<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 March 31, 1997
[ ] 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
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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 May 5, 1997, 64,006,371 shares of $.10 par value common stock of the
Registrant were outstanding.
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HEALTHSOURCE, INC.
INDEX
Page Number
-----------
Part I. Financial Information
- -----------------------------
Item 1. Financial Statements
--------------------
Condensed Consolidated Balance Sheets as of
March 31, 1997 and December 31, 1996 3
Condensed Consolidated Statements of Operations
for the Three Months Ended March 31, 1997 and 1996 4
Condensed Consolidated Statements of Cash Flows
for the Three Months Ended March 31, 1997 and 1996 5
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of
---------------------------------------
Financial Condition and Results of Operations 7 - 10
---------------------------------------------
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 11 - 13
-----------------
Item 6. Exhibits and Reports on Form 8-K 13
--------------------------------
Signatures 14
2
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HEALTHSOURCE, INC. AND SUBSIDIARIES
- -----------------------------------
<TABLE>
CONDENSED CONSOLIDATED BALANCE SHEETS
AS OF MARCH 31, 1997 AND DECEMBER 31, 1996
- --------------------------------------------------------------------------------
<CAPTION>
March 31, December 31,
1997 1996
--------- ------------
(unaudited)
(in thousands)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents . . . . . . . . $ 120,304 $ 125,017
Marketable securities . . . . . . . . . . 27,823 25,135
Premiums and administrative fees
receivable . . . . . . . . . . . . . . . 75,915 55,984
Self-insured claims payments receivable . 44,193 52,237
Restricted investments . . . . . . . . . . 122,097 108,136
Other current assets . . . . . . . . . . . 58,731 62,361
---------- ----------
Total current assets . . . . . . . . . 449,063 428,870
Long-term assets:
Long-term marketable securities . . . . . 110,198 110,049
Property and leasehold improvements - net 126,003 130,795
Restricted investments . . . . . . . . . . 9,886 11,072
Intangible assets - net . . . . . . . . . 337,958 301,704
Other assets . . . . . . . . . . . . . . . 20,029 24,410
---------- ----------
TOTAL $1,053,137 $1,006,900
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Medical claims payable . . . . . . . . . . $ 199,371 $ 175,481
Accounts payable and accrued expenses . . 148,500 137,639
Estimated liability under retrospective
refund agreements . . . . . . . . . . . 33,141 33,463
Deferred revenue . . . . . . . . . . . . . 22,479 16,158
Other current liabilities . . . . . . . . 1,508 2,423
---------- ----------
Total current liabilities . . . . . . 404,999 365,164
Long-term liabilities:
Revolving note payable . . . . . . . . . . - -
Convertible subordinated notes . . . . . . 247,250 247,250
Other liabilities . . . . . . . . . . . . 8,385 9,061
---------- ----------
Total liabilities . . . . . . . . . . 660,634 621,475
---------- ----------
Shareholders' equity:
Common stock . . . . . . . . . . . . . . . 6,389 6,380
Additional paid-in capital . . . . . . . . 226,132 224,778
Retained earnings . . . . . . . . . . . . 161,455 154,479
Unrealized gain (loss) on
marketable securities . . . . . . . . . (1,473) (212)
---------- ----------
Total shareholders' equity . . . . . . 392,503 385,425
---------- ----------
TOTAL $1,053,137 $1,006,900
========== ==========
</TABLE>
See notes to condensed consolidated financial statements
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HEALTHSOURCE, INC. AND SUBSIDIARIES
- -----------------------------------
<TABLE>
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 1997 AND 1996
- --------------------------------------------------------------------------------
<CAPTION>
Three Months Ended
March 31,
--------------------------
1997 1996
--------- ---------
(unaudited)
(in thousands,
except per share data)
<S> <C> <C>
Revenue:
HMO medical premiums . . . . . . . . . . . . . $ 371,042 $ 290,755
Other insured medical premiums . . . . . . . . 47,497 68,112
Administrative and managed care fees . . . . . 58,222 60,225
--------- ---------
Total operating revenue . . . . . . . . . 476,761 419,092
--------- ---------
Expenses:
Cost of HMO medical premiums . . . . . . . . . 305,830 227,855
Cost of other insured medical premiums . . . . 37,312 57,706
Selling, general and administrative:
HMO and fully insured . . . . . . . . . . . 64,171 56,963
