<PAGE> 1
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Quarterly Report Under Section 13 or 15(d) of the Securities Exchange Act
of 1934
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 1995
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 For the transition period from _________________
to _________________
Commission File No. 1-11538
-------------
HEALTHSOURCE, INC.
-----------------------------------------------------------------
(Exact name of Registrant as specified in its charter)
New Hampshire 02-0387748
- --------------------------------------- ----------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
Two College Park Drive, Hooksett, NH 03106
- --------------------------------------- ----------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (603) 268-7000
--------------
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
----- -----
At November 10, 1995, 31,759,107 shares of $.10 par value common stock
of the Registrant were outstanding.
1
<PAGE> 2
<TABLE>
HEALTHSOURCE, INC.
INDEX
<CAPTION>
Page Number
-----------
<S> <C>
Part I. Financial Information
- -----------------------------
Item 1. Financial Statements
--------------------
Condensed Consolidated Balance Sheets as of
September 30, 1995 and December 31, 1994 3
Condensed Consolidated Statements of Operations
for the Three Months and Nine Months ended
September 30, 1995 and 1994 4 - 5
Condensed Consolidated Statements of Cash Flows
for the Nine Months ended September 30, 1995 and 1994 6
Notes to Condensed Consolidated Financial Statements 7 - 9
Independent Accountants' Report 10
Item 2. Management's Discussion and Analysis of
---------------------------------------
Financial Condition and Results of Operations 11 - 17
---------------------------------------------
Part II. Other Information
- ---------------------------
Item 1. Legal Proceedings
-----------------
Not Applicable
Item 2. Changes in Securities
---------------------
Not Applicable
Item 3. Defaults Upon Senior Securities
-------------------------------
Not Applicable
Item 4. Submission of Matters to a Vote of
----------------------------------
Security Holders
----------------
Not Applicable
Item 5. Other Information 18
-----------------
Item 6. Exhibits and Reports on Form 8-K 18
--------------------------------
Signatures 19
</TABLE>
2
<PAGE> 3
<TABLE>
HEALTHSOURCE, INC. AND SUBSIDIARIES
- -----------------------------------
CONDENSED CONSOLIDATED BALANCE SHEETS
AS OF SEPTEMBER 30, 1995 AND DECEMBER 31, 1994
- ----------------------------------------------
<CAPTION>
September 30, December 31,
1995 1994
------------ ------------
(unaudited)
(in thousands)
<S> <C> <C>
ASSETS
- ------
Current assets:
Cash and cash equivalents . . . . . . . . $138,885 $ 67,193
Marketable securities . . . . . . . . . . 42,458 94,321
Premiums and administrative fees
receivable . . . . . . . . . . . . . . . 105,790 16,525
Restricted investments . . . . . . . . . . 125,453 -
Other current assets . . . . . . . . . . . 33,966 18,324
-------- --------
Total current assets . . . . . . . . 446,552 196,363
Long-term assets:
Long-term marketable securities . . . . . 84,109 97,083
Property and leasehold improvements - net. 87,852 39,686
Restricted investments . . . . . . . . . . 8,388 6,618
Intangible assets - net. . . . . . . . . . 250,671 76,760
Other assets . . . . . . . . . . . . . . . 15,336 7,765
-------- --------
TOTAL $892,908 $424,275
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
- ------------------------------------
Current liabilities:
Medical claims payable . . . . . . . . . . $159,948 $ 72,676
Accounts payable and accrued expenses . . 114,881 17,536
Deferred revenue . . . . . . . . . . . . . 8,886 3,388
Other current liabilities . . . . . . . . 1,305 2,352
-------- --------
Total current liabilities . . . . . . 285,020 95,952
Long-term liabilities:
Revolving note payable . . . . . . . . . . 130,000 -
Other liabilities . . . . . . . . . . . . 3,099 2,098
-------- --------
Total liabilities . . . . . . . . . . 418,119 98,050
-------- --------
Minority interest . . . . . . . . . . . . . . 3,430 3,741
-------- --------
Shareholders' equity:
Cumulative preferred stock . . . . . . . . 100,000 -
Common stock . . . . . . . . . . . . . . . 3,173 3,128
Additional paid-in capital . . . . . . . . 223,074 213,463
Retained earnings . . . . . . . . . . . . 145,254 107,443
Unrealized loss on marketable securities . (142) (1,550)
-------- --------
Total shareholders' equity . . . . . . 471,359 322,484
-------- --------
TOTAL $892,908 $424,275
======== ========
</TABLE>
See notes to condensed consolidated financial statements
3
<PAGE> 4
<TABLE>
HEALTHSOURCE, INC. AND SUBSIDIARIES
- -----------------------------------
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1995 AND 1994
- ------------------------------------------------------
<CAPTION>
Three Months Ended
September 30,
------------------------------
1995 1994
--------- ---------
(unaudited)
(in thousands,
except per share data)
<S> <C> <C>
Revenue:
HMO medical premiums . . . . . . . . . . . . . $207,843 $138,589
Other insured medical premiums . . . . . . . . 66,259 3,940
Administrative and managed care fees . . . . . 54,109 13,058
-------- --------
Total operating revenue . . . . . . . . . 328,211 155,587
-------- --------
Expenses:
Cost of HMO medical premiums . . . . . . . . . 159,319 106,629
Cost of other insured medical premiums . . . . 53,683 3,382
Premium tax . . . . . . . . . . . . . . . . . 961 954
Selling, general and administrative:
HMO and fully insured . . . . . . . . . . . 40,924 20,105
Admin. and managed care fees . . . . . . . . 47,633 10,520
-------- --------
Total selling, general and administrative. 88,557 30,625
Depreciation and amortization . . . . . . . . 6,838 2,951
-------- --------
Total operating expenses . . . . . . . . . 309,358 144,541
-------- --------
Operating income . . . . . . . . . . . . . 18,853 11,046
Interest and other income . . . . . . . . . . . . 5,974 3,584
Interest expense . . . . . . . . . . . . . . . . (2,174) -
-------- --------
