<PAGE> 1
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 THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE TRANSITION PERIOD FROM _______ TO _______
COMMISSION FILE NUMBER 33-99624
CHOICECARE CORPORATION
OHIO 31-1446609
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
655 EDEN PARK DRIVE, SUITE 400 45202
CINCINNATI, OHIO (Zip Code)
(Address of Principal Executive Offices)
(513) 784-5200
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
--- ---
As of November 1, 1996, 14,852,944 shares of ChoiceCare Corporation common stock
were outstanding.
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CHOICECARE CORPORATION
INDEX
PAGE
----
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Consolidated Statements of Income for the three month
periods ended September 30, 1996 and 1995 3
Consolidated Statements of Income for the nine month periods
ended September 30, 1996 and 1995 4
Consolidated Balance Sheets at September 30, 1996 and
December 31, 1995 5
Consolidated Statements of Cash Flows for the nine month
periods ended September 30, 1996 and 1995 6
Notes to Consolidated Financial Statements 7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 11
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 24
SIGNATURE 25
2
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CHOICECARE CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30,
1996 1995
-------- ---------
<S> <C> <C>
REVENUES:
Premium revenue $ 67,375 $ 68,426
Management services revenue 3,422 3,753
Other operating revenue 134 173
-------- --------
Total Operating Revenues 70,931 72,352
-------- --------
EXPENSES:
Health care services
Physician services 25,848 26,344
Hospital services 21,943 23,545
Pharmacy services 8,501 7,740
-------- --------
Total Health Care Services 56,292 57,629
Selling, general and administrative expenses 13,726 14,201
-------- --------
Total Operating Expenses 70,018 71,830
OPERATING INCOME 913 522
OTHER INCOME (EXPENSES)
Investment income, net 1,332 5,324
Settlement expense -- (28,000)
-------- --------
INCOME (LOSS) BEFORE PROVISION FOR INCOME TAXES 2,245 (22,154)
PROVISION FOR INCOME TAXES 808 --
-------- --------
NET INCOME (LOSS) $ 1,437 $(22,154)
======== ========
PRO
FORMA
--------
EARNINGS (LOSS) PER COMMON AND COMMON
EQUIVALENT SHARE $ .09 $ (1.06)
======== ========
WEIGHTED AVERAGE COMMON AND COMMON EQUIVALENT
SHARES OUTSTANDING (See Exhibit 11) 15,985,708 13,500,000
========== ==========
</TABLE>
The accompanying notes are an integral part of these statements.
3
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CHOICECARE CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
1996 1995
--------- ---------
<S> <C> <C>
REVENUES:
Premium revenue $ 208,660 $ 197,641
Management services revenue 10,281 11,472
Other operating revenue 895 520
--------- ---------
Total Operating Revenues 219,836 209,633
--------- ---------
EXPENSES:
Health care services
Physician services 84,565 78,616
Hospital services 70,240 69,938
Pharmacy services 25,662 21,828
--------- ---------
Total Health Care Services 180,467 170,382
Selling, general and administrative expenses 42,410 40,013
--------- ---------
Total Operating Expenses 222,877 210,395
OPERATING LOSS (3,041) (762)
OTHER INCOME (EXPENSES)
Investment income, net 3,485 10,425
Gain on assignment of Medicaid contract 4,554 --
Income from agreement termination -- 3,350
Settlement expense -- (28,000)
--------- ---------
INCOME (LOSS) BEFORE PROVISION FOR INCOME TAXES 4,998 (14,987)
PROVISION FOR INCOME TAXES 1,856 --
--------- ---------
NET INCOME (LOSS) $ 3,142 $ (14,987)
========= =========
PRO
FORMA
---------
EARNINGS (LOSS) PER COMMON AND COMMON
EQUIVALENT SHARE $ .21 $ (.72)
========= =========
WEIGHTED AVERAGE COMMON AND COMMON EQUIVALENT
SHARES OUTSTANDING (See Exhibit 11) 14,684,056 13,500,000
========== ==========
</TABLE>
The accompanying notes are an integral part of these statements.
4
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CHOICECARE CORPORATION
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1996 1995
------------- ------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 30,006 $ 12,622
Cash held in escrow -- 28,000
Securities available-for-sale 74,860 73,009
Premiums receivable 6,982 7,637
Health care receivables 4,629 6,251
Other current assets 6,004 5,545
--------- ---------
Total Current Assets 122,481 133,064
PROPERTY AND EQUIPMENT, net 10,304 10,258
OTHER LONG-TERM ASSETS 5,031 3,865
--------- ---------
Total Assets $ 137,816 $ 147,187
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Medical costs payable $ 49,990 $ 46,754
Accounts payable and accrued liabilities 12,818 14,829
Amounts due to vendor 6,200 --
Unearned premiums 4,596 4,104
Provider risk pool liability 10,886 15,681
Settlement liability -- 28,000
--------- ---------
Total Current Liabilities 84,490 109,368
LONG-TERM LIABILITIES 4,701 3,290
--------- ---------
Total Liabilities 89,191 112,658
--------- ---------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Preferred stock, without par value,
4,000,000 shares authorized; none issued -- --
Common stock, without par or stated value,
45,000,000 shares authorized; 14,852,944 shares
issued and outstanding at September 30, 1996
(13,500,000 at December 31, 1995) 12,015 --
Net unrealized gains (losses) on securities
available-for-sale (215) 846
Retained earnings 36,825 33,683
--------- ---------
Total Shareholders' Equity 48,625 34,529
--------- ---------
Total Liabilities and Shareholders' Equity $ 137,816 $ 147,187
========= =========
</TABLE>
The accompanying notes are an integral part of these statements.
5
<PAGE> 6
CHOICECARE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
1996 1995
--------- ---------
<S> <C> <C>
NET CASH FLOWS FROM OPERATING ACTIVITIES $ 5,955 $ 2,201
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Receipts from sale of investments 49,177 215,919
Payments for purchase of investments (52,376) (179,511)
Receipts from assignment of Medicaid contract 5,000 --
Additions to property and equipment (2,387) (4,475)
Payments committed to escrow -- (28,000)
Other -- (454)
--------- ---------
Net cash (used in) provided by investing
activities (586) 3,479
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Receipts from sale of common stock, net 12,015 --
--------- ---------
NET INCREASE IN CASH AND CASH EQUIVALENTS 17,384 5,680
CASH AND CASH EQUIVALENTS, beginning of period 12,622 15,614
--------- ---------
CASH AND CASH EQUIVALENTS, end of period $ 30,006 $ 21,294
========= =========
</TABLE>
The accompanying notes are an integral part of these statements.
