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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 September 30, 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 5,527,823 shares of Class A Common Stock ($0.01 par value) and
3,781,680 shares of Class B Common Stock ($0.01 par value) outstanding as of
November 5, 1996.
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<PAGE>
PHYSICIANS HEALTH SERVICES, INC. AND SUBSIDIARIES
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION PAGE NO.
---------------------- --------
Item 1. Financial Statements
Condensed Consolidated Balance Sheets at
September 30, 1996 and December 31, 1995 3
Condensed Consolidated Statements of Operations for the Three
and Nine Months Ended September 30, 1996 and 1995 4
Condensed Consolidated Statements of Stockholders' Equity
for the Nine Months Ended September 30, 1996 and 1995 5
Condensed Consolidated Statements of Cash Flows for the
Nine Months Ended September 30, 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 9
PART II. OTHER INFORMATION
-----------------
Item 6. Exhibits and Reports on Form 8-K 12
Signatures 13
<PAGE>
PHYSICIANS HEALTH SERVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 30,
1996 1995
------------- -------------
(Unaudited)
<S> <C> <C>
ASSETS:
Current Assets
Cash and Cash Equivalents $ 7,065 $ 7,536
Investments, Available for Sale at fair
value:
Fixed Securities - (amoritized cost - 83,035 102,130
1996 - $82,891 and 1995 - $101,181)
Equity Securities - (amoritized cost - 1,335 1,355
1996 - $1,417 and 1995 - $1,417)
Accounts Receivable Less Allowances (1996 -
$1,172 and 1995 - $1,050) 38,443 31,548
Other Receivables 28,115 14,815
Advances to Participating Hospitals 1,254 5,903
Prepaid Expenses and Other 1,205 204
------------- -------------
Total Current Assets 160,452 163,491
Property, Plant, and Equipment
Land 8,822 3,322
Building and Improvements 27,204 14,645
Furniture and Equipment 41,351 29,817
------------- -------------
77,377 47,784
Less Accumulated Depreciation and
Amoritization 14,006 11,028
------------- -------------
Total Property, Plant, and Equipment 63,371 36,756
------------- -------------
Other Assets 11,774 10,821
------------- -------------
TOTAL ASSETS $ 235,597 $ 211,068
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY:
Current Liabilities
Accrued Health Care Expenses $ 39,182 $ 23,878
Unearned Premiums 26,765 25,022
Amounts Due to IPA's, Physicians and
other Providers 43,391 37,806
Accounts Payable and Accrued Expenses 6,665 14,199
Short Term Debt 18,000 -
------------- -------------
Total Current Liabilities 134,003 100,905
Non Current Liabilities
Capitalized Leases 88 -
Excess of Net Assets Over Cost of Company Acquired 1,192 1,282
Stockholders' Equity
Class A Common Stock, Par Value $0.01
per Share - Authorized 13,000,000 Shares,
Issued and Outstanding; 1996 - 5,521,823
shares; 1995 - 5,310,347 shares 55 53
Class B Common Stock, Par Value $0.01 per
Share; non-transferable - authorized and
issued 1996 - 3,874,080 shares; 1995 -
4,052,974 shares; voting rights -
10 per share 39 41
Additional Paid-In Capital 41,360 40,760
Unrealized Appreciation of Marketable
Securities, Net of Tax 18 510
Retained Earnings 58,843 67,518
------------- -------------
100,315 108,882
Less cost of Class B Common Stock (86,400)
Shares in Treasury 1 1
------------- -------------
Total Stockholders' Equity 100,314 108,881
------------- -------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 235,597 $ 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)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------- ---------------------
1996 1995 1996 1995
---------------------- ---------------------
REVENUES:
Premiums $ 123,190 $ 85,703 $ 353,442 $ 243,961
Investment and Other Income 1,545 1,618 4,806 4,927
---------- ---------- ---------- ---------
124,735 87,321 358,248 248,888
COSTS AND EXPENSES:
Hospital Services 46,649 24,780 130,435 78,305
Physicians and Related
Health Care Services 52,726 34,242 143,284 96,257
Other Health Care Services 10,167 4,712 30,663 12,431
Indemnity Costs - - 7,008 -
Selling, General and
Administrative Expenses 23,126 14,744 61,502 40,849
Guardian Joint Marketing
Expense, Net 239 653 1,255 1,166
Proxy Defense Costs - (57) - 843
---------- ---------- ---------- ---------
132,907 79,074 374,147 229,851
---------- ---------- ---------- ---------
Interest Expense 295 - 295 -
Income (Loss) before Income Taxes (8,467) 8,247 (16,194) 19,037
Income Tax Expense (Benefit) (3,931) 3,061 (7,519) 7,047
---------- ---------- ---------- ---------
NET INCOME (LOSS) $ (4,536) $ 5,186 $ (8,675) $ 11,990
========== ========== ========== =========
Net Income (Loss) Per
Common Share $ (0.49) $ 0.55 $ (0.93) $ 1.28
========== ========== ========== =========
Weighted Average Number of Common
Shares Outstanding 9,306 9,288 9,298 9,381
========== ========== ========== =========
See Notes to Condensed Consolidated Financial Statements.
