<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 JUNE 30, 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:
OF SHARES OUTSTANDING
TITLE OF EACH CLASS AT JUNE 30, 1997
Common Stock 38,839,791
<PAGE>
PHYSICIAN CORPORATION OF AMERICA
QUARTERLY REPORT ON FORM 10-Q
FOR QUARTER ENDED JUNE 30, 1997
TABLE OF CONTENTS
PAGE
-----
PART I. Financial Information
Item 1. Financial Statements 1-10
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 11-16
PART II. Other Information
Item 1. Legal Proceedings 17
Item 2. Changes in Securities 18
Item 3. Defaults Upon Senior Securities 18
Item 4. Submission of Matters to a Vote of Security Holders 18
Item 5. Other Information 18
Item 6. Exhibits and Reports on Form 8-K 18
Signature Page 19
<PAGE>
PHYSICIAN CORPORATION OF AMERICA AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JUNE 30, 1997 AND DECEMBER 31, 1996
<TABLE>
<CAPTION>
(Unaudited)
June 30, December 31,
ASSETS 1997 1996
---------- ----------
(IN THOUSANDS)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 88,472 $ 134,011
Short term investments 138,009 130,788
Accounts receivable, net of allowance of approximately
$53,799 and $52,351 at June 30, 1997 and
December 31, 1996, respectively:
Trade (health and workers' compensation premiums,
and administrative service fees) 65,567 92,454
Reinsurance and other recoverables on paid and
unpaid losses 108,460 102,893
Other 17,842 20,340
Prepaid expenses, inventories and other
current assets 6,392 8,362
Income taxes receivable - 42,274
Deferred income tax benefit 19,206 23,280
---------- ----------
Total current assets 443,948 554,402
---------- ----------
Property and equipment 49,818 52,132
Long term investments 222,002 335,015
Reinsurance and other recoverables on unpaid losses 218,099 246,211
Statutory deposits and other assets 77,797 45,242
Intangible assets, net 118,381 121,985
---------- ----------
$1,130,045 $1,354,987
---------- ----------
---------- ----------
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<PAGE>
PHYSICIAN CORPORATION OF AMERICA AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (CONTINUED)
JUNE 30, 1997 AND DECEMBER 31, 1996
(Unaudited)
June 30, December 31,
LIABILITIES AND STOCKHOLDERS' EQUITY 1997 1996
---------- ----------
(IN THOUSANDS)
<S> <C> <C>
Current liabilities:
Accounts payable, accrued expenses and other
current liabilities $ 70,995 $ 82,792
Health claims payable 141,827 182,206
Current portion of other claims payable, primarily
workers' compensation 199,351 230,476
Unearned premiums and service fees 13,172 51,562
Current portion of long-term debt and obligations
under capital leases 121,791 122,709
Income taxes payable 4,090 -
---------- ----------
Total current liabilities 551,226 669,745
Long-term debt and obligations under capital
leases, less current portion 9,489 10,344
Long-term portion of other claims payable,
primarily workers' compensation 586,588 699,299
Deferred income taxes 3,493 7,432
Deferred income and other long-term liabilities 35,148 32,999
---------- ----------
Total liabilities 1,185,944 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 38,839,791 and
38,829,456 shares at June 30, 1997 and
December 31, 1996, respectively 388 388
Additional paid-in capital 136,265 136,435
Accumulated deficit (182,518) (193,627)
Unrealized gain (loss) on investments (1,030) 1,182
Common stock held in treasury - at cost; 450,419 and
460,754 shares at June 30, 1997 and December 31, 1996,
respectively (9,004) (9,210)
---------- ----------
Total stockholders' equity (deficit) (55,899) (64,832)
Commitments and contingencies
---------- ----------
$1,130,045 $1,354,987
---------- ----------
---------- ----------
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<PAGE>
PHYSICIAN CORPORATION OF AMERICA AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 1997 AND 1996
(Unaudited) (Unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
------------------------- -------------------------
1997 1996 1997 1996
---------- ---------- ---------- ----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Revenues:
Health premiums $ 349,908 $ 324,602 $ 682,741 $ 642,811
Workers compensation related revenues 15,440 13,291 39,356 62,654
Investment income 9,317 5,913 17,120 11,609
Other revenues 2,463 4,383 3,395 10,038
---------- ---------- ---------- ----------
Total revenues 377,128 348,189 742,612 727,112
Operating expenses:
Medical costs 298,402 282,904 588,339 560,869
Health administrative, marketing and other expenses 45,148 50,242 86,848 102,275
Workers' compensation related administrative,
marketing and other expenses 17,340 7,394 36,601 49,910
Depreciation and amortization 4,427 5,735 8,792 11,969
Other operating expenses 147 4,289 208 9,071
---------- ---------- ---------- ----------
Total operating expenses 365,464 350,564 720,788 734,094
Operating income (loss) 11,664 (2,375) 21,824 (6,982)
Gain on sale of subsidiaries - 7,900 - 7,900
Interest expense (4,012) (3,695) (9,215) (7,722)
Other income (expense) (35) (147) (50) (137)
---------- ---------- ---------- ----------
Earnings (loss) before income taxes 7,617 1,683 12,559 (6,941)
Income tax benefit (expense) (1,131) 3,653 (1,450) 7,343
---------- ---------- ---------- ----------
Net earnings $ 6,486 $ 5,336 $ 11,109 $ 402
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Net earnings per common and common
equivalent share $ 0.17 $ 0.14 $ 0.29 $ 0.01
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Net earnings per common and common
equivalent share assuming full dilution $ 0.17 $ 0.14 $ 0.29 $ 0.01
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Number of common shares used in computation of
primary earnings per share 38,932,000 39,144,000 38,935,000 39,281,000
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Number of common shares used in computation of
fully diluted earnings per share 38,935,000 39,144,000 38,935,000 39,281,000
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
-3-
<PAGE>
PHYSICIAN CORPORATION OF AMERICA AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND 1996
(Unaudited)
Six Months Ended
June 30,
------------------------
1997 1996
--------- ---------
(IN THOUSANDS)
<S> <S> <S>
Cash flows from operating activities:
Net earnings $ 11,109 $ 402
Adjustments to reconcile net earnings to net
cash provided by operating activities:
Depreciation and amortization 8,792 11,969
