like import referring
to the Credit Agreement, and each reference to the Credit Agreement in the other
Loan Documents, shall mean and be a reference to the Credit Agreement as amended
hereby.
(b) Except as specifically amended under Section 1 hereof and as
provided in Section 5 hereof, each of the Credit Agreement and each other Loan
Document shall remain in full force and effect and is hereby ratified and
confirmed.
(c) The Borrower acknowledges and agrees that, except to the extent
specifically amended under Section 1 hereof and as provided in Section 5 hereof,
it is obligated to comply with each and every term, covenant, agreement and
condition applicable to it under the Credit Agreement or the other Loan
Documents. The execution, delivery and effectiveness of this Amendment shall
not otherwise operate as a waiver of any right, remedy or privilege of any
Lender, the Issuing Bank or the Agent under the Credit Agreement or any other
Loan Document, any and all of which rights, remedies and privileges are
reserved.
SECTION 4. CONDITIONS AND EFFECTIVENESS. Section 1 of this Amendment
shall become effective as of April 22, 1997, if and only if all of the following
conditions precedent are satisfied on or before April 22, 1997:
(a) The Agent shall have received counterparts of this Amendment duly
executed by the Borrower, the Issuing Bank and each Lender and a
counterpart of the Consent of Guarantor attached hereto duly executed by
the Guarantor.
(b) The Agent shall have received the following, in form and
substance satisfactory to the Agent, the Issuing Bank and the Majority
Lenders (unless otherwise specified) and in sufficient copies for the
Agent, Issuing Bank and each Lender:
(i) A certificate, duly executed by the Borrower's Chief
Executive Officer or Chief Financial Officer, certifying that on such
date (i) after giving effect to Section 1 hereof, no Default or Event
<PAGE>
6
of Default has occurred and is continuing and (ii) the representations
and warranties set forth in Section 2 hereof are true on and as of
such date.
(ii) Certified copies of the resolutions of the Board of
Directors of the Borrower approving this Amendment, and of all
documents evidencing other necessary corporate action and governmental
and other third party approvals and consents, if any, with respect to
each such Loan Document.
(iii) A certificate of the Secretary or an Assistant
Secretary of the Borrower certifying the names and true signatures of
the officers of the Borrower authorized to sign this Amendment.
(iv) A legal opinion from Greenberg, Traurig, Hoffman, Lipoff,
Rosen & Quintal, P.A., counsel to the Borrower, as to this Amendment
and the Credit Agreement, as amended hereby, in form and substance
satisfactory to the Agent.
(c) The Borrower shall have paid to the Agent, in immediately
available funds for the rateable account of the Lenders, a fee in the
amount of 1.00% of the aggregate amount of the Advances and Letter of
Credit Liability outstanding on the date hereof.
(d) The Borrower shall have paid all amounts accrued and payable
under Section 9.04 of the Credit Agreement to the extent that request for
such payment has been made to the Borrower.
SECTION 5. COVENANTS. (a) ADDITIONAL FEE. The Borrower
agrees that in the event the Borrower does not deliver to the Agent on or before
July 31, 1997 either (a) a commitment letter or other binding agreement (in
either case in form and substance satisfactory to the Majority Lenders) between
the Borrower and one or more lenders or investors (satisfactory to the Majority
Lenders) providing for the commitment of such lender or lenders or investors to
provide financing to the Borrower sufficient to enable the Borrower to pay all
Obligations in full (including, without limitation, replacement and termination
of any outstanding Letter of Credit) on or before October 1, 1997 or (b) a
definitive agreement (in form and substance satisfactory to the Majority
Lenders) for the sale or merger of the Borrower or the sale of all or a
substantial portion of the assets of the Borrower, executed by the Borrower and
the other party or parties thereto, with such transaction proposed to be
consummated on or before October 1, 1997 and with such transaction to include
the payment of all Obligations in full (including, without limitation,
replacement and termination of any outstanding Letter of Credit) on or before
October 1, 1997, then on July 31, 1997, the Borrower shall pay to the Agent, in
immediately available funds for the ratable account of the Lenders, a fee in the
amount of 1.00% of the aggregate amount of the Advances and Letter of Credit
Liability outstanding on such date (after giving effect to any payment of such
<PAGE>
7
Advances or reduction in Letter of Credit Liability made on such date). Without
limiting any provision of any Loan Document, such fee shall be payable in
addition to interest at the applicable rate under the Credit Agreement and all
other amounts payable under the Loan Documents.