Interest and other income, net . . . . . . 3,800 3,584
Income before equity in income of
unconsolidated affiliates, provision for
income taxes and minority interest . . . . . . 22,653 14,630
Equity in income of unconsolidated affiliates . . - 367
-------- --------
Income before provision for income taxes and
minority interest . . . . . . . . . . . . . . . 22,653 14,997
Provision for income taxes . . . . . . . . . (7,733) (4,752)
Minority interest in net
(earnings) losses of consolidated entities . . 103 (103)
-------- --------
Net income . . . . . . . . . . . . . . . . $ 15,023 $ 10,142
======== ========
Net income per common share:
Primary $0.42 $0.32
Fully diluted 0.42 0.32
Weighted average number of common and common
equivalent shares outstanding:
Primary 31,874 31,700
Fully diluted 32,158 31,808
</TABLE>
See notes to condensed consolidated financial statements
4
<PAGE> 5
<TABLE>
HEALTHSOURCE, INC. AND SUBSIDIARIES
- -----------------------------------
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1995 AND 1994
- -----------------------------------------------------
<CAPTION>
Nine Months Ended
September 30,
------------------------------
1995 1994
--------- ---------
(unaudited)
(in thousands,
except per share data)
<S> <C> <C>
Revenue:
HMO medical premiums . . . . . . . . . . . . . $591,236 $365,545
Other insured medical premiums . . . . . . . . 118,632 13,152
Administrative and managed care fees . . . . . 113,194 37,936
-------- --------
Total operating revenue . . . . . . . . . 823,062 416,633
-------- --------
Expenses:
Cost of HMO medical premiums . . . . . . . . . 456,711 282,704
Cost of other insured medical premiums . . . . 95,875 11,029
Premium tax . . . . . . . . . . . . . . . . . 3,139 2,578
Selling, general and administrative:
HMO and fully insured . . . . . . . . . . . 105,086 53,871
Admin. and managed care fees . . . . . . . . 97,413 28,980
-------- --------
Total selling, general and administrative. 202,499 82,851
Depreciation and amortization . . . . . . . . 15,986 7,753
-------- --------
Total operating expenses . . . . . . . . . 774,210 386,915
-------- --------
Operating income . . . . . . . . . . . . . 48,852 29,718
-------- --------
Interest and other income . . . . . . . . . . . . 15,567 8,743
Interest expense . . . . . . . . . . . . . . . . (3,607) -
--------- --------
Interest and other income, net . . . . . . 11,960 8,743
Income before equity in income of
unconsolidated affiliates, provision for
income taxes and minority interest . . . . . . 60,812 38,461
Equity in income of unconsolidated affiliates . . - 1,653
-------- --------
Income before provision for income taxes and
minority interest . . . . . . . . . . . . . . . 60,812 40,114
Provision for income taxes . . . . . . . . . . . (20,707) (12,214)
Minority interest in net losses
of consolidated entities . . . . . . . . . . . 311 149
-------- --------
Net income . . . . . . . . . . . . . . . . $ 40,416 $ 28,049
======== ========
Net income per common share:
Primary $1.18 $0.90
Fully diluted 1.18 0.90
Weighted average number of common and common
equivalent shares outstanding:
Primary 31,935 31,243
Fully diluted 32,086 31,279
</TABLE>
See notes to condensed consolidated financial statements
5
<PAGE> 6
<TABLE>
HEALTHSOURCE, INC. AND SUBSIDIARIES
- -----------------------------------
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1995 AND 1994
- -----------------------------------------------------
<CAPTION>
Nine Months Ended
September 30,
------------------------------
1995 1994
----------- -----------
(unaudited)
(in thousands)
<S> <C> <C>
Cash flows from operating activities:
Net income . . . . . . . . . . . . . . . . . . . . $40,416 $28,049
Adjustments to reconcile net income
to net cash provided by operating activities:
Depreciation and amortization . . . . . . . . . 15,986 7,753
Equity items, including minority interest . . . (311) (1,802)
Deferred income taxes . . . . . . . . . . . . . 1,157 67
Changes in assets and liabilities,
net of effects of acquisitions:
Premiums and administrative fees receivable . . (12,575) (2,283)
Other current assets . . . . . . . . . . . . . (15,491) (3,652)
Medical claims payable . . . . . . . . . . . . 2,237 7,542
Accounts payable and accrued expenses . . . . . (4,113) 4,458
Deferred revenue . . . . . . . . . . . . . . . 3,853 1,769
------- -------
Net cash provided by operating activities . . 31,159 41,901
------- -------
Cash flows from investing activities:
Investment in affiliates/intangible assets, net
of cash acquired . . . . . . . . . . . . . . . . (153,943) 16,222
(Increase) decrease in marketable securities .. . 94,268 (38,767)
Additions to property and leasehold improvements . (32,356) (18,424)
(Increase) decrease in other assets and
restricted investments . . . . . . . . . . . . . 291 (3,537)
-------- -------
Net cash used for investing activities . . . (91,740) (44,506)
-------- -------
Cash flows from financing activities:
Net borrowings under revolving note payable . . . 130,000 -
Investment by
minority shareholder . . . . . . . . . . . . . . - 79
Issuance of common stock . . . . . . . . . . . . . 4,508 1,273
Preferred stock dividends . . . . . . . . . . . . (2,605) -
Increase (decrease) in other liabilities . . . . 370 (294)
------- -------
Net cash provided by
financing activities . . . . . . . . . . 132,273 1,058
------- -------
Increase (decrease) in cash and cash equivalents . . 71,692 (1,547)
Cash and cash equivalents, beginning of period . . . 67,193 64,229
-------- -------
Cash and cash equivalents, end of period . . . . . . $138,885 $62,682
======== =======
Supplemental disclosure of cash flow information:
Income taxes paid . . . . . . . . . . . . . . . . $21,458 $12,018
Interest paid . . . . . . . . . . . . . . . . . . 2,174 -
</TABLE>
Supplemental disclosure of non-cash transactions:
Effective May 1, 1995, the Company acquired the group health, HMO and
third-party administration business of Provident Life and Accident
Insurance Company of America, Inc. In connection with the agreement, the
Company issued $100 million in 6.25% cumulative preferred stock.
