<PAGE> 1
===============================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K/A
AMENDMENT NO. 1
TO
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
DATE OF REPORT: June 1, 1995
(Date of the Earliest Event Reported)
HEALTHSOURCE, INC.
(Exact name of Registrant as specified in its charter)
New Hampshire 1-11538 02-0387748
(State or other (Commission File (I.R.S. Employer
jurisdiction of Number) Identification Number)
incorporation)
Two College Park Drive
Hooksett, New Hampshire 03106
(Address of principal executive offices) (Zip Code)
603/268-7000
(Registrant's Telephone Number, including area code)
==============================================================================
<PAGE> 2
The undersigned registrant hereby amends the following items, financial
statements, exhibits or other portions of its Current Report on Form 8-K dated
June 1, 1995, as set forth below (all capitalized terms used and not otherwise
defined herein having the meaning specified in such Form 8-K):
Item 7. FINANCIAL STATEMENTS AND EXHIBITS.
(a) Financial statements of businesses acquired.
Audited statements of financial condition for the Acquired
Business at December 31, 1994 and 1993 with the related
statements of income, owner's equity and cash flows for the
fiscal years ended December 31, 1994, 1993 and 1992. Unaudited
condensed statement of financial condition for the Acquired
Business at March 31, 1995 with the related statements
of income and cash flow for the quarterly period then ended.
(b) Pro forma financial information.
Pro forma condensed consolidated statement of operations for
the Company for the fiscal year ended December 31, 1994. Pro
forma condensed consolidated balance sheet for the Company at
March 31, 1995 with the related pro forma condensed
consolidated statement of operations for the quarterly period
ended March 31, 1995.
(c) Exhibits.
23.2 Consent of Ernst & Young LLP regarding audited financial
statements.
<PAGE> 3
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 hereunto duly authorized.
HEALTHSOURCE, INC.
By: /s/ Thomas M Congoran
------------------------------------
Thomas M. Congoran
Chief Financial Officer
Dated: August 4, 1995
3
<PAGE> 4
Audited Financial Statements
Provident Life and Accident Insurance
Company of America and Subsidiaries'
Medical Services Operations
December 31, 1994
<PAGE> 5
AUDITED FINANCIAL STATEMENTS
PROVIDENT LIFE AND ACCIDENT INSURANCE COMPANY OF AMERICA AND SUBSIDIARIES'
MEDICAL SERVICES OPERATIONS
<TABLE>
<CAPTION>
DECEMBER 31, 1994
<S> <C>
Report of Independent Auditors.................................................1
Statements of Financial Condition..............................................2
Statements of Income...........................................................4
Statements of Owner's Equity...................................................5
Statements of Cash Flows.......................................................6
Notes to Financial Statements..................................................7
</TABLE>
<PAGE> 6
[ERNST & YOUNG LLP LETTERHEAD]
Report of Independent Auditors
We have audited the accompanying statements of financial condition of Provident
Life and Accident Insurance Company of America and Subsidiaries' Medical
Services Operations as of December 31, 1994 and 1993, and the related
statements of income, owner's equity, and cash flows for each of the three
years in the period ended December 31, 1994. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Provident Life and Accident
Insurance Company of America and Subsidiaries' Medical Services Operations at
December 31, 1994 and 1993, and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 1994, in
conformity with generally accepted accounting principles.
As discussed in Note 1 to the financial statements, during 1994 the Company
changed its method of accounting for certain debt and equity securities.
Ernst & Young LLP
Chattanooga, Tennessee
May 12, 1995
except for Note 8, as to which the date is
June 1, 1995
-1-
<PAGE> 7
STATEMENTS OF FINANCIAL CONDITION
Provident Life and Accident Insurance Company of America and Subsidiaries'
Medical Services Operations
<TABLE>
<CAPTION>
December 31
1994 1993
(in thousands of dollars)
-------------------------
<S> <C> <C>
Assets
Investment Pool -- Note 1 $215,530 $233,863
Cash and Bank Deposits 5,482 5,948
Accounts Receivable 50,738 48,643
Premiums Receivable 18,734 20,712
Accrued Investment Income 3,987 4,182
Property and Equipment -- at cost
less accumulated depreciation 26,844 26,471
Intangible Assets 102,837 113,989
Miscellaneous 326 --
------- --------
Total Assets $424,478 $453,808
-------- --------
</TABLE>
See notes to financial statements.
-2-
<PAGE> 8
STATEMENTS OF FINANCIAL CONDITION -- Continued
Provident Life and Accident Insurance Company of America and Subsidiaries'
Medical Services Operations
<TABLE>
<CAPTION>
December 31
1994 1993
(in thousands of dollars)
-------------------------
<S> <C> <C>
Liabilities and Owner's Equity
Policy and Contract Benefits $ 78,275 $ 89,550
Unearned Premiums 910 --
Experience Rating Refunds 46,190 56,349
Policyholders' Funds 25,971 11,039
Deferred Federal Income Tax Liability 22,060 23,835
Cash Overdrafts 40,087 29,064
Deposits from Uninsured Accounts 11,025 11,711
Other Liabilities 8,033 7,301
-------- --------
Total Liabilities 232,551 228,849
-------- --------
Commitments and Contingent Liabilities -- Note 7
Owner's Equity
Allocated Capital 197,087 224,959
Net Unrealized Loss on Securities -- Note 1 (5,160) --
-------- --------
Total Owner's Equity 191,927 224,959
-------- --------
Total Liabilities and Owner's Equity $424,478 $453,808
======== ========
</TABLE>
See notes to financial statements.
-3-
<PAGE> 9
STATEMENTS OF INCOME
Provident Life and Accident Insurance Company of America and Subsidiaries'
Medical Services Operations
<TABLE>
<CAPTION>
Year Ended December 31
1994 1993 1992
(in thousands of dollars)
------------------------------------------
<S> <C> <C> <C>
Revenue:
Premium Income $238,203 $261,762 $371,890
Net Investment Income 18,131 21,938 21,445
Net Realized Investment Gains 332 509 715
ASO Fees 108,949 110,554 112,261
Other Income 28,393 26,264 24,482
-------- -------- --------
Total Revenue 394,008 421,027 530,793
-------- -------- --------
Benefits and Expenses
Policy and Contract Benefits 178,373 212,191 291,106
Change in Reserves 1,652 (63) 2,804
Salaries 93,176 92,747 93,934
Other Operating Expenses 108,081 110,184 134,808
-------- -------- --------
Total Benefits and Expenses 381,282 415,059 522,652
-------- -------- --------
Income Before Federal Taxes 12,726 5,968 8,141
------- -------- ----------
Federal Income Taxes
Current 3,386 8,825 1,807
Deferred 1,004 (6,820) 812
------- -------- ---------
Total Federal Income Taxes 4,390 2,005 2,619
-------- -------- ---------
Net Income $ 8,336 $ 3,963 $ 5,522
========= ======== =========
</TABLE>
See notes to financial statements.