6
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CHOICECARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED)
NOTE 1. BASIS OF PRESENTATION
ChoiceCare Corporation (the "Company") is an Ohio for-profit
corporation, which is a majority-owned subsidiary of Tristate Foundation
for Health (the "Foundation"), an Ohio not-for-profit corporation. On
October 1, 1995, the Foundation transferred substantially all of the
operating assets and liabilities relating to its managed health care
operations to the Company in exchange for all of the issued and
outstanding shares of the Company. Contemporaneously, the Company
transferred the assets and liabilities of the managed health care
operations to its wholly-owned subsidiary, ChoiceCare Health Plans, Inc.
("Health Plans"), in exchange for all of its issued and outstanding
common shares. These events are collectively referred to as the
"Restructuring."
During June 1996, a requested ruling from the Internal Revenue Service
was received confirming that the Foundation incurred no tax liability as
a result of the Restructuring and continues to be recognized as a tax
exempt organization subsequent to the Restructuring.
With the exception of the consolidated financial statements as of and
for the nine-month period ended September 30, 1995, which were subject
to audit, the consolidated financial statements for the interim periods
included herein have been prepared by the Company, without audit,
pursuant to the rules and regulations of the Securities and Exchange
Commission, with the Consolidated Statement of Income for the three
months ended September 30, 1995 having been derived from the audited
amounts for the nine-month period ended September 30, 1995. Although
certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to such
rules and regulations, management believes that the disclosures are
adequate to make the information presented not misleading. Operating
results for the interim periods are not necessarily indicative of
results for the full fiscal year. It is suggested that these
consolidated financial statements and notes be read in conjunction with
the consolidated financial statements and notes thereto included in the
Company's Post-Effective Amendment No. 2 to Form S-1, as filed with the
Securities and Exchange Commission on April 1, 1996, and the Amended
Prospectus dated April 1, 1996.
The pro forma earnings per share information reflected in the
accompanying 1995 Consolidated Statement of Income is presented solely
to give effect to the estimated provision for income taxes that would
have been reported in accordance with Statement of Financial Accounting
Standards No. 109, "Accounting for Income Taxes" had the Company filed
federal, state and local income tax returns as a for-profit corporation,
based on an assumed effective federal, state and local tax rate of
35.5%. The pro forma earnings per share information is based upon
13,500,000 issued and outstanding shares of common stock. See Note 4.
7
<PAGE> 8
Certain reclassifications have been made to the 1995 financial
statements to conform with the 1996 presentation.
NOTE 2. ACCOUNTING POLICIES
The consolidated financial statements presented in this report have been
prepared in accordance with the accounting policies described in Note 2
of Notes to Consolidated Financial Statements included in the
aforementioned Post-Effective Amendment No. 2 to Form S-1 and Amended
Prospectus and reflect all adjustments consisting solely of normal
recurring adjustments which, in the opinion of management, are necessary
for a fair statement of the results of the interim periods presented.
While management believes that the procedures followed in the
preparation of the consolidated financial statements for the interim
periods are reasonable, certain estimated amounts are dependent upon
current facts and other information that may change subsequently during
the fiscal year.
NOTE 3. PER SHARE DATA
Earnings per share for the three and nine months ended September 30,
1996 are based on the weighted average number of shares of common stock
outstanding during the periods and the dilutive effect of assumed
exercise of stock options. See Note 6.
NOTE 4. STOCK TRANSACTIONS
Pursuant to the Company's stock offering that terminated on May 1, 1996,
approximately 1.36 million shares of common stock were purchased by over
1,000 shareholders. Gross proceeds from the offering totaled $13,529 and
were reduced by $1,514 of offering related expenses, which were
comprised of underwriting discounts and commissions ($706) and other
expenses incurred in connection with the offering ($808). The $12,015 of
net proceeds are reflected as Common Stock in the accompanying September
30, 1996 Consolidated Balance Sheet. Had such newly issued shares been
outstanding from the beginning of the nine month period ended September
30, 1996, earnings per share for the period would have been $.20.
On October 1, 1995, the Company issued 100 shares of common stock to the
Foundation representing the initial shares issued as part of the
Restructuring. In subsequent transactions related to the Restructuring,
on January 5, 1996 and February 6, 1996, respectively, the Company
effected a 142,000-to-1 stock split and redeemed 700,000 shares for a
total consideration of $1.00, resulting in 13,500,000 shares
outstanding. The accompanying consolidated financial statements give
effect to all stock transactions related to the Restructuring as of the
earliest period presented.
NOTE 5. ASSIGNMENT OF MEDICAID CONTRACT
Pursuant to the April 11, 1996 agreement with Health Power HMO, Inc.
("Health Power"), a Columbus, Ohio-based health maintenance
organization, effective June 30, 1996, the Company assigned its Medicaid
provider agreement with the Ohio Department of Human Services to Health
Power. Consideration aggregating $5,000 in cash was received, resulting
in a gain of $4,554, after deducting a
8
<PAGE> 9
provision of approximately $446 for expenses related to this
transaction. During the nine months ended September 30, 1996, the
Company recognized premium revenues of approximately $10,750 related to
members enrolled in its Special Health Medicaid product ($3,750 and
$9,650, respectively, in the three and nine months ended September 30,
1995). The absence of the revenue from this product after June 30, 1996
is not anticipated to have a material effect on the Company's future
operating income.
NOTE 6. LONG TERM STOCK INCENTIVE PLAN
On June 5, 1996, options to purchase 1,132,764 shares of the Company's
common stock at an exercise price equal to the then-current market value
of $10 were granted pursuant to the Company's Long Term Stock Incentive
Plan. With the exception of the 375,000 options granted to the Company's
Chief Executive Officer, the options have ten year terms and become
exercisable ratably over the four annual grant anniversary dates
following the date of grant. The options granted to the Chief Executive
Officer have ten year terms and become exercisable over the three annual
grant anniversary dates following the date of grant. See Note 8.