On March 31, 1994, the Company acquired the 69.9% of Healthsource
Healthplans, Inc., which it did not previously own, in exchange for
1,242,000 shares of the Company's common stock, which were valued at $39.2
million.
See notes to condensed consolidated financial statements
6
<PAGE> 7
HEALTHSOURCE, INC. AND SUBSIDIARIES
- -----------------------------------
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
- ----------------------------------------------------------------
1. BASIS OF PRESENTATION
The unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for
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 and nine month periods ended
September 30, 1995 are not necessarily indicative of the results of
operations to be expected for the full year.
2. SUMMARY OF SIGNIFICANT INCOME STATEMENT POLICIES
Revenue - HMO medical premium revenue and other insured medical premiums
are recognized in the month in which members are entitled to receive health
care services. Medical premiums collected in advance are recorded as
deferred revenue. Administrative and managed care fees are recognized in
the period that claims processing and other managed care services are
provided to self-funded clients. Revenue from management service
agreements is recognized in the period the Company performs the services.
Cost of HMO Medical Premiums - Cost of HMO medical premiums includes
the costs of all medical services delivered to enrolled members of the
Company's majority-owned HMOs and for whom the entities have recorded HMO
medical premium revenue during the reporting period. These costs include
payments for specific medical services and for capitation. The costs of
specific medical services include those paid to physicians, hospitals, and
other health care providers on a fee-for-service basis. These costs
include claims paid, claims in process and pending, estimates of unreported
claims, estimates of contractual adjustments pursuant to hospital and other
provider contracts, and estimates of charges at the balance sheet date for
which the Company will be responsible. Adjustments to prior period
estimates are reflected in the current period and are not significant. The
costs of capitation (fixed monthly payments per member) include payments
to certain physicians, hospitals, laboratories, pharmaceutical and mental
health care providers.
Cost of Other Insured Medical Premiums - Cost of other insured medical
premiums includes the costs of all medical services delivered to enrolled
members of the Company's non-HMO medical plans for whom the entities have
recorded medical premium revenue during the reporting period. These costs
include claims paid, claims in process and claims pending, and estimates of
unreported claims and charges at the balance sheet date for which the
Company will be responsible. Adjustments to prior period estimates are
reflected in the current period and are not significant.
Selling, General and Administrative (SG&A) Expense - HMO and fully-insured
SG&A expense includes the costs recognized by the Company and its
majority-owned entities: (1) to market and administer the delivery of
medical services for which the Company is at risk; and (2) to develop and
administer its management services agreements. Administrative and managed
care fees SG&A includes the costs recognized by the Company and its
majority-owned entities to market and administer the delivery of medical
services for self-insured clients. Corporate SG&A is included within HMO
and fully-insured SG&A expense.
Reclassifications - Certain prior year amounts have been reclassified to
conform with the current year presentation. Other insured medical
premiums, cost of other insured medical premiums and a significant portion
of
7
<PAGE> 8
administrative and managed care fees SG&A relate primarily to the Provident
acquisition. See Note 3.
3. ACQUISITIONS
1995 Acquisitions - Effective May 1, 1995, the Company acquired the group
health, HMO and third party administration business of Provident Life and
Accident Insurance Company of America, Inc. ("Provident") for $231 million
in cash and securities. The cash payment was $131 million and the Company
issued to Provident non-convertible Preferred Stock with a face value of
$100 million paying a 6.25% annual dividend redeemable at par for two years
in cash or for a 10 year subordinated note with interest at a market rate,
after which the dividend rate will be reset to market.
1994 Acquisitions - On January 13, 1994, the Company acquired the remaining
60.2% interest in Healthsource Maine, Inc. (HSME). Under the terms of the
agreement, the Company made a cash payment of $11.5 million in exchange for
all of the shares of HSME which it did not already own.
On March 31, 1994, the Company acquired the remaining 69.9% of Healthsource
Health Plans, Inc. (HSHP), the parent company of Healthsource North
Carolina, Inc. (HSNC). Under the terms of the agreement, HSHP shareholders
received approximately 1.24 million shares of the Company's common stock.
In addition, certain existing options held by HSHP management were
converted to options to purchase approximately 153,000 shares of
Healthsource stock with an exercise price of approximately $4.60 per share.