Amortization of premium/accretion of discount 303 1,405
Gain on sale of subsidiaries - (7,900)
Loss on sale of property and equipment - 70
Changes in working capital:
Accounts receivable 51,931 (56,958)
Income taxes 46,363 11,371
Accounts payable, accrued expenses and
other current liabilities (647) 215
Claims payable (184,215) 125,932
Unearned premiums (38,390) (13,917)
Deferred income taxes 2,514 (7,725)
Other changes in other assets and liabilities (8,424) (266)
--------- ---------
Total adjustments (121,773) 64,196
--------- ---------
Net cash provided by (used in) operating activities (110,664) 64,598
--------- ---------
Cash flows from investing activities:
Purchase of investments (52,312) (200,075)
Proceeds from sale of investments 119,465 115,068
Purchase of property and equipment (2,595) (6,505)
Proceeds from sale of property and equipment 3 1,574
Statutory deposits and other assets 2,325 (63,955)
Disposals, net of cash sold - (3,103)
--------- ---------
Net cash provided by (used in) investing activities 66,886 (156,996)
--------- ---------
Cash flows from financing activities:
Proceeds from borrowings 146 -
Principal payments on debt and capital leases (1,109) (15,558)
Principal payments on covenants not-to-compete (825) (1,500)
Proceeds from issuance of common stock 27 1,314
--------- ---------
Net cash provided by (used in) financing activities (1,761) (15,744)
--------- ---------
Net decrease in cash (45,539) (108,142)
Cash and cash equivalents at beginning of period 134,011 164,706
--------- ---------
Cash and cash equivalents at end of period $ 88,472 $ 56,564
--------- ---------
--------- ---------
</TABLE>
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<PAGE>
PHYSICIAN CORPORATION OF AMERICA
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR QUARTER ENDED JUNE 30, 1997
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
NOTE A:
ORGANIZATION
The accompanying unaudited consolidated financial statements of Physician
Corporation of America ("PCA" or the "Company") 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 six months ended June 30, 1997 are not necessarily
indicative of the results to be expected for the full year.
NOTE B:
PENDING MERGER
On June 2, 1997, the Company entered into an Agreement and Plan of Merger among
Humana, Inc. (Humana) HUMNOV, Inc., a wholly owned subsidiary of Humana, and the
Company (the "Merger Agreement"). The Merger Agreement provides for the merger
of the HUMNOV, Inc. with and into the Company, pursuant to which each
outstanding share of the common stock of the Company will be converted into the
right to receive $7.00 per share in cash (subject to dissenters' rights of
appraisal). The proposed transaction will require the approvals from the
Company's shareholders and various state and federal regulatory agencies,
including, but not limited to, the Florida, Texas, and Puerto Rico Departments
of Insurance and State Medicaid Agencies in those jurisdictions. The Company
has filed a definitive proxy with the Securities and Exchange Commission dated
August 8, 1997 which gave notice of a special meeting of the shareholders of the
Company ("special meeting") to be held on September 8, 1997 to consider and act
upon a proposal to adopt the Merger Agreement. The close of business on July
25, 1997 has been fixed as the record date for the determination of shareholders
entitled to receive notice of and vote at the special meeting. All government
agency and regulatory filings have been made. The expiration of the waiting
period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976 has
occurred. The Company anticipates the transaction to close in the third quarter
of 1997.
In the event the Merger Agreement does not close by October 1, 1997, the Company
will be (i) in default of its $101,750 Credit Facility, (ii) assessed a penalty
fee of up to 1% of its then outstanding Credit Facility indebtedness, (iii)
subject to the terms of a June 3, 1997 Florida Department of Insurance (FDOI)
Consent Order which permits the FDOI to place PCA/P&C in receivership without
contest from PCA, (iv) unable to meet its obligations including but not limited
to the repayment of its $101,750 Credit Facility indebtedness, its $16,750
indebtedness to Sierra Health Services, Inc. ("Sierra") and the $80,000
reinsurance premium
-5-
<PAGE>
PHYSICIAN CORPORATION OF AMERICA
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR QUARTER ENDED JUNE 30, 1997
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
NOTE B: (CONTINUED)
to be paid to Centre Reinsurance Company of New York ("Centre Re") if such
reinsurance is to be obtained, and (v) be required to submit a revised plan to
show NASDAQ how it will comply with NASDAQ's tangible net worth requirements to
avoid termination of its status as a listed company on NASDAQ. In such event,
the Company would re-establish its active evaluation of refinancing alternatives
to raise the capital (whether debt or equity related) required to meet its
obligations or outright sale/merger of the Company with another party.
NOTE C:
EARNINGS PER COMMON AND COMMON EQUIVALENT SHARE
Primary earnings 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 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 D:
DEBT
On April 22, 1997, the Company entered into an eighth amendment to modify its
$101,750 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 time of amendment of approximately $1,023 and, in the
event the Company did not enter into a merger or other agreement to refinance
the debt by July 31, 1997, an additional fee of 1% of the then outstanding
balance of indebtedness, and (iv) customary financial covenants. Additionally,
the Company is indebted to Sierra for $16,750 under the terms of a demand note
payable. Interest on this note accrues at 8.25% with the default interest rate
increasing by 5%. In September 1997, Sierra may demand repayment of the note
which would then become due after the Credit Facility indebtedness is repaid.
The Company does not have the existing cash resources to be able to pay the
principle balance due Sierra nor its Credit Facility lenders on October 1, 1997
and contemplates the satisfaction of both items of indebtedness as part of the
Humana merger. See Management's Discussion and Analysis - "Liquidity and
Capital Resources" for further discussion.