-4-
<PAGE> 10
STATEMENTS OF OWNER'S EQUITY
Provident Life and Accident Insurance Company of America and Subsidiaries'
Medical Services Operations
<TABLE>
<CAPTION>
Year Ended December 31
1994 1993 1992
(in thousands of dollars)
--------------------------------------
<S> <C> <C> <C>
Allocated Capital
Balance at Beginning of Year $224,959 $233,172 $258,710
Return of Allocated Capital (36,208) (12,176) (31,060)
Net Income 8,336 3,963 5,522
-------- -------- --------
Balance at End of Year 197,087 224,959 233,172
-------- -------- --------
Net Unrealized Loss on Securities
Balance at Beginning of Year -- -- --
Adjustment for the Application of SFAS 115--Note 1 9,258 -- --
Change During Year (14,418) -- --
--------- -------- --------
Balance at End of Year (5,160) -- --
--------- -------- --------
Total Owner's Equity $191,927 $224,959 $233,172
======== ======== ========
</TABLE>
See notes to financial statements.
-5-
<PAGE> 11
STATEMENTS OF CASH FLOWS
Provident Life and Accident Insurance Company of America and Subsidiaries'
Medical Services Operations
<TABLE>
<CAPTION>
Year Ended December 31
1994 1993 1992
(in thousands of dollars)
-------------------------------------------
<S> <C> <C> <C>
Cash Flows from Operating Activities
Net Income $ 8,336 $ 3,963 $ 5,522
Adjustments to Reconcile Net Income to Net Cash
Provided by Operating Activities
Depreciation and Amortization 16,881 16,304 14,087
Net Realized Investment Gains (332) (509) (715)
Accounts Receivable (2,095) 22,242 (13,850)
Premiums Receivable 1,978 21,229 2,432
Accrued Investment Income 195 (46) 445
Insurance Reserves and Liabilities (5,592) (20,597) (30,374)
Federal Income Taxes 1,004 (6,733) 725
Change in Cash Overdrafts 11,023 23,885 5,179
Deposits from Uninsured Accounts (686) (10,383) 12,115
Other 406 (10,248) 2,587
-------- -------- --------
Net Cash Provided (Used) by Operating Activities 31,118 39,107 (1,847)
-------- -------- --------
Cash Flows from Investing Activities
Proceeds from Sales of Investment Pool 15,204 6,160 32,032
Proceeds from Maturities of Investment Pool 26,522 67,473 45,094
Purchase of Investment Pool (31,000) (92,520) (50,779)
Purchase of Property and Equipment (6,102) (6,439) (2,370)
-------- -------- --------
Net Cash Provided (Used) by Investing Activities 4,624 (25,326) 23,977
-------- -------- --------
Cash Flows from Financing Activities
Return of Allocated Capital (36,208) (12,176) (31,060)
-------- -------- --------
Net Cash Used by Financing Activities (36,208) (12,176) (31,060)
-------- -------- --------
Net Increase (Decrease) in Cash and Bank Deposits (466) 1,605 (8,930)
Cash and Bank Deposits at Beginning of Year 5,948 4,343 13,273
-------- -------- --------
Cash and Bank Deposits at End of Year $ 5,482 $ 5,948 $ 4,343
======== ======== ========
</TABLE>
See notes to financial statements.
-6-<PAGE> 12
NOTES TO FINANCIAL STATEMENTS
Provident Life and Accident Insurance Company of America and Subsidiaries'
Medical Services Operations
NOTE 1 -- Significant accounting policies
BASIS OF PRESENTATION: The accompanying financial statements have been prepared
on the basis of generally accepted accounting principles. Such accounting
principles differ from statutory accounting practices prescribed or permitted by
state regulatory authorities. The financial statements include the accounts of
the Medical Services Operations (Medical Services) of the Group Department of
Provident Life and Accident Insurance Company of America and Subsidiaries (the
Company). Medical Services is not a separate legal entity but is an operating
division of the Group Department of the Company's wholly-owned subsidiaries,
Provident Life and Accident Insurance Company and Provident Life and Casualty
Insurance Company. Medical Services also includes the operations of Provident
Health Care Plans, Inc. (PHCP), the Company's subsidiary involved in the
development and management of health maintenance organizations.
OPERATIONS: Medical Services does business in the fifty states, the District of
Columbia, Puerto Rico, and Canada. Medical Services includes those products
which involve the delivery of healthcare to employee groups. As insurance
companies, Provident Life and Accident Insurance Company and Provident Life and
Casualty Insurance Company are subject to regulation by insurance regulatory
bodies which, among other things, requires the maintenance of minimum capital
and surplus and places restrictions on the amount of dividends which can be
paid without regulatory approval.
INVESTMENTS: The investment pool reported in the statements of financial
condition represents Medical Services' portion of investments owned by the Group
Department of the Company and represents the invested assets necessary to
support the liabilities and allocated capital of Medical Services. Individual
investments of the Group Department are not specifically allocated to any
operating division of the Group Department but are held and managed to support
the operations of the Group Department as a whole. The Medical Services' portion
of Group Department investments is 28.1 percent and 29.0 percent at December 31,
1994 and 1993, respectively. Net investment income and net realized investment
gains reported in the statements of income represent Medical Services' pro-rata
share of net investment income and net realized investment gains of the Group
Department. Amounts reported in Notes 2 and 3 represent total Group Department
investments. The investments included in the investment pool are reported as
follows:
Available-for-Sale Fixed Maturity Securities are reported at fair value.
Hold-to-Maturity Fixed Maturity Securities are generally reported at amortized
cost.
Equity Securities are reported at fair value.
Mortgage Loans are generally carried at the unpaid balance.
Real Estate other than foreclosed real estate is carried at cost less
accumulated depreciation which is calculated using principally the straight-line
method. Foreclosed real estate is carried at lower of cost or fair value, giving
consideration to current occupancy rates and economic conditions, less
accumulated depreciation from the date of foreclosure.
Short-term Investments are carried at cost.
Fixed maturity securities include bonds and redeemable preferred stocks. Equity
securities include common stocks and nonredeemable preferred stocks. Fixed
maturity and equity securities not bought and held for the purpose of selling
in the near term but for which the Company does not have the positive intent
and ability to hold to maturity are classified as available-for-sale. Fixed
maturity securities that the Company has the positive intent and ability to
hold to maturity are classified as held-to-maturity. The Company determines the
appropriate classification of fixed maturity securities at the time of
purchase.
-7-<PAGE> 13
NOTES TO FINANCIAL STATEMENTS - Continued
Provident Life and Accident Insurance Company of America and Subsidiaries'
Medical Services Operations
NOTE 1 - Significant Accounting Policies - Continued
Realized investment gains and losses, which are reported as a component of
revenue in the statements of income, are based upon specific identification of
the investments sold. At the time a decline in the value of an investment is
determined to be other than temporary, a provision for loss is recorded which
is included in realized investment gains and losses. Unrealized holding gains
and losses, resulting from carrying available-for-sale securities at fair
value, are reported in owner's equity, net of deferred tax credits of
$2,779,000 at December 31, 1994.
PROPERTY AND EQUIPMENT: Property and equipment is depreciated on the
straight-line method over its estimated useful life. The accumulated
depreciation for property and equipment was $24,655,000 and $18,926,000 as of
December 31, 1994 and 1993, respectively.
INTANGIBLE ASSETS: Intangible assets have been recorded in connection with the
acquisition of the health insurance operations of an insurance company. The
balance is amortized on the straight-line method over the estimated life of the
insurance in force. The amortization periods do not exceed 20 years for
large-case group health business and 10 years for small-case group health
operations. Accumulated amortization was $77,683,000 and $66,531,000 as of
December 31, 1994 and 1993, respectively.