NOTE 7. COMMITMENTS AND CONTINGENCIES
VENDOR AGREEMENT - The Company has agreements with various vendors for
services, including the management of medical services, certain of which
provide for the monthly prepayment of fees. The Company believes that
one such vendor has experienced a decline in the ratio of cash and cash
equivalents to claims outstanding. The Company believes that the vendor
has, to date, continued to meet its financial obligations to the
Company. By agreement on March 12, 1996, the vendor paid the Company
$6,000, which represents a portion of the amounts previously paid by the
Company to the vendor, and agreed to adjust such funds quarterly to
approximate ChoiceCare-related outstanding claims liabilities. Such
amount is reflected as Amounts due to vendor in the accompanying
September 30, 1996 Consolidated Balance Sheet. The vendor has waived its
right to avoid and recover such funds (which waiver may be ineffective)
in the event of bankruptcy proceedings. However, there exists a risk
that if the vendor files for bankruptcy protection or if an involuntary
petition is filed against the vendor, any payments made by the vendor
within 90 days of the commencement of the bankruptcy case may be avoided
and recovered by the vendor as a preferential transfer. As a result of
the above, the Company may be obligated to pay for unpaid claims of
service through the date of bankruptcy. Such amounts are currently
estimated to be approximately $6,200 and would be in addition to the
amount previously paid by the Company to the vendor that were
anticipated to cover such claims. The Company's management believes it
unlikely that current circumstances will result in this vendor entering
bankruptcy proceedings.
The aforementioned 90 day period has expired in relation to the payment
received from the vendor and, to date, the vendor has made no attempt to
seek any action which would serve to nullify the aforementioned
arrangement.
9
<PAGE> 10
LITIGATION - The Company is routinely involved in litigation matters
arising in the normal course of business. Management believes, based
upon the advice of counsel, that these actions and proceedings and
losses, if any, resulting from the final outcome thereof, will not be
material in the aggregate to the Company's financial position.
NOTE 8. SUBSEQUENT EVENTS
CREDIT FACILITY - On October 21, 1996, the Company entered into a $15
million floating rate revolving credit agreement with a commercial bank.
The credit agreement includes, among other things, provisions which
limit total indebtedness, require the maintenance of certain liquidity
ratios, and limit the amount of capital expenditures, capital stock
repurchases, asset sales and cash dividend payments by the Company.
There are no borrowings currently outstanding on the facility.
STOCK OPTIONS - Contingent upon the execution of an amended employment
agreement, on October 2, 1996, options to purchase an additional 25,000
shares of the Company's common stock at an exercise price equal to the
then-current market value of $10 were granted to the Company's Chief
Executive Officer pursuant to the Company's Long Term Stock Incentive
Plan.
10
<PAGE> 11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
THREE MONTHS ENDED SEPTEMBER 30, 1996
For the three months ended September 30, 1996 (the "1996 quarter"), the Company
generated net income of $1,437, as compared to a $22,154 net loss for the
corresponding prior year quarter (the "1995 quarter"), during which the Company
operated as a not-for-profit corporation. See Note 1 of Notes to Consolidated
Financial Statements. Comparisons of the results for these quarters were
significantly impacted by the following transactions:
1996 QUARTER - an approximate $1,175 reduction in health care services
expense (physician - $650; hospital - $525) recorded, due
to revising estimates of the net amount incurred in
connection with the Company's risk/reward sharing
arrangements with providers, a significant portion of
which related to periods prior to the 1996 quarter.
1995 QUARTER - $28,000 of settlement expense recorded in accordance with
the 1988 THOMPSON litigation settlement agreement as a
result of the Company's October 1, 1995 reorganization
(reflected as an other non-operating expense in the
accompanying Statements of Income).
An increase in member months for the Company's prepaid commercial products and
an increase in premium rates for such products, as evidenced by an approximate
3.7% average increase in premium rates for fully-insured groups renewing during
the first nine months of 1996, resulted in the Company experiencing a 4.2%
increase in premium revenue from its commercial products as compared to the 1995
quarter. These positive trends, as well as a retention rate of approximately 93%
for groups renewing during the first nine months of 1996, were achieved in an
increasingly competitive environment within the Company's service area,
following two years of flat or decreasing premium rates. Offsetting the effects
of this membership growth and increase in premium rates for renewing
fully-insured groups were the following factors, which combined to yield $913 of
operating income for the 1996 quarter, as compared to $522 for the 1995 quarter:
- loss of premium revenues recognized from the Company's Special Health
Medicaid product as a result of the June 30, 1996 assignment of the
Medicaid contract;
- decreased self-funded membership, resulting largely from the downsizing
activities of two large self-funded employer groups;
- increased health care professional services utilization levels and drug
costs compared to the 1995 quarter; and
- continued industry-wide health care cost inflation trends, particularly
pharmacy benefits.
11
<PAGE> 12
NINE MONTHS ENDED SEPTEMBER 30, 1996
During the nine months ended September 30, 1996 (the "1996 period"), the Company
achieved net income of $3,142, compared to a $14,987 net loss in the
corresponding prior year period (the "1995 period"), and operating losses of
$3,041 and $762 were reported in each of the respective periods. While the
year-to-date effects of the factors previously noted in the discussion of
quarterly results contributed significantly to year-to-date comparative results,
such results were also impacted by the effects of the following:
- the recognition of a $4,554 gain on the assignment of the Medicaid
contract;
- the receipt in 1995 of a $3,350 payment in connection with the
termination of an agreement with another managed care entity;
- the receipt in 1996 of $540 in connection with the risk sharing agreement
with the Company's pharmacy vendor; and
- the continuing effects of the Company's decision to decrease overall
premium rates throughout 1995 (consistent with its previous
not-for-profit mission), as it relates to employer groups having other
than calendar year renewals.