-6-
<PAGE>
PHYSICIAN CORPORATION OF AMERICA
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR QUARTER ENDED JUNE 30, 1997
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
NOTE E:
WORKERS' COMPENSATION
PCA Property and Casualty Insurance Company ("PCA/P&C"), the Company's Florida
property and casualty insurer, has reported a deficit as of June 30, 1997 and
December 31, 1996, of approximately $115,000 and $121,000, respectively, under
generally accepted accounting principles. This deficit resulted from losses
incurred or assumed under excess insurance, reinsurance and indemnification
contracts in favor of assessable workers' compensation self insurance funds and
mutual insurers.
The Florida Department of Insurance ("DOI") has exerted increasing control over,
and has initiated legal proceedings against, PCA/P&C because of its
deteriorating financial condition. In November 1996, PCA/P&C entered into an
administrative consent order, pursuant to which PCA/P&C ceased writing and
renewing insurance policies, subjected most of its business operations and
decisions to review and approval by the DOI, and was required to submit a
corrective plan satisfactory to the DOI. In late February 1997, the DOI brought
judicial proceedings seeking its appointment as receiver for PCA/P&C for
purposes of rehabilitation. Several proposed corrective plans were submitted,
but none were approved.
Under a Forbearance Agreement entered into May 2, 1997 (the "Forbearance
Agreement"), PCA/P&C consented to the DOI's appointment as receiver for purposes
of rehabilitation or liquidation on or after June 2, 1997. The DOI allowed
PCA/P&C until that date to submit a satisfactory plan assuring full payment of
claims and in the interim obtained greater control over its affairs and access
to its records. Separately, the DOI requested that the Company and certain
subsidiaries pay PCA/P&C amounts aggregating approximately $35,000 and refused
to permit PCA/P&C to pay substantial amounts due to affiliates. The Company
disputed these demands but agreed to inform the DOI of progress in negotiations
intended to obtain reinsurance coverage for PCA/P&C and/or to pay for such
coverage through a financing transaction or business combination as described
elsewhere herein.
In connection with execution of the Merger Agreement, and after lengthy
negotiations in which the DOI participated, on June 2, 1997, the Company,
PCA/P&C and PCA Solutions entered into four interrelated agreements with
Centre Re and an affiliate. Under the Aggregate Excess of Loss Reinsurance
Agreement (the "Reinsurance Agreement"), Centre Re agreed to pay up to
$230,000 to satisfy policyholder claims against PCA/P&C if PCA/P&C is not
able to discharge all its liabilities from its own resources. The Company
agreed to pay or arrange for payment of certain other liabilities of PCA/P&C,
to contribute $20,100 to PCA/P&C for tax benefits realized and to purchase or
guarantee the collection of specified assets. In addition, upon entering
into the Reinsurance Agreement, PCA/P&C paid to and received from various
affiliates amounts agreed by the parties to be owing through March 31, 1997.
Of the total premium of $84,000 payable to Centre Re, $4,000 has been paid
and has been recorded as a contra revenue amount included in Workers'
Compensation related revenues in the accompanying unaudited statements of
operations for the three and six months ended June 30, 1997. The balance of
the premium would be due at closing of the Reinsurance Agreement. In the
event the Company consummates the Reinsurance Agreement, the Company may
receive an experience refund up to a maximum amount of $42,000 and would
record an expense of approximately $38,000 at such time. If the balance of
the premium is not paid or the Centre Re transaction is not closed by October
31, 1997, the Reinsurance Agreement and the three related agreements
identified below will automatically terminate, and Centre Re will retain the
$4,000 premium already paid and the Company would not be liable for the
remaining premium.
-7-
<PAGE>
PHYSICIAN CORPORATION OF AMERICA
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR QUARTER ENDED JUNE 30, 1997
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
NOTE E: (CONTINUED)
Under the Claims Run-Off Administration Services Agreement (the "Claims
Agreement"), PCA Solutions will act as a third party claims service
administrator for purposes of handling the run-off of PCA/P&C's insurance
liabilities. The Claims Agreement, which supplements the prior Management
Contract under which PCA Solutions serves as managing general agent for
PCA/P&C, imposed additional duties on PCA Solutions and entitles Centre Re to
participate in and direct employment, compensation and property acquisition
decisions of PCA Solutions. The Company guaranteed PCA Solution's
performance of its duties under the Claims Agreement. PCA Solutions'
compensation for its services will be deferred and paid only from any
available funds of PCA/P&C remaining after the run-off, which will probably
be more than five years from the date of this statement.
Under the Investment Management Agreement, Zurich Investment Management, Inc.,
an affiliate of Centre Re, will manage the investment portfolio of PCA/P&C,
within agreed guidelines and constraints under the Florida Insurance Code, for
fees based on the size of the portfolio. Under the Tax Allocation and Escrow
Agreement between the Company and PCA/P&C, the latter will receive the benefit
of certain federal net operating loss carryforwards of up to $72,000 if and when
realized in the future by its corporate affiliates due to its net operating
losses and capital loss carryforwards.
If the Centre Re transaction is closed (whether or not in connection with the
Merger), in addition to paying the balance of the reinsurance premium, the
Company, PCA/P&C, and PCA Solutions are required to collateralize various of
their obligations to Centre Re. PCA/P&C must pledge all its assets to secure
its obligations under the Reinsurance Agreement. In addition, the Company must
pledge $45,000 of liquid investments and its stock in PCA Solutions, and PCA
Solutions must pledge all of its assets, to secure (a) obligations of PCA
Solutions under the Claims Agreement, (b) the Company's guaranty of PCA
Solutions' performance under the Claims Agreement and (c) certain of the
Company's obligations under the Reinsurance Agreement. The Company expects to
obtain the $45,000 of liquid investments through the Merger (or another
financing transaction or business combination). Other collateral agreed to be
pledged to Centre Re will be available only if the Company's present lenders
release their security interests in connection with repayment of their loans or
otherwise.