(b) MONTHLY REPORT. So long as any Obligations remain unpaid, as
soon as available and in any event within 30 days after the end of each calendar
month, the Borrower shall deliver to the Agent and each Lender a report, as of
the end of such calendar month, as to the Borrower's and its Subsidiary's
capital requirements calculations for Medicare Contracts.
SECTION 6. WAIVER/RELEASE OF COLLATERAL. (a) Notwithstanding
anything to the contrary in the Credit Agreement, the Lenders, the Issuing Bank
and the Agent hereby consent to (and waive any Default which would otherwise
arise as a result thereof) a PCIC Resolution (as hereinafter defined), provided
that no Default or Event of Default (excluding any Default or Event of Default
arising solely by the transactions contemplated by the PCIC Resolution) exists
at the time of the PCIC Resolution.
(b) "PCIC Resolution" means a transaction or series of transactions,
each of which has been duly approved by the Board of Directors of the Borrower,
including the transfer of the stock or certain or all of the assets of PCIC or
Solutions or claims to either of its future earnings or cash flow, the
incurrence of liens on the assets of either PCIC or Solutions or the incurrence
of direct or indirect obligations by either PCIC or Solutions, or any
combination of the foregoing, which in all cases are for the benefit of the
State of Florida Department of Insurance or other appropriate third parties and
which in each case is required or appropriate in order to reduce, minimize or
resolve the deficit (within the meaning of the regulations of the State of
Florida Department of Insurance) of PCIC and to limit or reduce any related
claims against the Borrower.
(c) On or before the date of any transaction within the meaning of
PCIC Resolution, to the extent needed, the Lenders, the Issuing Bank and the
Agent agree to release their security interest in the stock of PCIC or the stock
or assets of Solutions, as the case may be, and the Agent is accordingly
authorized in connection therewith to deliver to the Borrower such stock or an
appropriately completed uniform commercial code termination statement, as the
case may be.
SECTION 7. COUNTERPARTS. This Amendment may be executed in any
number of counterparts and by different parties hereto on separate counterparts,
each of which, when so executed and delivered, shall be an original, but all
such counterparts shall together constitute one and the same agreement.
SECTION 8. RELEASE. The Borrower and each of its agents,
employees, directors, officers, affiliates, subsidiaries, successors and assigns
(each such person individually, a "Releasing Party" and, collectively, the
"Releasing Parties") each hereby release and forever discharge each of the
Lenders, the Issuing Bank and the Agent and all of their respective agents,
direct and indirect shareholders, employees, directors, officers, attorneys,
affiliates, subsidiaries, successors and assigns (each such person individually,
<PAGE>
8
a "Released Party" and, collectively, the "Released Parties") of and from all
damage, loss, claims, demands, liabilities, obligations (except for any such
obligations pursuant to the terms of the Credit Agreement, as amended hereby),
actions and causes of action whatsoever (collectively, "Claims") the Releasing
Parties and each of them may, as of the date hereof, have or claim to have
against each of the Released Parties, in each case whether presently known or
unknown and of every nature and extent whatsoever on account of or in any way
relating to, arising out of or based upon the Credit Agreement or any other Loan
Document or the negotiation or documentation thereof or the transactions
contemplated thereby, including, without limitation, all such loss or damage of
any kind heretofore sustained, or that may arise as a consequence of the
dealings between the parties up to the date hereof in connection with or in any
way related to this Amendment. Each Releasing Party further covenants and
agrees that it has not assigned heretofore, and will not hereafter sue any
Released Party upon, any Claim released or purported to be released hereunder,
and the Borrower shall indemnify and hold harmless such Released Parties against
any loss or liability on account of any actions brought by any Releasing Party
or its assigns or prosecuted on behalf of any Releasing Party and relating to
any Claim released or purported to be released hereunder. This agreement and
covenant on the part of the Releasing Parties, respectively, is contractual, and
not a mere recital, and the parties hereto acknowledge and agree that no
liability whatsoever is admitted on the part of any party with respect to any
Claim released or purported to be released hereunder.
