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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM _______ TO _______
COMMISSION FILE NUMBER 33-99624
CHOICECARE CORPORATION
OHIO 31-1446609
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
655 EDEN PARK DRIVE, SUITE 400 45202
CINCINNATI, OHIO (Zip Code)
(Address of Principal Executive Offices)
(513) 784-5200
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
--- ---
As of August 2, 1996, 14,853,944 shares of ChoiceCare Corporation common stock
were outstanding.
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CHOICECARE CORPORATION
INDEX
Page
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Consolidated Statements of Income for the three
month periods ended June 30, 1996 and 1995 3
Consolidated Statements of Income for the six
month periods ended June 30, 1996 and 1995 4
Consolidated Balance Sheets at June 30, 1996 and
December 31, 1995 5
Consolidated Statements of Cash Flows for the
six month periods ended June 30, 1996 and 1995 6
Notes to Consolidated Financial Statements 7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS 11
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 16
SIGNATURE 17
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CHOICECARE CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(UNAUDITED)
THREE MONTHS ENDED
JUNE 30,
1996 1995
---- ----
REVENUES:
Premium revenue $ 70,777 $ 66,022
Management services revenue 3,440 3,816
Other operating revenue 638 172
-------- --------
Total Operating Revenues 74,855 70,010
-------- --------
EXPENSES:
Health care services
Physician services 28,573 26,624
Hospital services 23,780 22,551
Pharmacy services 8,891 7,440
-------- --------
Total Health Care Services 61,244 56,615
Selling, general and administrative expenses 14,021 13,164
-------- --------
Total Operating Expenses 75,265 69,779
OPERATING INCOME (LOSS) (410) 231
OTHER INCOME (EXPENSES)
Investment income, net 1,003 3,414
Gain on assignment of Medicaid contract 4,554 --
Income from agreement termination -- 3,350
-------- --------
INCOME BEFORE PROVISION FOR INCOME TAXES 5,147 6,995
PROVISION FOR INCOME TAXES 1,048 --
-------- --------
NET INCOME $ 4,099 $ 6,995
======== ========
PRO
FORMA
-----
EARNINGS PER SHARE $ .29 $ .33
======== ========
AVERAGE NUMBER OF SHARES OUTSTANDING 14,229,047 13,500,000
========== ==========
The accompanying notes are an integral part of these statements.
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CHOICECARE CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(UNAUDITED)
SIX MONTHS ENDED
JUNE 30,
1996 1995
---- ----
REVENUES:
Premium revenue $ 141,285 $ 129,215
Management services revenue 6,859 7,719
Other operating revenue 761 347
--------- ---------
Total Operating Revenues 148,905 137,281
--------- ---------
EXPENSES:
Health care services
Physician services 58,717 52,272
Hospital services 48,297 46,393
Pharmacy services 17,161 14,088
--------- ---------
Total Health Care Services 124,175 112,753
Selling, general and administrative expenses 28,684 25,812
--------- ---------
Total Operating Expenses 152,859 138,565
OPERATING LOSS (3,954) (1,284)
OTHER INCOME (EXPENSES)
Investment income, net 2,153 5,101
Gain on assignment of Medicaid contract 4,554 --
Income from agreement termination -- 3,350
--------- ---------
INCOME BEFORE PROVISION FOR INCOME TAXES 2,753 7,167
PROVISION FOR INCOME TAXES 1,048 --
--------- ---------
NET INCOME $ 1,705 $ 7,167
========= =========
PRO
FORMA
-----
EARNINGS PER SHARE $ .12 $ .34
========= =========
AVERAGE NUMBER OF SHARES OUTSTANDING 13,864,523 13,500,000
========== ==========
The accompanying notes are an integral part of these statements.
