<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 JUNE 30, 1997
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 0-22295
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 August 1, 1997, 14,852,844 shares of ChoiceCare Corporation common stock
were outstanding.
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CHOICECARE CORPORATION
INDEX
<TABLE>
<CAPTION>
Page
----
<S> <C>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Consolidated Statements of Operations for the three
month periods ended June 30, 1997 and 1996 3
Consolidated Statements of Operations for the six
month periods ended June 30, 1997 and 1996 4
Consolidated Balance Sheets at June 30, 1997 and
December 31, 1996 5
Consolidated Statements of Cash Flows for the
six month periods ended June 30, 1997 and 1996 6
Notes to Consolidated Financial Statements 7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS 9
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY
HOLDERS 16
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 16
SIGNATURE 17
</TABLE>
2
<PAGE> 3
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
- -----------------------------
CHOICECARE CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
JUNE 30,
1997 1996
---- ----
<S> <C> <C>
REVENUES:
Premium revenue $ 70,270 $ 70,777
Management services revenue 2,862 3,440
Other operating revenue 1,138 638
-------- --------
Total Operating Revenues 74,270 74,855
-------- --------
EXPENSES:
Health care services
Physician services 27,454 28,573
Hospital services 21,299 23,780
Pharmacy services 9,269 8,891
-------- --------
Total Health Care Services 58,022 61,244
Selling, general and administrative expenses 14,482 14,021
-------- --------
Total Operating Expenses 72,504 75,265
OPERATING INCOME (LOSS) 1,766 (410)
OTHER INCOME (EXPENSES)
Investment income, net 1,287 1,003
Gain on assignment of Medicaid contract -- 4,554
-------- --------
INCOME BEFORE INCOME TAXES 3,053 5,147
PROVISION FOR INCOME TAXES 1,161 1,048
-------- --------
NET INCOME $ 1,892 $ 4,099
======== ========
EARNINGS PER SHARE $ .12 $ .29
======== ========
WEIGHTED AVERAGE COMMON AND COMMON EQUIVALENT
SHARES OUTSTANDING (See Exhibit 11) 15,262 14,229
======== ========
</TABLE>
The accompanying notes are an integral part of these statements.
3
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CHOICECARE CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
1997 1996
---- ----
<S> <C> <C>
REVENUES:
Premium revenue $ 139,049 $ 141,285
Management services revenue 6,694 6,859
Other operating revenue 1,348 761
--------- ---------
Total Operating Revenues 147,091 148,905
--------- ---------
EXPENSES:
Health care services
Physician services 55,423 58,717
Hospital services 42,114 48,297
Pharmacy services 18,575 17,161
--------- ---------
Total Health Care Services 116,112 124,175
Selling, general and administrative expenses 31,169 28,684
--------- ---------
Total Operating Expenses 147,281 152,859
OPERATING LOSS (190) (3,954)
OTHER INCOME (EXPENSES)
Investment income, net 2,659 2,153
Gain on assignment of Medicaid contract -- 4,554
--------- ---------
INCOME BEFORE INCOME TAXES 2,469 2,753
PROVISION FOR INCOME TAXES 939 1,048
--------- ---------
NET INCOME $ 1,530 $ 1,705
========= =========
EARNINGS PER SHARE $ .10 $ .12
========= =========
WEIGHTED AVERAGE COMMON AND COMMON EQUIVALENT
SHARES OUTSTANDING (See Exhibit 11) 15,057 13,865
========= =========
</TABLE>
The accompanying notes are an integral part of these statements.