12
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RESULTS OF OPERATIONS
The following table sets forth selected operating data, expressed as a
percentage of total operating revenues, and the medical-expense ratio for the
periods indicated:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1996 1995 1996 1995
----------- ----------- ------------- -------------
<S> <C> <C> <C> <C>
OPERATING REVENUES:
Premiums 95.0% 94.6% 94.9% 94.3%
Management services fees 4.8 5.2 4.7 5.5
Other .2 .2 .4 .2
----------- ----------- ------------- -------------
Total 100.0 100.0 100.0 100.0
----------- ----------- ------------- -------------
OPERATING EXPENSES:
Health care services 79.3 79.6 82.2 81.3
Selling, general and
administrative 19.4 19.6 19.3 19.1
----------- ----------- ------------- -------------
Total 98.7 99.2 101.5 100.4
----------- ----------- ------------- -------------
Operating income (loss) 1.3 .8 (1.5) (.4)
Investment income, net 1.9 7.4 1.6 5.0
Gain on assignment of Medicaid
contact -- -- 2.1 --
Income from agreement termination -- -- -- 1.6
Settlement expense -- (38.7) -- (13.4)
----------- ----------- ------------- -------------
Income (loss) before
provision for income taxes 3.2 (30.5) 2.2 (7.2)
Provision for income taxes 1.1 -- .8 --
----------- ----------- ------------- -------------
Net income (loss) 2.1% (30.5%) 1.4% (7.2%)
=========== =========== ============= =============
MEDICAL-EXPENSE RATIO* 83.6% 84.2% 86.5% 86.2%
MEMBER MONTHS FOR THE PERIOD:
Prepaid
Commercial 587,679 567,075 1,730,620 1,636,026
Medicaid -- 26,884 77,496 70,410
----------- ----------- ------------- -------------
587,679 593,959 1,808,116 1,706,436
Self-funded 257,216 276,842 778,208 838,959
----------- ----------- ------------- -------------
Total 844,895 870,801 2,586,324 2,545,395
=========== =========== ============= =============
PMPM DATA:
Premium revenue - Commercial $ 114.65 $ 114.05 $ 114.36 $ 114.91
Premium revenue - Medicaid -- 139.49 138.72 137.05
Management services revenue 13.31 13.56 13.21 13.67
Health care services expense 95.79 97.03 99.81 99.85
Selling, general and
administrative expense 16.25 16.31 16.40 15.72
</TABLE>
*Health care services expense as a percentage of premiums.
13
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THREE MONTHS ENDED SEPTEMBER 30, 1996 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 1995
PREMIUM REVENUE -
The 1.5% decrease in premium revenue during the 1996 quarter reflects 1) the
assignment of the Medicaid contract, on which approximately $3,750 of premiums
were recognized during the 1995 quarter; 2) a 3.6% increase in member months for
the Company's prepaid commercial products; 3) and a .5% increase in the weighted
average PMPM premium on prepaid commercial products. The increase in weighted
average PMPM premium on prepaid commercial products can primarily be attributed
to the aforementioned average increase in premium rates, somewhat offset by the
continued migration of the customer base to the Company's more cost effective
products and benefit structures.
MANAGEMENT SERVICES REVENUE -
The decrease in management services fees from self-funded employer groups
results primarily from the combined effects of a 7.1% decrease in self-funded
membership, due largely to the aforementioned downsizing activities of two large
self-funded employer groups.
In September 1996, the Company was informed by a customer accounting for
approximately 33% of the Company's total self-funded members that the health
care services management agreement between the Company and the customer, which
expires March 31, 1997, will not be renewed. Management services fees received
from the customer during the three and nine months ended September 30, 1996
totaled approximately $1,050 and $3,100, respectively ($1,400 and $3,400,
respectively, in the three and nine months ended September 30, 1995).
Contributions to net earnings from the contract have historically not been
material to the Company's total results of operations due to the operating
expenses associated with the administration of the contract and providing
services to the customer's members.
In July 1996, the Company was successful in receiving a commitment for the
renewal of a multi-year contract, which will begin January 1, 1997, with an
existing customer that accounts for approximately 39% of the Company's total
self-funded members. The customer has again opted to also offer another
competitor's managed care plan. While management anticipates the Company will
retain a sizable amount of this customer's members, the possibility exists that
existing members will choose to enroll in competing health care plans offered by
the employer.
HEALTH CARE SERVICES EXPENSE -
The 2.3% decrease in total health care services expense during the 1996 quarter
reflects 1) the assignment of the Medicaid contract, which had higher PMPM
medical expenses relative to commercial membership; 2) a .8% decrease in
physician expenses on a PMPM basis, due primarily to the net effects of
increased health care professional services utilization levels, decreased
average cost per service resulting from changes in the mix of service provided,
refinement downward of the Company's estimate of physician claims expense in the
1996 quarter, and a reduction in the estimated amount incurred in connection
with the Company's risk/reward sharing arrangements with health care
professionals; and 3) a 5.8% decrease in hospital expenses on a PMPM basis. This
decrease in hospital expense on a PMPM basis can be attributed primarily to the
net effects of decreased utilization; increased average cost per service,
reflecting changes in the mix of service provided and the effect of
transitioning certain less complex services to outpatient
14
<PAGE> 15
settings; refinement downward of the Company's estimate of hospital claims
expense during the 1995 quarter outpacing similar refinements during the 1996
quarter; and a decrease in amounts incurred in connection with the Company's
hospital risk/reward sharing arrangements, due to the hospitals' performance
against established risk targets.
These factors were partially offset by the 3.6% increase in member months for
the Company's commercial prepaid products during the quarter and an 11.1%
increase in pharmacy expenses on a PMPM basis, resulting primarily from
continued industry-wide drug cost inflation. As a result of the 1.3% decrease in
health care services expense on a PMPM basis outpacing the .5% decrease in the
overall weighted average PMPM premium, the Company's medical-expense ratio
decreased to 83.6% in the 1996 quarter from 84.2% in the 1995 quarter.
During the 1996 quarter, the Company continued the implementation of several
initiatives designed to decrease health care services expense, particularly the
pharmacy expense component. However, there is no assurance that the benefits of
such efforts will be realized.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES -
The 3.3% decrease in expenses for selling, general and administrative ("SG&A")
costs in the 1996 quarter largely reflects 1) the reduction during the quarter
of the estimated amount of incentive compensation to be paid in relation to
1996, a significant portion of which had been accrued prior to the quarter; 2)
the fact that the 1995 quarter included approximately $365 of expenses incurred
in connection with the Company's restructuring; and 3) the impacts of
implementing various expense control measures. These factors were partially
offset by certain increased expenses, which are substantially comprised of 1)
compensation, resulting in large part from routine salary adjustments and a net
increase in employees since the 1995 quarter of approximately 15, or 3%; 2)
commissions paid to sales brokers, as an increased number of smaller employer
groups are being sold through such sales channel; and 3) depreciation and
amortization expense, relating to additional investments in computer hardware
and software.