REVENUE RECOGNITION: The amounts collected from policyholders are recognized as
premium income over the premium paying period and are reported net of
experience rating refunds and unearned premiums. Policyholders' funds represent
funds deposited by contract holders and are not included in revenue.
POLICY AND CONTRACT BENEFITS: Policy and contract benefits are based on
reported losses and estimates of incurred but not reported losses and related
claim adjustment expenses. Those estimates are subject to the effects of trends
in claim severity and frequency. Although considerable variability is inherent
in such estimates, management believes that such reserves are adequate. These
estimates are continually reviewed and adjusted as necessary as experience
develops or new information becomes known; such adjustments are included in
current operations.
POLICYHOLDERS' FUNDS: Policyholders' funds represent customer deposits plus
interest credited at contract rates.
OTHER OPERATING EXPENSES: Medical Services is provided certain administrative,
actuarial, and investment services from the Company. These services are
provided at cost.
FEDERAL INCOME TAXES: Deferred taxes have been recorded for significant
temporary differences between financial statement income and taxable income.
CHANGES IN ACCOUNTING PRINCIPLES:
Statement of Financial Accounting Standards No. 115 (SFAS 115), Accounting for
Certain Investments in Debt and Equity Securities.
SFAS 115 addresses the accounting and reporting for investments in fixed
maturity securities and for equity securities with readily determinable fair
values. SFAS 115 requires these investments to be classified into three
categories and accounted for as follows:
(1) Fixed maturity securities that the Company has the positive intent
and ability to hold to maturity are classified as held-to-maturity
securities and reported at amortized cost.
(2) Fixed maturity and equity securities that are bought and held
principally for the purpose of selling in the near term are
classified as trading securities and reported at fair value, with
changes in unrealized holding gains and losses included in income.
-8-
<PAGE> 14
NOTES TO FINANCIAL STATEMENTS -- Continued
Provident Life and Accident Insurance Company of America and Subsidiaries'
Medical Services Operations
NOTE 1 -- Significant Accounting Policies -- Continued
(3) Fixed maturity and equity securities classified neither as
held-to-maturity securities nor as trading securities are classified
as available-for-sale securities and reported at fair value, with
unrealized holding gains and losses reported as a separate component
of owner's equity.
The issuance of SFAS 115 changed the previous definition of what constituted a
security being held-to-maturity. Due to the significant restrictions placed on
securities classified as held-to-maturity, the Company believes that prudent
asset management requires a major portion of debt securities to be classified as
available-for-sale.
The Company adopted the provisions of SFAS 115 as of January 1, 1994, and
classified over 99 percent of the Group Department's fixed maturity securities
as available-for-sale with the remainder reported as held-to-maturity. In
accordance with SFAS 115, prior period financial statements have not been
restated to reflect the change in accounting principle.
The adjustments for the Group Department related to the adoption of SFAS 115
are as follows:
<TABLE>
<CAPTION>
December 31 January 1
1994 1994
(in thousands of dollars)
---------------------------------
<S> <C> <C>
Fair Value Adjustment to Fixed Maturity Securities $(27,543) $54,780
Less Deferred Federal Income Taxes (9,640) 19,173
-------- -------
Net Unrealized Gain (Loss) on Securities $(17,903) $35,607
======== =======
</TABLE>
The changes required by SFAS 115 did not result in any changes to the net
income of Medical Services. The Company has not changed its investment policies
or strategies as a result of the implementation of the new accounting
requirements.
NOTE 2 -- FAIR VALUES OF FINANCIAL INSTRUMENTS
The carrying amounts and fair values of the Group Department's financial
instruments are as follows:
<TABLE>
<CAPTION>
December 31
(in thousands of dollars)
--------------------------------------------------------------------
1994 1993
Carrying Fair Carrying Fair
Amount Value Amount Value
----------------------------- -----------------------------
<S> <C> <C> <C> <C>
Assets
Fixed Maturity Securities
Available-for-Sale $674,928 $674,928 $ -- $ --
Held-to-Maturity 3,565 3,486 708,158 763,593
Equity Securities 1,616 1,616 1,472 1,472
Mortgage Loans 48,716 49,107 52,270 56,935
Short-term Investments 13,719 13,719 24,149 24,149
Cash and Bank Deposits 5,808 5,808 6,863 6,863
</TABLE>
-9-
<PAGE> 15
NOTES TO FINANCIAL STATEMENTS -- Continued
Provident Life and Accident Insurance Company of America and Subsidiaries'
Medical Services Operations
Note 2 -- Fair Values of Financial Instruments -- Continued
The following methods and assumptions were used in estimating the fair values
of financial instruments:
Fixed Maturity Securities: Fair values for fixed maturity securities are based
on quoted market prices, where available. For fixed maturity securities not
actively traded, fair values are estimated using values obtained from
independent pricing services or, in the case of private placements, are
estimated by discounting expected future cash flows using a current market rate
applicable to the yield, credit quality, and maturity of the investments. See
Note 3 for the amortized cost and fair values of securities by security type
and by maturity date.
Equity Securities: Fair values for equity securities are based on quoted
market prices.
Mortgage Loans: Fair values for mortgage loans are estimated using discounted
cash flow analyses, using interest rates currently being offered for similar
loans to borrowers with similar credit ratings. Loans with similar
characteristics are aggregated for purposes of the calculations.
Short-term Investments and Cash and Bank Deposits: Carrying amounts for
short-term investments and cash and bank deposits approximate fair value.
Note 3 -- Investments
Securities
The amortized cost and fair values of the Group Department's fixed maturity
securities by security type are as follows:
<TABLE>
<CAPTION>
December 31, 1994
(in thousands of dollars)
------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Values
------------------------------------------------
<S> <C> <C> <C> <C>
Available-for-Sale Securities
United States Government and
Government Agencies and Authorities $ 6,433 $ 71 $ 213 $ 6,291
Foreign Governments 1,590 37 84 1,543
Public Utilities 140,299 2,624 6,899 136,024
Mortgage-backed Securities 132,890 431 8,541 124,780
All Other Corporate Bonds 394,242 4,304 19,504 379,042
Redeemable Preferred Stocks 27,017 988 757 27,248
-------- ------ ------- -------
Total Fixed Maturity Securities 702,471 8,455 35,998 674,928
Equity Securities 2,688 -- 1,072 1,616
-------- ------ ------- --------
$705,159 $8,455 $37,070 $676,544
======== ====== ======= ========
Held-to-Maturity Securities
United States Government and
Government Agencies and Authorities $ 542 $ -- $ 3 $ 539
States, Municipalities, and Political Subdivisions 3,023 120 196 2,947
-------- ------ ------- --------
Total $ 3,565 $ 120 $ 199 $ 3,486
======== ====== ======= ========
</TABLE>
-10-
<PAGE> 16
NOTES TO FINANCIAL STATEMENTS -- Continued
Provident Life and Accident Insurance Company of America and Subsidiaries'
Medical Services Operations
Note 3 -- Investments -- Continued
<TABLE>
<CAPTION>
December 31, 1993
(in thousands of dollars)
-------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------------------------------------------------
<S> <C> <C> <C> <C>
United States Government and
Government Agencies and Authorities $ 458 $ 179 $ -- $ 637
States, Municipalities, and Political
Subdivisions 3,586 440 3 4,023
Foreign Governments 1,643 228 -- 1,871
Public Utilities 143,239 14,556 363 157,432
Mortgage-backed Securities 167,295 4,416 367 171,344
All Other Corporate Bonds 360,816 34,545 522 394,839
Redeemable Preferred Stocks 31,121 2,405 79 33,447
-------- ------- ----- --------
Total Fixed Maturity Securities $708,158 $56,769 $1,334 $763,593
======== ======= ====== ========
Equity Securities $ 2,231 $ 42 $ 801 $ 1,472
======== ======= ====== ========
</TABLE>
The amortized cost and fair values of the Group Department's fixed maturity
securities by maturity date are shown below. The maturity dates have not been
adjusted for possible calls or prepayments.