The Reinsurance Agreement provides that either Centre Re or Humana may, by
notice, prevent the Centre Re transactions from closing if the Merger is
consummated. However, under the Agreement, Humana must, from and after the
Effective Time, select one of these three alternatives: (a) adhere to the
Centre Re agreement, (b) eliminate PCA/P&C's statutory deficit by making a
capital contribution in that amount and committing to make additional such
contributions as and when needed thereafter (the "Recapitalization
Alternative") or (c) enter into such other arrangements as the DOI deems
acceptable in its sole discretion. If Centre Re elects not to close the
reinsurance transaction, Humana must comply with the alternatives set forth
in clauses (b) or (c) above. The DOI has indicated that Humana's
Recapitalization Alternative is acceptable. No other alternative arrangement
has been proposed or is now anticipated.
-8-
<PAGE>
PHYSICIAN CORPORATION OF AMERICA
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR QUARTER ENDED JUNE 30, 1997
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
NOTE E: (CONTINUED)
Based on its evaluation of the Agreement and Centre Re agreements, on June 2,
1997, the DOI entered into a Joint Report to the Court and Supplemental
Agreement (the "Supplemental Agreement") with PCA/P&C. In the Supplemental
Agreement, the DOI determined that the Company had made sufficient progress
toward fulfilling the conditions in the Forbearance Agreement to justify
extending the period of forbearance from appointment of a receiver for PCA/P&C
and to allow a reasonable period for the agreed upon transactions to close. The
DOI agreed not to seek its appointment as receiver so long as certain conditions
are being met, including: payment of amounts due to PCA/P&C's creditors, the
absence of an event of default, absence of a material adverse change in the
financial condition of PCA/P&C, PCA Solutions and Centre Re, and diligent
pursuit of regulatory approvals required to close the Merger by October 31,
1997. The DOI reserved the right to obtain its appointment as receiver for
PCA/P&C in the event of, among other circumstances, noncompliance with or
material misrepresentation in provisions of the Supplemental Agreement, denial
of a regulatory consent or approval requisite to closing of the Merger, and
failure to close the Merger by October 31, 1997. The Company agreed to
cooperate in the DOI's investigation of the assessable workers' compensation
business and to keep the DOI regularly informed of progress in obtaining
consents necessary to consummate the Merger. PCA/P&C continues under the DOI's
administrative supervision, and the receivership petition remains pending.
The Supplemental Agreement also provides that, if the DOI does not enforce the
Forbearance Agreement by obtaining its appointment as receiver or otherwise, and
if the Merger is consummated, the receivership proceeding respecting PCA/P&C
will be dismissed or abated and the parties will enter into a new administrative
consent order. That new order is to provide, among other things, for continued
administrative supervision of PCA/P&C at least through 1998 under somewhat less
stringent DOI control, suspension of PCA/P&C's certificate of authority (so that
it could not resume active insurance operations unless its certificate were
reinstated), and covenants that would protect the Company and its affiliates
against the assertion of certain claims based on matters predating March 31,
1997. The agreements among PCA/P&C, the DOI and other interested parties
including Humana may be modified before or after the Effective Time (subject to
required consent of the affected parties).
NOTE F:
SIGNIFICANT CONTRACTS
PUERTO RICO:
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 $11,000 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.
-9-
<PAGE>
PHYSICIAN CORPORATION OF AMERICA
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR QUARTER ENDED JUNE 30, 1997
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
NOTE F: (CONTINUED)
Additionally, the Company has committed to the Puerto Rico Insurance
Commission that the equity of PCA/P.R. will be sufficient by December 31,
1997 to meet a 7:1 ratio of premiums to capital. This commitment will likely
require the Company to infuse an additional $2,500 before December 31, 1997.
See Management's Decision and Analysis of Financial Condition and Results of
Operations - Liquidity and Capital Resources.
FLORIDA:
The Company's subsidiary, PCA Family Health Plans, Inc. (PCA Family) provides
health services to Medicaid beneficiaries in Florida under the terms of an
annual contract which expires on June 30, 1998.
In the fourth quarter of 1996, AHCA initiated a competitive bidding process
whereby it would grade responses to request for proposal ("RFP") from
qualified bidders using both cost and quality of care criteria and award
contracts to selected bid winners to provide health services to Medicaid
recipients in Florida. PCA's response to the RFP was submitted to AHCA in
November 1996. In February 1997, AHCA announced its intent to award a
30-month Medicaid managed care contract to bid winners including PCA, which
were not expected to begin before the end of the second quarter of 1997. The
premium rates were expected to be set at 92% of fee-for-service costs and PCA
was awarded capacity to provide services to up to 337,000 Medicaid
beneficiaries, which was the largest award in the state. In April 1997, AHCA
reduced the rates it paid to managed care organizations, including the
Company, to amount equal to 92% of fee for service costs, down from the 95%
level then in effect.
However, as a result of litigation brought against AHCA by certain parties
submitting responses to AHCA's RFP, in June 1997 AHCA withdrew its RFP and
entered into separate one year contracts with managed care organizations.
Accordingly, PCA Family entered into a contract with AHCA to provide health
services from July 1, 1997 to June 30, 1998 to Medicaid beneficiaries in
Florida at premium rates which the Company anticipates will approximate a
1-2% increase over those in place at June 30, 1997 on a per member per month
basis.