In November 1994, the Company completed a cash tender offer and subsequent
merger to purchase the remaining 60% interest in Healthsource New York,
Inc. (formerly CNY Patient's Network, Inc.) the parent company of
Healthsource HMO of New York (HSNY) which resulted in a total purchase
price of approximately $11.5 million.
<TABLE>
The following unaudited pro forma consolidated statement of operations
information assumes the Provident, HSME, HSHP, and HSNY acquisitions
occurred on January 1, of each year (in thousands, except per share data):
<CAPTION>
Nine Months Ended
September 30,
------------------------
1995 1994
---------- ----------
<S> <C> <C>
Revenue $966,717 $756,429
Operating income 51,231 38,724
Net income 42,833 35,106
Net income per common share:
Primary $1.19 $0.96
Fully diluted 1.19 0.96
</TABLE>
4. REVOLVING NOTE PAYABLE
The Company has a $300 million unsecured revolving credit agreement with a
bank syndicate which is committed through March 15, 2000. Interest under
this revolving credit facility may range between LIBOR plus .2% and LIBOR
plus .45% depending upon the Company's ratio of indebtedness to total
capital. In connection with the agreement, the Company is required to
maintain certain minimum financial ratios. At September 30, 1995, the
Company had $130 million outstanding under this facility. The interest
rate at September 30, 1995 was approximately 6.5%.
8
<PAGE> 9
5. INCOME TAXES
The Company provides for income taxes based upon an estimate of its annual
effective tax rate. The estimated effective tax rates for the nine months
ended September 30, 1995 and 1994 were 34.1% and 30.4%, respectively.
6. COMMITMENTS AND CONTINGENCIES
In April 1995, the Company entered into a definitive agreement, amended on
November 9, 1995, to purchase the assets of Central Massachusetts Health
Care, Inc. (CMHC) for a cash purchase price of approximately $57.5 million
subject to certain closing conditions including but not limited to
approval by the Massachusetts Attorney General's office and other
regulatory approvals.
On July 26, 1995, the Company announced that it had signed a letter of
intent to purchase the assets of PACC HMO and PACC Health Plans for $80
million in cash, subject to certain adjustments. The letter of intent is
non-binding and subject to a definitive agreement and regulatory and other
approvals.
7. SUBSEQUENT EVENT
On November 8, 1995, the Company declared a two-for-one stock split payable
in the form of a 100% stock dividend to shareholders of record on November
30, 1995. Outstanding shares and earnings per common share have been
reflected at pre-split amounts.
9
<PAGE> 10
INDEPENDENT ACCOUNTANTS' REPORT
To the Board of Directors
and Shareholders of
Healthsource, Inc.
Hooksett, New Hampshire
We have reviewed the accompanying condensed consolidated balance sheet of
Healthsource, Inc. and subsidiaries as of September 30, 1995, the related
condensed consolidated statements of operations for the three month and nine
month periods ended September 30, 1995 and 1994, and the condensed consolidated
statements of cash flows for the nine month periods ended September 30, 1995
and 1994. These financial statements are the responsibility of the Company's
management.
We conducted our review in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures to
financial data and of making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit conducted
in accordance with generally accepted auditing standards, the objective of
which is the expression of an opinion regarding the financial statements taken
as a whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to such condensed consolidated financial statements for them to be in
conformity with generally accepted accounting principles.
We have previously audited, in accordance with generally accepted auditing
standards, the consolidated balance sheet of Healthsource, Inc. and
subsidiaries as of December 31, 1994 and the related consolidated statements of
operations, shareholders' equity, and cash flows for the year then ended (not
presented herein); and in our report dated February 17, 1995, we expressed an
unqualified opinion on those consolidated financial statements. In our
opinion, the information set forth in the accompanying condensed consolidated
balance sheet as of December 31, 1994 is fairly stated, in all material
respects, in relation to the consolidated balance sheet from which it has been
derived.
Boston, Massachusetts
November 3, 1995
(November 9, 1995 as to Notes 6 and 7)
10
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HEALTHSOURCE, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
General
- -------
The Company has experienced substantial growth in both revenues and
profitability since its formation in New Hampshire in 1985. Revenue growth has
been accomplished through increasing membership and medical premiums per member
and administrative and managed care fees from self-insured employers and
through acquisitions. The Company has made acquisitions of HMO companies
resulting in wholly-owned subsidiaries in South Carolina, Tennessee, Maine,
Indiana, North Carolina, and Syracuse, New York. The Company has formed
strategic alliances with hospitals to operate HMO's in Arkansas, Georgia, Texas
and Ohio and has formed start-up HMOs in Connecticut and Kentucky. It also
formed a strategic alliance with Chubb Life Insurance Co. to operate an HMO
(ChubbHealth) in metropolitan New York City. Effective May 1, 1995, the
Company acquired the group health, third-party administration and HMO business
(the Provident acquisition) from Provident Life and Accident Insurance Company
of America, Inc. for $231 million in cash and preferred stock. To conduct the
acquired businesses, the Company organized and capitalized Healthsource
Provident Insurance Company to assume the insured business and Healthsource
Provident Administrators, Inc. to administer the self-insured business.
Many Federal and State proposals have been made in the past to reform the
health care system. The Company anticipates that Federal and State
legislatures will continue to assess alternative health care systems and
payment methodologies. The Company is unable to predict which, if any, of
these health care reform proposals may be adopted. While the Company does not
believe it would be materially adversely impacted by most of the proposed
reforms, certain proposals could have such an impact and the imposition of a
single-payor system in any state could potentially eliminate the Company's
business in that state.