<TABLE>
<CAPTION>
December 31, 1994
(in thousands of dollars)
-------------------------
Amortized Fair
Cost Value
-------------------------
<S> <C> <C>
Available-for-Sale Securities
1 year or less $ 29,722 $ 30,133
Over 1 year through 5 years 103,593 103,664
Over 5 years through 10 years 300,409 280,917
Over 10 years 135,857 135,434
-------- --------
569,581 550,148
Mortgage-backed Securities 132,890 124,780
-------- --------
$702,471 $674,928
======== ========
Held-to-Maturity Securities
1 year or less $ 578 $ 431
Over 1 year through 5 years 1,147 1,179
Over 5 years through 10 years 1,298 1,337
Over 10 years 542 539
-------- --------
$ 3,565 $ 3,486
======== ========
</TABLE>
At December 31, 1994, the Group Department's investment in
below-investment-grade fixed maturity securities (securities rated below Baa3
by Moody's Investors Services or an equivalent internal rating) was $45,096,000
or 5.9 percent of invested assets. The amortized cost of these securities was
$47,500,000. At December 31, 1994, the Group Department had on deposit with
regulatory authorities securities with a book value of $4,349,000 held for the
protection of policyholders.
-11-
<PAGE> 17
NOTES TO FINANCIAL STATEMENTS -- Continued
Provident Life and Accident Insurance Company of America and Subsidiaries'
Medical Services Operations
Note 3 -- Investments -- Continued
Mortgage Loans
The Group Department's distribution of mortgage loans by property type and by
the ten most significant states follows:
<TABLE>
<CAPTION>
December 31, 1994
(in thousands of dollars)
-------------------------
AMOUNT %
------ -----
<S> <C> <C>
Property Type
Industrial and Warehouse $13,624 28.0%
Retail 11,290 23.2
Healthcare 8,281 17.0
Hotel 6,537 13.4
Apartment 4,736 9.7
General Office Buildings 3,737 7.7
Other 511 1.0
------- -----
Total $48,716 100.0%
======= =====
State
California $15,744 32.3%
Wisconsin 6,554 13.4
Colorado 5,174 10.6
Georgia 3,785 7.8
Maryland 3,084 6.3
Ohio 2,815 5.8
Washington 1,356 2.8
Virginia 1,346 2.8
Iowa 1,317 2.7
Kansas 1,254 2.6
Other 6,287 12.9
------- -----
Total $48,716 100.0%
======= =====
</TABLE>
The mortgage loans are typically collateralized by the related properties, and
the loan to value ratios at the date of loan origination generally do not
exceed 75 percent.
There were no mortgage loans in the process of foreclosure at December 31, 1994.
Real Estate
Accumulated depreciation on the Group Department's allocated portion of the
Company's investment real estate portfolio was $3,182,000 and $2,341,000 as of
December 31, 1994 and 1993, respectively.
-12-
<PAGE> 18
NOTES TO FINANCIAL STATEMENTS -- Continued
Provident Life and Accident Insurance Company of America and Subsidiaries'
Medical Services Operations
Note 3 -- Investments -- Continued
Non-current Investments
There were no non-current investments at December 31, 1994. Bonds in default at
December 31, 1993 were $525,000, or .07% of Group Department invested assets.
Net Investment Income
Sources for net investment income are as follows:
<TABLE>
<CAPTION>
Year Ended December 31
1994 1993 1992
(in thousands of dollars)
-----------------------------------
<S> <C> <C> <C>
Fixed Maturity Securities $60,127 $67,536 $64,722
Equity Securities 98 104 110
Mortgage Loans 4,825 7,424 8,779
Real Estate 858 526 465
Short-term Investments 462 557 174
Other 239 993 --
------- ------- -------
Gross Investment Income 66,609 77,140 74,250
Investment Expenses 650 789 677
------- ------- -------
Net Investment Income -- Group Department $65,959 $76,351 $73,573
======= ======= =======
Net Investment Income -- Medical Services $18,131 $21,938 $21,445
======= ======= =======
</TABLE>
Realized Investment Gains and Losses
Realized investment gains (losses) are as follows:
<TABLE>
<CAPTION>
Year Ended December 31
1994 1993 1992
(in thousands of dollars)
-----------------------------------
<S> <C> <C> <C>
Fixed Maturity Securities $ 954 $1,709 $1,115
Equity Securities 29 -- (63)
Mortgage Loans -- -- (500)
Real Estate 225 62 1,900
------ ------ ------
Net Realized Investment Gains -- Group Department $1,208 $1,771 $2,452
====== ====== ======
Net Realized Investment Gains -- Medical Services $ 332 $ 509 $ 715
====== ====== ======
</TABLE>
-13-
<PAGE> 19
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
Provident Life and Accident Insurance Company of America and Subsidiaries'
Medical Services Operations
Note 3 -- Investments -- Continued
Proceeds from sales of Group Department fixed maturity and equity securities
and the related gross gains and losses realized on those sales are as follows:
<TABLE>
<CAPTION>
Year Ended December 31
1994 1993 1992
(in thousands of dollars)
---------------------------------------
<S> <C> <C> <C>
Proceeds from Sales
Available-for-Sale Fixed Maturity Securities $26,377 $ -- $ --
Held-to-Maturity Securities -- 20,483 22,998
Equity Securities 238 936 674
Gross Gains
Available-for-Sale Fixed Maturity Securities 1,126 -- --
Held-to-Maturity Securities -- 1,827 1,116
Equity Securities 29 -- 55
Gross Losses
Available-for-Sale Fixed Maturity Securities 172 -- --
Held-to-Maturity Securities -- 118 1
Equity Securities -- -- 118
</TABLE>
Note 4 -- Federal Income Taxes
A reconciliation of the income tax attributable to continuing operations
computed at U.S. federal statutory tax rates to the income tax expense as
included in the statements of income follows:
<TABLE>
<CAPTION>
Year Ended December 31
1994 1993 1992
------------------------------------
<S> <C> <C> <C>
Statutory Federal Income Tax Rate 35.0% 35.0% 34.0%
Tax-preferred Investment Income (0.8) (2.2) (2.4)
Other Items, Net 0.3 0.8 0.6
---- ---- ----
Effective Tax Rate 34.5% 33.6% 32.2%
==== ==== ====
</TABLE>
-14-
<PAGE> 20
NOTES TO FINANCIAL STATEMENTS -- Continued
Provident Life and Accident Insurance Company of America and Subsidiaries'
Medical Services Operations
NOTE 4 -- Federal Income Taxes -- Continued
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial statement
purposes and the amounts used for income tax purposes. Significant components
of Medical Services' deferred federal income tax liability are as follows:
<TABLE>
<CAPTION>
December 31
1994 1993
(in thousands of dollars)
-------------------------
<S> <C> <C>
Deferred Tax Liability
Bond Market Discount $ 417 $ 409
Cost of Business Acquired 35,993 39,896
------- -------
Total Deferred Tax Liability 36,410 40,305
------- -------
Deferred Tax Asset
Reserves 11,482 16,381
Realized Investment Gains and Losses 89 89
Unrealized Investment Gains and Losses 2,779 --
------- -------
Total Deferred Tax Asset 14,350 16,470
Valuation Allowance for Deferred
Tax Asset -- --
------- -------
Deferred Tax Asset after Allowance 14,350 16,470
------- -------
Net Deferred Tax Liability $22,060 $23,835
======= =======
</TABLE>
Medical Services is required to establish a valuation allowance for any portion
of the deferred tax asset that management believes will not be realized. In the
opinion of management, it is more likely than not that Medical Services
will realize the benefit of the deferred tax asset, and, therefore, no such
valuation allowance has been established.