-10-
<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 AND SIX MONTHS ENDED JUNE 30, 1997. THIS INFORMATION SHOULD BE READ IN
CONJUNCTION WITH THE COMPANY'S JUNE 30, 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 OPERATIONS 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 RISKS AND UNCERTAINTIES THAT HAVE A DIRECT BEARING ON THE COMPANY'S
RESULTS OF OPERATIONS AND FINANCIAL CONDITION ARE (A) THE EXPECTATION BUT NOT
ASSURANCE THAT THE CASH ACQUISITION OF THE COMPANY BY HUMANA FOR $7 PER SHARE
WILL CLOSE DURING THE THIRD QUARTER OF 1997, AND IF NECESSARY, THE ABILITY OF
THE COMPANY TO MITIGATE THE EFFECTS OF THE MERGER AGREEMENT NOT CLOSING,
INCLUDING BUT NOT LIMITED TO (I) THE ABILITY OF PCA/P&C TO SUBMIT A DETAILED
CORRECTIVE PLAN TO REMEDY ITS CAPITAL DEFICIENCY THAT IS ACCEPTABLE TO THE DOI
PRIOR TO THE DOI EXERCISING ITS RIGHT TO ITS UNCONTESTED APPOINTMENT AS RECEIVER
FOR PURPOSES OF REHABILITATION OR LIQUIDATION ANYTIME ON OR AFTER OCTOBER 1,
1997, IF THE DOI IS NOT SATISFIED WITH THE CORRECTIVE PLAN, (II) THE ABILITY OF
THE COMPANY TO REFINANCE ITS CREDIT FACILITY INDEBTEDNESS BY ITS MATURITY DATE
OF OCTOBER 1, 1997, AND (III) THE ABILITY OF THE COMPANY TO BE ABLE TO REDUCE
THE LOSS OF BUSINESS THAT COULD RESULT FROM HUMANA HAVING HAD DETAILED REVIEW OF
THE COMPANY'S OPERATIONS INCLUDING ITS PRICING AND MARKETING STRATEGIES, (B) THE
ABILITY OF SIERRA TO CALL PCA'S DEMAND PROMISSORY NOTE PAYABLE TO SIERRA PRIOR
TO CONSUMMATION OF THE PROPOSED MERGER WITH HUMANA AND SIERRA'S SUCCESS IN ANY
ACTION BROUGHT TO ENFORCE ITS DEMANDS FOR EXPENSES IN CONNECTION WITH THE
TERMINATED MERGER AGREEMENT BETWEEN SIERRA AND THE COMPANY, (C) MEDICARE AND
MEDICAID PREMIUM RATES SET BY STATE AND FEDERAL GOVERNMENT AGENCIES CHANGING
UNEXPECTEDLY, (D) ACTIONS BY TEXAS, FLORIDA OR PUERTO RICO REGULATORS, (E)
NASDAQ AND OTHER FACTORS DISCUSSED HEREIN.
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, Texas and Puerto
Rico.
In the second quarter 1997, the Company continued to increase net income
revenues and health plan membership. The following sets forth certain financial
and operating information pertaining to the Company's results for the three and
six months ended June 30, 1997 compared to the same periods in 1996:
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<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
---------------------- ----------------------
1997 1996 1997 1996
------- ------- ------- -------
(In thousands)
<S> <C> <C> <C> <C>
Health Premiums:
Commercial 125,800 144,537 253,602 287,093
Medicaid 122,014 90,596 226,322 181,921
Medicare 86,876 80,536 172,536 156,722
Indemnity 15,218 8,933 30,281 17,075
------- ------- ------- -------
Total health premiums 349,908 324,602 682,741 642,811
------- ------- ------- -------
------- ------- ------- -------
Operating Statistics and Data:
Medical loss ratio (1) 85.3% 87.2% 86.2% 87.3%
Health administrative, marketing and
other expenses ratio (2) 12.9% 15.5% 12.7% 15.9%
Period ending membership:
HMO:
Commercial 397,000 452,000
Medicaid 612,000 418,000
Medicare 61,000 60,000
--------- -------
Total HMO 1,070,000 930,000
Health Indemnity and PPO 82,000 36,000
--------- -------
Total HMO and Insured Health Membership 1,152,000 966,000
--------- -------
--------- -------
</TABLE>
(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 AND SIX MONTHS ENDED JUNE 30, 1997 COMPARED TO THREE AND SIX
MONTHS ENDED JUNE 30, 1996
The Company earned net income of $6.5 million and $11.1 million for the three
and six months ended June 30, 1997 respectively, as compared to net income of
$5.3 million and $0.4 million for the same periods in 1996. The increase was
primarily due to a $11.1 million and $19.6 million improvement in profitability
of the Company's HMOs for the three and six months ended June 30, 1997,
respectively, as compared to the same periods in 1996. The three and six month
1996 amounts include a $7.9 million gain from the sale of the Company's medical
centers in June of 1996.
Health premium revenues for the three and six months ended June 30, 1997 as
compared to 1996 increased by $25.3 million or 8% and $39.9 million or 6%,
respectively. Of the three month increase, $68.8 million was due to a 21%
increase in the average number of members during the period offset by a $43.5
million decrease due to a 11% decrease in the weighted average health premium
rate per member. Of the six month increase, $99.7 million was due to a 16%
increase in the average number of members during the period, offset by a $59.8
million decrease due to a 8% decrease in the weighted average premium rate per
member. Total membership at June 30, 1997 increased by approximately 186,000
members from membership at June 30, 1996 (55,000 decrease in Commercial, 194,000
increase in Medicaid, 1,000 increase in Medicare and 46,000 increase 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 June 30, 1996. The premium rate
decrease period to period was attributable to (i) during the three and six
months ended June 30, 1997, the Company provided health care to approximately
605,000 and 530,000 Medicaid members, respectively, (the majority of which are
members of the Reform Program in Puerto Rico at an average premium rate of
approximately $47 per member per month) representing a 53% and 38% increase in
Medicaid members from the corresponding period in 1996 while (ii) the weighted
average Medicare premium rates increased by approximately 5% for the three and
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six months ended June 30, 1997 vs. 1996 to approximately $475 per member per
month, and (iii) commercial premium rates remained principally unchanged at
approximately $106 per member per month during the period.