The Company has experienced a decline in average premium yield during the third
quarter of 1995 of 3.6% as compared to the same period in 1994 due principally
to employer pressure to reduce health care expenditures. The Company expects
this premium pricing pressure to continue during 1996 and possibly beyond. As
a result of this premium pricing pressure, the Company's medical loss ratio and
ultimately its profitability will depend on its ability to control health care
costs. Since the Company commits to provide its services to members at agreed
upon prices for one year, unexpected cost increases during this period cannot
be passed on to client-employers or to members. The Company believes its
continued profitability in the third quarter of 1995 can be attributed
primarily to increases in membership, increased revenue from administrative and
managed care services, its successful cost control efforts, and the effects of
the Provident acquisition in May 1995 and the acquisition of the remaining
interest in Healthsource HMO of New York, Inc. (HSNY) in November 1994.
11
<PAGE> 12
<TABLE>
The following table shows membership for the Company's affiliated health plans
as of September 30, 1995 and 1994:
<CAPTION>
9/30/95 9/30/94
------- -------
<S> <C> <C>
HMOs1
Northern Region:
New Hampshire 106,500 82,200
Maine 59,100 42,400
New York (Syracuse) 22,900 22,500
Indiana 61,400 38,800
New York City 29,600 1,100
Kentucky 8,600 -
-------- -------
Sub-total 288,100 187,000
-------- -------
Southern Region:
South Carolina 103,000 68,100
North Carolina 128,800 90,600
Arkansas 26,200 10,200
Tennessee 41,000 17,600
Georgia (Savannah) 6,300 -
-------- -------
Sub-total 305,300 186,500
-------- -------
Total HMO 593,400 373,500
-------- -------
MANAGED INDEMNITY (INSURED)2 64,300 9,300
SELF AND PARTIALLY INSURED MEDICAL PRODUCTS
- -------------------------------------------
Point of Service 180,400 120,400
Workers' Compensation 116,900 83,700
Other Managed
Care/Administration3 2,371,600 310,800
--------- -------
Total Self-Insured 2,668,900 514,900
------------------ --------- -------
TOTAL ADMINISTERED MEDICAL 3,326,600 897,700
- -------------------------- --------- -------
DENTAL PRODUCTS4
- ---------------
Fully Insured 379,900 -
Self Insured 2,204,100 -
--------- -------
TOTAL ADMINISTERED DENTAL 2,584,000 -
- ------------------------- --------- -------
<FN>
1 Includes membership for HMOs owned, co-owned, and/or managed by the Company,
including HMO membership of 9,100 at September 30, 1995 resulting from the
Provident acquisition. Managed indemnity lives previously reported in the
Company's HMO membership are now reported separately as managed indemnity
lives. At September 30, 1995 and 1994, these lives were 7,000 and 9,300,
respectively.
2 Includes managed indemnity business from the Provident acquisition of
approximately 57,000 at September 30, 1995.
3 Includes self-insured business from the Provident acquisition of
approximately 2,097,000 lives at September 30, 1995. Included in these totals
are approximately 329,000 at September 30, 1995 which were covered by minimum
premium and retrospectively rated premium products where the Company shares
risk with the employers and where the Company receives an insurance premium.
Many of these employer accounts have managed care benefit designs.
4 Obtained through the Provident acquisition.
</TABLE>
12
<PAGE> 13
<TABLE>
The following table shows certain income statement data expressed as a percentage of total operating revenue for the three months
and nine months ended September 30, 1995 and 1994:
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ -----------------
(unaudited) (unaudited)
1995 1994 1995 1994
-------- -------- ------- -------
<S> <C> <C> <C> <C>
Revenue:
HMO medical premiums 63.3% 89.1% 71.8% 87.7%
Other insured medical premiums 20.2 2.5 14.4 3.2
Administrative and managed
care fees 16.5 8.4 13.8 9.1
----- ----- ----- -----
Total operating revenue 100.0 100.0 100.0 100.0
----- ----- ----- -----
Expenses:
Cost of HMO medical premiums 48.5 68.5 55.5 67.9
Cost of other insured
medical premiums 16.4 2.2 11.6 2.6
Premium tax 0.3 0.6 0.4 0.6
Selling, general and administrative:
HMO and fully-insured 12.5 12.9 12.8 12.9
Admin. and managed care fees 14.5 6.8 11.8 6.9
----- ----- ----- -----
Total selling, general and admin. 27.0 19.7 24.6 19.8
Depreciation and amortization 2.1 1.9 1.9 1.9
----- ----- ----- -----
Total operating expenses 94.3 92.9 94.0 92.8
----- ----- ----- -----
Operating income 5.7 7.1 6.0 7.2
Interest and other income 1.8 2.3 1.9 2.1
Interest expense (.6) - (.5) -
----- ----- ----- -----
Interest and other income, net 1.2 2.3 1.4 2.1
Income before equity in income of
unconsolidated affiliates, provision
for income taxes and minority interest 6.9 9.4 7.4 9.3
Equity in income of
unconsolidated affiliates - 0.2 - 0.4
Provision for income taxes (2.3) (3.0) (2.5) (3.0)
Minority interest - (0.1) - -
----- ----- ----- -----
Net income 4.6% 6.5% 4.9% 6.7%
===== ===== ===== =====
</TABLE>
Three Months Ended September 30, 1995 Compared to Three Months Ended
- --------------------------------------------------------------------
September 30, 1994
- ------------------
Revenue increased 111% to $328 million from $156 million. This
increase was largely the result of a 50% increase in HMO medical premium
revenue to $208 million from $139 million. The change in HMO medical premium
revenue was attributable to: (1) a $13 million increase due to the acquisitions
of Provident Health Care Plan (PHCP) and the remaining interest in the parent
company of HSNY; (2) the combined effect of a 42% increase in average
membership and a 3.6% decrease in average medical premium yield to $129 per
member per month (pmpm) from $134 pmpm at Healthsource New Hampshire (HSNH),
Healthsource Tennessee (HSTN), Healthsource Indiana (HSIN), Healthsource South
Carolina (HSSC), Healthsource Maine (HSME), Healthsource North Carolina (HSNC),
and Healthsource Arkansas (HSAR) (collectively "existing plans"); and (3) from
the commencement of operations of Healthsource Savannah (HSSV) and Healthsource
Kentucky (HSKY).