The financial results of Medical Services are included in a consolidated tax
return filed by the Company. The total federal income tax liability of Medical
Services is determined on a separate return basis.
-15-
<PAGE> 21
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
Provident Life and Accident Insurance Company of America and Subsidiaries'
Medical Services Operations
NOTE 5 -- Retirement Benefits
PENSION PLAN
The Company provides a self-administered, defined benefit pension plan for
eligible salaried employees. The benefits are based on years of service and the
employee's highest consecutive five years of compensation. The Company's funding
policy is to contribute amounts to the plan sufficient to meet the minimum
funding requirements set forth in the Employee Retirement Income Security Act of
1974, plus such additional amounts as the Company may determine to be
appropriate. Plan assets are invested in two separate accounts of a subsidiary
of the Company, one of which invests in listed equity securities and the other
in corporate obligations and U.S. bonds, and in guaranteed fixed income group
annuity contracts of a subsidiary of the Company. Medical Services employees
participate in the plan sponsored by the Company. Pension expense for Medical
Services was $1,783,000, $2,250,000, and $2,910,000 for 1994, 1993, and 1992.
POSTRETIREMENT PLANS
The Company sponsors two defined benefit postretirement plans other than
pensions for full-time employees who have ten years of credited service with the
Company and have reached age 55. One plan provides medical and dental benefits,
and the other provides life insurance benefits. The postretirement health care
plan is contributory, with retiree contributions adjusted annually, and contains
other cost-sharing features such as deductibles and coinsurance. It is the
Company's expressed intent to increase the health care plan's retiree
contribution rate annually as the cost of health care increases. The life
insurance plan is noncontributory and is fully funded through a life insurance
contract issued by the Company. The health care plan is unfunded. Medical
Services employees participate in the plans sponsored by the Company. Medical
Services' portion of the Company's postretirement benefit cost for the health
care plan was $2,531,000, $2,748,000, and $3,102,000 in 1994, 1993, and 1992.
-16-<PAGE> 22
NOTES TO FINANCIAL STATEMENTS -- Continued
Provident Life and Accident Insurance Company of America and Subsidiaries'
Medical Services Operations
Note 6 -- Liability for Unpaid Claims and Claim Adjustment Expenses
Changes in the liability for unpaid claims and claim adjustment expenses were
as follows:
<TABLE>
<CAPTION>
Year Ended December 31
1994 1993 1992
(in thousands of dollars)
--------------------------------
<S> <C> <C> <C>
Balance at January 1 $ 59,878 $ 95,289 $112,385
-------- -------- --------
Incurred related to:
Current year 206,876 258,221 341,818
Prior years (17,508) (38,474) (30,613)
-------- -------- --------
Total incurred 189,368 219,747 311,205
-------- -------- --------
Paid related to:
Current year 150,209 199,446 259,355
Prior years 42,677 55,712 68,946
-------- -------- --------
Total paid 192,886 255,158 328,301
-------- -------- --------
Balance at December 31 $ 56,360 $ 59,878 $ 95,289
======== ======== ========
</TABLE>
There were no reinsurance recoverables at January 1 or December 31, 1994,
1993, or 1992. The provision for unpaid claims and claim adjustment expenses
occurring in prior years decreased due to lower than anticipated health care
trends.
Note 7 -- Commitments and Contingent Liabilities
On June 2, 1988, the Company announced that it was cooperating with the
Department of Health and Human Services (HHS) in an investigation related to
Medicare payments to active working persons over age 65 and their spouses over
age 65 who are covered by an employer group health plan and who also received
Medicare benefits.
Medicare is supposed to pay benefits to such individuals only after they have
received benefits from their employer group health plans. In some cases,
Medicare paid full benefits first when those benefits should have been the
responsibility of the group health plan.
On March 31, 1989, the Company filed a Complaint for Declaratory Judgment
against HHS. The suit related to issues involving administration of the
Medicare payment program. On April 5, 1989, the Department of Justice filed a
lawsuit against the Company which sought to recover Medicare overpayments. This
suit was amended to also cover payments made on the behalf of those eligible
for Medicare due to End Stage Renal Disease and Disability.
On May 27, 1993, the Company and HHS executed an agreement terminating all
outstanding litigation between the parties regarding Medicare claims. The
effect of the settlement was a before-tax charge of $10,100,000 to the 1993
earnings of Medical Services. Expenses related to the HHS litigation other than
that of the settlement were $2,286,000 and $9,983,000 in 1993 and 1992.
Various lawsuits against Medical Services have arisen in the normal course of
business. Contingent liabilities that might arise from litigation are not
deemed likely to materially affect the financial position or net income of
Medical Services.
-17-
<PAGE> 23
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
Provident Life and Accident Insurance Company of America and Subsidiaries'
Medical Services Operations
Note 8 -- Subsequent Events
On December 20, 1994, the Company entered into an Asset and Stock Purchase
Agreement (the Agreement) with Healthsource, Inc. (Healthsource) whereby
Healthsource agreed to acquire certain assets and assume certain liabilities of
Medical Services. Pursuant to the Agreement, which closed on May 31, 1995
effective as of April 30, 1995, Healthsource acquired certain assets and
assumed certain liabilities of Medical Services including 100 percent of the
issued and outstanding stock of PHCP.
-18-
<PAGE> 24
<TABLE>
Provident Life and Accident Insurance Company of America
and Subsidiaries' Medical Services Operations
Condensed Statement of Financial Condition
March 31, 1995
(In thousands)
<S> <C>
Assets (UNAUDITED)
Cash and bank depositis $ 4,503
Investment pool 181,651
Accounts receivable 54,188
Premiums receivable 25,916
Accrued investment income 2,912
Property and equipment - at cost less accumulated depreciation 23,805
Intangible assets 100,049
Miscellaneous 10
--------
Total Assets 393,034
========
Liabilities and Owner's Equity
Policy and contract benefits 82,467
Unearned premiums 1,127
Experience rating refunds 47,037
Policyholders' funds 17,927
Federal income tax liability 25,433
Cash overdrafts 44,299
Deposits from uninsured accounts 10,283
Other liabilities 16,047
--------
Total Liabilities 244,620
--------
Owner's Equity
Allocated Capital 149,397
Net Unrealized loss on Securities (983)
--------
Total Owner's Equity 148,414
--------
Total Liabilities and Owner's Equity $393,034
========
</TABLE>
See notes to condensed consolidated financial statements.