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CHOICECARE CORPORATION
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED)
JUNE 30, DECEMBER 31,
1996 1995
---- ----
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 30,889 $ 12,622
Cash held in escrow -- 28,000
Securities available-for-sale 66,293 73,009
Premiums receivable 4,622 7,637
Health care receivables 3,044 6,251
Other current assets 5,833 5,545
--------- ---------
Total Current Assets 110,681 133,064
PROPERTY AND EQUIPMENT, net 10,406 10,258
OTHER LONG-TERM ASSETS 4,635 3,865
--------- ---------
Total Assets $ 125,722 $ 147,187
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Medical costs payable $ 44,974 $ 46,754
Accounts payable and accrued liabilities 11,226 14,829
Amounts due to vendor 6,200 --
Unearned premiums 4,057 4,104
Hospital risk pool liability 339 5,600
Medical risk pool liability 9,230 10,081
Settlement liability -- 28,000
--------- ---------
Total Current Liabilities 76,026 109,368
LONG-TERM LIABILITIES 2,873 3,290
--------- ---------
Total Liabilities 78,899 112,658
--------- ---------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Preferred stock, without par value,
4,000,000 shares authorized; none issued -- --
Common stock, without par or stated value,
45,000,000 shares authorized; 14,853,944
shares issued and outstanding at June 30, 1996
(13,500,000 at December 31, 1995) 12,025 --
Net unrealized gains (losses) on securities
available-for-sale (590) 846
Retained earnings 35,388 33,683
--------- ---------
Total Shareholders' Equity 46,823 34,529
--------- ---------
Total Liabilities and Shareholders' Equity $ 125,722 $ 147,187
========= =========
The accompanying notes are an integral part of these statements.
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CHOICECARE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
SIX MONTHS ENDED
JUNE 30,
1996 1995
---- ----
NET CASH FLOWS FROM OPERATING ACTIVITIES $ (2,298) $ (3,511)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Receipts from sale of investments 35,875 87,091
Payments for purchase of investments (30,763) (84,027)
Receipts from assignment of Medicaid contract 5,000 --
Additions to property and equipment (1,572) (1,614)
Other -- (215)
-------- --------
Net cash provided by investing activities 8,540 1,235
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Receipts from sale of common stock, net 12,025 --
-------- --------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS 18,267 (2,276)
CASH AND CASH EQUIVALENTS, beginning of period 12,622 15,614
-------- --------
CASH AND CASH EQUIVALENTS, end of period $ 30,889 $ 13,338
======== ========
The accompanying notes are an integral part of these statements.
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CHOICECARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED)
NOTE 1. BASIS OF PRESENTATION
ChoiceCare Corporation (the "Company") is an Ohio for-profit
corporation, which is a majority-owned subsidiary of Tristate
Foundation for Health (the "Foundation"), an Ohio not-for-profit
corporation. On October 1, 1995, the Foundation transferred
substantially all of the operating assets and liabilities relating to
its managed health care operations to the Company in exchange for all
of the issued and outstanding shares of the Company. Contemporaneously,
the Company transferred the assets and liabilities of the managed
health care operations to its wholly-owned subsidiary, ChoiceCare
Health Plans, Inc., in exchange for all of its issued and outstanding
common shares. These events are collectively referred to as the
"Restructuring."
During June 1996, a requested ruling from the Internal Revenue Service
was received confirming that the Foundation incurred no tax liability
as a result of the Restructuring and continues to be recognized as a
tax exempt organization subsequent to the Restructuring.
The consolidated financial statements for the interim periods included
herein have been prepared by the Company, without audit, pursuant to
the rules and regulations of the Securities and Exchange Commission,
with the financial statements for the 1995 interim periods having been
derived from audited amounts for the nine-month period ended September
30, 1995. Although certain information and footnote disclosures
normally included in financial statements prepared in accordance with
generally accepted accounting principles have been condensed or omitted
pursuant to such rules and regulations, management believes that the
disclosures are adequate to make the information presented not
misleading. Operating results for the interim periods are not
necessarily indicative of results for the full fiscal year. It is
suggested that these consolidated financial statements and notes be
read in conjunction with the consolidated financial statements and
notes thereto included in the Company's Post-Effective Amendment No. 2
to Form S-1, as filed with the Securities and Exchange Commission on
April 1, 1996, and its Amended Prospectus dated April 1, 1996.