4
<PAGE>
PHYSICIANS HEALTH SERVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS)
(UNAUDITED)
NINE MONTHS ENDED
SEPT. 30, SEPT. 30,
1996 1995
----------- -----------
CLASS A COMMON STOCK
Balance at Beginning of Period $ 53 $ 49
Conversion of Class B Common Stock
into Class A Common Stock 2 3
----------- -----------
Balance at End of Period $ 55 $ 52
=========== ===========
CLASS B COMMON STOCK
Balance at Beginning of Period $ 41 $ 45
Conversion of Class B Common Stock
into Class A Common Stock (2) (3)
----------- -----------
Balance at End of Period $ 39 $ 42
=========== ===========
ADDITIONAL PAID IN CAPITAL
Balance at Beginning of Period $ 40,760 $ 40,514
Exercise of Stock Options 600 23
----------- -----------
Balance at End of Period $ 41,360 $ 40,537
=========== ===========
UNREALIZED APPRECIATION (DEPRECIATION)
OF MARKETABLE SECURITIES, NET OF TAX
Balance at Beginning of Period $ 510 $ (949)
Unrealized Appreciation (Depreciation) (492) 1,406
----------- -----------
Balance at End of Period $ 18 $ 457
=========== ===========
RETAINED EARNINGS
Balance at Beginning of Period $ 67,518 $ 51,548
Net Income (Loss) (8,675) 11,990
----------- -----------
Balance at End of Period $ 58,843 $ 63,538
=========== ===========
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 600 23
Net Income (Loss) (8,675) 11,990
Unrealized Appreciation (Depreciation)
of Marketable Securities (492) 1,406
----------- -----------
Balance at End of Period $100,314 $104,625
=========== ===========
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>
NINE MONTHS ENDED
SEPT. 30, SEPT. 30,
1996 1995
--------- ---------
<S> <C> <C>
OPERATING ACTIVITIES
Net Income (Loss) $ (8,675) $ 11,990
Adjustments to Reconcile Net Income (Loss) to Net
Cash Used by Operating Activities:
Depreciation and Amortization 3,011 3,305
Provision for Doubtful Accounts 1,035 381
Amortization of Excess of Net Assets over Cost
of Company Acquired (90) (90)
Changes in Assets and Liabilities:
Accounts Receivable - Trade (7,930) (3,072)
Other Receivables (13,300) (3,834)
Advances to Participating Hospitals 4,649 303
Prepaid Expenses and Other (979) 1,480
Accrued Health Care Expenses 15,304 (2,820)
Unearned Premiums 1,743 1,041
Due to IPA's, Physicians and Other Providers 5,585 (8,740)
Accounts Payable and Accrued Expenses (7,890) (9,945)
--------- ---------
Net Cash Used by Operating Activities (7,537) (10,001)
INVESTING ACTIVITIES
Purchases of Property, Plant, and Equipment (29,642) (7,930)
Proceeds from Disposal of Equipment 16 65
Increase in Other Assets (953) (2,602)
Purchases of Marketable Securities (186,802) (228,744)
Proceeds from Sales and Maturities
of Marketable Securities 205,759 228,216
--------- ---------
Net Cash Used by Investing Activities (11,622) (10,995)
FINANCING ACTIVITIES
Proceeds from Revolving Credit Line 18,000 -
Capital Lease 88 -
Exercise of Stock Options 600 23
--------- ---------
Net Cash Provided by Financing Activities 18,688 23
--------- ---------
Decrease in cash and cash equivalents (471) (20,973)
Cash and cash equivalents at beginning of period 7,536 28,467
--------- ---------
Cash and cash equivalents at end of period $ 7,065 $ 7,494
========= =========
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
6
<PAGE>
PHYSICIANS HEALTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 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 nine month period ending September 30, 1996 are
not necessarily indicative of the results that may be expected for the year
ending 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.
Certain reclassifications were made to conform prior year amounts to
current year presentation.
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. Common stock equivalent shares are excluded to the extent they
have an antidilutive effect on per share data.
3. Tax Provision
The effective tax rate for the quarter and nine months ended September 30,
1996 is a benefit of 46.4% compared to a tax provision of 37.1% and 37.0%
for the third quarter and nine months ended September 30, 1995,
respectively. The effective tax rate benefited from the favorable effect
of income from tax exempt securities which increased the tax benefit
available in 1996 and reduced the tax provisions in 1995.
The Company is currently under examination by the Internal Revenue Service
(IRS) for certain prior tax years. Management does not expect any
proposed adjustments which may result from the IRS' audit to have a
material adverse impact on the Company's financial position or results of
operations.
7
<PAGE>
PHYSICIANS HEALTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1996
(UNAUDITED)
4. Agreements with The Guardian Life Insurance Company of America Under the
Company's profit sharing arrangement with the Guardian in Connecticut,
cumulative profits and losses are calculated separately for the managed
care and indemnity business written. If both businesses are profitable, the
profits are shared equally. If both businesses are unprofitable, each party
retains its losses. If only one part of the business is profitable, the
profits of the one are applied against the losses of the other. If the
profits exceed the losses, the excess is shared equally. If the losses
exceed the profits, the balance of the losses is retained by the business
which incurred the loss. Based on current estimates for the third quarter
of 1996 and the first nine months of 1996, both businesses were
unprofitable. Accordingly, for the third quarter and nine months ended
September 30, 1996, the Company recognized approximately $1.4 million and
$3.6 million, respectively, in after-tax losses related to managed care
business under the Connecticut Guardian arrangement.