Admin. and managed care services . . . . . . 48,376 47,963
--------- ---------
Total selling, general and administrative. 112,547 104,926
Other charges . . . . . . . . . . . . . . . . 550 -
Depreciation and amortization . . . . . . . . 11,312 8,709
--------- ---------
Total operating expenses . . . . . . . . . 467,551 399,196
--------- ---------
Operating income . . . . . . . . . . . . . 9,210 19,896
Interest and other income . . . . . . . . . . . . . 5,483 6,461
Interest expense . . . . . . . . . . . . . . . . . (3,166) (2,373)
--------- ---------
Interest and other income, net . . . . . . 2,317 4,088
--------- ---------
Income before provision for income taxes . . . . . 11,527 23,984
Income tax provision . . . . . . . . . . . . . . . (4,551) (8,422)
--------- ---------
Net income . . . . . . . . . . . . . . . . . . . . $ 6,976 $ 15,562
========= =========
Preferred stock dividends . . . . . . . . . . . . . - (1,128)
--------- ---------
Net income
available to common shareholders . . . . . . . . $ 6,976 $ 14,434
========= =========
Net income per common share: . . . . . . . . . . . $ 0.11 $ 0.22
Weighted average number of common and common
equivalent shares outstanding: . . . . . . . . . 64,266 65,953
</TABLE>
See notes to condensed consolidated financial statements
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HEALTHSOURCE, INC. AND SUBSIDIARIES
- -----------------------------------
<TABLE>
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 1997 AND 1996
- --------------------------------------------------------------------------------
<CAPTION>
Three Months Ended
March 31,
----------------------------
1997 1996
-------- ---------
(unaudited)
(in thousands)
<S> <C> <C>
Cash flows from operating activities:
Net income ........................................ $ 6,976 $ 15,562
Adjustments to reconcile net income
to net cash provided by operating activities:
Depreciation and amortization ................. 11,312 8,709
Changes in assets and liabilities,
net of effects of acquisitions:
Premiums and administrative fees receivable ... (18,209) 5,345
Other current assets .......................... 12,265 (8,904)
Medical claims payable ........................ 16,782 6,346
Accounts payable and accrued expenses ......... (7,512) 8,161
Deferred revenue .............................. 4,850 4,359
-------- ---------
Net cash provided by operating activities ... 26,464 39,578
-------- ---------
Cash flows from investing activities:
Investment in affiliates/intangible assets, net
of cash acquired ................................ (31,191) (46,879)
(Increase) decrease in marketable securities ...... 2,317 (26,631)
Additions to property and leasehold improvements .. 1,662 (13,715)
(Increase) decrease in other assets and
restricted investments .......................... (4,425) (2,908)
-------- ---------
Net cash used for investing activities ...... (31,637) (90,133)
-------- ---------
Cash flows from financing activities:
Issuance of convertible subordinated notes ........ - 247,250
Redemption of preferred stock ..................... - (100,000)
Net borrowings (repayment) under revolving
note payable .................................... - (85,000)
Issuance of common stock .......................... 1,136 813
Preferred stock dividends ......................... - (1,128)
Increase (decrease) in other liabilities ............... (676) (694)
-------- ---------
Net cash provided by financing activities ... 460 61,241
-------- ---------
Increase (decrease) in cash and cash equivalents ....... (4,713) 10,686
Cash and cash equivalents, beginning of period ......... 125,017 121,467
-------- ---------
Cash and cash equivalents, end of period ............... $120,304 $ 132,153
======== =========
Supplemental disclosure of cash flow information:
Income taxes paid ................................. $ 445 $ 2,312
Interest paid ..................................... $ 6,257 1,856
Supplemental disclosure of non-cash transactions:
</TABLE>
See notes to condensed consolidated financial statements
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HEALTHSOURCE, INC. AND SUBSIDIARIES
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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. These financial statements should be read in
conjunction with the audited consolidated financial statements of
Healthsource, Inc. (the Company) for the year ended December 31, 1996,
included in the Company's Annual Report on Form 10K for the year ended
December 31, 1996. In the opinion of management, all normal recurring
adjustments considered necessary for a fair presentation have been
included.
