<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 June 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 August 4, 1995, 31,495,646 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
June 30, 1995 and December 31, 1994 3
Condensed Consolidated Statements of Operations
for the Three Months and Six Months ended
June 30, 1995 and 1994 4 - 5
Condensed Consolidated Statements of Cash Flows
for the Six Months ended June 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 - 16
---------------------------------------------
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 17
-----------------
Item 6. Exhibits and Reports on Form 8-K 18
--------------------------------
Signatures 19
</TABLE>
2
<PAGE> 3
HEALTHSOURCE, INC. AND SUBSIDIARIES
- -----------------------------------
<TABLE>
CONDENSED CONSOLIDATED BALANCE SHEETS
AS OF JUNE 30, 1995 AND DECEMBER 31, 1994
- ------------------------------------------------------------------------------------
<CAPTION>
June 30, December 31,
1995 1994
----------- ------------
(unaudited)
(in thousands)
<S> <C> <C>
ASSETS
- ------
Current assets:
Cash and cash equivalents . . . . . . . . $141,341 $ 67,193
Marketable securities . . . . . . . . . . 47,625 94,321
Premiums and administrative fees
receivable . . . . . . . . . . . . . . . 106,358 16,525
Restricted investments . . . . . . . . . . 157,514 -
Other current assets . . . . . . . . . . . 25,951 18,324
-------- --------
Total current assets . . . . . . . . . 478,789 196,363
Long-term assets:
Long-term marketable securities . . . . . 89,034 97,083
Property and leasehold improvements - net. 78,113 39,686
Restricted investments . . . . . . . . . . 7,939 6,618
Intangible assets - net. . . . . . . . . . 248,848 76,760
Other assets . . . . . . . . . . . . . . . 10,734 7,765
-------- --------
TOTAL $913,457 $424,275
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
- ------------------------------------
Current liabilities:
Medical claims payable . . . . . . . . . . $163,786 $ 72,676
Accounts payable and accrued expenses . . 114,656 17,536
Deferred revenue . . . . . . . . . . . . . 43,482 3,388
Other current liabilities . . . . . . . . 1,697 2,352
-------- --------
Total current liabilities . . . . . . 323,621 95,952
Long-term liabilities:
Revolving note payable . . . . . . . . . . 130,000 -
Other liabilities . . . . . . . . . . . . 3,399 2,098
-------- --------
Total liabilities. . . . . . . . . . . 457,020 98,050
-------- --------
Minority interest . . . . . . . . . . . . . . . . 3,533 3,741
-------- --------
Shareholders' equity:
Cumulative preferred stock . . . . . . . . 100,000 -
Common stock . . . . . . . . . . . . . . . 3,149 3,128
Additional paid-in capital . . . . . . . . 218,074 213,463
Retained earnings . . . . . . . . . . . . 131,794 107,443
Unrealized loss on marketable securities . (113) (1,550)
-------- --------
Total shareholders' equity . . . . . . . . . 452,904 322,484
-------- --------
TOTAL $913,457 $424,275
======== ========
</TABLE>
See notes to condensed consolidated financial statements
3
<PAGE> 4
HEALTHSOURCE, INC. AND SUBSIDIARIES
- -----------------------------------
<TABLE>
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED JUNE 30, 1995 AND 1994
- -----------------------------------------------------------------------------------------
<CAPTION>
Three Months Ended
June 30,
--------------------------
1995 1994
----------- ------------
(unaudited)
(in thousands,
except per share data)
<S> <C> <C>
Revenue:
HMO medical premiums . . . . . . . . . . . . . $195,081 $133,469
Other insured medical premiums . . . . . . . . 48,662 4,588
Administrative and managed care fees . . . . . 43,001 13,733
-------- --------
Total operating revenue . . . . . . . . . 286,744 151,790
-------- --------
Expenses:
Cost of HMO medical premiums . . . . . . . . . 151,070 104,250
Cost of other insured medical premiums . . . . 39,432 3,941
Premium tax . . . . . . . . . . . . . . . . . 987 773
Selling, general and administrative:
HMO and fully insured . . . . . . . . . . . 36,509 18,641
Admin. and managed care fees . . . . . . . . 36,988 10,536
-------- --------
Total selling, general and administrative. 73,497 29,177
Depreciation and amortization . . . . . . . . 5,816 2,747
-------- --------
Total operating expenses . . . . . . . . . 270,802 140,888
-------- --------
Operating income . . . . . . . . . . . . . 15,942 10,902
Interest and other income. . . . . . . . . . . . . . . . 6,000 2,556