The Company and the Guardian have discussed replacing the profit sharing
agreement in Connecticut with a reinsurance agreement similar to the
arrangements in effect in New York and New Jersey. The reinsurance
agreement would only cover the managed care products and would exclude
indemnity business going forward. However, no assurance can be given that
such a change in the Connecticut arrangement will be concluded or what the
final terms will be.
5. Subsequent Events
In June 1996, the Company entered into a five-year, $30.0 million revolving
credit agreement. At September 30, 1996, there was $18.0 million
outstanding under this line which represented funds borrowed to purchase
the Company's new headquarters building. As of September 30, 1996, the
Company's liability under this agreement was classified as short term
debt since the Company repaid the debt in its entirety in October 1996 and
terminated the revolving credit agreement.
In October 1996, the Guardian canceled its warrant, issued by the Company
in 1995, which originally provided for the purchase of one million shares
of the Company's Class A common stock, once certain operating conditions
had been met. Based upon a subsequent agreement with the Guardian, the
number of shares available for purchase under the warrant at the time it
was canceled had been substantially reduced as a result of the Guardian's
purchase of shares of the Company's Class A common stock on the open
market. The Company had not recognized any expense related to the warrant
as the conditions to its exercisability had not been met, nor was it deemed
probable that they would be met up to the date of cancellation.
8
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
- ---------------------
QUARTER ENDED SEPTEMBER 30, 1996 VERSUS SEPTEMBER 30, 1995
NINE MONTHS ENDED SEPTEMBER 30, 1996 VERSUS SEPTEMBER 30, 1995
Premium revenue increased 43.7% to $123.2 million in the third quarter of 1996
from $85.7 million for the comparable 1995 quarter. For the nine months ended
September 30, 1996, premium revenue increased 44.9% to $353.4 million from
$244.0 million for the comparable 1995 period. Enrollment at September 30, 1996
was 355,402, an increase of 47.8% from enrollment of 240,539 at September 30,
1995. Overall premium revenues increased at a slightly lower rate than the
growth in enrollment primarily due to competitive conditions which depressed
pricing flexibility and 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 (which accounted for 35% of the
enrollment growth from 1995) while premium revenue includes only the Company's
50% share of revenues derived from the NY Healthcare Solutions products. This
arrangement became effective July 1, 1995. The Company expects that the growth
in premium revenue may continue to lag the growth in enrollment to the extent
that the current competitive conditions and demand for lower margin products
continue.
Investment income declined 4.5% and 2.5% for the third quarter and nine months,
respectively, from the comparable 1995 periods due to a decline in invested
assets and lower investment yields due to lower interest rates on tax exempt
securities.
Health care expenses as a percentage of premium revenues (medical loss ratio)
increased to 90.2% for the third quarter of 1996 as compared to 75.9% for the
comparable 1995 quarter. For the nine months ended September 30, 1996, the
medical loss ratio was 89.4% compared to 77.5% for the first nine months of
1995. Total health care expenses increased $45.8 million to $109.5 million in
the third quarter of 1996 from $63.7 million for the comparable 1995 quarter.
On a year to date basis, total health care expenses increased $124.4 million to
$311.4 million for the first nine months of 1996 from $187.0 million for the
same 1995 period. As a result of the competitive market conditions and demand
for the Company's lower margin products referred to above, and since a
substantial portion of the Company's premium revenue is on a calendar year
renewal cycle, the Company expects that the medical loss ratios in 1996 will
continue to be higher than those reported for the respective year earlier
periods.
Hospital services expense increased 88.3% to $46.6 million for the third quarter
of 1996 from $24.8 million for the third quarter of 1995. Hospital services
expense for the first nine months of 1996 totaled $130.4 million, up 66.6% from
$78.3 million in the first nine months of 1995. The increase in hospital
services expense is due primarily to the increase in fully-insured membership.
Additionally, the increase in hospital expenses for the third quarter when
compared to the same quarter in the prior year was exacerbated by the fact that
prior year results reflect favorable reserve developments not experienced in the
current year. Inpatient hospital utilization for fully-insured commercial
enrollees increased slightly to 274 days per thousand members for the quarter
ended September 30, 1996 from 272 days per thousand members for the comparable
1995 period. This increase is due, in part, to legislation which requires
certain minimum hospital stays for maternity patients, which are greater than
recent historical averages. For the nine months ended September 30, 1996, bed
days per thousand members declined 8.0% to 277 days in 1996 from 301 days in
1995. Offsetting this favorable trend is an increase in outpatient costs which
is attributable to an increase in the cost and complexity of outpatient
procedures as more procedures are shifted from inpatient to outpatient settings.
9
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS (CONT.)
- ---------------------
Physician and related health care expenses increased by 54.0% from $34.2 million
for the third quarter of 1995 to $52.7 million for the third quarter of 1996.
For the nine months ended September 30, 1996, physician and related health care
expenses increased 48.9% to $143.2 million from $96.2 million for the same 1995
period. The increase reflects the increase in membership as well as an increase
in non-capitated expenses, including costs for out-of-network physician
services.
Other health care expenses increased by $5.5 million in the third quarter of
1996 and by $18.2 million on a year to date basis. The increase is almost
entirely due to higher prescription drug costs resulting primarily from an
increase in the number of members covered by prescription drug riders, as well
as from a shift in membership to drug riders that offer greater benefits, lower
generic drug utilization and unfavorable mix of medications being prescribed.