In February 1997, the Company signed an agreement of merger with CIGNA
Corporation providing for the acquisition of the Company at a cash price of
$21.75 per share, subject to regulatory and other approvals and conditions.
The results of operations for the three month period are not necessarily
indicative of the results of operations to be expected for the full year.
2. SUMMARY OF SIGNIFICANT INCOME STATEMENT POLICIES
Reclassifications - Certain prior year amounts have been reclassified to
conform with the current year presentation.
3. COMMITMENTS AND CONTINGENCIES
The Company is involved in legal actions in the ordinary course of
business. Although the outcome of any such legal actions cannot be
predicted, in the opinion of management there are no legal proceedings
pending against or involving the Company, the outcome of which is likely to
have a material adverse effect upon the consolidated financial position or
results of operations of the Company.
4. OTHER CHARGES
Other charges include $1.9 million in costs associated with the CIGNA
transaction offset by a $1.3 million reduction in the Company's
restructuring reserve to reflect the Company's current business plans for
certain subsidiaries.
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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 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 health maintenance organization ("HMO") companies resulting in
wholly-owned subsidiaries in South Carolina, Tennessee, Maine, Indiana, North
Carolina, Syracuse, New York, Massachusetts, and the metropolitan New York City
and Northern New Jersey areas. The Company has formed strategic alliances with
hospitals and organized HMOs in Arkansas, Georgia, north central Texas, and
southwestern Ohio and has formed additional new HMOs in Connecticut and
Louisville, Kentucky. The Company also has indemnity and third-party
administration businesses which are principally associated with its Healthsource
Provident subsidiary.
The Company has experienced an increase in average premium yield during the
first three months of 1997 of 1.6% as compared to the same period in 1996 for
the same health plans in 1996. The 1.6% average yield increase is also net of a
significant change in the mix of members from various health plans which on a
mix-adjusted basis would result in a higher average premium yield increase.
Although continuing to experience strong resistance to premium increases by
employers and intense price competition from payors, including new entrants, the
Company believes premium pricing conditions are better in 1997 than the prior
year and the Company has generally increased premium yield on its 1997 renewal
business whenever practicable. The Company's medical loss ratio, and ultimately
its profitability, will depend upon its ability to control healthcare and
administrative costs commensurate with the premium pricing environment. The
Company can make no assurances that it will be able to increase premium levels
at a faster rate than healthcare costs increase.
Acquisition Developments
- ------------------------
In February 1997, the Company signed an agreement of merger with CIGNA
Corporation providing for the acquisition of the Company at a cash price of
$21.75 per share, subject to regulatory and other approvals and conditions. In
January 1997, the Company completed its previously announced agreement with
Chubb Life Insurance Company of America to acquire the remaining 85% interest in
ChubbHealth, a 68,000 member HMO operating in the metropolitan New York/New
Jersey market.
Recent Reduction in Profitability; Enrollment Levels; Review of Operations
- --------------------------------------------------------------------------
The Company's profitability in 1997 is dramatically lower than the similar
period in 1996, as a result of the continuing deterioration in healthcare costs
and despite a modest increase in premium pricing. The Company has sought
increases in 1997 premium pricing which has contributed to its reduced
enrollment growth rates and sought to strategically exit from certain employer
accounts which contributed to its enrollment level as of January 1, 1997 at
certain plans being lower than 1996 levels. The Company is also attempting to
improve its medical loss ratio through initiatives to reduce inappropriate or
excessive healthcare costs. Such initiatives (which may include lower payment
levels to providers, new contracting methodologies, and steerage of members more
aggressively to more efficient providers, and other measures) may cause the
Company's relationship with healthcare providers to be strained in certain
markets. In some markets,
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however, the Company may have to increase payment levels to providers over 1996
levels. No assurance can be given that healthcare costs will not continue to
increase to even more unacceptable levels.