4
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CHOICECARE CORPORATION
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1997 1996
---- ----
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 30,185 $ 38,597
Securities available-for-sale 75,101 70,436
Premiums receivable 4,202 7,815
Health care receivables 5,618 5,636
Other current assets 11,557 12,489
--------- ---------
Total Current Assets 126,663 134,973
PROPERTY AND EQUIPMENT, net 8,670 9,536
OTHER LONG-TERM ASSETS 6,193 5,279
--------- ---------
Total Assets $ 141,526 $ 149,788
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Medical costs payable $ 42,780 $ 48,260
Accounts payable and accrued liabilities 13,679 15,043
Amounts due to vendor 5,338 6,200
Unearned premiums 5,480 5,133
Provider risk pool liability 9,036 12,304
--------- ---------
Total Current Liabilities 76,313 86,940
LONG-TERM LIABILITIES 12,222 12,296
--------- ---------
Total Liabilities 88,535 99,236
--------- ---------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Preferred stock, without par value,
4,000 shares authorized; none issued -- --
Common stock, without par or stated value,
45,000 shares authorized; 14,853 shares
issued and outstanding at June 30, 1997
and December 31, 1996 12,014 12,014
Net unrealized gains (losses) on securities
available-for-sale, net of taxes 888 (21)
Retained earnings 40,089 38,559
--------- ---------
Total Shareholders' Equity 52,991 50,552
--------- ---------
Total Liabilities and Shareholders' Equity $ 141,526 $ 149,788
========= =========
</TABLE>
The accompanying notes are an integral part of these statements.
5
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CHOICECARE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
1997 1996
---- ----
<S> <C> <C>
NET CASH FLOWS FROM OPERATING ACTIVITIES $ (4,251) $ (2,298)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of investments 20,352 35,875
Purchases of investments (23,656) (30,763)
Proceeds from assignment of Medicaid contract -- 5,000
Purchases of property and equipment (857) (1,572)
-------- --------
Net cash (used in) provided by investing activities (4,161) 8,540
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from sale of common stock, net -- 12,025
-------- --------
NET (DECREASE) INCREASE IN CASH AND CASH
EQUIVALENTS (8,412) 18,267
CASH AND CASH EQUIVALENTS, beginning of period 38,597 12,622
-------- --------
CASH AND CASH EQUIVALENTS, end of period $ 30,185 $ 30,889
======== ========
</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 The ChoiceCare Foundation (the
"Foundation"), an Ohio not-for-profit corporation (formerly named Tristate
Foundation for Health and, prior to that, Midwest Foundation Independent
Physicians Association). The Foundation was organized in 1978 as a
not-for-profit health maintenance organization.
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. 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 Annual Report on Form 10-K for the year
ended December 31, 1996.
Certain reclassifications have been made to the 1996 financial statements
to conform with the 1997 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
Annual Report on Form 10-K 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. POTENTIAL MERGER TRANSACTION
The Company entered into a definitive Agreement and Plan of Merger with
Humana Inc. ("Humana"), dated as of June 3, 1997, under which Humana will
pay total consideration of $250,000 in cash for the Company's
outstanding common shares and vested stock options, or $16.38 per
outstanding share. Closing of the transaction is subject to the approval of
the Company's shareholders and the satisfaction of certain conditions,
including regulatory approval--see Note 7. In addition, the transaction is
subject to termination, under certain conditions, including if the
transaction has not closed on or before January 31, 1998.
Subject to the successful completion of this transaction, Humana has
committed to reimburse the Company for transaction-related expenses. The
June 30, 1997 Consolidated Balance Sheet reflects a receivable from Humana
of $665 for transaction-related expenses.
7
<PAGE> 8
NOTE 4. PER SHARE DATA
Earnings per share are based on the weighted average number of shares of
common stock outstanding during the periods and the dilutive effect of the
assumed exercise of stock options, if any. In calculating the dilutive
effect of the assumed exercise of stock options, the market value per
outstanding common share was considered to be $16.38 for the period April
1, 1997 to June 30, 1997 in light of the potential transaction discussed in
Note 3.
NOTE 5. LONG TERM STOCK INCENTIVE PLAN
On March 5, 1997, the Company's Board of Directors (the "Board") resolved
to grant, subject to certain conditions, no more than approximately 666,000
stock options during 1997 under the terms of the 1996 Long Term Stock
Incentive Plan (the "Stock Incentive Plan"). By resolution dated June 1,
1997, the Board withdrew the March 5, 1997 resolutions concerning options
in view of the potential transaction discussed in Note 3, the closing of
which will be immediately preceded by the termination of the Stock
Incentive Plan without prejudice to holders of the options.