Indemnity costs reflect the medical costs associated with the indemnity business
assumed under the New York reinsurance agreement with the Guardian. As a result
of continuing adverse experience related to this business, the Company began
negotiations in the second quarter of 1996 with the Guardian to reduce the
Company's participation in the assumption of the indemnity business. As a result
of the negotiations, the Company and the Guardian amended the New York
reinsurance agreement to reduce the Company's share of the indemnity business
being assumed from 50% to 10%, retroactive to January 1, 1996. The impact of
this retroactive adjustment was to reduce the after tax loss associated with the
indemnity business by approximately $900 thousand, which was recorded in the
second quarter of 1996. The amendment also provides that the Company will assume
no further indemnity business in New York after July 1, 1996. As a result of the
amendment, the Company is not participating in the experience of the New York
indemnity business after June 30, 1996 under the Joint Marketing Arrangement
with the Guardian.
For the third quarter and nine months ended September 30, 1996, the Company
recognized approximately $1.4 million and $3.6 million, respectively, in after-
tax losses relating to the managed care business under the Guardian Connecticut
arrangement. Refer to Note 4 to the Condensed Consolidated Financial Statements
for further details. The Company and the Guardian have discussed replacing the
profit sharing agreement in Connecticut with a reinsurance agreement similar to
the arrangements in effect in New York and New Jersey. The reinsurance agreement
would only cover the managed care products and would exclude indemnity business
going forward. However, no assurance can be given that such a change in the
Connecticut arrangement will be concluded or what the final terms will be.
Selling, general and administrative expenses increased by 56.9% or $8.4 million
in the third quarter of 1996 from the comparable 1995 period. For the nine
months ended September 30, 1996, selling, general and administrative expenses
are up 50.6% or $20.7 million over the prior year. Selling, general and
10
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS (CONT.)
- ---------------------
administrative expenses as a percentage of premium revenue increased to 18.8%
for the third quarter of 1996 as compared to 17.1% for the third quarter of
1995. On a year to date basis, selling, general and administrative expenses as a
percentage of premium revenue totaled 17.4% and 17.1% for the nine months ended
September 30, 1996 and 1995, respectively. The increase in both periods is due
primarily to the continuing resource requirements needed to support the
geographic expansion and the enrollment growth and product diversification.
The Company's effective tax rate for the third quarter and nine months ended
September 30, 1996 is a benefit of 46.4% as compared to a tax provision of 37.1%
for the third quarter of 1995 and 37.0% for the first nine months of 1995. The
effective tax rate benefited from the favorable effect of income from tax exempt
securities which increased the tax benefit available in 1996 and reduced the tax
provisions in 1995.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
Cash and cash equivalents decreased $471 thousand at September 30, 1996 from
December 31, 1995. For the nine months ended September 30, 1996, $7.5 million
was used by operating activities, primarily as a result of the loss for the
period. Additionally, the net cash used for the period relates primarily to the
timing of claim payments and collection of amounts due from the Guardian. During
the first nine months, $18.0 million was provided from a revolving credit line
which was used to fund the purchase of the Company's new corporate headquarters
building in the second quarter. Approximately $19.0 million of net cash was
provided from the sales and maturities of investments, some of which was used to
fund the enhancement of the Company's computer systems and also to fund the risk
retention payments made in March, 1996 under the Company's agreements with its
IPAs in respect of 1995.
In October 1996, the Company repaid the entire amount outstanding under the
revolving credit line, including accrued interest. Given the Company's losses
during the year and the terms of the credit facility, the Company terminated the
credit line because it would not have had any near term borrowing capability
under the credit line and could not justify the ongoing expenses of the
facility.
Stockholders' equity declined to $100.3 million during the first nine months of
1996 from $108.9 million at December 31, 1995 due primarily to the net losses.
The Company expects to spend additional capital, principally in computer and
technology systems enhancements and building improvements over the next several
years. The Company is presently exploring its alternatives to replace the
revolving credit agreement and, although it can provide no assurances in this
regard, 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.
11
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
- ------------------------------------------
(a) Exhibits required by Item 601 of Regulation S-K
EXHIBIT NO. DESCRIPTION OF DOCUMENT
----------- -----------------------
10(a) Agreement dated October 21, 1996 between The Guardian Life
Insurance Company of America and Physicians Health Services,
Inc. relinquishing rights to purchase common stock pursuant to
warrant dated November 28, 1995.
10(b) Employment agreement dated October 29, 1996 between Robert L.
Natt and Physicians Health Services, Inc.
10(c) Amendment dated August 28, 1996 to the Employment Agreement
dated December 17, 1995 between Michael E. Herbert and
Physicians Health Services, Inc.
(b) Reports on Form 8-K
There was one report, pertaining to Items 5 and 7 of Form 8-K, filed on
August 27, 1996 during the three months ended September 30, 1996.
12
<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: November 14, 1996 /s/ James L. Elrod, Jr.
--------------------- ----------------------------------
James L. Elrod, Jr.
Chief Financial Officer
Date November 14, 1996 /s/ Robert L. Natt
--------------------- ----------------------------------
Robert L. Natt
President
13
<PAGE>
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION OF EXHIBIT SEQUENTIAL PAGE
----------- ---------------------- ---------------
10(a) Agreement dated October 21, 1996 between
The Guardian Life Insurance Company of
America and Physicians Health Services, Inc.
relinquishing rights to purchase common stock
pursuant to warrant dated November 28, 1995.