<TABLE>
The following table shows membership for the Company's affiliated health plans
as of March 31, 1997 and 1996:
<CAPTION>
3/31/97 3/31/96
------- -------
<S> <C> <C>
HMOs
Northern Region:
New Hampshire ......................... 134,900 127,100
Massachusetts ......................... 75,500 81,100
Indiana ............................... 31,600 69,000
Maine ................................. 70,500 66,800
New York City ......................... 33,400 32,500
New York (Syracuse) ................... 17,300 21,900
New Jersey ............................ 37,000 8,300
Kentucky .............................. 13,700 12,400
Ohio .................................. 2,500 800
Connecticut ........................... 2,200 -
--------- ---------
Sub-total ...................... 418,600 419,900
--------- ---------
Southern Region:
North Carolina ........................ 224,300 175,400
South Carolina ........................ 137,900 150,200
Tennessee ............................. 94,900 68,500
Arkansas .............................. 32,600 34,300
Georgia ............................... 27,500 10,800
Texas ................................. 13,600 5,300
--------- ---------
Sub-total ...................... 530,800 444,500
--------- ---------
Total HMO ...................... 949,400 864,400
--------- ---------
MANAGED INDEMNITY (INSURED) ............... 40,600 64,600
SELF AND PARTIALLY INSURED MEDICAL PRODUCTS
- -------------------------------------------
Point of Service ........................ 179,100 210,900
Workers' Compensation ................... 89,100 122,000
Other Managed
Care/Administration ................... 1,848,300 2,187,600
--------- ---------
Total Self-Insured ............... 2,116,500 2,520,500
------------------ --------- ---------
TOTAL ADMINISTERED MEDICAL ................ 3,106,500 3,449,500
- -------------------------- --------- ---------
DENTAL PRODUCTS
- ---------------
Fully Insured ........................... 314,900 314,100
Self Insured ............................ 2,268,500 2,170,800
--------- ---------
TOTAL ADMINISTERED DENTAL ................. 2,583,400 2,484,900
- ------------------------- --------- ---------
</TABLE>
Three Months Ended March 31, 1997 Compared to Three Months Ended March 31, 1996
- -------------------------------------------------------------------------------
Revenue increased 14% to $477 million from $419 million. This increase was
largely the result of a 28% increase in HMO medical premium revenue to $371
million from $291 million. The change in HMO medical premium revenue was
attributable to: (1) the combined effect of a 11% increase in average membership
and a 1.6% increase in average medical premium yield to $127 per member per
month (pmpm) from $125 pmpm at Healthsource New Hampshire (HSNH), Healthsource
Tennessee (HSTN), Healthsource Indiana (HSIN), Healthsource South Carolina
(HSSC), Healthsource Maine (HSME), Healthsource North Carolina (HSNC),
Healthsource Arkansas (HSAR), Healthsource Georgia (HSGA), Healthsource New York
(HSNY), Healthsource Kentucky (HSKY), Healthsource North Texas (HSNTX), and
Healthsource Ohio (HSOH) (collectively "Existing Plans"); (2) a $44 million
increase due to the acquisitions of Healthsource CMHC ("HSCMHC") and
Healthsource Metro New York (HSMNY); and (3) the commencement of operations of
Healthsource Texas (HSTX) and Healthsource Connecticut (HSCT).
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Other insured medical premium decreased 30% to $47 million from $68 million as a
result of both lapses and a conscious effort to reduce or convert the Company's
non-HMO insured book of business.
Cost of HMO medical premiums (health care costs) increased 34% to $306 million
from $228 million. This increase was due to: (1) the combined effect of the 11%
increase in average membership with a 6.4% increase in the average cost of
medical premiums to $105 pmpm from $99 pmpm at Existing Plans; (2) a $38 million
increase due to the acquisitions of HSCMHC and HSMNY; and (3) the commencement
of operations at HSTX and HSCT. This 6.4% increase in costs resulted principally
from higher pharmaceutical and diagnostic costs and certain pricing adjustments
to non-capitated provider contract pricing.
The cost of HMO medical premiums as a percent of HMO medical premiums (the
"medical loss ratio") increased to 82.4% from 78.4% primarily because the 1.6%
increase in average medical premium yield was less than the 6.4% increase in
average cost of medical premiums at Existing Plans. The divergence between
premium pricing and health care costs was primarily responsible for the
Company's significant reduction in profitability. Failure to achieve further
increases in premium yield at a rate equal to that of healthcare cost increases
will increase the Company's medical loss ratio and reduce net income.