The pro forma earnings per share information reflected in the
accompanying 1995 Consolidated Statement of Income is presented solely
to give effect to the estimated provision for income taxes that would
have been reported in accordance with Statement of Financial Accounting
Standards No. 109, "Accounting for Income Taxes" had the Company filed
federal, state and local income tax returns as a for-profit
corporation, based on an assumed effective federal, state and local tax
rate of 35.5%. The pro forma earnings per share information is based
upon 13,500,000 issued and outstanding shares of common stock. See Note
4.
Certain reclassifications have been made to the 1995 financial
statements to conform with the 1996 presentation.
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NOTE 2. ACCOUNTING POLICIES
The consolidated financial statements presented in this report have
been prepared in accordance with the accounting policies described in
Note 2 of Notes to Consolidated Financial Statements included in the
aforementioned Post-Effective Amendment No. 2 to Form S-1 and Amended
Prospectus and reflect all adjustments consisting solely of normal
recurring adjustments which, in the opinion of management, are
necessary for a fair statement of the results of the interim periods
presented. While management believes that the procedures followed in
the preparation of the consolidated financial statements for the
interim periods are reasonable, certain estimated amounts are dependent
upon current facts and other information that may change subsequently
during the fiscal year.
NOTE 3. PER SHARE DATA
Earnings per share for the three and six months ended June 30, 1996 are
based on the weighted average number of shares of common stock
outstanding during the periods. The effect of the common stock
equivalents for these periods (resulting from the granting of stock
options -- see Note 6) was not significant. Fully diluted earnings per
share for these periods is not significantly different from earnings
per share set forth in the Consolidated Statements of Income.
NOTE 4. STOCK TRANSACTIONS
Pursuant to the Company's stock offering that terminated on May 1,
1996, approximately 1.36 million shares of common stock were purchased
by over 1,000 shareholders. Gross proceeds from the offering totaled
$13,539 and were reduced by $1,514 of offering related expenses, which
were comprised of underwriting discounts and commissions ($706) and
other expenses incurred in connection with the offering ($808). The
$12,025 of net proceeds are reflected as Common Stock in the
accompanying June 30, 1996 Consolidated Balance Sheet. Had such newly
issued shares been outstanding from the beginning of the three and six
month periods ended June 30, 1996, earnings per share for the periods
would have been $.28 and $.11, respectively.
On October 1, 1995, the Company issued 100 shares of common stock to
the Foundation representing the initial shares issued as part of the
Restructuring. In subsequent transactions related to the Restructuring,
on January 5, 1996 and February 6, 1996, respectively, the Company
effected a 142,000-to-1 stock split and redeemed 700,000 shares for a
total consideration of $1.00, resulting in 13,500,000 shares
outstanding. The accompanying consolidated financial statements give
effect to all stock transactions related to the Restructuring as of the
earliest period presented.
NOTE 5. ASSIGNMENT OF MEDICAID CONTRACT
Pursuant to the April 11, 1996 agreement with Health Power HMO, Inc.
("Health Power"), a Columbus, Ohio-based health maintenance
organization, effective June 30, 1996, the Company assigned its
Medicaid provider agreement with the Ohio Department of Human Services
to Health Power. Consideration aggregating $5,000 in cash was received,
resulting in a gain of $4,554, after deducting a
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provision of approximately $446 for expenses related to this
transaction. During the three and six months ended June 30, 1996, the
Company recognized premium revenues of approximately $5,350 and
$10,750, respectively, related to members enrolled in its Special
Health Medicaid product ($3,000 and $5,900, respectively, in the three
and six months ended June 30, 1995). The absence of the revenue from
this product after June 30, 1996 will not have a material effect on the
Company's future operating income.