10(b) Employment Agreement dated October 29, 1996
--
between Robert L. Natt and Physicians Health
Services, Inc.
10(c) Amendment dated August 28, 1996 to the
Employment Agreement dated December 17, 1995
between Michael E. Herbert and Physicians
Health Services, Inc.
<PAGE>
Exhibit 10(a)
[LETTERHEAD OF THE GUARDIAN]
October 21, 1996
Physicians Health Services, Inc.
120 Hawley Lane
Trumbull, CT 06611
Dear Sirs:
The Guardian Life Insurance Company of America ("Guardian") is the
holder of a warrant dated November 28, 1995 (the "Warrant") to purchase one
million (1,000,000) shares of Class A Common Stock ("Common Stock") of
Physicians Health Services, Inc., a Delaware corporation ("PHS"). Guardian
hereby advises you that, as of the date hereof, it is irrevocably relinquishing
its rights under the Warrant to purchase three hundred ninety five thousand,
three hundred (395,300) shares of Common Stock, the remaining shares of Common
Stock available for purchase by Guardian under the Warrant. Prior to the date
hereof, Guardian relinquished the right to purchase six hundred four thousand,
seven hundred (604,700) shares of Common Stock under the Warrant. As a result,
no shares of Common Stock remain available under the Warrant for purchase by
Guardian.
Very truly yours,
THE GUARDIAN LIFE
INSURANCE COMPANY
OF AMERICA
By: /s/
------------------------
Name:
Title:
PHS acknowledges that, as of the date hereof, Guardian has relinquished
its right under the Warrant to purchase three hundred ninety five thousand,
three hundred (395,300) shares of Common Stock. PHS further acknowledges that
Guardian has previously relinquished its right under the Warrant to purchase six
hundred four thousand, seven hundred (604,700) shares of Common Stock and that
no shares of Common Stock remain available under the Warrant for purchase by
Guardian.
PHYSICIANS HEALTH
SERVICES, INC.
By: /s/
------------------------
Name:
Title:
<PAGE>
Exhibit 10(b)
HIGHLY CONFIDENTIAL
-------------------
EMPLOYMENT AGREEMENT
--------------------
BETWEEN
-------
PHYSICIANS HEALTH SERVICES, INC.
--------------------------------
AND
---
ROBERT L. NATT
--------------
<PAGE>
AMENDED AND RESTATED
EMPLOYMENT AGREEMENT
------------------------
AGREEMENT, made as of the __th day of October, 1996, by and between
Physicians Health Services, Inc., a corporation organized under the laws of the
State of Delaware (hereinafter referred to as "PHS"), and Robert L. Natt an
individual residing at 51 Tuckahoe Road, Easton, CT 06612 (hereinafter referred
to as "Employee").
WITNESSETH:
-----------
WHEREAS, PHS and Employee are parties to an Employment Agreement dated as
of December 19, 1995 pursuant to which Employee was employed as the Company's
Executive Vice President and Chief Operating Officer; and
WHEREAS, PHS now desires that Employee serve in the capacity of
President and Co-Chief Executive Officer of the Company; and Employee desires to
accept such employment on the terms and conditions hereafter set forth.
NOW, THEREFORE, in consideration of the premises and of the mutual
covenants and other good and valuable considerations hereinafter set forth, the
parties hereto agree as follows:
1. EMPLOYMENT AND DUTIES.
---------------------
(a) PHS hereby employs Employee as its President and Co-Chief Executive
Officer on the terms and conditions set forth in this Agreement, to
perform such services and to discharge such duties as may be assigned
to him from time to time by the President of PHS.
(b) Employee accepts such employment as above stated and for the
compensation hereinafter provided, and agrees that during the term of
this Agreement, he will serve PHS faithfully to the best of his ability
and, under the direction of the Board of Directors of PHS and shall
devote his full business time, energy and skills to his duties
hereunder.
(c) Without limiting the generality or scope of the services and duties
which may be assigned to him, Employee's duties shall include the
duties outlined in Employee's job description, as on file with PHS.
(d) Employee agrees to do such traveling and to attend such educational and
associational conferences and seminars as may be from time to time
directed or approved. Reasonable travel, lodging, registration and/or
attendance fees incurred and required in connection with such travel,
conferences and seminars shall be either paid by PHS or reimbursed by
PHS to Employee.
2. COMPENSATION
------------
(a) SALARY
------
(i) For all services rendered by Employee under this Agreement, PHS
shall, for the period commencing upon November 1, 1995, pay to
Employee the annual sum of $260,000 Dollars, payable in bi-weekly
installments in accordance with PHS's standard payroll policies.
Retroactive adjustments shall be payable in a lump sum payment
promptly upon processing a salary adjustment.
(ii) For the remainder of the term of this Agreement, PHS shall set
Employee's salary at an annual sum which shall not be less than the
base salary in effect for the first year of the Agreement, adjusted
by the percentage increase or decrease, if any, during
<PAGE>
that period of the Federal Bureau of Labor Statistics CPI-U All
Cities Index. Nothing in this Agreement shall preclude PHS from
increasing Employee's compensation by an amount greater than any
percentage increase in this Paragraph 2(a)(ii).