NOTE 6. COMMITMENTS AND CONTINGENCIES
EMPLOYMENT AGREEMENTS - The Company currently has in effect employment
agreements with its executive officers and certain of its other officers
which provide for severance or other payments in the event that employment
is terminated for reasons other than for cause. In addition, the agreements
also contain provisions related to a change in control (as defined in the
employment agreements), including lump-sum retention incentive payments
that apply if an applicable executive officer or other officer remains
employed for a specified period of time after a change in control and, in
the agreements of executive officers, lump-sum change in control severance
payments in the event of their termination after a change in control. The
maximum contingent liability of the Company related to such retention
incentive payments and change in control severance payments, pursuant to
the employment agreements, is currently estimated (based on 1997 salary
levels and targeted incentives) to approximate 1) $3,200 in the event that
only retention incentive payments are made; or 2) $7,300 in the event that
only change in control severance payments are made in the event of
termination.
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 consolidated financial position.
NOTE 7. SUBSEQUENT EVENTS
CERTAIN REGULATORY MATTERS REGARDING POTENTIAL MERGER TRANSACTION - On July
31, 1997, the Attorney General of the State of Ohio approved the merger
transaction discussed in Note 3, and, on August 2, 1997, the period of time
for antitrust review of the proposed merger transaction under the federal
Hart-Scott-Rodino procedure expired without objection from the Federal
Trade Commission or Department of Justice.
8
<PAGE> 9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
-----------------------------------------------------------------------
OF OPERATIONS
-------------
(In thousands, except member and per member per month ("PMPM") data)
OVERVIEW
- --------
THREE MONTHS ENDED JUNE 30, 1997
During the three months ended June 30, 1997 (the "1997 quarter"), the Company
generated net income of $1,892, as compared to $4,099 for the corresponding
prior year quarter (the "1996 quarter"). Comparisons of the 1997 and 1996
quarterly results were significantly impacted by the following transactions:
1997 Quarter
- ------------
- a $1,412 reduction in health care services expense (physician -
$1,212; hospital - $200) 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 the first quarter of 1997;
- a $788 refinement downward of the Company's estimates of hospital
services expenses which related to periods prior to the 1997 quarter;
and
- $521 of other operating revenue recorded in connection with processing
the run-out of claims for a large self-funded employer group whose
administrative services management agreement with the Company expired
on March 31, 1997.
1996 Quarter
- ------------
- $4,554 pre-tax gain on the June 30, 1996 assignment of the Company's
Medicaid contract; and
- $540 earned in connection with the risk sharing agreement with the
Company's pharmacy vendor.
An increase in member months and premium rates resulted in the Company
experiencing a 6.9% increase in premium revenue from prepaid commercial products
compared to the 1996 quarter. Management services revenue decreased 16.8%,
reflecting a 42.5% decrease in member months for the Company's self-funded
products, as further discussed below, partially offset by administrative fee
rate increases which took effect during the first half of 1997. The Company also
experienced an improvement in overall health care services expense levels in the
1997 quarter. These trends, as well as a retention rate of approximately 91% for
groups renewing during the first six months of 1997, were achieved in an
increasingly competitive environment within the Company's service area. The
aforementioned prepaid commercial membership growth, rate increases and improved
health care service expense levels combined with the following partially
offsetting factors to yield $1,766 of operating income for the 1997 quarter, as
compared to an operating loss of $410 for the 1996 quarter:
- loss of premium revenues recognized from the Company's Special Health
Medicaid product upon assignment of the Medicaid contract -- gross
margin of $688 generated during the 1996 quarter;
- decreased self-funded membership, as discussed below;
- continuation of industry-wide health care cost inflation trends; and
9
<PAGE> 10
- gross margin contributed by the Company's managed Medicare ("Senior
Health") product and revenues from the Workers' Compensation product,
both of which began covering their first member/covered life in March
1997, more than offset by approximately $3,090 of administrative
expenses related to such new products and the continuing expansion
efforts into the Dayton, Ohio service area.