NOTE 6. LONG TERM STOCK INCENTIVE PLAN
On June 5, 1996, options to purchase 1,132,764 shares of the Company's
common stock at an exercise price equal to the then-current market
value of $10 were granted pursuant to the Company's Long Term Stock
Incentive Plan. With the exception of the 375,000 options granted to
the Company's Chief Executive Officer, the options have ten year terms
and become exercisable ratably over the four annual grant anniversary
dates following the date of grant. The options granted to the Chief
Executive Officer have ten year terms and become exercisable over the
three annual grant anniversary dates following the date of grant.
NOTE 7. COMMITMENTS AND CONTINGENCIES
VENDOR AGREEMENT - The Company has agreements with various vendors for
services, including the management of medical services, certain of
which provide for the monthly prepayment of fees. The Company believes
that one such vendor has experienced a decline in the ratio of cash and
cash equivalents to claims outstanding. The Company believes that the
vendor has, to date, continued to meet its financial obligations to the
Company. By agreement on March 12, 1996, the vendor paid the Company
$6,000, which represents a portion of the amounts previously paid by
the Company to the vendor, and agreed to adjust such funds quarterly to
approximate ChoiceCare-related outstanding claims liabilities. Such
amount is reflected as Amounts due to vendor in the accompanying June
30, 1996 Consolidated Balance Sheet. The vendor has waived its right to
avoid and recover such funds (which waiver may be ineffective) in the
event of bankruptcy proceedings. However, there exists a risk that if
the vendor files for bankruptcy protection or if an involuntary
petition is filed against the vendor, any payments made by the vendor
within 90 days of the commencement of the bankruptcy case may be
avoided and recovered by the vendor as a preferential transfer. As a
result of the above, the Company may be obligated to pay for unpaid
claims of service through the date of bankruptcy. Such amounts are
currently estimated to be approximately $6,200 and would be in addition
to the amount previously paid by the Company to the vendor that were
anticipated to cover such claims. The Company's management believes it
unlikely that current circumstances will result in this vendor entering
bankruptcy proceedings.
The aforementioned 90 day period has expired in relation to the payment
received from the vendor and, to date, the vendor has made no attempt
to seek any action which would serve to nullify the aforementioned
arrangement.
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LITIGATION - The Company is routinely involved in litigation matters
arising in the normal course of business. Management believes, based
upon the advice of counsel, that these actions and proceedings and
losses, if any, resulting from the final outcome thereof, will not be
material in the aggregate to the Company's financial position.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
THREE MONTHS ENDED JUNE 30, 1996
For the three months ended June 30, 1996 (the "1996 quarter"), the Company
generated net income of $4,099, as compared to $6,995 for the corresponding
prior year quarter (the "1995 quarter") during which the Company operated as a
not-for-profit corporation. See Note 1 of Notes to Consolidated Financial
Statements. Net income for these quarters were impacted by the following
non-recurring transactions:
1996 Quarter - 1) $4,554 pre-tax gain on the assignment of the
Company's Medicaid contract, and 2) $540 earned in
connection with the risk sharing agreement with the
Company's pharmacy vendor, which is reflected in Other
Operating Revenue
1995 Quarter - $3,350 of income from termination of an agreement with
another managed care entity
An increase in member months for the Company's prepaid products and an increase
in premium rates for such products, as evidenced by an approximate 3.4% average
increase in premium rates for fully-insured groups renewing during the first six
months of 1996, resulted in the Company experiencing an increase in premium
revenue as compared to the 1995 quarter. These positive trends, as well as a
retention rate of approximately 95% for groups renewing during the first six
months of 1996, were achieved in an increasingly competitive environment within
the Company's service area, following two years of flat or decreasing premium
rates. Offsetting the effects of this membership growth and increase in premium
rates for renewing fully-insured groups were the following factors, which
combined to yield a $410 operating loss for the 1996 quarter, as compared to
$231 of operating income for the 1995 quarter:
- decreased self-funded membership, resulting largely from the
downsizing activities of a large self-funded employer group;
- increased health care professional services utilization levels
and drug costs compared to the 1995 quarter; and
- continued industry-wide health care cost inflation trends,
particularly pharmacy benefits.