INVESTMENT INCOME -
During the 1996 quarter, the Company experienced a $3,992 decrease in net gains
realized on the investment portfolio as compared to the 1995 quarter. This
decline can primarily be attributed to 1) a decrease in the average outstanding
portfolio balance, which resulted largely from funding the THOMPSON litigation
settlement in October 1995; and 2) the effect of equity investments comprising
an increased percentage of the Company's investment portfolio during the 1996
quarter, the earnings on which are not anticipated to be declared and recorded
until later in the year.
INCOME TAX EXPENSE -
Income tax expense has been recorded at the highest tax rate applicable to the
Company, currently estimated at an effective tax rate of approximately 36%. This
rate may ultimately be adjusted based upon 1996 full year results. The Company
operated as a tax exempt organization throughout the 1995 quarter.
15
<PAGE> 16
NINE MONTHS ENDED SEPTEMBER 30, 1996 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
1995
As previously noted, while many factors discussed in the quarter-to-quarter
analysis contributed significantly to the results for the 1996 period, as
compared to the 1995 period, certain components of each nine month period's
Statement of Income were also significantly impacted by events and trends
occurring prior to the three months ended September 30 of each year. Following
is a period-over-period analysis of such components:
PREMIUM REVENUE -
The 5.6% increase in premium revenue during the 1996 period reflects 1) the June
30, 1996 assignment of the Company's Medicaid contract to Health Power HMO,
Inc., on which approximately $10,750 of premiums were recognized during the six
months in 1996 prior to the assignment ($9,650 during the 1995 period); 2) a
5.8% increase in member months for the Company's prepaid commercial products; 3)
and a .5% decrease in the weighted average PMPM premium on prepaid commercial
products. In addition to the aforementioned average increase in premium rates
and the continued migration of the customer base to the Company's more cost
effective products, the decrease in weighted average PMPM premium on prepaid
commercial products also reflects the continuing effects, primarily in the first
three months of 1996, of the Company's decision to decrease overall premium
rates throughout 1995 (consistent with its previous not-for-profit mission), as
it relates to employer groups having other than calendar year renewals.
MANAGEMENT SERVICES REVENUE -
The decrease in management services fees from self-funded employer groups
results primarily from the combined effects of a 7.2% decrease in self-funded
membership, due largely to the aforementioned downsizing activities of two large
self-funded employer groups and renegotiation of an increased rate with a
self-funded employer group during 1995, applied retroactively to the second
quarter of 1994.
OTHER OPERATING INCOME -
The increase in other operating income is largely attributable to $540 earned
during the 1996 period in connection with the risk sharing agreement with the
Company's pharmacy vendor for the contract year ended May 1996. See discussion
of pharmacy expense below.
HEALTH CARE SERVICES EXPENSE -
The 5.9% increase in total health care services expense during the 1996 period
reflects 1) the 6.0% increase in prepaid member months during the period, which
includes a 10.1% increase in member months related to the Company's former
Medicaid product despite the assignment of the contract on June 30, 1996; 2) a
1.5% increase in physician expenses on a PMPM basis, due primarily to the net
effects of increased health care professional services utilization levels,
relatively stable average cost per service, refinement downward of the Company's
estimate of physician claims expense in the 1995 period and a reduction in the
estimated amount incurred in connection with the Company's risk/reward sharing
arrangements with health care professionals; and 3) a 10.9% increase in pharmacy
expenses on a PMPM basis, resulting largely from continued industry-wide drug
cost inflation.
16
<PAGE> 17
These factors were partially offset by a 5.2% decrease in hospital expenses on a
PMPM basis, which can be attributed primarily to the net effects of decreased
utilization; increased average cost per service, reflecting changes in the mix
of service provided and the effect of transitioning certain less complex
services to outpatient settings; refinement downward of the Company's estimate
of hospital claims expense during the 1995 period; and a decrease in amounts
incurred in connection with the Company's hospital risk/reward sharing
arrangements, due to the hospitals' performance against established risk
targets.
As a result of the .4% decrease in the overall weighted average PMPM premium
outpacing the less than .1% decrease in health care services expense on a PMPM
basis, the Company's medical-expense ratio increased to 86.5% in the 1996
period from 86.2% in the 1995 period.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES -
The 6.0% increase in expenses for SG&A costs in the 1996 period largely reflects
the 1.6% growth in overall member months and the continued effect of expenses
incurred in connection with infrastructure and new product investments made in
order to raise the standard of service provided to current members, to service
anticipated membership growth and to manage medical cost inflation effectively.
Such increased expenses are substantially comprised of 1) compensation,
resulting in large part from routine salary adjustments and a net increase in
employees since the 1995 period of approximately 40, or 8%; 2) commissions paid
to sales brokers, as an increased number of smaller employer groups are being
sold through such sales channel; and 3) depreciation and amortization expense,
relating to additional investments in computer hardware and software. These
factors were partially offset by a lower amount of incentive compensation
accrued to be paid in relation to 1996, as compared to 1995, and the fact that
the 1995 period included approximately $1,400 of expenses incurred in
connection with the Company's restructuring.
OTHER NON-OPERATING INCOME (EXPENSE) -
During the 1996 period, the Company recognized the aforementioned $4,554 gain on
the assignment of its Medicaid contract. See Note 5 of Notes to Consolidated
Financial Statements.
The 1995 period included a $3,350 payment received in connection with the
termination of an agreement with another managed care entity. This amount
represented reimbursement for expenses incurred in 1994 and 1995 for negotiating
and implementing infrastructure changes to provide services under the agreement,
the cost of negotiating termination of the agreement and an element of
compensation for potential lost profits the Company may have realized under the
terms of the agreement.
The 1995 period also included the aforementioned $28,000 of litigation
settlement expense recorded in connection with the Company's October 1, 1995
reorganization, which stemmed from the 1988 settlement of a judgment against the
Company.