It is anticipated that these new products, as well as the service area
expansion, will continue to negatively impact operating income for the
year ending December 31, 1997, offsetting otherwise anticipated
profitable operations for the Cincinnati Commercial Health Plan.
SIX MONTHS ENDED JUNE 30, 1997
During the six months ended June 30, 1997 (the "1997 period"), the Company
generated net income of $1,530, compared to $1,705 in the corresponding prior
year period (the "1996 period"), and operating losses of $190 and $3,954 were
reported in each of the respective periods. These comparative results can
primarily be attributed to the year-to-date effects of the factors previously
noted in the discussion of quarterly results.
10
<PAGE> 11
RESULTS OF OPERATIONS
- ---------------------
The following table sets forth selected operating data, expressed as a
percentage of total operating revenues and/or on a PMPM basis, selected member
data and medical-expense ratios:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
OPERATING REVENUES:
Premiums 94.6% 94.6% 94.5% 94.9%
Management services fees 3.9 4.6 4.6 4.6
Other 1.5 .8 .9 .5
----- ----- ----- -----
Total 100.0 100.0 100.0 100.0
----- ----- ----- -----
OPERATING EXPENSES:
Health care services 78.1 81.8 78.9 83.4
Selling, general and administrative 19.5 18.7 21.2 19.3
----- ----- ----- -----
Total 97.6 100.5 100.1 102.7
----- ----- ----- -----
Operating income (loss) 2.4 (.5) (.1) (2.7)
Investment income, net 1.7 1.3 1.8 1.4
Gain on assignment of Medicaid
contract -- 6.1 -- 3.1
----- ----- ----- -----
Income before income taxes 4.1 6.9 1.7 1.8
Provision for income taxes 1.6 1.4 .6 .7
----- ----- ----- -----
Net income 2.5% 5.5% 1.1% 1.1%
===== ===== ===== =====
MEDICAL-EXPENSE RATIO* 82.6% 86.5% 83.5% 87.9%
MEMBER MONTHS FOR THE PERIOD:
Prepaid
Commercial 587,421 571,873 1,171,947 1,142,941
Medicare 952 -- 952 --
Medicaid -- 38,684 -- 77,496
----------- ----------- ----------- -----------
588,373 610,557 1,172,899 1,220,437
Self-funded 149,192 259,387 381,613 520,992
----------- ----------- ----------- -----------
Total 737,565 869,944 1,554,512 1,741,429
=========== =========== =========== ===========
PMPM DATA:
Premium revenue
Commercial $ 119.01 $ 114.39 $ 118.34 $ 114.19
Medicare 381.52 -- 381.52 --
Medicaid -- 138.53 -- 138.97
Management services revenue 19.18 13.26 17.54 13.17
Health care services expense 98.61 100.31 99.00 101.75
Selling, general and
administrative expense 19.63 16.12 20.05 16.47
</TABLE>
* Health care services expense as a percentage of premiums.
11
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THREE MONTHS ENDED JUNE 30, 1997 COMPARED TO THREE MONTHS ENDED JUNE 30, 1996
- -----------------------------------------------------------------------------
PREMIUM REVENUE -
The 0.7% decrease in premium revenue during the 1997 quarter results primarily
from the assignment of the Company's Special Health Medicaid contract. Excluding
Medicaid premium revenues of $5,359 from the 1996 quarter, premium revenues for
the 1997 quarter increased 7.4% over the same period last year. This increase is
primarily attributable to a 2.7% increase in prepaid commercial member months
and a 4.0% increase in the weighted average PMPM premium for such products,
reflecting a recently improved pricing environment compared to flat or
decreasing pricing during 1996. Additionally, the Company recorded premium
revenues of $363 during the second quarter of 1997 related to its new Senior
Health Medicare product.