SECTION 9. GOVERNING LAW. THIS AMENDMENT SHALL BE GOVERNED BY,
AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK.
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to
be duly executed and delivered by their respective officers thereunto duly
authorized, as of the date first above written.
THE BORROWER:
PHYSICIAN CORPORATION OF AMERICA
By:_______________________________________
Name:
Title:
THE LENDERS AND ISSUING BANK:
CITIBANK, N.A., as Lender and as Issuing Bank
<PAGE>
9
By:_______________________________________
Name:
Title:
FIRST UNION NATIONAL BANK OF NORTH CAROLINA
By:_______________________________________
Name:
Title:
NATIONSBANK OF TENNESSEE
By:_______________________________________
Name:
Title:
NATIONSBANK, NATIONAL ASSOCIATION (MID-WEST)
(formerly known as Boatmen's First National Bank
of Kansas City)
By:_______________________________________
Name:
Title:
SUNTRUST BANK, MIAMI, N.A.
By:_______________________________________
Name:
Title:
THE BANK OF NOVA SCOTIA
By:_______________________________________
Name:
Title:
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
UNAUDITED FINANCIAL STATEMENTS OF PHYSICIAN CORPORATION OF AMERICA FOR THE
THREE MONTHS ENDED MARCH 31, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<CASH> 143485
<SECURITIES> 146455
<RECEIVABLES> 62845
<ALLOWANCES> 51674
<INVENTORY> 372
<CURRENT-ASSETS> 504817
<PP&E> 75254
<DEPRECIATION> 24142
<TOTAL-ASSETS> 1200228
<CURRENT-LIABILITIES> 590668
<BONDS> 9746
0
0
<COMMON> 388
<OTHER-SE> (64580)
<TOTAL-LIABILITY-AND-EQUITY> 1200228
<SALES> 356749
<TOTAL-REVENUES> 365484
<CGS> 350898
<TOTAL-COSTS> 355324
<OTHER-EXPENSES> 5218
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 5203
<INCOME-PRETAX> 4942
<INCOME-TAX> 319
<INCOME-CONTINUING> 4623
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4623
<EPS-PRIMARY> .12
<EPS-DILUTED> .12
</TABLE>
<PAGE>
EXHIBIT 99.1
IN THE CIRCUIT COURT OF THE
SECOND JUDICIAL CIRCUIT IN AND
FOR LEON COUNTY, FLORIDA
CASE NO.: 97-997
THE STATE OF FLORIDA, ex Rel.
The Department of Insurance
Relator,
vs.
PCA PROPERTY & CASUALTY
INSURANCE COMPANY,
Respondent.
______________________________/
CONSENT ORDER
THIS CAUSE came on for consideration of the Forbearance Agreement (the
"Agreement") by and between PCA PROPERTY & CASUALTY COMPANY ("PCA") and the
FLORIDA DEPARTMENT OF INSURANCE (the "Department"). After a complete review of
the entire record, upon consideration thereof, and being otherwise fully advised
in the premises, the Court finds that, in the best interests of the
policyholders of PCA and of the general public, this Consent Order should be
approved and adopted by this Court, and further finds as follows:
1. PCA is insolvent and has consented to the entry of this Consent Order
adjudicating it to be insolvent and placing it in receivership for the purposes
of rehabilitation or liquidation.
2. The Department shall be entitled to secure from this Court an Order of
Rehabilitation or of Liquidation (individually or collectively, the "Order"), at
any time, on or after June 2, 1997, by submitting the Order to this Court ex
parte. The decision with respect to which Order to secure shall be made by the
Department, in its sole and absolute discretion.