(b) ADDITIONAL COMPENSATION
-----------------------
(i) In advance of the commencement of each twelve (12) month calendar
period during the term of this Agreement, PHS and the Employee
shall establish annual performance objectives with respect to
Employee's duties and obligations hereunder. These objectives shall
form the basis of an incentive compensation program which will
permit Employee to earn up to an additional 60 percent of his base
compensation as additional compensation in addition to his regular
annual compensation hereunder, as approved by the Compensation
Committee of the Board of Directors.
(ii) PHS's Board of Directors or its Compensation Committee, may also,
from time to time and in its discretion, direct PHS to pay or
provide additional compensation to Employee beyond the compensation
specified above in Paragraph 2(a)(i) and 2(b)(i), in such amounts
and in such form as the Board shall deem fit.
(c) FRINGE BENEFITS
---------------
(i) Employee shall be entitled to the amount of annual vacation in
accordance with the policies then in effect at PHS.
(ii) Employee shall be entitled to participate in any qualified pension
plan, qualified profit-sharing plan, medical or dental
reimbursement plan, group term life insurance plan, or any other
employee or fringe benefit plan that is currently in effect at PHS
or that may be established in the future by PHS. Employee's right
to participate in such plans shall be subject to the respective
terms of the particular plans involved.
(iii) Employee shall be entitled to compensation provided hereunder
during the periods of actual illness or other incapacity which
exceed his accrued sick leave up to a total of 90 days.
(iv) Subject to such reasonable guidelines as may be adopted and
approved by the Board of Directors, PHS shall pay any necessary
business expenses incurred by Employee in direct furtherance of
the business and affairs of PHS.
(v) Employee shall be entitled to the use of a company owned or leased
automobile commensurate with other PHS employees at his grade
level. PHS shall reimburse Employee for reasonable maintenance,
operating and insurance expenses incurred with respect to use of
such automobile in connection with PHS's business affairs.
(vi) Employee shall be entitled to a group term life insurance policy,
purchased by PHS and with premiums paid by PHS, in an amount equal
to two times Employee's base salary, as it may be adjusted from
time to time, up to $750,000 (subject to insurability requirements
of the insurer).
<PAGE>
3. NO COMPETING BUSINESS
---------------------
Notwithstanding any other term or provision herein contained, Employee
shall not, during the term of this Agreement, compete, directly or
indirectly, with PHS or any subsidiary of PHS without the prior written
consent of PHS.
4. TIME DEVOTED TO OTHER ACTIVITIES: FEES
---------------------------------------
(a) Except as the Board of Directors of PHS may otherwise designate and
authorize, or as is provided in PHS's Personnel Policies Manual,
Employee shall not render any service or engage in any activity not
directly related to the business of PHS, its subsidiaries, or
physicians and other health care providers with which is contracts for
services.
(b) It is understood and agreed that during the term of this Agreement, PHS
may from time to time direct Employee to engage in certain specified
activities, solely on behalf of PHS. All fees and other compensation
payable with respect to such activities as may be so specified,
designated, authorized or approved shall be the property of and payable
to PHS. All fees and other compensation which may be payable with
respect to activities or services which Employee engaged in with the
approval of PHS and in accordance with PHS's Personnel Policies Manual,
but which are not on behalf of PHS, shall be the property of Employee.
5. TERM
----
This Agreement shall be effective as of January 1, 1996 (hereinafter
referred to as the "Commencement Date"), and shall continue in full force
and effect until December 31, 2000, unless sooner terminated as hereinafter
provided (hereinafter referred to as the "Termination Date"). This
Agreement shall be automatically extended for another twelve (12) months,
unless notification to terminate or renegotiate it is made by PHS or the
Employee at any time prior to six (6) months prior to Termination Date.
This Agreement shall supersede all previous agreements between the parties,
whether written or oral, and all such Agreements are hereby rescinded.
6. TERMINATION
-----------
(a) TERMINATION BY PHS FOR CAUSE
----------------------------
PHS shall have the right to terminate Employee's employment hereunder
prior to the expiration of the term hereof, without liability to it,
but only for Cause as defined in Paragraph 6(e).
(b) TERMINATION BY PHS WITHOUT CAUSE
--------------------------------
PHS shall have the right to terminate Employee's employment hereunder
without cause at any time, with liability to it as provided pursuant to
Paragraph 6(d).
(c) TERMINATION BY EMPLOYEE
-----------------------
Employee may terminate his employment hereunder, without liability to
him, by giving PHS notice thereof three (3) months in advance of the
effective date of such termination or at an earlier date if mutually
agreed upon by both PHS and Employee. Employee shall have no
obligation to mitigate damages to PHS if he terminates employment
pursuant to this Paragraph 6(c).
(d) EFFECT OF TERMINATION
---------------------
In the event PHS terminates this Agreement pursuant to Paragraph 6(b),
PHS shall pay to Employee an amount equal to the sum of the payments
due for the remainder of this Agreement or eighteen (18) months' of
annual compensation, whichever is greater, at the
<PAGE>
rate in effect on the date of termination. In addition, the medical
insurance benefits noted in Paragraph 2(c)(ii) will continue in effect
for a period of twelve (12) months following the effective date of
termination. The provisions of Paragraph 3 hereof shall continue in
effect for a period of one year from the Termination Date, but only
within the geographic area served by PHS or any subsidiary thereof. In
the event employment is terminated as a result of the death of
Employee, PHS shall pay all amounts accrued and unpaid to the date of
termination to the estate of Employee (including credit for any
vacation earned but not taken and the amount, if any, of any bonus for
a past fiscal year which has not been awarded or paid to Employee).