Interest expense . . . . . . . . . . . . . . . . . . . . (1,433) -
-------- --------
Interest and other income, net . . . . . . 4,567 2,556
Income before equity in income of
unconsolidated affiliates, provision for
income taxes and minority interest . . . . . . . . . . 20,509 13,458
Equity in income of unconsolidated affiliates. . . . . . -- 321
-------- --------
Income before provision for income taxes and
minority interest. . . . . . . . . . . . . . . . . . . 20,509 13,779
Provision for income taxes . . . . . . . . . . . . . . . (7,028) (4,401)
Minority interest in net losses
of consolidated entities . . . . . . . . . . . . . . . 141 115
-------- --------
Net income . . . . . . . . . . . . . . . . $ 13,622 $ 9,493
======== ========
Net income per share:
Primary $ 0.39 $ 0.30
Fully diluted 0.39 0.30
Weighted average number of common and common
equivalent shares outstanding:
Primary 31,901 31,747
Fully diluted 31,901 31,747
</TABLE>
See notes to condensed consolidated financial statements
4
<PAGE> 5
HEALTHSOURCE, INC. AND SUBSIDIARIES
- -----------------------------------
<TABLE>
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 1995 AND 1994
- -----------------------------------------------------------------------------------------
<CAPTION>
Six Months Ended
June 30,
--------------------------
1995 1994
----------- ------------
(unaudited)
(in thousands,
except per share data)
<S> <C> <C>
Revenue:
HMO medical premiums . . . . . . . . . . . . . $383,393 $226,956
Other insured medical premiums . . . . . . . . 52,373 9,212
Administrative and managed care fees . . . . . 59,425 24,878
-------- --------
Total operating revenue . . . . . . . . . 495,191 261,046
-------- --------
Expenses:
Cost of HMO medical premiums . . . . . . . . . 297,392 176,075
Cost of other insured medical premiums . . . . 42,192 7,647
Premium tax . . . . . . . . . . . . . . . . . 2,178 1,624
Selling, general and administrative:
HMO and fully insured . . . . . . . . . . . 64,162 33,766
Admin. and managed care fees . . . . . . . . 50,120 18,460
-------- --------
Total selling, general and administrative. 114,282 52,226
Depreciation and amortization . . . . . . . . 9,148 4,802
-------- --------
Total operating expenses . . . . . . . . . 465,192 242,374
-------- --------
Operating income . . . . . . . . . . . . . 29,999 18,672
Interest and other income. . . . . . . . . . . . . . . . 9,593 5,159
Interest expense . . . . . . . . . . . . . . . . . . . . (1,433) -
-------- --------
Interest and other income, net . . . . . . 8,160 5,159
Income before equity in income of
unconsolidated affiliates, provision for
income taxes and minority interest . . . . . . . . . . 38,159 23,831
Equity in income of unconsolidated affiliates. . . . . . - 1,286
-------- --------
Income before provision for income taxes and
minority interest. . . . . . . . . . . . . . . . . . . 38,159 25,117
Provision for income taxes . . . . . . . . . . . . . (12,975) (7,462)
Minority interest in net losses
of consolidated entities . . . . . . . . . . . . . . . 208 252
-------- --------
Net income . . . . . . . . . . . . . . . . $ 25,392 $ 17,907
======== ========
Net income per share:
Primary $ 0.76 $ 0.58
Fully diluted 0.76 0.58
Weighted average number of common and common
equivalent shares outstanding:
Primary 31,966 31,013
Fully diluted 32,050 31,013
</TABLE>
See notes to condensed consolidated financial statements
5
<PAGE> 6
HEALTHSOURCE, INC. AND SUBSIDIARIES
- -----------------------------------
<TABLE>
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 1995 AND 1994
- -----------------------------------------------------------------------------------------
<CAPTION>
Six Months Ended
June 30,
--------------------------
1995 1994
----------- ------------
(unaudited)
(in thousands)
<S> <C> <C>
Cash flows from operating activities:
Net income . . . . . . . . . . . . . . . . . . . . $ 25,392 $ 17,907
Adjustments to reconcile net income
to net cash provided by operating activities:
Depreciation and amortization . . . . . . . . . 9,148 4,802
Equity items, including minority interest . . . (208) (1,538)
Deferred income taxes . . . . . . . . . . . . . 763 (1,167)
Changes in assets and liabilities,
net of effects of acquisitions:
Premiums and administrative fees receivable . . (8,976) (1,530)
Other current assets . . . . . . . . . . . . . (7,005) (1,185)
Medical claims payable . . . . . . . . . . . . 6,075 9,645