SIX MONTHS ENDED JUNE 30, 1996
During the six months ended June 30, 1996, the Company achieved net income of
$1,705, compared to $7,167 in the corresponding prior year period, and operating
losses of $3,954 and $1,284 were reported in each of the respective periods.
While these comparative results can primarily be attributed to the year-to-date
effects of the factors previously noted in the discussion of quarterly results,
the six month year-over-year declines also reflect the continuing effects of the
Company's decision to decrease overall premium rates throughout 1995 (consistent
with its previous not-for-profit mission), as it relates to employer groups
having other than calendar year renewals.
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RESULTS OF OPERATIONS
The following table sets forth selected operating data, expressed as a
percentage of total operating revenues, and the medical-expense ratio for the
periods indicated:
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
1996 1995 1996 1995
---- ---- ---- ----
OPERATING REVENUES:
Premiums 94.6% 94.3% 94.9% 94.1%
Management services fees 4.6 5.5 4.6 5.6
Other .8 .2 .5 .3
----- ----- ----- -----
Total 100.0 100.0 100.0 100.0
----- ----- ----- -----
OPERATING EXPENSES:
Health care services 81.8 80.9 83.4 82.1
Selling, general and
administrative 18.7 18.8 19.3 18.8
----- ----- ----- -----
Total 100.5 99.7 102.7 100.9
----- ----- ----- -----
Operating income (loss) (.5) .3 (2.7) (.9)
Investment income, net 1.3 4.9 1.4 3.7
Gain on assignment of Medicaid
contact 6.1 -- 3.1 --
Income from agreement termination -- 4.8 -- 2.4
----- ----- ----- -----
Income before provision
for income taxes 6.9 10.0 1.8 5.2
Provision for income taxes 1.4 -- .7 --
----- ----- ----- -----
Net income 5.5% 10.0% 1.1% 5.2%
===== ===== ===== =====
MEDICAL-EXPENSE RATIO* 86.5% 85.8% 87.9% 87.3%
MEMBER MONTHS FOR THE PERIOD:
Prepaid 610,557 570,711 1,220,437 1,112,477
Self-funded 259,387 279,825 520,992 562,117
------- ------- --------- ---------
Total 869,944 850,536 1,741,429 1,674,594
======= ======= ========= =========
PMPM DATA:
Premium revenue $115.92 $115.68 $115.77 $116.15
Management services revenue 13.26 13.64 13.17 13.73
Health care services expense 100.31 99.20 101.75 101.35
Selling, general and
administrative expense 16.12 15.48 16.47 15.41
* Health care services expense as a percentage of premiums.
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THREE MONTHS ENDED JUNE 30, 1996 COMPARED TO THREE MONTHS ENDED JUNE 30, 1995
PREMIUM REVENUE -
The 7.2% increase in premium revenue during the 1996 quarter reflects a 7.0%
increase in member months for the Company's prepaid products and a .2% increase
in the weighted average PMPM premium. The increase in weighted average PMPM
premium can primarily be attributed to the aforementioned average increase in
premium rates, somewhat offset by the continued migration of the customer base
to the Company's more cost effective products and benefit structures.
MANAGEMENT SERVICES REVENUE -
The decrease in management services fees from self-funded employer groups
results primarily from the combined effects of a 7.3% decrease in self-funded
membership, due largely to the aforementioned downsizing activities of a large
self-funded employer group, and renegotiation of an increased rate with a
self-funded employer group during 1995, applied retroactively to the second
quarter of 1994.
Subsequent to June 30, 1996, the Company was successful in receiving a
commitment for the renewal of a multi-year contract, which will begin January 1,
1997, with an existing customer that accounts for approximately 39% of the
Company's total self-funded members. The customer has opted to also offer
another competitor's managed care plan. While management anticipates the Company
will retain a sizable amount of this customer's members, the possibility exists
that existing members will choose to enroll in competing health care plans
offered by the employer.