In addition, there was a significant increase in revenue resulting from an
increase in other insured medical premiums to $66 million from $4 million due
to the Provident acquisition. The acquired business consists of fully-insured
managed indemnity products and minimum premium and retrospectively rated
premium products with large employer groups.
The remaining revenue increase was due to a 314% increase in administrative and
managed care fees to $54 million from $13 million which resulted from the
Provident acquisition and the growth of the Company's self-funded,
Point-of-Service (POS) business in various states and workers' compensation
health care administration fees in New Hampshire.
13
<PAGE> 14
Cost of HMO medical premiums (health care costs) increased 49% to $159 million
from $107 million. This increase was due to the acquisition of the remaining
interest in HSNY, the commencement of operations of HSSV and HSKY, and the
combined effect of the 42% increase in average membership with a 4.3% decrease
in the average cost of medical premiums to $99 pmpm from $103 pmpm at existing
plans. This 4.3% decrease in costs resulted from lower inpatient and
outpatient hospital costs offsetting increases in physician, diagnostic and
pharmaceutical costs.
The cost of HMO medical premiums as a percent of HMO medical premiums (the
"medical loss ratio") decreased to 76.7% from 76.9% because the 3.6% decrease
in average medical premium yield was less than the 4.3% decrease in average
cost of medical premiums at existing plans, offset by HSNY, PHCP, HSSV and
HSKY which combined had higher medical loss ratios than the existing plans.
The Company expects the premium pricing environment to continue to be resistant
to increases during 1996 and possibly beyond. The Company's medical
loss ratio may increase if the Company is unable to keep the cost of medical
premiums in line with level or declining premium yield.
The cost of other insured medical premiums increased to $54 million from $3
million as a result of the acquisition of Provident's fully-insured managed
indemnity products and minimum premium and retrospectively rated premium
products.
Total selling, general and administrative (SG&A) expenses increased to $89
million from $31 million due to acquisitions and the development of existing
operations and new businesses. As a percent of total operating revenue, SG&A
expenses increased to 27.0% from 19.7%.
SG&A expenses related to HMO, fully-insured medical business and corporate
administration increased 104% to $41 million from $20 million. This increase
resulted primarily from the SG&A associated with the Provident business, the
acquisition of the remaining interest in HSNY, the membership increases at
existing HMOs, the commencement of operations at HSSV, development expenses at
start- up HMOs and other business development activities. SG&A expenses
related to administration and managed care fees increased 353% to $48 million
from $11 million due to the SG&A associated with the Provident business and
increases in the Company's administrative service businesses serving
self-insured POS and managed workers' compensation clients.
Depreciation and amortization expense increased 132% to $7 million from $3
million primarily due to the amortization expense associated with the Provident
acquisition and the acquisition of the remaining interest in HSNY.
Interest and other income increased 67% to $6 million from $3.6 million. This
increase resulted primarily from the increase in cash, cash equivalents and
marketable securities associated with the Provident acquisition and the
Company's continued increases in cash available from operations. The Company
incurred interest expense of $2 million in 1995 as a result of borrowings
associated with the Provident acquisition.
The Company had no equity in the income of unconsolidated affiliates for the
three months ended September 30, 1995 as compared to $0.4 million in the same
period in 1994. This decrease occurred because of the Company's acquisition of
the remaining interest in HSNY which was previously accounted for using the
equity method.
The Company's effective tax rate increased to 34.1% from 31.7% due primarily to
the Provident acquisition.
14
<PAGE> 15
Nine Months Ended September 30, 1995 Compared to Nine Months Ended September
- ----------------------------------------------------------------------------
30, 1994
- --------
Revenue increased 98% to $823 million from $417 million. The majority of the
difference was the result of a 62% increase in HMO medical premium revenue to
$591 million from $366 million. The change in HMO medical premium revenue was
attributable to: (1) an $81 million increase due to the acquisitions of PHCP
and the remaining interests in HSNC and HSNY, (2) the combined effect of a 40%
increase in average membership and a 3.2% decrease in average medical premium
yield to $131 pmpm from $136 pmpm at its wholly-owned subsidiaries HSNH, HSTN,
HSME, HSSC, HSAR and HSIN ("existing plans"); and (3) from the commencement of
operations of HSSV and HSKY.
In addition, due to the Provident acquisition, there was a significant increase
in revenue resulting from an increase in other insured medical premiums to $119
million from $13 million.