Accounts payable and accrued expenses . . . . . (5,776) 2,792
Deferred revenue . . . . . . . . . . . . . . . 8,449 1,126
--------- --------
Net cash provided by operating activities . . 27,862 30,852
--------- --------
Cash flows from investing activities:
Investment in affiliates/intangible assets, net
of cash acquired . . . . . . . . . . . . . . . . (147,061) 16,222
(Increase) decrease in marketable securities . . . 84,205 (14,552)
Additions to property and leasehold improvements . (20,943) (13,701)
Increase in other assets
and restricted investments . . . . . . . . . . . (1,321) (1,923)
--------- --------
Net cash used for investing activities . . . (85,120) (13,954)
--------- --------
Cash flows from financing activities:
Net borrowings under revolving note payable . . . 130,000 -
Investment by (purchase from)
minority shareholder . . . . . . . . . . . . . . - 79
Issuance of common stock . . . . . . . . . . . . . 2,359 981
Preferred stock dividends . . . . . . . . . . . . (1,042) -
Increase (decrease) in other liabilities . . . . . 89 (304)
--------- --------
Net cash provided by
financing activities . . . . . . . . . . . 131,406 756
--------- --------
Increase in cash and cash equivalents. . . . . . . . . . . . 74,148 17,654
Cash and cash equivalents, beginning of period . . . . . . . 67,193 64,229
--------- --------
Cash and cash equivalents, end of period . . . . . . . . . . $ 141,341 $ 81,883
========= ========
Supplemental disclosure of cash flow information:
Income taxes paid . . . . . . . . . . . . . . . . 13,372 6,169
</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 Coordinated Medical
Services of North Carolina, 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 six month periods
ended June 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, 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.
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,
7
<PAGE> 8
cost of other insured medical premiums and a significant portion of
administrative and managed care fees SG&A relate primarily to the
Provident acquisition.
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 Healthsource 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 common 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 CNY
Patient's Network, Inc. (CNY), the parent company of Patients' Choice,
Inc. (PCI) 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 CNY acquisitions
occurred on January 1, of each year (in thousands, except per share
data):
<CAPTION>
Six Months Ended
June 30,
----------------------
1995 1994
---------- ----------
<S> <C> <C>
Revenue $638,652 $497,839
Operating income 32,384 25,590
Net income 27,718 23,047
Primary $0.77 $0.63
Fully diluted 0.77 0.63
</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 indebtness to
total capital. In connection with the agreement, the Company is
required to maintain certain minimum financial ratios. At June 30,
1995, the Company had $130 million outstanding under this facility. The
interest rate at June 30, 1995 was approximately 6.5%.
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
six months ended June 30, 1995 and 1994 were 34.0% and 29.7%,
respectively.
8
<PAGE> 9
6. COMMITMENTS AND CONTINGENCIES
In April 1995, the Company entered into a definitive agreement to
purchase the assets of Central Massachusetts Health Care, Inc. (CMHC)
for a cash purchase price of approximately $62.5 million subject to
certain major closing conditions including but not limited to reaching
agreement on a new provider contract with a major hospital, 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, subject to certain adjustments. The letter of intent is
non-binding and subject to a definitive agreement and regulatory and
other approvals.
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 June 30, 1995, the related condensed
consolidated statements of operations for the three and six month periods ended
June 30, 1995 and 1994, and the condensed consolidated statements of cash flows
for the six month periods ended June 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
August 4, 1995
<PAGE> 11
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
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
received HMO licenses 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 Co. to assume the insured business and Healthsource Provident
Administrators, Inc. to administer the self-insured business.