Workers' compensation related revenues (which are comprised of workers'
compensation TPA revenues and workers' compensation premiums) for the three and
six month periods ended June 30, 1997 increased by $2.1 million or 16% and
decreased by $23.3 million or 37%, respectively, as compared to the same periods
in 1996. The three month increase was primarily the result of the Company,
during the quarter ended June 30, 1996, retroactively amending to January 1,
1996, its quota share arrangements with its third party reinsurers whereby its
retained share of related premiums and claims decreased from 50% to 25%. This
adjustment, which amounted to approximately $33.8 million for the quarter ended
June 30, 1996, accounts for the $0.6 million increase in premium revenues during
the quarter ended June 30, 1997 despite the Company not writing new or renewal
premiums. TPA revenues increased by $1.5 million for the three months ended
June 30, 1997 as compared to 1996. The six month decrease is consistent with
the Company ceasing to write new and renewal workers' compensation insurance in
November 1996. Accordingly, workers' compensation related insurance premiums
decreased by $28.2 million for the six months ended June 30, 1997, as compared
to 1996. Additionally, workers' compensation TPA fees increased by $4.9 million
during the six months ended June 30, 1997, compared to the same period in 1996.
The three and six month increases in workers' compensation related TPA revenues
are attributable to the Company, beginning in November 1996, to provide TPA
services to employer groups that previously obtained workers' compensation
related insurance (including the administration thereof) from PCA/P&C which then
utilized PCA Solutions to provide TPA services for such policies. As the 1996
TPA revenues were generated by PCA Solutions from its affiliate, PCA/P&C, those
revenues were eliminated upon consolidation of the Company's financial
statements. In 1997 the majority of TPA revenues were generated from third
party customers which resulted in an increase in TPA revenues despite PCA's
overall workers' compensation premium base decreasing. The Company anticipates
its TPA revenue base to continue to decrease over the remainder of 1997.
Investment income for the three and six months ended June 30, 1997 as compared
to 1996 increased by $3.4 million or 57% and $5.5 million or 47%, respectively.
These increases are due to the Company having larger investment balances during
the 1997 periods as compared to 1996 as a result of the approximately $160.0
million in investments assumed from the workers' compensation self insured funds
effective September 30, 1996. Additionally, during the three months ended June
30, 1997, the Company recorded a gain of approximately $1 million on the
disposal of common stock it acquired as partial consideration when it sold its
medical clinics in June 30, 1996.
Other revenues for the three and six months ended June 30, 1997 as compared to
1996 decreased by $1.9 million or 44% and $6.6 million or 66%, respectively.
These decreases are due entirely to the Company selling its medical center
subsidiary and Alabama and Georgia HMOs operations in June and September 1996,
respectively, which together earned $3.4 million and $7.5 million in
professional services and management administration revenues in the three and
six months ended June 30, 1996. The 1997 amounts include a $1 million
performance fee earned by the Company from global capitation agreements in
Florida by achieving specified membership levels.
Medical costs for the three and six months ended June 30, 1997 as compared to
1996 increased by $15.5 million or 5% and $27.5 million or 5%. Of the three
month increase, $60.0 million was due to a 21% increase in the average number of
members during the period offset by a $44.5 million decrease due to a 13%
decrease in the weighted average medical cost per member. Of the six month
increase, $87.0 million was due to a 16% increase in the average number of
members during the period offset by a $59.5 million decrease in the weighted
average cost per member. This decrease in the weighted average medical cost per
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member was due primarily to (i) an increase in Medicaid members (which have a
lower than average per member medical cost) and (ii) an overall decrease in
medical costs arising from the global capitation agreements entered into by the
Company in its Florida and Puerto Rico markets. As a result of these factors,
the Company's medical loss ratio for the three and six months ended June 30,
1997 decreased to 85.3% from 87.2% and to 86.2% from 87.3%, respectively, for
the same periods in 1996.
Health related administrative, marketing and other expenses for the three and
six months ended June 30, 1997 as compared to 1996 decreased by $5.1 million or
10% and $15.4 million or 15%, respectively. The three and six month decreases
were due in part to $2.3 million and $5.2 million reduction in costs incurred in
1996 by subsidiaries sold by the Company in 1996. The remaining $2.8 million and
$10.2 million decreases, respectively, are the result of management implementing
its plan to reduce administrative costs incurred by the Company's HMOs which
included employee headcount reductions and office consolidations in the second
and third quarters of 1996. The reduction in overall administrative costs in
1997 was achieved despite a 21% and 16% increase in the weighted average number
of members during the three and six months ended June 30, 1997, respectively, as
compared to 1996. As a result, the Company's health administrative ratio
improved to 12.9% from 15.5% and to 12.7% from 15.9%, respectively, for the
three and six months ended June 30, 1997 as compared to the same periods in
1996.
Workers' compensation related administrative, marketing and other expenses for
the three and six months ended June 30, 1997 increased by $10.0 million or 135%
and decreased by $13.3 million or 27%, respectively as compared to the same
periods in 1996. The three month increase is entirely attributable to the quota
share treaties which was recorded in the second quarter of 1996 reducing the
Company's retention on its primary workers' compensation insurance from 50% to
25%. Accordingly, the six month decrease is reflective of the fact the Company
ceased writing all new and renewal workers' compensation related insurance
effective in November 1996. The Company's workers' compensation related
revenues consist of run off workers' compensation premiums and TPA revenues.
The Company expects its TPA revenues to continue to decline throughout 1997.
Depreciation and amortization for the three and six months ended June 30,
1997 amounted to $4.4 million and $8.8 million, respectively, and decreased
by $1.3 million or 23% and $3.2 million or 27%, respectively, as compared to
1996. The decreases are 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 as well
as lower depreciation resulting from the sale of subsidiaries in 1996.
In June 1996, the Company sold its wholly owned subsidiary, Physicians First,
Inc., which held and operated the Company's medical centers. This transaction
resulted in a gain of $7.9 million in the second quarter of 1996. No
subsidiaries were sold by the Company in 1997.