The remaining revenue increase was due to a 198% increase in administrative and
managed care fee revenue to $113 million from $38 million which resulted from
the Provident acquisition and continued growth of the Company's self-funded,
POS business in various states, workers' compensation health care
administration fees in New Hampshire, and the acquisition of the remaining
interest in Healthsource North Carolina Administrators, Inc. (HSNCA).
Cost of HMO medical premiums increased 62% to $457 million from $283 million.
This increase was due to the acquisition of the remaining interests in HSNC and
HSNY, the commencement of operations of HSSV and HSKY and the combined effect
of the 40% increase in average membership with a 4.5% decrease in average cost
of medical premiums to $101 pmpm from $105 pmpm at existing plans. This 4.5%
decrease in costs resulted from lower inpatient and outpatient hospital costs
offsetting increases in diagnostic testing, physician and pharmaceutical costs.
The Company's HMO medical loss ratio decreased to 77.2% from 77.3% because the
3.2% decrease in the average premium yield was less than the 4.5% decrease
in average cost of medical premiums at existing plans offset by HSNC,
HSNY, PHCP, HSSV, and HSKY which combined had higher medical loss ratios than
the existing plans. The Company expects the premium pricing environment to
continue to be resistant to increases during 1996 and possibly beyond. The
Company's medical loss ratio may increase if the Company is unable to keep the
cost of medical premiums in line with level or declining premium yield.
The cost of other insured medical premiums increased to $96 million from $11
million as a result of the acquisition of Provident's fully-insured managed
indemnity products and minimum premium and retrospectively rated premium
products.
Total SG&A expenses increased to $202 million from $83 million due to
acquisitions and the development of existing and new businesses. As a percent
of total operating revenue, SG&A increased to 24.6% from 19.8%.
SG&A expenses related to HMO, fully-insured medical business and corporate
administration increased 95% to $105 million from $54 million. This increase
was primarily due to the SG&A associated with the Provident business, the
acquisition of the remaining interests in HSNC and HSNY, the membership
increases at existing plans, the commencement of operations at HSSV and HSKY,
development expenses at start-up HMOs and other business development
activities. SG&A expenses related to administrative and managed care fees
increased 236% to $97 million from $29 million due to the SG&A associated with
the Provident business, the acquisition of the remaining interest in HSNCA and
increases in the Company's administrative service businesses serving
self-insured POS and managed workers' compensation clients.
15
<PAGE> 16
Depreciation and amortization expense increased 106% to $16 million from $8
million primarily due to amortization expense associated with the Provident
acquisition and the acquisition of the remaining interests in HSNC and HSNY.
Interest and other income increased 78% to $16 million from $8.7 million. This
increase resulted primarily from the increase in cash, cash equivalents and
marketable securities associated with the Provident acquisition, the
acquisition of HSNC and continued increases in cash available from operations.
The Company incurred interest expense of $3.6 million in 1995 as a result of
borrowings associated with the Provident acquisition.
The Company had no equity in the income of unconsolidated affiliates for the
nine months ended September 30, 1995 as compared to $1.7 million in the same
period in 1994. This decrease occurred because of the Company's acquisition of
the remaining interests in HSNC and HSNY which were previously accounted for
using the equity method.
The Company's effective tax rate increased to 34.1% from 30.4% due primarily to
the Provident and HSNC acquisitions.
Liquidity and Capital Resources
- -------------------------------
At September 30, 1995, cash, cash equivalents and marketable securities totaled
approximately $265 million, of which $230 million were held by regulated
operating companies and were largely restricted to use in those companies. The
balance was held by the Company.
During the first nine months of 1995, the Company generated $31 million from
operations. The Company invested approximately $32 million in property and
equipment. The Company's Provident acquisition on May 1, 1995 resulted in a
net cash expenditure of $150 million.
In April 1995, the Company agreed to acquire the assets of Central Massachusetts
Health Care, Inc. for a purchase price amended in November 1995 of $57.5 million
in cash subject to certain adjustments. The transaction is subject to certain
closing conditions, including the approval of the Massachusetts Attorney
General's Office and other regulatory approvals. The Company anticipates funding
the purchase price, if and when closing occurs, with cash on hand and the
proceeds from its revolving line of credit. Additionally, the Company has
signed a non-binding letter of intent to purchase the assets of PACC HMO and
PACC Health Plans for $80 million in cash.
The Company has a $300 million unsecured revolving credit agreement which is
committed through March 15, 2000. At September 30, 1995, the Company had $130
million outstanding.
The Company has no other significant commitments for capital resources. The
Company believes that its existing cash balances and cash flow generated by its
wholly-owned plans coupled with the revolving note payable are adequate to fund
its existing operations on a short-term and long-term basis.
Effects of Inflation
- --------------------
Historically, medical premiums and the cost of medical premiums generally have
risen at a rate higher than that for consumer goods as a whole. Nationally,
the rate of inflation of premiums and the cost of medical premiums slowed
substantially during the first nine months of 1995. The Company has
experienced a decrease of four and a half percent (4.5%) in the average cost of
medical premiums during the first nine months of 1995 over the similar period
of 1994. There is no assurance that the Company's cost of medical premiums
will continue to decline.
The Company attempts to control the costs of medical premiums through some or
all of the following activities: (1) improving its contracting methodologies
with providers to achieve lower costs and to promote risk-sharing; (2)
reviewing and, as necessary, modifying benefit designs so as to discourage
inappropriate levels
16
<PAGE> 17
of consumer-driven utilization; (3) using various utilization review techniques
and technologies to mitigate inappropriate use of health care resources by
providers; and (4) communicating with the Company's primary care physicians
about the impact of clinically inappropriate utilization of health care
resources.
