<PAGE>
================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
- - ---
ACT OF 1934
For the quarterly period ended March 31, 1996.
___ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission file number 0-21098.
Physicians Health Services, Inc.
(Exact name of registrant as specified in charter)
Delaware 06-1116976
(State or other jurisdiction of (IRS employer
incorporation or organization) identification number)
120 Hawley Lane 06611
Trumbull, Connecticut (Zip Code)
(Address of principal executive offices)
Registrant's telephone number, including area code (203) 381-6400
Not applicable
____________________________________________________________
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by a check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No ____
---
There were 5,457,033 shares of Class A Common Stock ($0.01 par value)
and 3,846,443 shares of Class B Common Stock ($0.01 par value) outstanding as of
May 7, 1996.
================================================================================
<PAGE>
PHYSICIANS HEALTH SERVICES, INC. AND SUBSIDIARIES
TABLE OF CONTENTS
PAGE NO.
--------
PART I. FINANCIAL INFORMATION
---------------------
Item 1. Financial Statements
Condensed Consolidated Balance Sheets at
March 31, 1996 and December 31, 1995 3
Condensed Consolidated Statements of Operations for the Three
Months Ended March 31, 1996 and 1995 4
Condensed Consolidated Statements of Stockholders' Equity
for the Three Months Ended March 31, 1996 and 1995 5
Condensed Consolidated Statements of Cash Flows for the
Three Months Ended March 31, 1996 and 1995 6
Notes to Condensed Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 8-9
PART II. OTHER INFORMATION
-----------------
Item 6. Exhibits and Reports on Form 8-K 10
Signatures 11
2
<PAGE>
PHYSICIANS HEALTH SERVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1996 1995
(Unaudited)
--------- ---------
<S> <C> <C>
ASSETS:
Current Assets
Cash and Cash Equivalents $ 3,742 $ 7,536
Investments, at fair value:
Fixed Maturities - (amortized cost--1996--$78,310 and 1995--$101,181) 78,720 102,130
Equity Securities - (amortized cost--1996--$1,417 and 1995--$1,417) 1,345 1,355
Accounts Receivable Less Allowances (1996--$1,882 and 1995--$1,050) 37,781 31,548
Other Receivables 18,077 14,815
Advances to Participating Hospitals 3,136 5,903
Prepaid Expenses and Other 1,268 204
-------- --------
Total Current Assets 144,069 163,491
Property, Plant, and Equipment
Land 3,322 3,322
Building and Improvements 14,933 14,645
Furniture and Equipment 33,449 29,817
-------- --------
51,704 47,784
Less Accumulated Depreciation and Amortization 11,855 11,028
-------- --------
Total Property, Plant, and Equipment 39,849 36,756
Other Assets 12,046 10,821
-------- --------
TOTAL ASSETS $195,964 $211,068
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY:
Current Liabilities
Accrued Health Care Expenses $ 26,430 $ 23,878
Unearned Premiums 26,787 25,022
Amounts Due to IPA's, Physicians and other Providers 23,453 37,806
Accounts Payable and Accrued Expenses 8,239 14,199
-------- --------
Total Current Liabilities 84,909 100,905
Excess of Net Assets Over Cost of Company Acquired 1,252 1,282
Stockholders' Equity
Class A Common Stock, Par Value $0.01 per Share--Authorized 54 53
13,000,000 Shares, Issued and Outstanding; 1996--5,434,503
shares; 1995--5,310,347 shares
Class B Common Stock, Par Value $0.01 per Share; 40 41
non-transferable--authorized and issued 1996--3,948,958 shares;
1995--4,052,974 shares; voting rights - 10 per share
Additional Paid-In Capital 41,138 40,760
Unrealized Appreciation of Investments,
Net of Tax 188 510
Retained Earnings 68,384 67,518
-------- --------
109,804 108,882
Less Cost of Class B Common Stock (86,400) Shares in Treasury 1 1
-------- --------
Total Stockholders' Equity 109,803 108,881
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $195,964 $211,068
======== ========
</TABLE>
See Notes to Condensed Consolidated Financial Statements
3
<PAGE>
PHYSICIANS HEALTH SERVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
------------------
1996 1995
--------- -------
<S> <C> <C>
REVENUES
Premiums $111,820 $79,566
Investment and Other Income 1,666 1,847
-------- -------
113,486 81,413
COSTS AND EXPENSES
Hospital Services 39,655 25,982
Physicians and Related Health Care Services 40,938 31,755
Other Health Care Services 10,719 4,740
Indemnity Costs 2,633 -