Many Federal and State proposals have been made 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 second
quarter of 1995 of 2% as compared to the same period in 1994. The Company
expects this premium pricing environment to continue during 1995 and possibly
beyond. As a result of this premium pricing environment, the Company's medical
loss ratio and ultimately its profitability will depend on its ability to
control health care costs. Also, 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 second 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 and the
acquisition of the remaining interest in Patient's Choice, Inc. (PCI) in
November 1994.
11
<PAGE> 12
<TABLE>
The following table shows certain income statement data expressed as a
percentage of total revenue for the three months and six months ended June 30,
1995 and 1994:
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
---------------- -----------------
(unaudited) (unaudited)
1995 1994 1995 1994
------ ------- -------- --------
<S> <C> <C> <C> <C>
Revenue:
HMO medical premiums 68.0% 87.9% 77.4% 86.9%
Other insured medical premiums 17.0 3.0 10.6 3.6
Administrative and managed
care fees 15.0 9.1 12.0 9.5
----- ----- ----- -----
Total revenue 100.0 100.0 100.0 100.0
----- ----- ----- -----
Expenses:
Cost of HMO medical premiums 52.7 68.7 60.1 67.5
Cost of other insured
medical premiums 13.8 2.6 8.5 2.9
Premium tax 0.3 0.5 0.4 0.6
Selling, general and administrative:
HMO and fully-insured 12.7 12.3 12.9 12.9
Admin. and managed care fees 12.9 6.9 10.2 7.1
----- ----- ----- -----
Total selling, general and admin. 25.6 19.2 23.1 20.0
Depreciation and amortization 2.0 1.8 1.8 1.8
----- ----- ----- -----
Total expenses 94.4 92.8 93.9 92.8
----- ----- ----- -----
Operating income 5.6 7.2 6.1 7.2
Interest and other income 2.1 1.7 1.9 2.0
Interest expense (0.5) - (0.3) -
----- ----- ----- -----
Interest and other income, net 1.6 1.7 1.6 2.0
Income before equity in income of
unconsolidated affiliates, provision
for income taxes and minority interest 7.2 8.9 7.7 9.2
Equity in income of
unconsolidated affiliates - 0.2 - 0.5
Provision for income taxes (2.5) (2.9) (2.6) (2.9)
Minority interest - 0.1 - 0.1
----- ----- ----- -----
Net income 4.7% 6.3% 5.1% 6.9%
===== ===== ===== =====
</TABLE>
<TABLE>
The following table shows membership for the Company's affiliated health plans as
of June 30, 1995 and 1994:
<CAPTION>
6/30/95 6/30/94
------- -------
<S> <C> <C>
HMOs(1)
Northern Region:
New Hampshire 101,600 77,900
Maine 58,300 42,600
New York (Syracuse) 23,400 22,400
Indiana 65,000 38,200
New York City 28,400 -
------- -------
Sub-total 276,700 181,100
------- -------
Southern Region:
South Carolina 90,700 64,400
North Carolina 122,400 88,200
Arkansas 21,000 7,100
Tennessee 42,900 16,400
Georgia (Savannah) 6,000 -
------- -------
Sub-total 283,000 176,100
------- -------
Total HMO 559,700 357,200
======= =======
MANAGED INDEMNITY (INSURED)(2) 63,600 10,000
======= =======
</TABLE>
12
<PAGE> 13
<TABLE>
<S> <C> <C>
SELF AND PARTIALLY INSURED MEDICAL PRODUCTS
- -------------------------------------------
Point of Service 176,000 116,400
Workers' Compensation 117,400 75,700
Other Managed
Care/Administration(3) 2,286,700 319,900
--------- -------
Total Self-Insured 2,580,100 512,000
------------------ --------- -------
TOTAL ADMINISTERED MEDICAL 3,203,400 879,200
- -------------------------- ========= =======
DENTAL PRODUCTS(4)
- ------------------
Fully Insured 374,100 -
Self Insured 2,067,600 -
--------- -------
TOTAL ADMINISTERED DENTAL 2,441,700 -
- ------------------------- ========= =======
<FN>
(1) Includes membership for HMOs owned, co-owned, and/or managed by
Healthsource, including HMO membership of 9,000 at June 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 June 30, 1995 and 1994, these lives were 7,600 and 10,000,
respectively.