17
<PAGE> 18
FINANCIAL CONDITION
Net cash totaling $5,955 was provided by operations during the first nine months
of 1996, resulting primarily from the net effects of 1) the $2,277 decrease in
receivables, due in large part to receiving payment of amounts due; 2) the
$4,795 decrease in the provider risk pool liability, reflecting primarily the
combined impact of the hospitals' year-to-date performance against established
risk targets and the Company's payment during the 1996 period of amounts owed to
the hospitals for 1995; and 3) the receipt of $6,200 under a vendor agreement
during March 1996. See Note 7 of Notes to Consolidated Financial Statements for
discussion of the cash received under the aforementioned vendor agreement, and
the Company's related obligation. In addition, net proceeds totaling $12,015
were received from the sale of common stock. These net cash receipts were
slightly offset by the $586 of net cash used in investing activities, which
reflects the net cash impact of investment portfolio transactions and cash
received from assignment of the Company's Medicaid contract, less capital
expenditures.
As of September 30, 1996, the Company's investment portfolio was comprised of
debt securities (71.4%), fixed income mutual funds (10.8%), equity-based mutual
funds (9.8%) and money market instruments (8.0%), all of which are available to
meet current obligations and classified as securities available-for-sale in the
accompanying Consolidated Balance Sheet. Unfavorable fixed income security
market conditions, particularly during the second quarter, resulted in
unrealized losses on the investment portfolio totaling $215 as of September 30,
1996 compared to unrealized gains totaling $846 as of December 31, 1995. Such
net unrealized gains and losses are reflected as a separate component of equity
in the accompanying Consolidated Balance Sheets. The Company believes that its
cash and cash equivalents, investment portfolio and credit facility will be
sufficient to fund its liquidity needs for at least the next 12 months.
CAUTIONARY STATEMENT
The Company wishes to take advantage of the new safe harbor provisions included
in the Private Securities Litigation Reform Act of 1995. Accordingly, in
addition to historical information, this Management's Discussion and Analysis of
Financial Condition and Results of Operations contains certain forward-looking
statements. These statements involve a number of risks and uncertainties. Any
forward-looking statements made by the Company herein and in future reports and
statements are not guarantees of future performance. Actual results could differ
materially from those projected in the forward-looking statements of the Company
made by or on behalf of the Company as a result of various factors including
without limitation those referred to below.
In making these forward-looking statements, the Company is not undertaking to
address or update each factor in future filings or communications regarding the
Company's business or results, and is not undertaking to address how any of
these factors may have caused changes to discussions or information contained in
previous filings or communications. In addition, any of the matters discussed
below may have affected the Company's past results and may affect future
results, so that the Company's actual results for the 1996 quarter and beyond
may differ materially from those expressed in prior communications.
18
<PAGE> 19
FUTURE PREMIUM INCREASES; CONTROL OF MEDICAL COSTS -
A substantial portion of the revenues received by the Company are generated by
member premiums. Of that revenue, a large portion is used to pay the costs of
health care services or supplies delivered to its members. The total medical
costs incurred by the Company are affected by the number and mix of individual
services rendered and the cost of each service. The Company's premiums are
generally set in advance of the actual delivery of services and the related
incurring of the cost, generally for a 12-month term. The Company attempts to
base the premiums it charges at least in part on its estimate of expected
medical costs over the fixed premium period. Competition, regulations and
other circumstances, however, may limit the Company's ability to establish
premiums at levels sufficient to fully recover the estimated costs on which
such premiums were based. In addition, many factors may and often do cause
actual medical costs to exceed those estimated costs on which premiums were
based. These factors may include without limitation increased utilization of
services, change in mix of services, increased cost of individual services, new
technologies, catastrophes, epidemics, seasonality, general inflation, new
mandated benefits or other regulatory changes and insured population
characteristics. There can be no assurance that the Company will be able to
continue to estimate medical costs and adequately recover such costs in the
future through premiums. If the Company is unable to obtain adequate premiums
because of competitive, regulatory or other factors, or is unable to establish
acceptable risk sharing arrangements with providers, the Company could incur
decreased margins and/or significant losses. Additionally, the Company has
entered into new contracts with certain hospitals which are structured to allow
the Company to manage medical costs by using a methodology that incorporates a
combination of case rate and per diem methods. The Company has limited
experience as to the effectiveness of these contracts from a cost management
perspective.
The Company recently completed a review by the Health Care Financing
Administration ("HCFA") for the purpose of being awarded a contract to offer a
Medicare risk product. While the Company received favorable results from the
review and believes it will be awarded a risk contract in the near future, there
can no assurance that such a contract will be awarded. In the event the Company
is awarded a Medicare risk contract, the revenues from such a program
(anticipated to commence during the first quarter of 1997) could be adversely
affected if reimbursement rates do not keep pace with the rising costs of health
care services or supplies, or if the Company is unable to adequately control the
medical utilization of the population served by this product. Historically,
Medicare reimbursement rates have been subject to fluctuations from year to
year. In the event that reimbursement were to decline from projected amounts,
the Company would attempt to renegotiate its contracts with its health care
providers or initiate additional premiums to members, or both. There can be no
assurance that the Company could successfully renegotiate these financial
arrangements, and failure to reduce the medical costs associated with such
program could have a material adverse effect on the Company's business.
POTENTIAL INACCURACY OF MEDICAL COSTS PAYABLE -
The Company's estimation of its medical costs includes an estimate of claims
that have been incurred but not yet reported to the Company. The Company
estimates its claims liability on a monthly basis using accepted actuarial
methodologies, which are based upon the historical average interval between the
date services are rendered, the date claims are reported and the date claims are
paid, as well as membership levels and medical cost trends. The Company believes
that its reserves are adequate to satisfy its ultimate claims liability.
However, there can be no assurance as to the ultimate accuracy or completeness
of such estimates or that adjustments to
19
<PAGE> 20
reserves will not cause volatility in the Company's results of operations,
particularly as it relates to new products such as Medicare for which there is
no ChoiceCare-specific historical data.
COMPETITION AND INDUSTRY TRENDS -
The managed health care industry is highly competitive and in the midst of rapid
and radical structural changes driven by attempts to control medical costs.