In addition, negotiations for the renewal of a multi-year contract are currently
ongoing with an existing customer that accounts for approximately 33% of the
Company's total self-funded members, with the customer's decision expected in
the near future. At the present time, the ultimate results of these negotiations
are unknown.
OTHER OPERATING INCOME -
The increase in other operating income is primarily attributable to the
aforementioned $540 earned during the 1996 quarter in connection with the risk
sharing agreement with the Company's pharmacy vendor for the contract year ended
May 1996. See discussion of pharmacy expense below.
HEALTH CARE SERVICES EXPENSE -
The 8.2% increase in total health care services expense during the 1996 quarter
reflects 1) the 7.0% increase in prepaid member months during the quarter; 2) an
11.7% increase in pharmacy expenses on a PMPM basis, resulting from continued
industry-wide drug cost inflation and lower amounts of rebate rates; and 3) a
.3% increase in physician expenses on a PMPM basis, due primarily to increased
health care professional services utilization levels, decreased cost per service
resulting from changes in the mix of service provided and refining downward the
Company's estimate of physician claims expense in the 1995 quarter. These
factors were partially offset by a 1.4% decrease in hospital expenses on a PMPM
basis, which can be attributed primarily to the net effects of 1) decreased
utilization; 2) increased inpatient cost per service, reflecting changes in the
mix of service provided and the effect of transitioning certain less complex
services to outpatient settings; 3) refinement downward of the Company's
estimate of hospital claims expense during the 1995 quarter; and 4) an increase
in amounts earned in connection with the Company's hospital risk/reward sharing
arrangements, due to the hospitals' performance against
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established targets. As a result of the 1.1% increase in health care services
expense on a PMPM basis outpacing the .2% increase in the weighted average PMPM
premium, the Company's medical-expense ratio increased to 86.5% in the 1996
quarter from 85.8% in the 1995 quarter.
During the 1996 quarter, the Company began implementation of several initiatives
designed to decrease health care services expense, particularly the pharmacy
expense component. However, there is no assurance that the benefits of such
efforts will be realized.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES -
The 6.5% increase in expenses for selling, general and administrative ("SG&A")
costs in the 1996 quarter largely resulted from the 2.3% growth in overall
member months and the expenses incurred in connection with continued
infrastructure and new product investments made in order to raise the standard
of service provided to current members, to service anticipated membership growth
and to manage medical cost inflation effectively. Such increased expenses are
substantially comprised of 1) compensation resulting in large part from a net
increase in employees since the 1995 quarter of approximately 45, or 8%; 2)
commissions paid to sales brokers, as an increased number of smaller employer
groups are being sold through such sales channel; and 3) depreciation and
amortization expense, relating to computer hardware and software. The 1995
quarter included approximately $670 of expenses incurred in connection with the
Company's restructuring.
INVESTMENT INCOME -
During the 1996 quarter, the Company experienced a $2,411 decrease in net gains
realized on the investment portfolio as compared to the 1995 quarter. This
decline can primarily be attributed to 1) a decrease in the average outstanding
portfolio balance, which resulted largely from funding the Thompson litigation
settlement in October 1995; 2) the effect of equity investments comprising an
increased percentage of the Company's investment portfolio during the 1996
quarter, the earnings on which are not anticipated to be declared and recorded
until later in the year; and 3) unfavorable fixed income security market
conditions resulting in net realized losses on the sale of such investments
during the 1996 quarter.
OTHER NON-OPERATING INCOME -
During the 1996 quarter, the Company recognized the aforementioned $4,554 gain
on the assignment of its Medicaid contract. See Note 5 of Notes to Consolidated
Financial Statements.
The 1995 quarter included a $3,350 payment received in connection with the
termination of an agreement with another managed care entity. This amount
represented reimbursement for expenses incurred in 1994 and 1995 for negotiating
and implementing infrastructure changes to provide services under the agreement,
the cost of negotiating termination of the agreement and an element of
compensation for potential lost profits ChoiceCare may have realized under the
terms of the agreement.