3. PCA waives hearings, and further waives any and all challenges
available to it in any forum to contest the adjudication of insolvency, the
appointment of the Department as receiver, as well as the entry of this Consent
Order or of any Order entered by this Court with respect thereto, including any
right to appeal this Consent Order or any such Order.
<PAGE>
Case No.: 97-997
4. Enforcement of this Consent Order shall not take place prior to June
2, 1997. In the event that, on or before June 2, 1997, PCA submits to the
Department an agreement, recapitalization or other transaction providing for the
full guarantee of timely payment of all known or potential claims of PCA and
which agreement, recapitalization or other transaction is acceptable to the
Department, in its sole and absolute discretion (provided, however, that the
Department shall act in good faith and not arbitrarily), the Department shall
not proceed with rehabilitation, liquidation or any other form of receivership
at that time.
5. The Agreement, attached hereto as Exhibit "A", is hereby approved,
incorporated herein by reference and made a part of this Consent Order.
6. All previous orders, including all injunctions provided for in the
Order to Show Cause entered on February 25, 1997, shall remain in full force and
effect until further order of the Court. The Court expressly retains
jurisdiction to enforce the Agreement and this Consent Order by appropriate
motion.
DONE AND ORDERED in Chambers at the Leon County Courthouse, Tallahassee,
Leon County, Florida, this 2nd day of May, 1997.
_______________________________________
CIRCUIT COURT JUDGE
CONSENT OF PCA
BY EXECUTION HEREOF, PCA consents to entry of this Consent Order and agrees
without reservation to all of the above terms and conditions and shall be bound
by all provisions herein. PCA further agrees that within ten (10) days of this
Consent Order, the undersigned shall secure a resolution of the Board of
Directors of PCA authorizing the undersigned to execute the Agreement and this
Consent Order on behalf of PCA.
<PAGE>
The undersigned represents pursuant to Section 624.301, Florida Statutes,
that he/she has the authority to bind PCA to the terms and conditions of the
Agreement and this Consent Order.
PCA PROPERTY AND CASUALTY INSURANCE
COMPANY
BY:____________________________________
Peter E. Kilissanly, its President and CEO
ACCEPTED AND AGREED
De Zayas, O'Naghten, Diaz Katz, Kutter, Haigler, Alderman,
& De Cordoba Marks, Bryant & Yon, P.A.
Attorneys for Department Attorneys for PCA
Suite 1100 Highpoint Center, Suite 1200
Grand Bay Plaza 106 East College Avenue (32301)
2665 South Bayshore Drive P.O. Box 1877 (32302-1877)
Coconut Grove, Florida 33133 Tallahassee, Florida
Telephone: (305) 285-0800 Telephone: (904) 224-9634
Facsimile: (305) 285-0837 Facsimile: (904) 222-0103
BY:__________________________ BY:______________________________
Of Counsel, Kendall Coffey Gary P. Timin
Florida Bar No: 259861 Florida Bar No: 439071
<PAGE>
EXHIBIT 99.2
FORBEARANCE AGREEMENT
This FORBEARANCE AGREEMENT (the "Agreement") is made and entered into this
2nd day of May, 1997, by and between PCA PROPERTY & CASUALTY COMPANY, a Florida
corporation ("PCA") and THE STATE OF FLORIDA, EX REL, THE DEPARTMENT OF
INSURANCE (the "Department"), joined by PHYSICIAN CORPORATION OF AMERICA, a
Delaware corporation ("PCOA") and PCA SOLUTIONS, INC., a Florida corporation
("Solutions").
RECITALS
A. PCA is a Florida corporation with its principal place of business at
260 Wekiva Springs Road, Suite 200, Longwood, Florida 32779, and is a domestic
insurer authorized to transact an insurance business in this state. PCA is a
subsidiary of PCOA.
B. PCOA is a Delaware corporation with its principal place of business at
6101 Blue Lagoon Drive, Miami, Florida 33126, and is a managed health care
holding company that, among other things, provides administrative and management
services through its workers' compensation third-party administration companies,
i.e. Solutions, and workers' compensation and health related insurance through
its insurance companies, i.e. PCA.