These changes are altering traditional relationships among physicians, patients
and hospitals. In this environment it is possible that types of organizations
such as preferred provider organizations, traditional indemnity insurance
carriers, third-party administrators and others could be more successful than
HMOs. The Company competes with all of these types of organizations as well as
other HMOs. Many of these competitors have substantially larger enrollments,
greater financial resources and offer a broader scope of products than the
Company. The Company believes that there are few barriers to entry in its
service area, so that the addition of new competitors can occur relatively
easily. These additional competitors may enter the service area de novo or as a
result of the significant merger and acquisition activity that has occurred in
the HMO industry, as well as in industries which serve as suppliers to the
Company such as the hospital, physician, pharmaceutical and medical device
industries. This activity may create stronger competitors and/or result in
higher medical costs. Additionally, certain of the Company's customers may
decide to perform for themselves functions or services formerly provided by the
Company, which would result in a decrease in revenue for the Company. The
Company also may face increasing competition in its service area from a
developing trend by some health care providers to form their own networks in
order to contract directly with employer groups and other customers to provide
health care services. Competitive pressures may limit the Company's ability to
increase or maintain its premium levels. Such pressures could have a material
adverse affect on the Company's results of operations by decreasing profit
margins.
GOVERNMENT REGULATION AND HEALTH CARE REFORM -
The Company's business is subject to extensive federal, state and local laws and
regulations, including, but not limited to, financial requirements, plan
provisions and premium rates, licensing requirements, membership limitations and
periodic examinations by governmental agencies. There can be no assurance that
the Company will be able to continue to obtain or maintain required governmental
approvals or licenses or that regulatory changes will not have a material
adverse impact on the Company in the future. Delays in obtaining regulatory
approvals or licenses or moratoriums imposed by regulatory authorities could
adversely affect the Company's ability to bring new products to the market as
planned. Under existing state insurance regulations, Health Plans is required to
maintain aggregate minimum statutory capital and surplus. Additionally, the
Company may be required to make periodic capital contributions to Health Plans.
The Company is also subject to various governmental audits and investigations.
Such activities could result in the loss of licensure or the right to
participate in certain programs, or the imposition of fines, penalties and other
sanctions. Furthermore, disclosure of any adverse investigation or audit results
or sanctions could negatively affect the Company's reputation in various markets
and make it more difficult for the Company to sell its products and services.
Of the states in the Company's service area, only Kentucky has adopted
comprehensive health care reform legislation which provides that managed health
care companies can offer only certain standard plans, that Kentucky residents
have certain rights to insurance, including the right to purchase insurance with
restricted pre-existing
20
<PAGE> 21
condition limitations, and requires that an HMO accept any individual who
applies for coverage when switching plans. Numerous state and federal
legislative proposals have been or may be introduced, and other proposals are
being considered, relating to health care reform, including proposals to
restructure the Medicare program. Certain of these reforms may reduce fees
payable to managed care companies and providers under these plans and increase
competition for the limited pool of health care dollars from Medicare
beneficiaries. Legislation of this nature generally requires HMOs to contract
with any provider who is willing to accept the HMO's reimbursement rates and
other terms. Such legislation tends to make it more difficult for HMOs to limit
the size of their networks, and, therefore, to negotiate provider discounts in
exchange for patient volume. Certain of these legislative proposals, if enacted,
could have a material adverse effect on the Company's business.
ANTI-REFERRAL LEGISLATION -
Federal legislation exists including the Medicare/Medicaid Kickback Statute and
The Ethics in Patient Referrals Act of 1989, as amended (the "Stark Laws") which
prohibit activities deemed to raise the cost of the Medicare and Medicaid
programs. These statutes generally prohibit the referral of patients in exchange
for remuneration or to a facility in which a physician or family member has a
financial interest. The prohibitions on conduct are broad and complex. Failure
to comply with these laws could subject the Company to penalties including
criminal prosecution and civil fines and treble damages, and exclusion of the
Company from the Medicare and Medicaid programs. No assurance can be given that,
in the future, the Company will not be found to have violated one or both of
these laws. Any such violation could have a material adverse effect on the
Company's business.
DEPENDENCE UPON EMPLOYER GROUPS -
The Company's business is dependent upon its ability to obtain and maintain
group benefit agreements with employer groups. These agreements are generally
renewable on an annual basis. The Company's ten largest employer groups (based
on membership) accounted for approximately 27% of its total revenue for the 1996
period. The loss of one or more of these employer groups could have a material
adverse effect on the Company. There can be no assurance that the Company will
be able to renew its agreements with such employer groups in the future or that
it will not experience a decline in enrollment within its employer groups.
DEPENDENCE UPON HEALTH CARE PROVIDERS -
The Company's profitability is dependent, in large part, upon its ability to
contract favorably with hospitals, physicians and other health care providers.
The Company's contracts with hospitals are for varying terms. Contracts with
physicians are renewable annually, but certain contracts may be terminated on
prior written notice by either party. Certain provider contracts contain
risk-sharing provisions which may, in certain situations, cause providers to be
at risk for additional health care expenditures. If, as a result, providers
incur excessive health care expenditures, providers may terminate their
contracts with the Company. There can be no assurance that the Company will be
able to enter into agreements with providers on favorable terms. Additionally,
providers could refuse to contract with the Company altogether, demand higher
payments or take actions which could result in higher medical costs, less
desirable products for customers and members or difficulty meeting regulatory or
accreditation requirements.
Certain providers within the Company's service area, particularly hospitals,
physician/hospital organizations and multi-specialty physician groups, may have
significant market position or even monopolies. Many of these providers may
compete
21
<PAGE> 22
directly with the Company. If such market providers refuse to contract with the
Company or utilize their market position to negotiate favorable contracts or
place the Company at a competitive disadvantage, the Company's ability to market
products or to be profitable in the service area could be adversely affected.
GEOGRAPHIC CONCENTRATION -
The Company's operations are concentrated in southwestern Ohio, northern
Kentucky and southeastern Indiana. In the event of losses in this market, the
Company will be unable to offset any such losses with profits received from
other markets. Certain larger competitors of the Company, which operate on a
multi-location or national basis, could offset losses in the Company's service
area with profits from other markets. Any adverse economic, regulatory or other
developments that may occur in the service area may adversely impact the
Company's operations and financial condition. In addition, health care patterns
among the population in the service area may result in increased health care
costs for the Company. The Company is considering geographic expansion into
contiguous markets, but there can be no assurance of such geographic expansion
or the Company's success in those new markets.