Selling, General and Administrative Expenses 18,321 13,079
Proxy Defense Costs - 450
-------- -------
112,266 76,006
-------- -------
Income before Income Taxes 1,220 5,407
Income Tax Expense 354 2,263
-------- -------
NET INCOME $ 866 $ 3,144
======== =======
Net Income Per Common Share $ 0.09 $ 0.33
======== =======
Weighted Average Number of Common
Shares Outstanding 9,536 9,396
======== =======
</TABLE>
See Notes to Condensed Consolidated Financial Statements
4
<PAGE>
PHYSICIANS HEALTH SERVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS)
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
---------------------
MARCH 31, MARCH 31,
1996 1995
---------- ---------
<S> <C> <C>
CLASS A COMMON STOCK
Balance at Beginning of Period $ 53 $ 49
Conversion of Class B Common Stock
into Class A Common Stock 1 1
-------- -------
Balance at End of Period $ 54 $ 50
======== =======
CLASS B COMMON STOCK
Balance at Beginning of Period $ 41 $ 45
Conversion of Class B Common Stock
into Class A Common Stock (1) (1)
-------- -------
Balance at End of Period $ 40 $ 44
======== =======
ADDITIONAL PAID IN CAPITAL
Balance at Beginning of Period $ 40,760 $40,514
Exercise of Stock Options 378 5
-------- -------
Balance at End of Period $ 41,138 $40,519
======== =======
UNREALIZED APPRECIATION (DEPRECIATION) OF INVESTMENTS,
NET OF TAX
Balance at Beginning of Period $ 510 (949)
Unrealized Appreciation (Depreciation) (322) 871
-------- -------
Balance at End of Period $ 188 $ (78)
======== =======
RETAINED EARNINGS
Balance at Beginning of Period $ 67,518 $51,548
Net Income 866 3,144
-------- -------
Balance at End of Period $ 68,384 $54,692
======== =======
TREASURY STOCK
-------- -------
Balance at Beginning and End of Period $ (1) $ (1)
======== =======
TOTAL STOCKHOLDERS' EQUITY
Balance at Beginning of Period $108,881 $91,206
Exercise of Stock Options 378 5
Net Income 866 3,144
Unrealized Appreciation (Depreciation) of
Investments (322) 871
-------- -------
Balance at End of Period $109,803 $95,226
======== =======
</TABLE>
See Notes to Condensed Consolidated Financial Statements
5
<PAGE>
PHYSICIANS HEALTH SERVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW
(IN THOUSANDS)
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
---------------------
MARCH 31, MARCH 31,
1996 1995
--------- ---------
<S> <C> <C>
OPERATING ACTIVITIES
Net Income $ 866 $ 3,144
Adjustments to Reconcile Net Income to Net Cash
Provided by (Used by) Operating Activities:
Depreciation and Amortization 827 902
Provision for Doubtful Accounts 832 59
Amortization of Excess of Net Assets over Cost
of Company Acquired (30) (30)
Deferred income tax expense (319) 204
Changes in Assets and Liabilities:
Accounts Receivable - Trade (7,065) (336)
Other Receivables (3,262) (682)
Advances to Participating Hospitals 2,767 (174)
Prepaid Expenses and Other (1,064) 1,120
Accrued Health Care Expenses 2,552 1,772
Unearned Premiums 1,765 69
Due to IPA's, Physicians and Other Providers (14,353) (17,803)
Accounts Payable and Accrued Expenses (5,400) (4,924)
--------- ---------
Net Cash Used by Operating Activities (21,884) (16,679)
INVESTING ACTIVITIES
Purchases of Property, Plant, and Equipment (3,926) (2,665)
Proceeds from Disposal of Equipment 6 44
Increase in Other Assets (1,225) (396)
Purchases of Investments (140,990) (115,843)
Proceeds from Sales and Maturities of Investments 163,847 113,325
--------- ---------
Net Cash Provided by (Used) by Investing Activities 17,712 (5,535)
FINANCING ACTIVITIES
Exercise of Stock Options 378 5
--------- ---------
Net Cash Provided by Financing Activities 378 5
--------- ---------
Decrease in cash and cash equivalents (3,794) (22,209)
Cash and cash equivalents at beginning of period 7,536 28,467
--------- ---------
Cash and cash equivalents at end of period $ 3,742 $ 6,258
========= =========
</TABLE>
See Notes to Condensed Consolidated Financial Statements
6
<PAGE>
PHYSICIANS HEALTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1996
(UNAUDITED)
1. Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with generally accepted accounting principles
for interim financial information and with the instructions to Form 10-Q
and Article 10 of Regulation S-X. Accordingly, they do not include all of
the information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of
management, all adjustments (consisting solely of normal recurring
accruals) considered necessary for a fair presentation have been included.