(2) Includes managed indemnity business from the Provident acquisition of
approximately 56,000 at June 30, 1995.
(3) Includes self-insured business from the Provident acquisition of
approximately 2,000,000 lives at June 30, 1995. Included in these totals are
approximately 367,000 lives at June 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>
Three Months Ended June 30, 1995 Compared to Three Months Ended June 30, 1994
- -----------------------------------------------------------------------------
Revenue increased 89% to $287 million from $152 million. This increase was
largely the result of a 46% increase in HMO medical premium revenue to $195
million from $133 million. The change in HMO medical premium revenue was
attributable to: (1) an $11 million increase due to the acquisitions of
Provident Health Care Plan (PHCP) and the remaining interest in the parent
company of PCI; (2) the combined effect of a 37% increase in average membership
and a 2% decrease in average medical premium yield to $132 per member per
month (pmpm) from $135 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).
In addition, due to the Provident acquisition, there was a significant increase
in revenue resulting from a 961% increase in other insured medical premiums
to $49 million from $5 million. 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 213% increase in administrative and
managed care fees to $43 million from $14 million resulting from (1) a $25
million increase as a result of the Provident acquisition and (2) continued
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.
Cost of HMO medical premiums (health care costs) increased 45% to $151 million
from $104 million. This increase was due to the acquisition of the remaining
13
<PAGE> 14
interest in PCI, the commencement of operations of HSSV, and the combined effect
of the 37% increase in average membership with a 4% decrease in average
cost of medical premiums to $101 pmpm from $105 pmpm at existing plans. This 4%
decrease in costs resulted from lower inpatient and outpatient hospital costs
offsetting increases in physician and pharmaceutical costs.
The cost of HMO medical premiums as a percent of HMO medical premiums (the
"medical loss ratio") decreased to 77.4% from 78.1% because the 2%
decrease in average medical premium yield was less than the 4% decrease in
average cost of medical premiums at existing plans offset by PCI, PHCP and HSSV
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 the balance of 1995 and possibly beyond. The Company's medical
loss ratio may increase during the remainder of 1995 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 901% to $39 million from $4
million due to the Provident acquisition.
Total selling, general and administrative (SG&A) expenses increased to $73
million from $29 million due to acquisitions and the development of existing
operations and new businesses. As a percent of total revenue, SG&A expenses
increased to 26% from 19%.
SG&A expenses related to HMO, fully-insured medical business and corporate
administration increased 96% to $37 million from $19 million. This increase
resulted primarily from the Provident acquisition, the acquisition of the
remaining interest in PCI, the membership increases at existing HMOs, the
commencement of operations at HSSV, development expenses at start-up HMOs and
other business development. SG&A expenses related to administration and managed
care fees increased 251% to $37 million from $11 million due to the Provident
acquisition and increases in the Company's administrative service businesses
serving self-insured POS and managed workers' compensation clients.
Depreciation and amortization expense increased 112% to $5.8 million from $2.7
million primarily due to the amortization expense associated with the Provident
acquisition and the acquisition of the remaining interest in PCI.
Interest and other income increased 135% to $6.0 million from $2.6 million.
This increase resulted primarily from the increase in cash 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 $1.4 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 six
months ended June 30, 1995 as compared to $0.3 million in the same period in
1994. This decrease occurred because of the Company's acquisition of the
remaining interests in PCI which was previously accounted for using the equity
method.
The Company's effective tax rate increased to 34.3% from 31.9% due primarily to
the Provident acquisition.
Six Months Ended June 30, 1995 Compared to Six Months Ended June 30, 1994
- -------------------------------------------------------------------------
Revenue increased 90% to $495 million from $261 million. The majority of the
difference was the result of a 69% increase in HMO medical premium revenue to
$383 million from $227 million. The change in HMO medical premium revenue was
attributable to: (1) a $68 million increase due to the acquisitions of PHCP and
the remaining interests in HSNC and PCI, (2) the combined effect of a 37%
increase in average membership and a 2% decrease in average medical premium
yield to $133 pmpm from $136 pmpm at its wholly-owned subsidiaries HSNH, HSTN,
HSME,
14
<PAGE> 15
HSSC, HSAR and HSIN ("existing plans"); and (3) from the commencement of
operations of HSSV.