MANAGEMENT SERVICES REVENUE -
The 16.8% decrease in management services revenue from self-funded employer
groups results primarily from the combined effects of the March 31, 1997
expiration of the Company's administrative services management agreement with a
significant employer group and an approximate 22% decrease in the membership of
a large self-funded employer group which, consistent with the July 1996
announcement of its multi-year renewal commitment, opted to offer its employees,
as an additional option, a competitor's managed care plan as of January 1, 1997.
The impact of the loss of self-funded membership was partially offset by 1997
rate increases, as evidenced by the 44.6% increase in management services
revenue on a PMPM basis.
OTHER OPERATING REVENUE -
The nearly two-fold increase in other operating income is attributable to 1) the
$521 earned during the 1997 quarter for processing the run-out of claims for the
former self-funded employer group referred to above; 2) $113 of revenue
generated in the 1997 quarter by the Company's new Workers' Compensation
product; and 3) $175 earned in connection with the risk sharing agreement with
one of the Company's large self-funded employer groups. The 1996 quarter
included $540 earned in connection with the risk sharing agreement with the
Company's pharmacy vendor versus $189 earned in the 1997 quarter.
HEALTH CARE SERVICES EXPENSE -
The 5.3% decrease in total health care services expense during the 1997 quarter
reflects 1) the assignment of the Medicaid contract, which had higher PMPM
medical expenses relative to commercial membership; 2) a .3% decrease in
physician expenses on a PMPM basis; 3) a 7.1% decrease in hospital expenses on a
PMPM basis; and 4) an 8.2% increase in pharmacy expenses on a PMPM basis,
resulting primarily from continued industry-wide drug cost inflation and
slightly higher utilization levels.
In addition to the Medicaid contract assignment, the decreases in PMPM physician
and hospital expenses result in large part from the net effects of:
Physician
---------
- increased health care professional services utilization levels;
- decreased average cost per service resulting from changes in the mix
of service provided; and
- a reduction in the estimated amount incurred in connection with the
Company's risk/reward sharing arrangements with health care
professionals.
Hospital
--------
- increased utilization and decreased cost per service;
- a decrease in hospital service reimbursement rates paid to certain
core hospitals;
- an increase in amounts earned in connection with the Company's
hospital risk/reward sharing arrangements, due to the hospitals'
performance against established cost of hospital services and
quality targets; and
12
<PAGE> 13
- a refinement downward in the 1997 quarter of the Company's estimates
of hospital claims expense recorded prior to the quarter.
As a result of the 1.7% decrease in health care services expense on a PMPM
basis, in conjunction with the 3.0% increase in the weighted average PMPM
premium, the Company's medical-expense ratio decreased to 82.6% in the 1997
quarter from 86.5% in the 1996 quarter.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES -
The 3.3% increase in expenses for selling, general and administrative
costs in the 1997 quarter reflects the continued impact of expenses incurred for
investment in new products and geographic expansion, including approximately
$3,090 of expenses incurred in connection with the previously discussed Senior
Health and Workers' Compensation products and expansion into the Dayton service
area -- an approximate $2,515 increase in such expenses over the 1996 quarter.
Increased expenses are substantially comprised of 1) advertising and printed
materials, primarily related to the new products and service area expansion; and
2) higher computer software amortization. Partially offsetting these increases
were reductions in 1) compensation, reflecting the net effects of an approximate
4% reduction in employees since the 1996 quarter, salary increases in the normal
course of business and a shift in the relative mix of the Company's workforce;
and 2) a refinement downward of certain expenses estimated in prior periods.
INVESTMENT INCOME -
During the 1997 quarter, the Company experienced a 28.3% increase in investment
income compared to the 1996 quarter. This period-over-period increase can
primarily be attributed to an increase in the average outstanding cash, cash
equivalent and investment portfolio balance, due largely to the proceeds from
the May 1, 1996 stock offering and the June 30, 1996 assignment of the Special
Health Medicaid contract and, to a lesser extent, higher short-term interest
rates in 1997.