(e) CAUSE
-----
(i) Termination for Cause as defined herein may only occur after the
expiration of a period of five business days following delivery of
a written notice from PHS to Employee setting forth the
determination of the Board of Directors made in good faith to
terminate his employment and specifying in reasonable detail the
facts and circumstances claimed to provide the basis for PHS's
right of termination pursuant to Paragraph 6(a).
(ii) So long as no "change of control" (as defined in the Conditional
Employment Agreement between PHS and Employee dated March 13, 1995
(the "Conditional Employment Agreement") shall have occurred and be
continuing, the term "Cause" as used herein shall mean: (a) fraud,
dishonesty or theft involving PHS; (b) Employee's being convicted
in a criminal proceeding (excluding motor vehicle misdemeanors);
(c) habitual intoxication, or abuse of any substance that impairs
Employee's performance of his duties hereunder; (d) illegal
business conduct; (e) breach of this Agreement not corrected within
the five business days notice period specified in Paragraph
6(e)(i); (f) failure of Employee for any reason, within 24 hours
after receipt by his written notice thereof from PHS, to correct,
cease or otherwise alter any insubordination, failure to comply
with instructions, or other omission to act that materially
adversely affects, or is likely to materially adversely effect,
PHS's business or operations; (g) gross negligence or willful
misconduct of Employee related to PHS's business.
After any Change of Control of PHS has occurred (as defined in the
Conditional Employment Agreement), "Cause" as used herein shall have
the meaning specified in the Conditional Employment Agreement.
7. ORAL NEGOTIATIONS SUPERSEDED: AMENDMENT
----------------------------------------
This Agreement sets forth the entire Agreement of the parties and
supersedes all oral negotiations and prior writings with respect to the
subject matters hereof. This Agreement may not be amended or modified in
any manner, including the provision against oral amendment or modification,
except by an instrument in writing signed by the parties hereto.
8. BINDING EFFECT
--------------
This Agreement shall inure to the benefit of and be binding upon PHS and
its respective successors, permitted assigns, executors and administrators.
9. PARAGRAPH HEADINGS
------------------
Paragraph headings used herein are for convenience only and shall not
affect construction of this Agreement.
<PAGE>
10. GOVERNING LAW
-------------
This Agreement shall be governed by and construed under the laws of the
State of Connecticut.
11. COUNTERPARTS
------------
This Agreement may be executed in two or more counterparts which, taken
together, shall constitute one document.
12. SEVERABILITY
------------
In the event that any provision hereof shall be declared invalid or
unenforceable by any court, such invalidity shall not affect the validity
or enforceability of the remainder of this Agreement.
13. ARBITRATION
-----------
Any controversy or claims arising out of or relating to this Agreement, or
the breach thereof, shall be settled in Bridgeport, Connecticut pursuant to
the rules of the American Arbitration Association; and judgment upon the
award rendered by the Arbitrator(s) may be entered in any court having
jurisdiction thereof.
IN WITNESS WHEREOF, the parties hereto have affixed their hands and seals
as of the day and year first above written.
Physicians Health Services, Inc.
By: __________________________
__________________________
_____________________________
Robert L. Natt
<PAGE>
EXHIBIT 10(c)
HIGHLY CONFIDENTIAL
-------------------
EMPLOYMENT AGREEMENT
--------------------
BETWEEN
-------
Physicians Health Services, Inc.
--------------------------------
AND
---
Michael E. Herbert
------------------
<PAGE>
AGREEMENT, made as of the 28th day of August, 1996, by and between
Physicians Health Services, Inc., a corporation organized under the laws of the
State of Delaware (hereinafter referred to as "PHS") and Michael E. Herbert, an
individual residing at 30 Applegate Lane, Trumbull, CT 06611 (hereinafter
referred to as "Employee").
WITNESSETH:
-----------
WHEREAS, PHS and the Employee are parties to an Employment Agreement dated
December 19, 1995 (the "Employment Agreement"); and
WHEREAS, PHS desires to make certain changes in the Employment Agreement
and Employee is willing to accept such changes.
NOW, THEREFORE, in consideration of the premises and other good and
valuable consideration, receipt of which is hereby acknowledged, the parties
hereto agree as follows:
1. Paragraph 1(a) of the Employment Agreement is hereby amended in its
entirety to provide as follows:
(a) PHS hereby employs Employee as its Third Vice Chairman and Co-
Chief Executive Officer on the terms and conditions set forth in
this Agreement, to perform such services and to discharge such
duties, consistent with his position as a member of senior
management of PHS as more fully described in the Position
Description set forth in Exhibit A attached hereto, as may be
assigned to him from time to time by the Board of Directors of
PHS.
2. Paragraph 1(c) of the Employment Agreement is hereby amended in its
entirety to provide as follows:
(c) Employee's duties shall be those set forth in the Position
Description set forth in Exhibit A attached hereto, which
Position Description shall govern Employee's activities on behalf
of PHS and its subsidiaries; Employee shall serve as a vice
chairman of the subsidiaries of PHS. PHS shall provide Employee
with such resources as are reasonably deemed necessary by PHS to
enable Employee to perform his job responsibilities. PHS
confirms that it has no immediate plans to make any change in
Employee's office location and agrees that consideration will be
paid to his title and position in connection with any relocation
of his office in the future. The Chairman of the Board of PHS
will hold himself available to mediate any specific problems that
may
<PAGE>
hereafter arise relating to Employee's duties or conditions of
employment.