The cost of other insured medical premiums decreased to $37 million from $58
million as a result of a decrease in the fully-insured managed indemnity
products and minimum premium and retrospectively rated premium products and
generally better loss experience on existing accounts.
Total selling, general and administrative (SG&A) expenses increased to $113
million from $105 million due to acquisitions and the development of existing
operations and new businesses. As a percent of total operating revenue, SG&A
expenses decreased to 23.6% from 25% as a result of a number of factors
including change in mix of business where SG&A levels as a percentage of revenue
are far lower in fully-insured business than self-insured business where revenue
does not include health care expenses, a reduction in workforce in 1996 and
other cost containment measures.
SG&A expenses related to HMO, fully-insured medical business and corporate
administration increased 13% to $64 million from $57 million. This increase
resulted primarily from the SG&A expense associated with the acquisition of
HSCMHC and HSMNY, the membership increases at existing HMOs, the commencement of
operations at HSTX and HSCT, development expenses at start-up HMOs and other
business development activities. SG&A expenses related to administration and
managed care fees remained level at $48 million.
Other charges include $1.9 million in costs associated with the CIGNA
transaction offset by a $1.3 million reduction in the Company's restructuring
reserve to reflect the Company's current business plans for certain
subsidiaries.
Depreciation and amortization expense increased 30% to $11.3 million from $8.7
million primarily due to the amortization expense associated with HSCMHC and
HSMNY and depreciation associated with 1996 capital purchases.
Interest expense increased 33% to $3.2 from $2.4 million as a result of the
convertible subordinated notes issued in March 1996.
Liquidity and Capital Resources
- -------------------------------
At March 31, 1997, cash, cash equivalents and marketable securities totaled
approximately $258 million, of which the majority were held by regulated
operating companies and, except for permissible dividends, were largely
restricted to use in those companies.
During the first three months of 1997, the Company generated $26 million of cash
from operations and invested approximately $2 million in additional facilities
and information technology.
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The Company has a $200 million unsecured revolving credit agreement with Chase
Manhattan Bank, N.A. as agent ("Chase Facility"). At March 31, 1997, the
Company had no amount outstanding. Due to certain covenants taking effect in
March 1998, the effective availability of the Chase Facility is approximately
$100 million.
The principal and interest on the Notes is by their terms subordinated in right
of payment to principal and interest on substantially all existing and future
debt (including debt under the Chase Facility) incurred by the Company ("Senior
Debt"). As of March 31, 1997 the Company had no Senior Debt. As of such date,
the Company's subsidiaries had aggregate liabilities of appoximately $377
million, to which the Notes are also structurally subordinated.
In January 1997, the Company completed the acquisition of the 85% interest in
ChubbHealth, Inc. which it did not already own in exchange for a cash payment
of $25.3 million. The Company may be required to contribute an additional $6
million to ChubbHealth under the terms of the agreement. The Company funded the
purchase with cash from operations.
The Company believes that its existing cash balances and cash flow generated by
its wholly-owned plans coupled with the amounts available for borrowing under
the Chase Facility are adequate to fund its existing operations and commitments.
Effects of Inflation
- --------------------
Medical premiums and the costs of medical premiums (healthcare costs) generally
increase at higher rates than the overall rates of inflation in the economy.
Accordingly, the Company must use appropriate utilization management techniques
and provider contracting methodologies to counteract inflationary trends in
healthcare costs and, given the current period of difficult premium pricing, any
failure to adequately control healthcare costs can substantially increase the
Company's medical loss ratio and decrease the Company's net income.
* * * * * *
Risks associated with any forward looking statements contained in Management's
Discussion and Analysis of Financial Condition and Results of Operations are
discussed in Item 5, Other Information.
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PART II - OTHER INFORMATION
Items 1, 2, 3, & 4. Not Applicable.
--------------
Item 5. Other Information.