1
<PAGE> 25
<TABLE>
Provident Life and Accident Insurance Company of America
and Subsidiaries' Medical Services Operations
Condensed Statement of Income
For the three months ended March 31, 1995
(In thousands)
<CAPTION>
(UNAUDITED)
<S> <C>
Revenue
Premium income $ 71,254
ASO fees 28,544
--------
Total revenue 99,798
Benefits and Expenses
Policy and contract benefits 56,814
Change in reserves 719
Operating expenses 51,396
--------
Total benefits and expenses 108,929
--------
Operating income (9,131)
Interest and other income
Net investment income 3,570
Net realized investment gains 112
Other income 8,213
--------
Total interest and other income 11,895
--------
Income before federal income taxes 2,764
Federal income taxes 880
--------
Net income $ 1,884
========
</TABLE>
See notes to condensed consolidated financial statements.
2
<PAGE> 26
<TABLE>
Provident Life and Accident Insurance Company of America
and Subsidiaries' Medical Services Operations
Condensed Statement of Cash Flows
For the three months ended March 31, 1995
(In thousands)
(UNAUDITED)
<S> <C>
Net cash provided by operating activities $ 6,568
--------
Cash flows from investing activities
Net sale of investment pool 40,420
Sale of property and equipment 1,607
--------
Net cash provided by investing activities 42,027
--------
Cash flows from financing activities
Return of allocated capital (49,574)
--------
Net cash used by financing activities (49,574)
--------
Net decrease in cash and bank deposits (979)
Cash and bank deposits, beginning of period 5,482
--------
Cash and bank deposits, end of period $ 4,503
========
</TABLE>
See notes to condensed consolidated financial statements.
3
<PAGE> 27
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
- ----------------------------------------------------------------
1. BASIS OF PRESENTATION
The unaudited condensed financial statements have been prepared in
accordance with generally accepted accounting principles for the interim
financial information and with the instructions to Rule 10 of Regulation
S-X. Accordingly, they do not include all of the information and footnotes
required by generally accepted accounting principles for complete financial
statements. In the opinion of management, all normal recurring adjustments
considered necessary for a fair presentation have been included.
The results of operations for the three month period ended March 31, 1995
are not necessarily indicative of the results of operations to be expected
for the full year.
4
<PAGE> 28
PRO FORMA FINANCIAL INFORMATION (UNAUDITED)
The following pro forma financial information has been prepared giving effect
to the acquisitions of Coordinated Medical Services of North Carolina, Inc.
("CMS") (now called "Healthsource Health Plans, Inc." ("HSHP")), Patients
Choice, Inc. ("PCI"), and the Provident Life and Accident Insurance Company of
America ("PLA") and subsidiaries' medical services operations (now collectively
called "Healthsource-Provident") as if each acquisition had taken place as of
January 1, 1994 for the pro forma consolidated income statements and as if the
Healthsource-Provident acquisition had taken place as of March 31, 1995 for
the pro forma condensed consolidated balance sheet. All three acquisitions
have been accounted for as purchases. The carrying values of assets and
liabilities for PLA have been estimated to approximate fair market value.
Accordingly, no pro forma adjustments to these amounts were made to reflect the
allocation and amount of the purchase price, the determination of which will be
based upon final appraisals and valuations of all transferred assets and
liabilities. Any adjustments to the allocation of the purchase price have been
or will be made within one year from the acquisition date and are not expected
to be material to the pro forma financial information taken as a whole.
On March 31, 1994, the Company acquired approximately 70% of CMS which it did
not already own for 1,242,000 shares of its Common Stock, which was valued at
$39.2 million.
In November 1994, the Company completed a cash tender offer and subsequent
merger to purchase the remaining 60% interest in CNY Patients' Network, Inc.,
the parent company of PCI, for approximately $11.5 million.
Effective as of May 1, 1995, the Company acquired the medical services
operations of PLA for $231 million in cash and newly issued preferred stock.
The Company has formed two subsidiaries, Healthsource Provident Adminstrators,
Inc. ("HPA") and Healthsource Provident Insurance Company ("HPIC")
(collectively called, "Healthsource Provident"), to operate the acquired
business.
The pro forma financial information is not necessarily indicative of the
results of operations or the financial position which would have been attained
had the acquisitions been consummated at either of the foregoing dates or which
may be attained in the future. The pro forma financial information should be
read in conjuction with the historical consolidated financial statements of
Healthsource and the historical financial statements of CMS, CNY and PLA and
subsidiaries' medical services operations.
<PAGE> 29
<TABLE>
HEALTHSOURCE, INC.
PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET (UNAUDITED)
MARCH 31, 1995
(in thousands)
<CAPTION>
HISTORICAL PRO FORMA
---------------------------- PRO FORMA FINANCIAL
HEALTHSOURCE PROVIDENT ADJUSTMENTS STATEMENTS
------------ --------- ----------- ----------
<S> <C> <C> <C> <C>
Assets
Cash and cash equivalents $ 96,483 $ 4,503 $ (44,000)(1) $ 61,986
Marketable securities 83,482 181,651 (32,548)(5) 76,132
(156,453)(6)
Premiums and admin. fees receivable 20,584 80,104 38 (5) 100,726
Restricted investments 156,453 (6) 156,453
Other current assets 21,477 2,912 36,644 (5) 61,033
-------- -------- ---------- --------
Total current assets 222,026 269,170 456,330
Long-term marketable securities 94,599 0 94,599
Property and household improvements 45,334 23,805 69,139
Restricted investments 6,592 0 6,592
Intangible assets -- net 77,504 100,049 170,700 (2) 243,204
(100,049)(5)
Other assets 9,427 10 9,437
-------- -------- ---------- --------
TOTAL $455,482 $393,034 $ 30,785 $879,301
======== ======== ========== ========
Liabilities and Shareholders' Equity
Medical claims payable 84,559 147,431 231,990
Accounts payable and accrued expenses 14,928 80,015 (24,701)(5) 70,242
Deferred revenue 8,073 1,127 9,200
Other current liabilities 5,433 16,047 21,480
-------- -------- --------
Total current liabilities 112,993 244,620 332,912
Other liabilities 2,389 0 2,389
Notes payable-long term 100,000 (3) 100,000
-------- -------- --------
Total liabilities 115,382 244,620 435,301
-------- -------- --------
Minority interest 3,674 3,674
Shareholders' equity:
Preferred stock 100,000 (4) 100,000
Common stock 3,134 0 3,134
Additional paid-in capital 214,921 149,397 (73,300)(2) 218,821
(72,197)(5)
Retained earnings 119,214 0 119,214
Unrealized loss on securities (843) (983) 983 (5) (843)
-------- -------- --------
Total shareholders' equity 336,426 148,414 440,326
-------- -------- ---------- --------
TOTAL $455,482 $393,034 $ 30,785 $879,301
======== ======== ========== ========
</TABLE>
See Notes to Pro Forma Condensed Consolidated Financial Statements.
<PAGE> 30
HEALTHSOURCE, INC.