NEW PRODUCTS AND SERVICES; ACQUISITION -
In order to remain competitive in the industry, the Company intends to introduce
new products and services, including a Medicare product. However, there can be
no assurance that the Company will be able to develop products and services that
will effectively compete with the products and services of other competitors or
that such products or services will be profitable. The Company believes that the
development and introduction of its new Medicare product will require a
substantial amount of resources and capital and will involve additional risks
based on the nature of the Medicare population, the potential for adverse
selection and government control over reimbursement rates.
The Company may make acquisitions in the future. Significant uncertainties
accompany any acquisition and its integration, including, without limitation,
the possibility of understated medical costs and contingent liabilities. Due to
such uncertainties, any acquisition could have a material adverse effect on the
Company.
LITIGATION AND INSURANCE -
The Company is subject to a variety of legal actions to which any corporation
may be subject, including employment and employment discrimination-related
suits, employee benefit claims, breach of contract actions, tort claims,
shareholder suits, including for securities fraud, and intellectual property
related litigation. In addition, because of the nature of its business, the
Company is also subject to other types of litigation, including denied benefit
claims, poor outcomes for care delivered or arranged, antitrust claims, medical
malpractice claims, contract claims and other disputes pertaining to its
arrangements with providers, employer groups and their employees, and individual
members. Denied benefit claims, or "bad faith" claims, if prosecuted
successfully, may result in awards of punitive damages. Such awards generally
are not insurable and are not covered under the Company's insurance policies.
The Company may incur losses beyond the limits of its insurance coverage, may
incur losses that are not insured and may in the future be unable to obtain
adequate insurance. Although the Company believes that it currently carries
adequate insurance, no assurance can be given that the Company's insurance
coverage in the future will be adequate or cost-effective.
22
<PAGE> 23
MANAGEMENT INFORMATION SYSTEMS -
The Company's management information systems are critical to the Company's
current and future operations. The information processed by the management
information systems enables the Company to price its services, monitor
utilization and other cost factors, and process provider claims. Interruption of
data processing capabilities for any extended length of time, loss of stored
data, programming errors or other computer problems could have a material
adverse effect on the Company's business. There can be no assurance that back-up
procedures will be adequate.
DEPENDENCE ON SENIOR MANAGEMENT -
The Company's success is highly dependent upon the performance of its senior
management. All members of senior management have entered into three-year
employment agreements with the Company which contain one-year non-compete
provisions. However, there can be no assurance that a loss of the services of
one or several members of senior management would not have a material adverse
effect on the Company.
RESTRICTED TRADING -
Currently, there is no trading market for the Company's common shares, and
investors are subject to provisions of the Company's Regulations that restrict
the ability of a shareholder to sell his or her common shares, except to other
eligible investors -- defined as 1) employees of the Company, 2) individual
physicians or other health care professionals who have executed a provider
agreement with the Company, or 3) credentialed professional employees of a
corporation or other entity that has executed a group provider agreement with
the Company. Any trades of the Company's common shares will be on an
individually negotiated basis between eligible investors. Accordingly, the
opportunity to sell the common shares of the Company will be limited, and
shareholders may not be able to resell their common shares at a price equal to
or greater than the purchase price.
POSSIBLE VOLATILITY OF COMMON SHARE PRICE -
Recently, there has been significant volatility in the market prices of
securities of companies in the health care industry. Many factors, including
medical cost increases, analysts' comments, announcements of new legislation or
proposals or laws relating to health care reform, the performance of, and
investor expectations for, the health care industry and the Company, general
economic and market conditions, and reports of acquisition activity in the
industry may impact the trading price of the Company's common shares.
23
<PAGE> 24
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
11. Computation of Earnings Per Share
27. Financial Data Schedule
(b) Reports on Form 8-K
The Company filed a Form 8-K dated September 18, 1996 reporting 1) the
resignation of Paul Nezi, Executive Vice President and Chief Marketing
Officer, and 2) the decision of a particular self-funded customer to not
renew the health care services management agreement between the Company and
the customer upon the agreement's March 31, 1997 expiration.
24
<PAGE> 25
SIGNATURE
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.
CHOICECARE CORPORATION
Date: November 12, 1996 By: /s/ Juan M. Fraiz
-------------------------------------
Juan M. Fraiz
Vice President and Chief Financial
Officer (Principal Financial Officer)
<PAGE> 1
EXHIBIT 11
CHOICECARE CORPORATION
COMPUTATION OF EARNINGS PER SHARE
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
1996 1996
------------- -------------
<S> <C> <C>
Net income $ 1,437 $ 3,142
=========== ===========
Shares used in calculation of earnings per share:
Weighted average common shares outstanding 14,852,944 14,196,223
Dilutive effect of assumed exercise of
stock options 1,132,764 487,833
----------- -----------
Weighted average common and common
equivalent shares outstanding 15,985,708 14,684,056
=========== ===========
Earnings per common and common equivalent share -
primary and fully diluted $ .09 $ .21
=========== ===========
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS AS OF AND FOR THE NINE MONTH PERIOD ENDED SEPTEMBER 30,
1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> SEP-30-1996
<CASH> 30,006
<SECURITIES> 74,860
<RECEIVABLES> 7,050
<ALLOWANCES> 68
<INVENTORY> 0
<CURRENT-ASSETS> 122,481
<PP&E> 19,001
<DEPRECIATION> 8,697
<TOTAL-ASSETS> 137,816
<CURRENT-LIABILITIES> 84,490
<BONDS> 0
<COMMON> 12,015
0
0
<OTHER-SE> 36,610
<TOTAL-LIABILITY-AND-EQUITY> 137,816
<SALES> 0
<TOTAL-REVENUES> 219,836
<CGS> 0
<TOTAL-COSTS> 180,467
<OTHER-EXPENSES> 42,410
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 4,998
<INCOME-TAX> 1,856
<INCOME-CONTINUING> 3,142
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,142
<EPS-PRIMARY> 0.21
<EPS-DILUTED> 0.21
</TABLE>