-----------------
(I) SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF
1995. The statements contained in the Management's Discussion and Analysis of
Financial Condition and Results of Operations and those contained in the
Company's Annual Report on Form 10-K concerning future profitability, premium
pricing levels, future levels of medical-loss ratios, the Company's ability to
control healthcare and SG&A costs and all other statements that are not
historical facts are forward looking statements. Because such statements involve
risks and uncertainties, the following factors, among others, could affect the
Company's actual results and could cause actual future results to differ
materially from those expressed in any forward looking statements made by the
Company or its representatives including those made herein or in SEC filings,
press releases, presentations to securities analysts or investors or other
communications by the Company:
CONTROL AND PREDICTABILITY OF HEALTH CARE COSTS. The Company's profitability
depends in large part on predicting and maintaining effective control of the
healthcare costs of its HMOs. The future profitability of the Company's HMOs is
dependent upon controlling future healthcare costs in part through appropriate
benefit design, utilization control and negotiation of favorable provider
contracts, including global capitation arrangements with hospitals which
generally link healthcare costs for assigned members to the premiums received
for such members. The Company may be unable to predict accurately or to control
health care costs because of many factors, including the inherent
unpredictability of rates of utilization of services in any given period and the
volatility of such use particularly in quarterly periods; major epidemics;
undetected increases in costs of units of services (in some cases implemented by
providers without prior notice); changes in risk profile of a rapidly increasing
membership due to pre-existing medical conditions, changing demographics and
other factors; and increased utilization driven by changes in physician practice
patterns and new techniques (e.g., use of bone marrow transplants for an
increasing number of diagnostic categories)and by consumer demand for new drugs.
There can be no assurance that the Company will be successful in predicting or
mitigating the effect of any of these factors nor that its global capitation
agreements will be able to effectively buffer these factors or costs for
assigned members, especially since the Company expects that certain provider
disputes will require it to pay higher than anticipated costs for health care
services in 1997 and beyond.
COMPETITION AND PREMIUM PRICING. The managed healthcare industry is highly
competitive at both the local HMO level and in the regional and national
employer markets. The principal competitive factors affecting the Company's
products are premium rates and fees, plan design and flexibility, and
physician/hospital network and reputation. The Company competes in all of its
markets with Blue Cross plans, indemnity insurers, HMOs, TPAs, PPOs and other
managed care companies. The Company also faces competition in many of its
markets from hospitals and other provider groups who have organized their own
networks to contract directly with employer groups.
The price charged for providing benefits is in many instances the controlling
factor in obtaining and retaining employer groups, and in certain markets some
competitors are underpricing the Company's products. In many historically under-
penetrated markets such as the Carolinas and upper New England, many new HMOs
have been recently licensed which is reflected in premium pressure for new and
renewal business. The Company expects the difficult premium pricing environment
to continue.
ACCOUNTING; MIS; NETWORK DISRUPTION ISSUES. Reserves for incurred but not
reported claims ("IBNR") are a large component of the Company's medical claims
payable reserve and are based upon an estimation of future claims using
11
<PAGE> 12
traditional actuarial techniques heavily influenced by historical claims
experience; rapid growth and changing risk profiles could render the Company's
IBNR estimates inaccurate and there can be no assurance as to the ultimate
accuracy of such estimates or that subsequent adjustments will not cause
fluctuations in the Company's operating results. The ability to predict IBNR,
control costs in general and to manage increasingly complicated global
capitation arrangements depends upon the use of sophisticated customized MIS
systems; there can be no assurance that such systems can be developed quickly
enough to effectively manage the increasing complexity of the Company's
contractual arrangements nor that facility or equipment problems will not
disrupt the Company's ability to effectively provide such MIS support. The
increasing complexity of contractual arrangements and adverse experience in
periods of modest premium increases and increasing healthcare costs, create the
potential for disagreements with major hospital providers over the reimbursement
under such contracts, which disagreements (if not resolved) could disrupt
relations with affiliated hospital or physician providers, could potentially
affect the perception of the Company's plans in the affected markets and has
resulted in the Company's election to invest in certain of these long-term
arrangements to smooth the affiliated providers' transition to global risk.