3. Paragraph 4(b) of the Employment Agreement is hereby amended by adding the
following sentence at the end thereof:
PHS acknowledges that Employee has been elected to serve as Chairman
of the American Association of Health Plans (AAHP) from June 1996 to
June 1998 and that service in such position is an appropriate activity
for his position with PHS. Such service shall be deemed on behalf of
PHS for purposes of this Paragraph. PHS agrees that, provided
Employee continues to be Chairman of AAHP, PHS will continue to be a
member of AAHP until June 1998, and provided further that the
positions of AAHP are consistent with those of PHS.
4. The first sentence of Paragraph 5 of the Employment Agreement is hereby
amended in its entirety to provide as follows:
This Agreement shall be effective as of January 1, 1996
(hereinafter referred to as the "Commencement Date"), and shall
continue in full force and effect until January 31, 1999, unless
sooner terminated as hereinafter provided (hereinafter referred to as
the "Termination Date"); provided, however, that if PHS terminates
-------- -------
this Agreement pursuant to Paragraph 6(b) prior to January 31, 1999,
the second calendar date referred to in this sentence shall be deemed,
for purposes of Paragraph 6(d) hereof, to be December 31, 2000.
5. The Employment Agreement is hereby amended by adding the following
additional paragraphs:
14. DISCUSSIONS WITH THIRD PARTIES
------------------------------
During the term of this Agreement, Employee shall not, without the
express prior approval of the Board of Directors of PHS, or the
Chairman of the Board thereof, engage in any discussions with any
third party relating to any transaction that would result in either
the acquisition of PHS (by way of merger or otherwise) by a third
party or the acquisition by a third party, other than in ordinary
brokerage transactions or other than by a third party that is
registered as an investment company under the Investment Company Act
of 1940,
- 2 -
<PAGE>
as amended, of any shares of stock of PHS that are, for purposes of
Section 16(a) of the Securities Exchange Act of 1934, as amended,
deemed to be beneficially owned by Employee. Nothing contained herein
shall limit Employee from (a) engaging in any discussion with persons
who are, and are acting in their capacity as, officers or directors of
PHS, (b) engaging in discussions with a charitable organization with
respect to unconditional and unrestricted gifts that he proposes to
make to such charitable organization or (c) engaging in discussions
with members of his family concerning gifts that he proposes to make
to them.
15. PUBLIC COMMENTS
---------------
During the term of this Agreement, (a) PHS agrees not to make any
disparaging remarks to the public about Employee, and (b) Employee
agrees not to make any disparaging remarks to the public about PHS or
the other members of the management of PHS.
6. PHS agrees to pay Employee's legal expenses in connection with the
negotiation of this Agreement in an amount not to exceed $15,000.
7. PHS agrees that, except as required by applicable law, rule or regulation,
it will maintain, and will cause its directors, officers and employees to
maintain, in confidence this Agreement and the confidential information
that was provided to PHS by Employee in connection with the negotiation
hereof. Employee acknowledges that he is bound by the terms of a
Confidentiality Agreement dated February 16, 1995, between PHS and
Employee.
IN WITNESS WHEREOF, the parties hereto have affixed their hands and seals
as of the day and year first above written.
Physicians Health Services, Inc.
By: /s/ David Grayer
-----------------------------
Its: Chairman of the Board
/s/ Michael E. Herbert
-------------------------------
Michael E. Herbert
- 3 -
<PAGE>
EXHIBIT A
---------
Position Description
--------------------
THIRD VICE CHAIRMAN AND CO-CHIEF EXECUTIVE OFFICER, PHYSICIANS HEALTH SERVICES,
- -------------------------------------------------------------------------------
INC.: The Third Vice Chairman and Co-Chief Executive Officer, Physicians Health
- ----
Services Inc. reports to the Board of Directors and the Chairman of the Board,
and, as more fully described below, is principally responsible for community
relations and advising the Company on strategic issues.
Specific Responsibilities: Subject to the direction and control of the Board of
- -------------------------
Directors and/or the Chairman of the Board of Physicians Health Services, Inc.,
the Third Vice Chairman and Co-Chief Executive Officer's responsibilities
include:
1. Represents the Company on various state and national trade associations,
including the American Association of Health Plans.
2. Responsible for community relations in the State of Connecticut and, upon
request of the Board of Directors or the Chairman of the Board, shall be
responsible for the Company's sponsorship or support of community
activities in additional service areas of the Company.
3. Responsible for government relations activities at the national level and,
upon the request of the Board of Directors or the Chairman of the Board,
shall be responsible for certain state government relations activities.
These activities may include monitoring legislation, development of
corporate/industry positions, lobbying activities, and testifying before
appropriate legislative bodies.
4. As a member of senior management, represents the Company at industry
meetings of senior executives of companies in the managed care industry.
5. Responsible for advising the Company as requested concerning industry
trends and emerging best practices.
6. Remains available to the Company, at its reasonable request, to provide
other services that are generally commensurate with the prior
responsibilities at the Company of the Vice Chairman and Co-Chief Executive
Officer.
5629\01\empamend.v3
A:\EMPAMEND.V3
- 4 -
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