INCOME TAX EXPENSE -
Income tax expense has been recorded at the rate applicable to the Company,
currently estimated at an effective tax rate of approximately 38%. This rate may
ultimately be adjusted based upon 1997 full year results.
SIX MONTHS ENDED JUNE 30, 1997 COMPARED TO SIX MONTHS ENDED JUNE 30, 1996
- -------------------------------------------------------------------------
With the exception of certain factors noted in the analysis of health care
services expense below, the majority of the factors discussed in the
quarter-to-quarter analysis were also the primary factors contributing to the
results for the 1997 period, as compared to the 1996 period. Accordingly, the
trends between the 1997 and 1996 year-to-date results are consistent in all
material respects with the previously analyzed quarter-to-quarter trends.
HEALTH CARE SERVICES EXPENSE -
The 6.5% decrease in total health care services expense during the 1997 period
reflects 1) the assignment of the Medicaid contract, which had higher PMPM
medical expenses relative to commercial membership; 2) a 1.8% decrease in
physician expenses on a PMPM basis; 3) a 9.2% decrease in hospital expense on a
PMPM basis; and 4) a 12.7% increase in pharmacy expenses on a PMPM basis,
resulting primarily from continued industry-wide drug cost inflation and
slightly higher utilization levels.
13
<PAGE> 14
In addition to the Medicaid contract assignment, the decreases in PMPM physician
and hospital expenses result in large part from the net effects of:
Physician
---------
- increased health care professional services utilization levels;
- decreased average cost per service resulting from changes in the mix
of service provided; and
- a reduction in the estimated amount incurred in connection with the
Company's risk/reward sharing arrangements with health care
professionals.
Hospital
--------
- increased utilization and decreased cost per service;
- a decrease in hospital service reimbursement rates paid to certain
core hospitals;
- a year-to-date decrease in amounts earned in connection with the
Company's hospital risk/reward sharing arrangements, due to the
hospitals' performance against established cost of hospital services
and quality targets; and
- a refinement downward in the 1997 period of the Company's prior
years' estimates of hospital claims expense.
As a result of the 2.7% decrease in health care services expense on a PMPM
basis, in conjunction with the 2.4% increase in the weighted average PMPM
premium, the Company's medical-expense ratio decreased to 83.5% in the 1997
period from 87.9% in the 1996 period.
FINANCIAL CONDITION
- -------------------
Net cash totaling $4,251 was used in operations during the first six months of
1997, resulting primarily from the net activity in certain of the Company's
balance sheet components since year-end 1996. Most significant were 1) a $5,480
net decrease in medical costs payable, reflecting the combined impact of claims
payments made since year-end 1996 and the refinement downward in 1997 of the
Company's prior years' estimates of hospital claims; 2) a $3,613 decrease in
premiums receivables, due in large part to the timing of receiving payments of
amounts due; and 3) a $3,268 net decrease in provider risk pool liabilities,
reflecting the combined impact of the Company's payment during the 1997 period
of amounts owed under the risk/reward sharing arrangements for 1996 and the
year-to-date accumulation of amounts owed under such arrangements for the
current year. In addition, $4,161 of cash was used by investing activities
during the six-month period, reflecting the net cash impact of investment
portfolio transactions and capital expenditures.
As of June 30, 1997, the Company's investment portfolio was comprised of debt
securities (75.3%), equity-based mutual funds (14.0%) and fixed income mutual
funds (10.7%), all of which are available to meet current obligations and
classified as securities available-for-sale in the accompanying Consolidated
Balance Sheet. Favorable market conditions resulted in unrealized gains on the
investment portfolio totaling $888, net of taxes, as of June 30, 1997 compared
to unrealized losses totaling $21 as of December 31, 1996. 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 the $15,000 available under its debt
facility will be sufficient to fund its liquidity needs for at least the next
twelve months.