ACQUISITIONS AND NEW PRODUCTS. A significant part of the Company's business
strategy is to diversify into new geographic markets through acquisitions or
start-up plans and to develop new products although existing credit lines limit
its current ability to do so. Identifying and pursuing acquisition
opportunities, integrating acquired businesses and managing growth requires a
significant amount of management time and skill. The Company may be unable to
(i) negotiate acceptable terms with suitable acquisition candidates or ensure
that, if negotiated, such acquisitions will be either approved by all relevant
regulatory authorities or concluded, (ii) assimilate such acquired companies
free from hidden risks undetected at the time of closing or (iii) manage future
growth effectively. Until start-up HMOs reach a critical mass of membership,
they generally produce operating losses (despite capitated provider contracts)
and failure to generate sufficient membership in start-up markets could
adversely affect operating results. There can be no assurance that the Company
will successfully mitigate any of the foregoing risks.
IMPACT OF HEALTHCARE REFORM. Many federal and state proposals have been made in
the past to reform the healthcare system. Federal legislation covering minimum
maternity stay and enhanced mental health benefits has been recently passed. The
Company anticipates that federal and state legislatures will continue to assess
alternative healthcare systems and payment methodologies as well as other
mandated coverages, capitation limits, underwriting constraints and other
measures that could affect the Company's business. The Company is unable to
predict which, if any, of these healthcare reform proposals may be adopted.
While the Company does not believe it would be materially adversely impacted by
most of the recent or proposed reforms, certain proposals could have such an
impact; for example the imposition of a single-payor system in any state could
potentially eliminate the Company's business in that state. See "Business
Governmental Regulation" in the Company's Form 10-K.
GOVERNMENTAL REGULATION. The Company's HMOs, insurance companies and certain of
its other subsidiaries are licensed by and subject to periodic examination and
extensive regulation by the states in which they operate and by the federal
government. Such state and federal statutes and regulations are subject to
change and such changes could adversely impact the Company's operations in the
future. There can be no assurance that the Company will be able to obtain any
regulatory approvals required to enter new markets or to offer new products. See
"Business - Governmental Regulation" in the Company's Form 10-K.
VOLATILITY OF THE COMPANY'S STOCK. The existence of the CIGNA Merger Agreement
largely controls the trading price of the Company's Common Stock and Notes. In
the absence of the CIGNA Merger Agreement, the price of the Company's Common
Stock would likely decrease and, thereafter, the market price for the Company's
stock might be affected by investor perception of the Company, by general
economic and market conditions, by fluctuations in quarterly earnings, by
general
12
<PAGE> 13
trends in the healthcare market, by adverse news coverage of the HMO industry
and by regulatory developments especially at the federal level.
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 following reports on Form 8-K were filed with the Securities and
Exchange Commission during the quarter ended March 31, 1997:
(i) Report on Form 8-K dated January 9, 1997 reporting the
acquisition of the remaining interest in ChubbHealth,
Inc.
(ii) Report on Form 8-K dated March 4, 1997 reporting the
execution of the Merger Agreement dated February 27,
1997 with CIGNA Corporation.
13
<PAGE> 14
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: May 13, 1997 By
----------------------------------
Norman C. Payson, M.D.
President and
Chief Executive Officer
By
----------------------------------
Joseph M. Zubretsky
Chief Financial Officer/Principal
Accounting Officer
14
<PAGE> 1
EXHIBIT 11
HEALTHSOURCE, INC.
COMPUTATION OF NET INCOME PER SHARE
(UNAUDITED)
Three Months Ended
March 31,
-------------------------
1997 1996
------- --------
(in thousands
except per share data)
Net income . . .. . . . . . . . . . . . . $ 6,976 $ 15,562
Preferred dividend . . . . . . . . . . . . - (1,128)
------- --------
Net income available
to common stockholder . . . . . . . . . $ 6,976 $ 14,434
======= ========
COMPUTATION OF SHARES OUTSTANDING:
Average weighted common shares
outstanding . . . . . . . . . . . . . 63,823 63,615
Dilutive effect of stock options issued . 443 2,338
------- --------
Average weighted common shares and share
equivalents outstanding . . . . . . . 64,266 65,953
======= ========
NET INCOME PER COMMON SHARE: . . . . . . . $ .11 $ .22
15
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<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<EXCHANGE-RATE> 1
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0
0
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