Notes to Pro Forma Condensed Consolidated Financial Statements (unaudited)
March 31, 1995
(1)- Represents cash expected to be paid in conjunction with this transaction,
as follows (in thousands):
Purchase Price: 231,000
Estimated acquisition costs: 13,000
---------
Total cost 244,000
Amount borrowed under revolving note payable (100,000)
Preferred stock issued as part of the transaction (100,000)
---------
Net - Cash paid by Healthsource 44,000
(2)- Represents the recording of the excess of purchase price and acquisition
costs over the fair value of the net assets acquired:
Total cost per (1) above 244,000
Net assets acquired: (73,300)*
---------
Intangible asset 170,700
* Represents $76 million per purchase and sale agreement adjusted for certain
post closing adjustments and other liabilities assumed.
(3)- Represents borrowings of $100 milion at 6.8% associated with this
transaction under the company's revolving note payable (see (1) above).
(4)- Represents the issuance of $100 million 6.25%, cumulative, non-convertible
preferred stock in conjunction with the transaction (see note (1) above).
(5)- Represents adjustments to the balance sheet of Provident Life and Accident
Insurance Company of America (PLA) and Subsidiaries' Medical Services
Operations in accordance with the terms of the Asset and Stock Purchase
Agreement to reflect those assets and liabilities included in the PLA balance
sheet that were not ultimately transferred to Healthsource, Inc. as part of the
transaction. These adjustments consisted of the following items:
Adjustment (in thousands)
- ---------- --------------
Marketable Securities (32,548)
Premiums and Administrative Fees Receivable 38
Accrued Investment Income and Other Current Assets 36,644
Intangible Assets, net (100,049)
Accrued Liabilities 24,701
Unrealized Loss on Securities (983)
-------
Net - Additional Paid In Capital (72,197)
=======
(6)- Healthsource Provident Insurance Company (HPIC) is required to place 102%
of certain reserve accounts into a trust account to settle claims for the
benefit of Provident Life and Accident Company (PLAC) until HPIC is licensed as
an insurance company in all states where it will be doing business. At
March 31, 1995 $156,453,000 would have been placed in trust. HPIC can access
these funds with PLAC's approval to pay for benefit payments.
<PAGE> 31
<TABLE>
HEALTHSOURCE, INC.
Pro Forma Condensed Consolidated Statement of Operations (unaudited)
For the Three Months Ended March 31, 1995
(all amounts in thousands, except per share data)
<CAPTION>
Historical Pro Forma
------------- Pro Forma Financial
Healthsource Provident Adjustments Statements
------------- --------- ----------- ----------
<S> <C> <C> <C> <C>
Medical premiums $ 192,023 $ 71,254 $263,277
Administrative and managed
care fees 16,202 36,757 52,959
Management fees 222 222
--------- --------- --------
Total Revenue 208,447 108,011 316,458
Expenses:
Cost of medical premiums 149,082 57,533 206,615
Premium Tax 1,191 1,191
Selling, general & administrative 40,785 42,896 (1,300)(A) 82,381
Depreciation & amortization 3,332 8,500 1,423 (B) 10,467
(2,788)(C)
--------- --------- --------
Total Expenses 194,390 108,929 300,654
Operating Income 14,057 (918) 15,804
(660)(D)
Interest & Other Income 3,593 3,682 (525)(E) 6,090
Interest expense 1,700 (F) 1,700
--------- --------- --------
Income before taxes and
minority interest 17,650 2,764 20,194
Provision for taxes (5,946) (880) 77 (G) (6,749)
Minority Interest 67 0 67
--------- --------- --------
Net Income $ 11,771 $ 1,884 $ 13,512
========= ========= ========
Shares used to compute
Net income per share:
Primary 32,031 32,031
Fully diluted 32,198 32,198
Net income per share:
Primary $ 0.37 $ 0.37
Fully diluted 0.37 $ 0.37
</TABLE>
See Notes to the Pro Forma Condensed Consolidated Financial Statements.
<PAGE> 32
HEALTHSOURCE INC.
Notes to Pro Forma Condensed Consolidated Financial Statements (unaudited)
March 31, 1995
(A) At the time of this transaction, Provident had several start up HMOs in
operation. These losses are expected to be non-recurring in nature because
the Company has existing HMOs into which certain of the Provident
membership is expected to be transferred. These losses amounted to
$1,300,000 for this period.
<TABLE>
(B) Represents the recording of intangibles and the related amortization
calculated as follows:
<S> <C>
Purchase price: 231,000
Estimated acquisition costs: 13,000
Net assets acquired: (73,300)
--------
Excess of purchase price and acquistion costs over
the fair value of the net assets acquired 170,700
Estimated average life of identifiable and
unidentifiable intangible assets 30
--------
5,690
Pro rated (3 months) 1,423
</TABLE>
(C) Represents the elimination of amortization expense associated with existing
allocated Provident intangibles which were not transferred as part of net
assets.
(D) Represents the lost income on $44 million paid in cash ($44,000 x 6% =
$2,640 / 4 = $660)
<TABLE>
(E) Represents the incremental reduction in interest income due to Provident's
historical investment return being higher than Healthsource's expected
return calculated as follows (in thousands):
<S> <C>
Investment balance: 210,000
Rate difference (8.75% - 7.75%) 1.00%
-------
2,100
Pro rated (3 months) 525
</TABLE>
<TABLE>
(F) Represents interest expense associated with $100 million borrowed to
finance the transaction calculated as follows:
<S> <C>
Debt 100,000
Interest rate 6.8%
-------
6,800
Pro rated (3 months) 1,700
</TABLE>
Note: Dividends associated with the $100 million, 6.25% cumulative preferred
stock have not been reflected in this pro-forma income statement. These
dividends will be charged directly to retained earnings for the respective
period.
<TABLE>
(G) Represents the tax impact of adjustments calculated as follows:
<S> <C>
Adjustment A 1,300
Adjustment B (1,423)
Adjustment C 2,788
Adjustment D (660)
Adjustment E (525)
Adjustment F (1,700)
------
(220)
Tax rate 35.0%
------
(77)
</TABLE>
<PAGE> 33
<TABLE>
HEALTHSOURCE, INC.