INCOME TAX EXPENSE -
During the 1996 quarter, management conservatively revised its estimate of the
Company's 1996 effective tax rate. Accordingly, income tax expense has been
recorded at the highest tax rate applicable to the Company. The Company operated
as a tax exempt organization throughout the 1995 quarter.
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SIX MONTHS ENDED JUNE 30, 1996 COMPARED TO SIX MONTHS ENDED JUNE 30, 1995
The majority of the factors previously noted in the quarter-to-quarter analysis
were also the primary factors contributing to the results for the six month
period ended June 30, 1996 (the "1996 period"), as compared to the corresponding
prior year period (the "1995 period"). As a result, with the exception of the
.3% decline in weighted average PMPM premium, the trends between the 1996 and
1995 year-to-date results are consistent in all material respects with the
previously analyzed quarter-to-quarter trends.
In addition to the aforementioned average increase in premium rates and the
continued migration of the customer base to the Company's more cost effective
products, the .3% decrease in weighted average PMPM premium, as compared to the
1995 period, also reflects the impact of the following factor existing primarily
in the first three months of 1996. The weighted average PMPM premium achieved
during the 1996 period reflects the continuing effects of the Company's decision
to decrease overall premium rates throughout 1995 (consistent with its previous
not-for-profit mission), as it relates to employer groups having other than
calendar year renewals.
FINANCIAL CONDITION
Net cash totaling $2,298 was used in operations during the first six months of
1996, resulting primarily from the net effects of 1) the $6,222 decrease in
receivables, due in large part to receiving payment of amounts due; 2) the
$3,603 decrease in accounts payable and accruals, reflecting the impact of
making payment on certain significant amounts owed at year-end; 3) the $5,261
decrease in the hospital risk pool liability, which resulted from the combined
impact of the hospitals' year-to-date performance against established targets
and the Company's payment during the 1996 period of amounts owed to the
hospitals for 1995; and 4) the receipt of $6,200 under a vendor agreement during
March 1996. See Note 7 of Notes to Consolidated Financial Statements for
discussion of the cash received under the aforementioned vendor agreement, and
the Company's related obligation. This use of cash was more than offset by the
$12,025 net proceeds from the sale of common stock and $8,540 of net cash
provided by investing activities, which reflects the net cash impact of
investment portfolio transactions and cash received from assignment of the
Company's Medicaid contract, less capital expenditures.
As of June 30, 1996, the Company's investment portfolio was comprised of debt
securities (80.3%), equity-based mutual funds (10.7%) and money market
instruments (9.0%), all of which are available to meet current obligations and
classified as securities available-for-sale in the accompanying Consolidated
Balance Sheet. Unfavorable fixed income security market conditions resulted in
unrealized losses on the investment portfolio totaling $590 as of June 30, 1996
compared to unrealized gains totaling $846 as of December 31, 1995. Such net
unrealized gains and losses are reflected as a separate component of equity in
the accompanying Consolidated Balance Sheets. The Company believes that its
investment portfolio will be sufficient to fund its liquidity needs for at least
the next 12 months.
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PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.(ii)(B)(12) Diagnostic Imaging Services Agreement between
ChoiceCare Health Plans, Inc. and Medicon, Inc.,
dated April 1, 1996
27. Financial Data Schedule
(b) Reports on Form 8-K
The Company filed a Form 8-K dated April 25, 1996 reporting the signing
of the agreement providing for the assignment of the Company's Medicaid
provider agreement with the Ohio Department of Human Services to Health
Power HMO, Inc. See Note 5 of Notes to Consolidated Financial
Statements.
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CHOICECARE CORPORATION
Date: August 12, 1996 By: /s/ Juan M. Fraiz
-------------------------------------
Juan M. Fraiz
Vice President and Chief Financial
Officer (Principal Financial Officer)
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