Operating results for the three month period ended March 31, 1996 are not
necessarily indicative of the results that may be expected for the year
ended December 31, 1996. For further information, refer to the
consolidated financial statements and footnotes thereto included in the
Physicians Health Services, Inc. and Subsidiaries' annual report on Form
10-K for the year ended December 31, 1995.
2. Stockholders' Equity and Per Share Data
Pursuant to the Company's Certificate of Incorporation, upon conversion of
Class B shares to Class A Shares, such Class B shares are canceled and
cannot be reissued. Per share data are based upon the weighted average
number of common and common equivalent shares outstanding during the
period.
3. Tax Provision
The effective tax rate for the quarter ended March 31, 1996 declined to
29.0% from 41.9% for the same 1995 period. The decrease in the effective
tax rate is due to a shift of much of the Company's investment portfolio
into tax exempt municipal bonds and due to pretax income being generated
by investment income at the lower tax rate.
7
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
---------------------
QUARTER ENDED MARCH 31, 1996 VERSUS MARCH 31, 1995
Premium revenue increased 40.5% to $111.8 million in the first quarter of 1996
from $79.6 million for the comparable 1995 quarter. Enrollment at March 31,
1996 was 320,660, an increase of 62.6% from enrollment of 197,253 at March 31,
1995. Overall premium revenues increased at a lower rate than the growth in
enrollment due to competitive conditions which depressed pricing flexibility
and due to a shift in product mix to lower revenue yielding and lower margin
products such as the gatekeeper products, Healthcare Solutions products and
Medicaid. Also, enrollee statistics include 100% of the enrollees in the New
York Healthcare Solutions products, while premium revenue includes the
Company's 50% share of revenues derived from the New York arrangement which
was effective July 1, 1995. The Company expects that the growth in premium
revenue may continue to lag the growth in enrollment to the extent the current
competitive conditions and demand for lower margin products continue.
Investment and other income decreased 9.8% to $1.7 million for the first
quarter of 1996 from $1.8 million for the quarter ending March 31, 1995. The
decrease is due to a decline in invested assets and lower investment yields
due to lower interest rates.
Health care expenses as a percentage of premium revenues (medical loss ratio)
increased to 85.3% for the first quarter of 1996 as compared to 79.7% for the
first quarter of 1995. Total health care expenses increased 50.4% to $93.9
million in the first quarter of 1996 from $62.4 million for the comparable
1995 quarter. As a result of the competitive market conditions and demand for
the Company's lower margin products referred to above, the Company expects
that the medical loss ratios will continue to be higher than those reported
for the respective year earlier periods.
Hospital services expenses increased 52.6% to $39.6 million from $26.0 million
for the first quarter of 1995. Inpatient hospital utilization for fully-
insured enrollees, excluding Medicare cost contract enrollees, decreased 6.5%
to 288 days per thousand members for the quarter ended March 31, 1996 from 308
days per thousand members for the comparable 1995 period.
Physician and related health care expenses increased by 28.9% from $31.8
million for the first quarter of 1995 to $40.9 million for the first quarter
of 1996. The increase is reflective of the increase in membership, offset in
part by more favorable utilization and improved capitation arrangements.
Other health care expenses increased by $6.0 million in the first quarter of
1996 as compared to the first quarter of 1995. The increase is primarily due
to higher prescription drug costs resulting from a shift in membership to drug
riders that offer greater benefits and due to an increase in utilization,
particularly in government programs. Additionally, for the first quarter of
1996, other health care expenses includes the Healthcare Solutions profit
sharing expense which resulted from the Guardian joint marketing arrangement
in Connecticut which began in the second quarter of 1995.