Interest expense for the three and six months ended June 30, 1997 was $4.0
million and $9.2 million, respectively, representing a $0.3 million and $1.5
million increase in the same periods in 1996. These increases resulted from an
approximate 4% increase in the average annual interest rate change increasing
from 7% to 11%, while the average outstanding loan balance decreased by
approximately $40 million. The 1997 amount also includes approximately $1.0
million of fees paid to its primary lenders in connection with amendments of its
Credit Facility.
Income tax expense for the three and six months ended June 30, 1997 was $1.1
million and $1.45 million compared to a $3.7 million and $7.3 million income tax
benefit, respectively, for the same periods in 1996. This income tax expense in
1997 resulted 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 15% and
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<PAGE>
12% effective income tax rate for the three and six months ended June 30,
1997 is lower than the 35% statutory rate for such period, primarily due to
the nondeductibility of goodwill amortization for income tax purposes arising
from the acquisition of HMOs and workers compensation companies offset by tax
exempt investment income and the utilization of net operating loss
carryforwards. The Company's tax benefit for the three and six months ended
June 30, 1996 was primarily the result of the utilization of capital loss
carryforwards which eliminated tax expense relating to the 1996 gain on sale
of subsidiaries.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 1997, the Company had a working capital deficit of $107.3 million,
primarily the result of the Company's Credit Facility and Sierra debt being
classified as a current liability. Cash and cash equivalents were $88.5 million
at June 30, 1997, a decrease of $45.5 million from $134.0 million at December
31, 1996 and short term investments were $138.0 million at June 30, 1997, an
increase of $7.2 million from a $130.8 million balance at December 31, 1996.
The decrease in cash and cash equivalents is primarily the result of cash used
in operations and financing activities offset by cash provided by investing
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 six months ended June 30, 1997
was $110.7 million compared to cash of $64.6 million provided by operating
activities for the six months ended June 30, 1996. The cash used in
operating activities in 1997 was principally the result of the following
factors: (i) net income of $11.1 million, (ii) decrease in claims payable in
the amount of $184.2 million (primarily the result of a $153.0 million
decrease in workers' compensation related claims caused by PCA paying claims
without writing new or renewal workers' compensation business in 1997), (iii)
increase in income taxes payable in the amount of $46.4 million resulting
principally from income tax refunds received, (iv) decrease in unearned
premiums in the amount of $38.4 million, (v) $51.9 million decrease in
accounts receivable and reinsurance recoveries, (vi) a decrease in accounts
payable, accrued expenses and other current liabilities of $0.6 million and
(vii) a $3.1 million net increase from changes in other assets and
liabilities and non cash operating items.
In 1997, net cash provided by investment activities increased to $66.9 million,
from $157.0 million used in investment activities in 1996. The net cash
provided by investing activities was primarily the result of the net proceeds
from sale of investments of $67.2 million which was used to pay claims. The
Company believes it will be able to finance all capital expenditures 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 six months ended June 30,
1997 increased to $1.8 million compared to $15.7 million cash provided in the
six months ended June 30, 1996. The cash used in financing activities was
primarily the result of $1.9 million of long-term debt principal and covenant
payments offset by $0.1 million of indebtedness and diminimous proceeds from
employee exercises of stock options.
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 its liquidity requirements
will be met by working capital to be provided by Humana after the merger is
completed. In the event the merger is not completed, the Company will be
required to effect one or more of the following refinancing 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. However,
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<PAGE>
there can be no assurance that it will be successful in such endeavors.
Additionally, if the merger is not consummated, the Company will be required to
raise additional capital to be able to meet its obligations regarding (i) the
reinsurance policy with Centre Re for PCA/P&C, if it is so consummated, (ii)
capital infusion requirements of its regulated HMOs, (iii) repayment of
indebtedness due to Sierra and (iv) its ongoing operations.
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
equity in each regulated subsidiary and to obtain prior consent to declare
any dividend. At June 30, 1997, the Company's regulated HMO and insurance
subsidiaries (excluding PCA/P&C) had approximately $18.0 million in excess
statutory equity. The Company's Florida HMOs incurred operating losses in
1996 and the Company has submitted and revised a corrective action plan to
regulators under which these HMOs will operate until profitability is
obtained. The Company's Texas HMO, PCA/Texas has been notified by the Texas
Department of Health (TDH) that the TDH intends to suspend PCA/Texas' right
to enroll new Medicaid members effective September 10, 1997 until PCA/Texas
demonstrates full compliance with the TDH's claims payment requirements.
Additionally, the PCA/P&C subsidiary had a deficit of approximately $115.0
million as of June 30, 1997, which, pursuant to a corrective action plan in
process, will be replenished through collection of non-admitted assets and
future investment earnings, as well as either the purchase of reinsurance or
infusion of capital by Humana if the sale to Humana is completed. 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 E to the June 30, 1997 unaudited 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 F to the June 30, 1997 unaudited
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. However, the Company
anticipates it will be able to fund the additional PCA/P.R. equity
requirements of approximately $2.5 million, 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.
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PART II. OTHER INFORMATION
Item 1. Legal Proceedings
As a result of the deterioration of PCA/P&C's financial condition,
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 was then rescheduled to June
2, 1997. Under a Forbearance Agreement entered into May 2, 1997 (the
Forbearance Agreement), PCA/P&C consented to the DOI's appointment
as receiver for purposes of rehabilitation or liquidation on or
after June 2, 1997. The DOI allowed PCA/P&C until that date to
submit a satisfactory plan assuring full payment of claims and in
the interim obtained greater control over its affairs and access to
its records. Separately, the DOI requested that the Company and
certain subsidiaries pay PCA/P&C amounts aggregating approximately
$35 million and refused to permit PCA/P&C to pay substantial amounts
due to affiliates.