C. Solutions is a Florida corporation with its principal place of
business at 260 Wekiva Springs Road, Suite 200, Longwood, Florida 32779, and is
a workers' compensation third-party administrator and managing general agent.
Solutions is a subsidiary of PCOA.
D. On February 25, 1997, the Department filed its Petition for Order to
Show Cause (the "Petition") with the Circuit Court of the Second Judicial
Circuit in and for Leon County, Florida (the "Court").
E. On February 25, 1997, the Court entered its Order to Show Cause,
Temporary Injunction, and Notice of Automatic Stay which, among other things,
ordered PCA to appear before the Court on May 2, 1997, to show good cause why
the Department should not be appointed receiver of PCA for the purpose of
rehabilitation in accordance with Chapter 631, Part 1, Florida Statutes.
F. As evidenced by this Agreement, the parties herein have reached an
agreement with respect to the Petition and certain matters related thereto, and
will submit this Agreement to the Court on May 2nd for its approval.
NOW, THEREFORE, for and in consideration of the premises, and the mutual
promises, terms and conditions hereinafter set forth and the performance of
each, the parties, for themselves and their respective successors and assigns,
agree as follows:
<PAGE>
1. Recitals:
The recitals to this Agreement are true and correct and are incorporated
into this Agreement.
2. Forbearance:
PCA hereby admits that it is insolvent and consents (i) to the entry of an
order by the Court in the form attached hereto as Exhibit A (the "Consent
Order") and (ii) to placing it in receivership for the purposes of
rehabilitation or of liquidation in accordance with the terms of the Consent
Order and this Agreement. The Department shall be entitled to secure from the
Court an Order of Rehabilitation or of Liquidation (individually or
collectively, the "Order"), at any time, on or after June 2, 1997, by submitting
the Order to the Court ex parte. The decision with respect to which Order to
secure shall be made by the Department, in its sole and absolute discretion.
PCA hereby waives hearings, and further waives any and all challenges available
to it in any forum to contest the adjudication of insolvency, the appointment of
the Department as receiver, as well as the entry of this Consent Order or of any
Order entered by this Court with respect thereto, including any right to appeal
this Consent order or any such Order.
PCA and the Department hereby agree that enforcement of this Consent Order
shall not take place prior to June 2, 1997. In the event that, on or before
June 2, 1997, PCA submits to the Department an agreement, recapitalization or
other transaction providing for the full guarantee of timely payment of all
known or potential claims of PCA and which agreement, recapitalization or other
transaction is acceptable to the Department, in its sole and absolute discretion
(provided, however, that the Department shall act in good faith and not
arbitrarily), the Department shall not proceed with rehabilitation, liquidation
or any other form or receivership at that time. The Department shall review any
agreement, recapitalization or other transaction within a reasonable time and
shall identify to PCA any concerns or objections of the Department with respect
to such proposals within a reasonable time.
A copy of the Consent Order, attached hereto as Exhibit "A", is
incorporated herein by reference and made a part of this Agreement.
3. Pending Discovery:
All pending discovery requests and/or public records requests made by, or
on behalf of, PCOA or PCA, with respect only to these proceedings, are hereby
withdrawn and of no further force and effect.
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<PAGE>
4. Data and computer access:
The Department shall have complete, total and free access to all existing
PCA accounting, claims and other data as well as the use of all computers and
software relating to or required for the generation and production of such data.
PCOA and/or Solutions will grant a license to PCA and the Department to use any
and all software that is either proprietary or which PCOA and/or Solutions is a
licensee, unless prohibited by such license. In the event such a license is
prohibited, PCOA and Solutions will use their best efforts to obtain a
sublicense for PCA and the Department, at their sole cost and expense.
5. Office Space:
PCOA and Solutions, as the case may be, shall continue to provide the
Department, free of any charge or expense to the Department, with sufficient
office space as may be reasonably required by the Department, from time to time,
in order for the Department to carry out the intent and purpose of this
Agreement and the Consent Order.