Pro Forma Condensed Consolidated Statement of Operations (unaudited)
For the Year Ended December 31, 1994
(all amounts in thousands, except per share data)
<CAPTION>
HISTORICAL PRO FORMA
------------ PRO FORMA FINANCIAL HISTORICAL PRO FORMA
HEALTHSOURCE CMS ADJUSTMENTS STATEMENTS CNY ADJUSTMENTS
------------ --- ----------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
Medical premiums $532,476 $29,855 $562,331 $30,923
Administrative and managed
care fees 49,389 995 50,384 194
Management fees 2,378 (151)(A) 2,227 (593)(B)
-------- ------- -------- -------
Total Revenue 584,243 30,850 614,942 31,117
Expenses:
Cost of medical premiums 408,193 23,525 431,718 22,428
Purchase Tax 3,578 3,578
Selling, general &
administrative 119,079 4,185 (151)(A) 123,113 4,298 (593)(B)
Depreciation & amortization 11,254 0 227 (A) 11,481 252 (B)
-------- ------- -------- -------
Total Expenses 542,104 27,710 569,890 26,726
Operating Income 42,139 3,140 45,052 4,391
Interest & Other Income 12,607 215 0 12,822 379 575 (B)
Interest expense
Equity in Income of CMS 604 (604)(A) 0
Equity in Income of CNY 1,066 1,066 (1,066)(B)
-------- ------- -------- -------
Total Equity Earnings 1,670 0 1,066 0
-------- ------- -------- -------
Income before taxes and
minority interest 56,416 3,355 58,940 4,770
Provision for taxes (17,769) (1,348) 34 (A) (19,083) (1,877)
Minority Interest 397 0 0 397 0
-------- ------- -------- -------
Net Income $ 39,044 $ 2,007 $ 40,254 $ 2,893
======== ======= ======== =======
Shares used to compute
Net income per share:
Prmary 31,409 455 (A) 31,864
Fully diluted 31,457 455 (A) 31,912
Net income per share:
Prmary $1.24 $1.26
Fully diluted 1.24 1.26
</TABLE>
<PAGE> 34
<TABLE>
<CAPTION>
PRO FORMA PRO FORMA
FINANCIAL PRO FORMA FINANCIAL
STATEMENTS PROVIDENT ADJUSTMENTS STATEMENTS
---------- --------- ----------- ----------
<S> <C> <C> <C> <C>
Medical premiums $593,254 $238,203 $ 831,457
Administrative and managed
care fees 50,578 137,342 187,920
Management fees 1,634 1,634
-------- -------- ----------
Total Revenue 645,466 375,545 1,021,011
Expenses:
Cost of medical premiums 454,146 180,025 634,171
Purchase Tax 3,578 3,578
Selling, general &
administrative 126,818 184,376 (3,200)(C) 307,994
Depreciation & amortization 11,733 16,881 5,690 (D) 23,104
(11,200)(E)
-------- -------- ----------
Total Expenses 596,275 381,282 968,847
Operating Income 49,191 (5,737) 52,164
(2,100)(F)
Interest & Other Income 13,776 18,463 (2,640)(G) 27,167
(332)(H)
Interest expense 6,800 (I) 6,800
Equity in Income of CMS 0
Equity in Income of CNY 0
-------- -------- ----------
Total Equity Earnings 0 0 0
-------- -------- ----------
Income before taxes and
minority interest 62,967 12,726 72,531
Provision for taxes (20,960) (4,390) 1,107 (J) (24,243)
Minority Interest 397 397
-------- -------- ----------
Net Income $ 42,404 $ 8,336 $ 48,685
======== ======== ==========
Shares used to compute
Net income per share:
Prmary 31,864 31,864
Fully diluted 31,912 31,912
Net income per share:
Prmary $1.33 $1.33
Fully diluted 1.33 1.33
</TABLE>
See Notes to the Pro Forma Condensed Consolidated Financial Statements.
<PAGE> 35
HEALTHSOURCE, INC.
Notes to Pro Forma Condensed Consolidated Financial Statements (unaudited)
December 31, 1994
(A)- On March 31, 1994, Healthsource issued approximately 1,242,000 shares of
its common stock in exchange for the remaining 69.9% of the Coordinated Medical
Services of North Carolina, Inc. (CMS) which Healthsource did not already own.
For the purposes of these proforma financial statements, the financial
statements of CMS represent the results of operations for the three months that
Healthsource did not own 100% of CMS. Proforma adjustments include the
elimination of management fees ($151K) and equity in earnings ($604K), the
amortization of intangibles created in the transaction ($227K), and the related
tax adjustments ($34K). For EPS calculations, total shares includes 1,242,000
related to outstanding shares and 128,738 related to outstanding CMS options
which were converted to 153,450 Healthsource options with an approximate
exercise price of $4.63. This converts to 128,738 shares using the treasury
stock method. Additionally, outstanding shares have been adjusted to reflect
the impact of this transaction on the first quarter.
(B)- In November 1994, Healthsource completed a cash tender offer and
subsequent merger to purchase the remaining 60% interest in CNY Patients'
Network, Inc. (CNY), the parent company of Patients' Choice, Inc. (PCI). Under
the terms of the agreement, Healthsource paid an estimated purchase price of
$11.5 million. Proforma adjustments include the elimination of management fees
($593K) and equity in earnings ($1,066K), the amortization of the $7.7 million
intangible created in the transaction ($252K), and the interest lost on the
cash payment ($575K).
(C)- At the time of this transaction Provident had several start up HMOs in
operation. These losses are expected to be non-recurring in nature because the
Company has existing HMOs into which certain of the Provident membership is
expected to be transferred. These losses amounted to $5,200,000 for this
period and were offset by approximately $2,000,000 in premium tax recoveries
which will not recur on a going forward basis.
<TABLE>
(D)- Represents the amortization of the purchase price and acquisition costs in
excess of the fair value of the net assets acquired calculated as follows (in
thousands):
<S> <C>
Purchase price 231,000
Estimated acquisition costs: 13,000
Net assets acquired: (73,300)
-------
Excess of purchase price and acquisiton costs over
the fair value of the net assets acquired 170,700
Estimated average life of identifiable and
unidentifiable intangible assets 30
-------
Annual amortization 5,690
</TABLE>
(E)- Represents the elimination of amortization expense associated with
existing allocated Provident intangibles which were not transferred as part of
net assets.
<TABLE>
(F)- Represents the incremental reduction in interest income due to Provident's
historical investment return being higher than Healthsource's expected return
calculated as follows (in thousands):
<S> <C>
Investment balance 210,000
Rate difference (8.75% - 7.75%) 1.00%
-------
2,100
</TABLE>
<PAGE> 36
<TABLE>
(G) - Represents interest lost on the $39 million paid out as part of the
transaction, as follows (in thousands):
<S> <C>
Cash paid out as part of the transaction 44,000
Heatlhsource, Inc.'s expected return 6.00%
-------
Interest lost 2,640
</TABLE>
(H) - Represents the elimination of the gain on the sale of securities which
were not transferred as part of net assets and are therefore non-recurring in
nature.
(I) - Represents interest expense associated with $100 million borrowed to
finance the transaction at an estimated rate of 6.8% ($100,000 X .068 = $6,800)
Dividends associated with the $100 million, 6.25%, cumulative preferred stock
have not been reflected in this pro-forma income statement. These dividends
will be charged directly to retained earnings for the respective period.
<TABLE>
(J) - Represents the tax impact of adjustments calculated as follows (in
thousands):
<S> <C>
Adjustment C (net) 3,200
Adjustment D (5,690)
Adjustment E 11,200
Adjustment F (2,100)
Adjustment G (2,640)
Adjustment H (332)
Adjustment I (6,800)
-------
Total adjustments (pre-tax) (3,162)
Tax rate 35%
-------
Tax benefit (1,107)
</TABLE>
<PAGE> 1
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in Registration Statements No.
33-43242, No. 33-49856, No. 33-76910 and No. 33-80456 of Healthsource, Inc. and
Subsidiaries on Form S-8 of our report dated May 12, 1995 except for Note 8 as
to which the date is June 1, 1995, with respect to the statements of financial
condition of Provident Life and Accident Insurance Company of America and
Subsidiaries' Medical Services Operations as of December 31, 1994 and 1993 and
the realted statements of income, owner's equity and cash flows for each of the
three years in the period ended December 31, 1994, included in this Current
Report on Form 8-K, Amendment No. 1.
/s/ Ernst & Young LLP
Chattanooga, Tennessee
August 1, 1995