8
<PAGE>
QUARTER ENDED MARCH 31, 1996 VERSUS MARCH 31, 1995 (CONT.)
Indemnity costs reflect the medical costs associated with the indemnity
revenue assumed in connection with the Guardian reinsurance arrangement in New
York which was effective July 1, 1995.
Selling, general and administrative expenses increased by 35.4% or $4.8
million in the first quarter of 1996 from the first quarter of 1995. The
increase is due primarily to continuing resource commitments needed to support
the geographic expansion and the enrollment growth and diversity. The
selling, general and administrative expenses as a percentage of revenue
improved to 16.4% for the first quarter of 1996 as compared to 17.0% for the
comparable 1995 period.
The Company's effective tax rate for the first quarter of 1996 declined to
29.0% from 41.9% for the quarter ending March 31, 1995. The decline in the
effective tax rate is due to the shift of much of the Company's investment
portfolio into tax exempt municipal bonds and due to pretax income being
generated by investment income at the lower tax rate.
LIQUIDITY AND CAPITAL RESOURCES
-------------------------------
Cash and cash equivalents decreased $3.8 million at March 31, 1996 from
December 31, 1995. For the quarter ended March 31, 1996, $21.9 million was
used by operating activities, primarily to fund the payment of risk retention
to IPAs, physicians and other providers and to fund the payment of accrued
liabilities. Additionally, trade and other receivables increased in the first
quarter of 1996, due in part to the arrangements with Guardian whereby the
cash balances relating to the arrangements are held and invested by
Guardian. During the first quarter of 1996, approximately $17.7 million of
net cash was provided by investing activities, primarily from the sales and
maturities of investments which was used to fund the risk retention payments.
Stockholder's equity increased to $109.8 million during the first three months
of 1996 from $108.9 million at December 31, 1995 due to net income for the
period augmented by approximately $400 thousand from the exercise of stock
options. These amounts were partially offset by approximately $300 thousand
decline in the unrealized appreciation in the investment portfolio.
The Company expects to spend additional capital, principally in computer and
technology system enhancements over the next several years. Additionally, in
February of 1996, the Company committed to purchase an additional building to
meet the expanding space requirements necessitated by its growth. The
purchase price of the building is $18,500,000 and closing is expected to take
place by June 1996. The Company believes that in addition to its current
capital resources and internally generated funds, it will be able to obtain
financing, if necessary, sufficient for its continued operations, the funding
of geographical and product expansions, system enhancements and its additional
space requirements.
9
<PAGE>
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
-----------------------------------------
(a) No new exhibits.
(b) Reports on Form 8-K
A current report on Form 8-K was filed on May 2, 1996 reporting in Item 5:
Other Events, the signing of a Marketing and Services Agreement with The
Guardian Life Insurance Company of America, extending the joint marketing
arrangement to New Jersey. No financial statements were filed.
10
<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.
PHYSICIANS HEALTH SERVICES, INC.
--------------------------------
(Registrant)
Date: May 15, 1996 /s/ James L. Elrod, Jr.
--------------------- ------------------------------
James L. Elrod, Jr.
Chief Financial Officer
Date May 15, 1996 /s/ Michael E. Herbert
---------------------- ------------------------------
Michael E. Herbert
President
11
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> MAR-31-1996
<CASH> 3,742
<SECURITIES> 80,065
<RECEIVABLES> 37,781
<ALLOWANCES> 1,882
<INVENTORY> 0
<CURRENT-ASSETS> 144,069
<PP&E> 39,849
<DEPRECIATION> 11,855
<TOTAL-ASSETS> 195,964
<CURRENT-LIABILITIES> 84,909
<BONDS> 0
94
0
<COMMON> 0
<OTHER-SE> 109,709
<TOTAL-LIABILITY-AND-EQUITY> 195,964
<SALES> 111,820
<TOTAL-REVENUES> 113,486
<CGS> 0
<TOTAL-COSTS> 93,945
<OTHER-EXPENSES> 18,321
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 1,220
<INCOME-TAX> 354
<INCOME-CONTINUING> 866
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 866
<EPS-PRIMARY> .09
<EPS-DILUTED> .09
</TABLE>