On June 2, 1997, the DOI entered into a Joint Report to the Court
and Supplemental Agreement (the Supplemental Agreement) with
PCA/P&C. In the Supplemental Agreement, the DOI determined that the
Company had made sufficient progress toward fulfilling the
conditions in the Forbearance Agreement to justify extending the
period of forbearance from appointment of a receiver for PCA/P&C and
to allow a reasonable period for the agreed upon transactions to
close. The DOI agreed not to seek its appointment as receiver so
long as certain conditions are being met, including: payment of
amounts due to PCA/P&C's creditors, the absence of an event of
default, absence of a material adverse change in the financial
condition of PCA/P&C, PCA Solutions and Centre Re, and diligent
pursuit of regulatory approvals required to close the Merger by
October 31, 1997. The DOI reserved the right to obtain its
appointment as receiver for PCA/P&C in the event of, among other
circumstances, noncompliance with or material misrepresentation in
provisions of the Supplemental Agreement, denial of a regulatory
consent or approval requisite to closing of the Merger, and failure
to close the Merger by October 31, 1997. The Company agreed to
cooperate in the DOI's investigation of the assessable workers'
compensation business and to keep the DOI regularly informed of
progress in obtaining consents necessary to consummate the Merger.
PCA/P&C continues under the DOI's administrative supervision, and
the receivership petition remains pending.
The Supplemental Agreement also provides that, if the DOI does not
enforce the Forbearance Agreement by obtaining its appointment as
receiver or otherwise, and if the Merger is consummated, the
receivership proceeding respecting PCA/P&C will be dismissed or
abated and the parties will enter into a new administrative consent
order. That new order is to provide, among other things, for
continued administrative supervision of PCA/P&C at least through
1998 under somewhat less stringent DOI control, suspension of
PCA/P&C's certificate of authority (so that it could not resume
active insurance operations unless its certificate were reinstated),
and covenants that would protect the Company and its affiliates
against the assertion of certain claims based on matters predating
March 31, 1997. The agreements among PCA/P&C, the DOI and other
interested parties including Humana may be modified before or after
the Effective Time (subject to required consent of the affected
parties). See note E to the Company's June 30, 1997 unaudited
consolidated financial statements. The Company cannot predict the
outcome of this matter.
On March 18, 1997, the Company filed suit against Sierra in the
United States District Court for the Southern District of Florida.
In the suit, the Company alleges that Sierra terminated the
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Agreement and Plan of Merger among Sierra, Sierra Acquisition, Inc.
and PCA (the Sierra-PCA Merger Agreement) on March 1, 1997 and that
the termination was not permitted by the terms of the Sierra-PCA
Merger Agreement. Alternatively, the Company alleges that Sierra's
statement on March 1, 1997 that it would not proceed with the merger
under its existing terms constituted a withdrawal or modification,
or proposed withdrawal or modification, of the approval or
recommendation of the Sierra-PCA Merger Agreement by the Sierra
board of directors. The Company also alleges that Sierra breached
its covenants and agreements under the Sierra-PCA Merger Agreement
by failing to take all reasonable action necessary or use all
reasonable efforts to obtain approval of the merger by the DOI and
the Florida Agency for Health Care Administration and by failing to
offer employment to a key executive of the Company as required by
the terms of the PCA-Sierra Merger Agreement. The Company seeks
liquidated damages in the amount of $20 million plus costs and
expenses, pursuant to the terms of the Sierra-PCA Merger Agreement.
The Company also seeks additional actual damages for, among other
things, loss of business opportunities, damage to business
reputation, lost profits and other consequential damages allegedly
caused by Sierra's breach of contract and fraudulent inducement to
enter into the Sierra-PCA Merger Agreement.
On March 27, 1997, Sierra and its wholly owned subsidiary filed suit
against the Company in the Court of Chancery of the State of
Delaware in and for New Castle County with respect to the failed
merger. In the suit, Sierra alleges that the Company's disclosures
relating to PCA/P&C constitute a breach of the Company's
representations and warranties under the Sierra-PCA Merger Agreement
and that this breach entitled Sierra to terminate the Sierra-PCA
Merger Agreement and to recover from the Company the sum of $3
million plus its expenses, as defined under the Sierra-PCA Merger
Agreement. Sierra also alleges that it is entitled to an award of
damages resulting from allegedly false representations by the
Company regarding its financial condition and the financial
condition of its subsidiaries. Sierra takes the position that it
terminated the Sierra-PCA Merger Agreement in a letter to the
Company dated March 18, 1997.
Both lawsuits are still pending. At this stage of the proceedings,
it is impossible to predict with any degree of certainty whether the
Company will prevail on the merits or the financial impact of the
lawsuits on the Company. Management of the Company believes that
these lawsuits will not impact the ability to consummate the Merger.
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:
(B) Reports on Form 8-K:
(1) Form 8-K dated April 28, 1997 (filed April 28, 1997 and
incorporated herein by this reference)
(2) Form 8-K dated June 16, 1997 (filed June 17, 1997 and
incorporated herein by this reference)
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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: August 12, 1997
-19-
<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 AND SIX MONTHS ENDED JUNE 30, 1997 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<CASH> 88,472
<SECURITIES> 138,009
<RECEIVABLES> 65,567
<ALLOWANCES> 53,799
<INVENTORY> 595
<CURRENT-ASSETS> 443,948
<PP&E> 49,818
<DEPRECIATION> (26,487)
<TOTAL-ASSETS> 1,130,045
<CURRENT-LIABILITIES> 551,226
<BONDS> 9,489
0
0
<COMMON> 388
<OTHER-SE> (56,287)
<TOTAL-LIABILITY-AND-EQUITY> 1,130,045
<SALES> 721,997
<TOTAL-REVENUES> 742,612
<CGS> 711,788
<TOTAL-COSTS> 720,788
<OTHER-EXPENSES> 50
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 9,215
<INCOME-PRETAX> 12,559
<INCOME-TAX> (1,450)
<INCOME-CONTINUING> 11,109
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 11,109
<EPS-PRIMARY> 0.17
<EPS-DILUTED> 0.17
</TABLE>