In addition, due to the Provident acquisition, there was a significant increase
in revenue resulting from a 469% increase in other insured medical premiums
to $52 million from $9 million.
The remaining revenue increase was due to a 139% increase in administrative and
managed care fee revenue to $59 million from $25 million which was attributed to
(1) $25 million in administrative fees due to the Provident acquisition and (2)
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 69% to $297 million from $176 million.
This increase was due to the acquisition of the remaining interests in HSNC and
PCI, the commencement of operations of HSSV and the combined effect of
the 37% increase in average membership with a 4% decrease in average cost of
medical premiums to $102 pmpm from $106 pmpm at existing plans. This 4%
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 remained flat at 77.6% because although
the 2% decrease in the average premium yield was less than the 4% decrease in
average cost of medical premiums at existing plans, HSNC, PCI, PHCP, and HSSV
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 the balance of 1995 and possibly beyond. The Company's
medical loss ratio may increase during the remainder of 1995 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 452% to $42 million from $8
million due to the Provident acquisition.
Total SG&A expenses increased to $114 million from $52 million due to
acquisitions and the development of existing and new businesses. As a percent
of total revenue, SG&A increased to 23% from 20%.
SG&A expenses related to HMO, fully-insured medical business and corporate
administration increased 90% to $64 million from $34 million. This increase was
primarily due to the Provident acquisition, the acquisition of the remaining
interests in HSNC and PCI, the membership increases at existing plans, the
commencement of operations at HSSV, development expenses at start-up HMOs and
other business development. SG&A expenses related to administrative and managed
care fees increased 172% to $50 million from $18 million due to the Provident
acquisition, 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.
Depreciation and amortization expense increased 91% to $9.1 million from $4.8
million primarily due to amortization expense associated with the Provident
acquisition and the acquisition of the remaining interests in HSNC and PCI.
Interest and other income increased 86% to $10 million from $5 million. This
increase resulted primarily from the increase in cash 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 $1.4 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 six
months ended June 30, 1995 as compared to $1.3 million in the same period in
1994. This decrease occurred because of the Company's acquisition of the
15
<PAGE> 16
remaining interests in HSNC and PCI which were previously accounted for using
the equity method.
The Company's effective tax rate increased to 34.0% from 29.7% due primarily to
the Provident and HSNC acquisitions.
Liquidity and Capital Resources
- -------------------------------
At June 30, 1995, cash, cash equivalents and marketable securities totaled
approximately $278 million, of which $229 million were held by regulated
operating companies and were largely restricted to use in those companies.
The balance was held by the Company and resulted primarily from the Company's
operations.
During the first six months of 1995, the Company generated $28 million from
operations. The Company invested approximately $21 million in property and
equipment. The Company's Provident acquisition on May 1, 1995 resulted in a net
cash decrease of $147 million.
In April 1995, the Company agreed to acquire the assets of Central Massachusetts
Health Care for $62.5 million in cash. The transaction is subject to several
significant closing conditions, including reaching agreement on a new provider
agreement with a major hospital provider and various 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.
The Company has a $300 million unsecured revolving credit agreement which is
committed through March 15, 2000. At June 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 moderated during
1994 and the first six months of 1995. The Company has experienced a decrease
of four percent (4%) in the average cost of medical premiums during the first
six 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 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.
16
<PAGE> 17
PART II - OTHER INFORMATION
Items 1, 2, 3, & 4. Not Applicable.
---------------
Item 5. Other Information.
------------------
On July 26, 1995, the Company announced that it signed a letter of intent with
PACC HMO and PACC Health Plans (together, "PACC"), affiliated not-for-profit HMO
and managed care companies based in Clackamas, Oregon, pursuant to which the
Company will purchase substantially all of the operating assets of PACC,
including over $41 million in tangible net equity, for approximately $80
million in cash, subject to adjustment. The letter of intent is non-binding and
subject to a definitive agreement and regulatory and other approvals. No
assurance can be given that agreement will be reached or such approvals will be
received.
PACC is a 108,000 member multiple product HMO and managed care company which
primarily serves the greater Portland area and is licensed to operate in Oregon
and Washington. PACC provides commercial HMO, Medicaid HMO, Medicare cost HMO,
point-of-service HMO, fully-insured PPO and managed indemnity service.