17
<PAGE> 18
PART II - OTHER INFORMATION
Items 1, 2, 3, & 4. Not Applicable.
--------------
Item 5. Other Information.
-----------------
On November 8, 1995, the Company declared a two-for-one stock split
payable in the form of a 100% stock dividend to shareholders of
record on November 30, 1995. Certificates for the dividend shares
will be issued on December 15, 1995.
On November 9, 1995, the Company and Central Massachusetts Health
Care, Inc. (CMHC) amended their previously announced agreement for
the purchase by the Company of the operating assets of CMHC. The
amendment provides for a reduced purchase price of $57.5 million.
The closing of the agreement remains subject to various conditions,
including but not limited to approval by the Massachusetts Attorney
General's office and other regulatory approvals.
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
(a) Exhibits
11. Statement re: Computation of Net Income Per Share
(b) Reports on Form 8-K
On August 4, 1995, the Company filed Amendment No. 1 to its Form 8-K
dated June 14, 1995. The Amendment included certain historical and
proforma information relating to the business acquired from
Provident Life and Accident Insurance Company of America on
June 1, 1995.
18
<PAGE> 19
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
HEALTHSOURCE, INC.
Dated: November 10, 1995 By
/S/ Norman C. Payson
----------------------------------
Norman C. Payson, M.D.
President and
Chief Executive Officer
By
/S/ Thomas M. Congoran
----------------------------------
Thomas M. Congoran
Chief Financial Officer/Principal
Accounting Officer
19
<PAGE> 1
<TABLE>
HEALTHSOURCE, INC. EXHIBIT 11
COMPUTATION OF NET INCOME PER SHARE Page 1 of 2
(UNAUDITED)
<CAPTION>
Three Months Ended
September 30,
--------------------------------
1995 1994
----------- ----------
(in thousands
except per share data)
<S> <C> <C>
NET INCOME . . . . . . . . . . . . . . . . $15,023 $10,142
PREFERRED DIVIDENDS (1,563) -
------- -------
NET INCOME AVAILABLE TO COMMON SHAREHOLDERS: $13,460 $10,142
======= =======
COMPUTATION OF SHARES OUTSTANDING - PRIMARY:
- -------------------------------------------
Average weighted common shares
outstanding . . . . . . . . . . . . . 31,527 31,183
Dilutive effect of stock options issued . 347 517
------- -------
Average weighted common shares and share
equivalents outstanding . . . . . . . 31,874 31,700
======= =======
COMPUTATION OF SHARES OUTSTANDING - FULLY DILUTED:
- -------------------------------------------------
Average weighted common shares
outstanding . . . . . . . . . . . . . 31,527 31,183
Dilutive effect of stock options issued . 631 625
------- -------
Fully diluted shares outstanding . . . . . 32,158 31,808
======= =======
NET INCOME PER COMMON SHARE:
- ---------------------------
Primary $0.42 $0.32
Fully diluted 0.42 0.32
</TABLE>
20
<PAGE> 2
<TABLE>
HEALTHSOURCE, INC. EXHIBIT 11
COMPUTATION OF NET INCOME PER SHARE Page 2 of 2
(UNAUDITED)
<CAPTION>
Nine Months Ended
September 30,
--------------------------------
1995 1994
----------- ----------
(in thousands
except per share data)
<S> <C> <C>
NET INCOME . . . . . . . . . . . . . . . . $40,416 $28,049
PREFERRED DIVIDENDS (2,605) -
------- -------
NET INCOME AVAILABLE TO COMMON SHAREHOLDERS: $37,811 $28,049
======= =======
COMPUTATION OF SHARES OUTSTANDING - PRIMARY:
- -------------------------------------------
Average weighted common shares
outstanding . . . . . . . . . . . . . 31,403 30,704
Dilutive effect of stock options issued . 532 539
------- -------
Average weighted common shares and share
equivalents outstanding . . . . . . . 31,935 31,243
======= =======
COMPUTATION OF SHARES OUTSTANDING - FULLY DILUTED:
- -------------------------------------------------
Average weighted common shares
outstanding . . . . . . . . . . . . . 31,403 30,704
Dilutive effect of stock options issued . 683 575
------- -------
Fully diluted shares outstanding . . . . . 32,086 31,279
======= =======
NET INCOME PER COMMON SHARE:
- ---------------------------
Primary $1.18 $0.90
Fully diluted 1.18 0.90
</TABLE>
21
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1994
<PERIOD-START> JAN-01-1995
<PERIOD-END> SEP-30-1995
<CASH> 138,885
<SECURITIES> 126,567
<RECEIVABLES> 105,790
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 446,552
<PP&E> 87,852
<DEPRECIATION> 0
<TOTAL-ASSETS> 892,908
<CURRENT-LIABILITIES> 285,020
<BONDS> 130,000
<COMMON> 3,173
0
100,000
<OTHER-SE> 368,186
<TOTAL-LIABILITY-AND-EQUITY> 892,908
<SALES> 823,062
<TOTAL-REVENUES> 838,629
<CGS> 649,999
<TOTAL-COSTS> 774,210
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,607
<INCOME-PRETAX> 60,812
<INCOME-TAX> 20,707
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 40,416
<EPS-PRIMARY> 1.18
<EPS-DILUTED> 1.18
</TABLE>