6. Access to Records:
The Department shall have direct access to any and all records that PCA
and/or Solutions and/or any other subsidiary of PCOA may have in its possession
relating to PCA. Such information shall be made available, upon the request of
Department, either in electronic form or otherwise. This information shall be
made available to the Department notwithstanding the physical location of such
information, (regardless of whether such information may be found in Miami,
Orlando, South Carolina or any other location). Notwithstanding the provisions
of this paragraph 6, no party to this Agreement shall be deemed to have waived
any privileges to which they may be entitled by applicable law and which have
not previously been waived.
7. Operational Matters:
The following measures will be immediately implemented:
a. INVESTMENT ACCOUNT CUSTODY - PCA shall provide to the Department
daily transaction ledgers and confirmations received from
brokerage and other investment accounts. Any transfers shall be
authorized in writing by dual signature; one signature by a
representative of the Department and one signature by a
representative of PCA. No transfers from such accounts in excess
of $500 thousand in any one day, whether individually or in the
aggregate, shall be authorized without the prior written approval
of the Department. Any individual transfers in excess of
$500,000 shall require the prior written consent of the
Department.
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<PAGE>
b. OTHER BANK ACCOUNTS - The Department shall be a signatory for all
checks, drafts and transfer instructions to be issued in respect
of PCA accounts effective from and after the date of this
Agreement in excess of $5,000. Monthly bank statements shall be
provided to the Department unopened upon receipt and thereafter
shall be promptly provided to an employee of PCA for
reconciliation. Employees of PCA and the Department shall be
joint signatories on all checking accounts of PCA. PCA shall
provide daily check registers in respect of all bank accounts to
the Department.
c. PCA STOCK REGISTER, STOCK CERTIFICATES AND MINUTE BOOK - The
originals shall be provided to the Department for custody. In
the event that any stock certificates are being held by a third
party for purposes of perfecting a security interest in the
shares represented by such certificates, the identify of the
holder of the certificates and their location shall be identified
in writing to the Department.
d. PCA LEASES - The originals of all leases to which PCA is a party
shall be provided to the Department.
e. INSURANCE - A copy of any and all insurance policies covering PCA
real and personal properties shall be provided to the Department.
f. CLAIMS MANAGEMENT - PCA and Solutions shall permit the Department
direct access to all claims files.
g. PREMIUM AND AGENTS' BALANCES - The Department shall have direct
access to any and all PCA records regarding premiums and/or
agents' balances.
h. REINSURANCE RECOVERABLE - The Department shall have direct access
to all PCA records with respect to any and all reinsurance
recoverables on loss and loss adjustment expenses payments.
i. SALVAGE AND SUBROGATION - The Department shall have direct access
to all records of PCA concerning salvage and subrogation, and any
settlements in respect thereof shall require the prior written
consent of the Department.
8. Pending transactions:
PCOA and PCA have informed the Department that they are currently
soliciting for their consideration various proposals and agreements the effect
of which are to guarantee the payment of all
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<PAGE>
known and potential claims of PCA. PCOA and PCA shall, contemporaneously with
their distribution, submit to the Department any and all information distributed
by PCOA, PCA or its agents as part of their formal solicitation process.
Additionally, PCOA, PCA or its agents shall, contemporaneously with their
receipt, submit to the Department any and all information (including but not
limited to, reinsurance agreements, letter of intent and purchase and sale
agreements) received by all or any one of them either in response to any such
formal solicitation or otherwise. To the extent permitted by law, the
Department shall treat all such information and documents as confidential
pursuant to Section 624.82, Florida Statutes.
Nothing contained in this Agreement shall be construed as waiving any
right(s) that the Department may have pursuant to its statutory authority,
including but not limited to, the approval of the structure of any such proposed
transaction or of the parties thereto.
9. Reimbursement of costs and expenses:
PCA shall be responsible for and shall reimburse the Department for any and
all costs and expenses incurred by it with respect to this matter from and after
May 1, 1997.