14
<PAGE> 15
CAUTIONARY STATEMENT
- --------------------
The information set forth above may include "forward-looking" information, as
defined in the Private Securities Litigation Reform Act of 1995. The CAUTIONARY
STATEMENT filed by the Company on November 12, 1996 as part of its Form 10-Q for
the period ended September 30, 1996 is incorporated herein by reference, and
investors are specifically referred to such CAUTIONARY STATEMENT for a
discussion of factors that could affect the Company's operations and
"forward-looking" statements contained herein.
15
<PAGE> 16
PART II - OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- -----------------------------------------------------------
(a) The Annual Meeting of Shareholders of the Company was held on May 14, 1997.
(b) Not Applicable.
(c) (i) Three nominees were elected to the Board of Directors at the 1997
Annual Meeting.
Donald E. Hoffman was elected by a vote of 13,997,287 for and 30,750
withheld.
Janet B. Reid, Ph.D. was elected by a vote of 13,988,077 for and 39,960
withheld.
Michael Schmerler, M.D. was elected by a vote of 14,011,027 for and
17,010 withheld.
(ii) The shareholders confirmed the selection of Arthur Andersen LLP as the
Company's independent accountants for 1997. There were 14,020,427 votes
cast in favor, 4,710 votes cast in opposition and 2,900 abstentions.
(d) Not Applicable.
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 June 3, 1997 reporting the signing of
the definitive Agreement and Plan of Merger with Louisville, Kentucky-based
Humana Inc. See Note 3 of Notes to Consolidated Financial Statements.
16
<PAGE> 17
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: August 13, 1997 By: /s/ Juan M. Fraiz
-------------------------------
Juan M. Fraiz
Vice President and Chief Financial
Officer (Principal Financial Officer)
17
<PAGE> 1
EXHIBIT 11
CHOICECARE CORPORATION
COMPUTATION OF EARNINGS PER SHARE
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
PRIMARY EARNINGS PER SHARE:
- ---------------------------
Net income $ 1,892 $ 4,099 $ 1,530 $ 1,705
======= ======= ======= =======
Shares used in calculation of earnings per share:
Weighted average common shares outstanding 14,853 14,229 14,853 13,865
Dilutive effect of assumed exercise of
stock options 409 -- 204 --
------- ------- ------- -------
Weighted average common and common
equivalent shares outstanding 15,262 14,229 15,057 13,865
======= ======= ======= =======
Earnings per common and common equivalent share -
primary $ .12 $ .29 $ .10 $ .12
======= ======= ======= =======
FULLY DILUTED EARNINGS PER SHARE:
- ---------------------------------
Net income $ 1,892 $ 4,099 $ 1,530 $ 1,705
======= ======= ======= =======
Shares used in calculation of earnings per share:
Weighted average common shares outstanding 14,853 14,229 14,853 13,865
Dilutive effect of assumed exercise of
stock options 409 -- 409 --
------- ------- ------- -------
Weighted average common and common
equivalent shares outstanding 15,262 14,229 15,262 13,865
======= ======= ======= =======
Earnings per common and common equivalent share -
fully diluted $ .12 $ .29 $ .10 $ .12
======= ======= ======= =======
</TABLE>
18
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS AS OF AND FOR THE SIX MONTH PERIOD ENDED JUNE 30, 1997 AND
IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<CASH> 30,185
<SECURITIES> 75,101
<RECEIVABLES> 4,270
<ALLOWANCES> 68
<INVENTORY> 0
<CURRENT-ASSETS> 126,663
<PP&E> 18,714
<DEPRECIATION> 10,044
<TOTAL-ASSETS> 141,526
<CURRENT-LIABILITIES> 76,313
<BONDS> 0
<COMMON> 12,014
0
0
<OTHER-SE> 40,977
<TOTAL-LIABILITY-AND-EQUITY> 141,526
<SALES> 0
<TOTAL-REVENUES> 147,091
<CGS> 0
<TOTAL-COSTS> 116,112
<OTHER-EXPENSES> 31,169
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 2,469
<INCOME-TAX> 939
<INCOME-CONTINUING> 1,530
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,530
<EPS-PRIMARY> .10
<EPS-DILUTED> .10
</TABLE>