17
<PAGE> 18
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
(a) Exhibits
11. Statement re: Computation of Net Income Per Share
27. Financial Data Schedule
(b) Reports on Form 8-K
The Company filed a Form 8-K dated June 14, 1995, as amended August 4,
1995, reporting the closing on June 1, 1995 (effective as of May 1,
1995) of the acquisition of the group health, HMO and third-party
administration business of Provident Life and Accident Insurance
Company of America ("Provident") for $231 million in cash and
preferred stock. The Company paid $131 million in cash and issued to
Provident a new class of 6.25% cumulative non-convertible preferred
stock with a face value of $100 million.
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: August 11, 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
June 30,
-------------------------
1995 1994
----------- -----------
(in thousands
except per share data)
<S> <C> <C>
NET INCOME . . . . . . . . . . . . . . . . . . . . $13,622 $ 9,493
PREFERRED DIVIDENDS . . . . . . . . . . . . . . . (1,042) -
------- -------
12,580 9,493
======= =======
COMPUTATION OF SHARES OUTSTANDING - PRIMARY:
- --------------------------------------------
Average weighted common shares
outstanding . . . . . . . . . . . . . . . . . 31,379 31,132
Dilutive effect of stock options issued . . . . . 522 615
------- -------
Average weighted common shares and share
equivalents outstanding . . . . . . . . . . . 31,901 31,747
======= =======
COMPUTATION OF SHARES OUTSTANDING - FULLY DILUTED:
- --------------------------------------------------
Average weighted common shares
outstanding . . . . . . . . . . . . . . . . . 31,379 31,132
Dilutive effect of stock options issued . . . . . 522 615
------- -------
Fully diluted shares outstanding . . . . . . . . . 31,901 31,747
======= =======
NET INCOME PER SHARE:
- ---------------------
Primary $ 0.39 $ 0.30
Fully diluted 0.39 0.30
</TABLE>
21
<PAGE> 2
<TABLE>
HEALTHSOURCE, INC. EXHIBIT 11
COMPUTATION OF NET INCOME PER SHARE Page 2 of 2
(UNAUDITED)
<CAPTION>
Six Months Ended
June 30,
-------------------------
1995 1994
----------- -----------
(in thousands
except per share data)
<S> <C> <C>
NET INCOME . . . . . . . . . . . . . . . . . . . . $25,392 $17,907
PREFERRED DIVIDENDS . . . . . . . . . . . . . . . (1,042) -
------- -------
24,350 17,907
======= =======
COMPUTATION OF SHARES OUTSTANDING - PRIMARY:
- --------------------------------------------
Average weighted common shares
outstanding . . . . . . . . . . . . . . . . . 31,341 30,463
Dilutive effect of stock options issued . . . . . 625 550
------- -------
Average weighted common shares and share
equivalents outstanding . . . . . . . . . . . 31,966 31,013
======= =======
COMPUTATION OF SHARES OUTSTANDING - FULLY DILUTED:
- --------------------------------------------------
Average weighted common shares
outstanding . . . . . . . . . . . . . . . . . 31,341 30,463
Dilutive effect of stock options issued . . . . . 709 550
------- -------
Fully diluted shares outstanding . . . . . . . . . 32,050 31,013
======= =======
NET INCOME PER SHARE:
- ---------------------
Primary $ 0.76 $ 0.58
Fully diluted 0.76 0.58
</TABLE>
22
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1994
<PERIOD-START> JAN-01-1995
<PERIOD-END> JUN-30-1995
<CASH> 141,341
<SECURITIES> 136,659
<RECEIVABLES> 106,358
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 478,789
<PP&E> 78,113
<DEPRECIATION> 0
<TOTAL-ASSETS> 913,457
<CURRENT-LIABILITIES> 323,621
<BONDS> 0
<COMMON> 3,149
0
100,000
<OTHER-SE> 349,755
<TOTAL-LIABILITY-AND-EQUITY> 913,457
<SALES> 495,191
<TOTAL-REVENUES> 504,784
<CGS> 389,704
<TOTAL-COSTS> 465,192
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,433
<INCOME-PRETAX> 38,159
<INCOME-TAX> 12,975
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 25,392
<EPS-PRIMARY> .76
<EPS-DILUTED> .76
</TABLE>