10. Bankruptcy:
PCA stipulates and agrees that it is a domestic insurance company and that,
consequently, it may not be a debtor under any chapter of the United States
Bankruptcy Code. PCOA and PCA likewise stipulate that the filing by PCOA of a
petition for relief under any chapter of the United States Bankruptcy Code shall
not stay enforcement of the Consent Order against PCA, pursuant to 11 U.S.C. 362
(b) (4) and/or (b) (5), and the Department shall be entitled to an ex parte
order annulling any such stay from the United States Bankruptcy Court where such
petition for relief is filed, without necessity for any declaratory relief or
any other adversary proceeding or contested matter. This provision shall not
limit (i) the rights of any person other than PCA to petition for relief under
said Code or (ii) the right of the Department to challenge whether any such
person may be a debtor under any chapter of the United States Bankruptcy Code.
11. No Liability:
The parties hereby acknowledge that the Department, in addition to its
statutory immunities, shall have no liability of any kind with respect to the
subject matter of this Agreement. Other than the duty of forbearance described
in Paragraph 2 of this Agreement, the Department is under no obligation or duty
to take any action whatsoever, legal or otherwise, with respect to this
Agreement, and no implied duties or obligations shall be imposed upon the
Department under this Agreement.
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<PAGE>
12. Attorneys' Fees and Costs:
If attorney's fees or other costs are incurred to secure performance of any
obligations hereunder, or to establish damages for the breach thereof or to
obtain any other appropriate relief based on this Agreement, whether by way of
prosecution or defense, the prevailing party will be entitled to recover
reasonable attorneys' fees and costs incurred in connection therewith, including
costs on appeal.
13. Further Assurance:
Each party agrees to execute any and all documents and to perform such
other acts as may be necessary or expedient to further the purposes of this
Agreement.
14. Counterparts:
This Agreement may be executed in one or more counterparts for the
convenience of the parties hereto, all of which together will constitute one and
the same instrument.
15. Entire Agreement:
This Agreement contains the entire understanding of the parties relating to
the subject matter hereof and supersedes all prior written or oral agreements
and all contemporaneous oral agreements and understandings relating to the
subject matter hereof. This Agreement cannot be modified or amended except in
writing signed by the party against whom enforcement is sought.
18. Governing Law:
This Agreement shall be governed by and construed, interpreted and enforced
in accordance with the laws of the State of Florida.
19. Paragraph Headings:
The captions in this Agreement are inserted for convenience of reference
and in no way define, describe or limit the scope or intent of this Agreement or
any of the provisions hereof.
20. Binding:
The terms of this Agreement shall be binding upon and shall inure to the
benefit of the parties hereto, their successors, transferees and assigns.
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<PAGE>
21. Assignment:
Neither this Agreement nor any of the rights, interests and obligations
hereunder may be assigned or delegated by PCOA, Solutions or PCA. This
Agreement is not intended to and does not confer any rights or benefits to any
person other than the parties hereto.
22. Termination:
This Agreement shall terminate upon the earliest of (a) the express
agreement of the parties to such effect or (b) appointment of a receiver for
PCA.
IN WITNESS WHEREOF, the parties have executed this Agreement on the date
and year first above written.
PCA PROPERTY AND CASUALTY INSURANCE
COMPANY
BY:__________________________________
Peter E. Kilissanly, its President and CEO
FLORIDA DEPARTMENT OF INSURANCE
BY:___________________________________
Suzanne K. Murphy, Deputy Insurance
Commissioner
JOINDER
The undersigned, jointly and severally, hereby join in the execution of
this Agreement for the purpose of:
(i) signifying their agreement to be bound by the terms and conditions of
this Agreement which require their joint or several performance; and,
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<PAGE>
(ii) signifying their agreement to perform in accordance with such terms
and conditions:
PHYSICIAN CORPORATION OF AMERICA
BY:__________________________________
E. Stanley Kardatzke, its Chairman
and CEO
PCA SOLUTIONS, INC.
BY:__________________________________
David L. Willis, its Vice President
and CFO
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