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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 MARCH 31, 1997
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 0-22295
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 May 1, 1997, 14,852,844 shares of ChoiceCare Corporation common shares
were outstanding.
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CHOICECARE CORPORATION
INDEX
Page
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Consolidated Statements of Operations for the three
month periods ended March 31, 1997 and 1996 3
Consolidated Balance Sheets at March 31, 1997 and
December 31, 1996 4
Consolidated Statements of Cash Flows for the
three month periods ended March 31, 1997 and 1996 5
Notes to Consolidated Financial Statements 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS 8
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 12
SIGNATURE 13
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CHOICECARE CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
THREE MONTHS
ENDED MARCH 31,
1997 1996
-------- --------
REVENUES:
Premium revenue $ 68,779 $ 70,508
Management services revenue 3,832 3,419
Other operating revenue 210 123
-------- --------
Total Operating Revenues 72,821 74,050
-------- --------
EXPENSES:
Health care services
Physician services 27,969 30,144
Hospital services 20,815 24,517
Pharmacy services 9,306 8,270
-------- --------
Total Health Care Services 58,090 62,931
Selling, general and administrative expenses 16,687 14,663
-------- --------
Total Operating Expenses 74,777 77,594
OPERATING LOSS (1,956) (3,544)
OTHER INCOME (EXPENSE)
Investment income, net 1,372 1,150
-------- --------
LOSS BEFORE INCOME TAXES (584) (2,394)
INCOME TAX BENEFIT 222 --
-------- --------
NET LOSS $ (362) $ (2,394)
======== ========
LOSS PER SHARE $ (.02) $ (.18)
======== ========
AVERAGE NUMBER OF SHARES OUTSTANDING 14,853 13,500
======== ========
The accompanying notes are an integral part of these statements.
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CHOICECARE CORPORATION
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
(UNAUDITED)
MARCH 31, DECEMBER 31,
1997 1996
---- ----
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 34,833 $ 38,597
Securities available-for-sale 74,684 70,436
Premiums receivable 5,284 7,815
Health care receivables 7,875 5,636
Other current assets 12,622 12,489
-------- --------
Total Current Assets 135,298 134,973
PROPERTY AND EQUIPMENT, net 9,194 9,536
OTHER LONG-TERM ASSETS 5,380 5,279
-------- --------
Total Assets $149,872 $149,788
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Medical costs payable $ 47,378 $ 48,260
Accounts payable and accrued liabilities 13,578 15,043
Amounts due to vendor 5,450 6,200
Unearned premiums 5,797 5,133
Provider risk pool liability 15,962 12,304
-------- --------
Total Current Liabilities 88,165 86,940
LONG-TERM LIABILITIES 12,082 12,296
-------- --------
Total Liabilities 100,247 99,236
-------- --------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Preferred stock, without par value,
4,000 shares authorized; none issued -- --
Common stock, without par or stated value,
45,000 shares authorized; 14,853
shares issued and outstanding at March 31, 1997 12,014 12,014
and December 31, 1996
Net unrealized losses on securities
available-for-sale, net of taxes (586) (21)
Retained earnings 38,197 38,559
-------- --------
Total Shareholders' Equity 49,625 50,552
-------- --------
Total Liabilities and Shareholders' Equity $149,872 $149,788
======== ========
The accompanying notes are an integral part of these statements.
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CHOICECARE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
THREE MONTHS
ENDED MARCH 31,
1997 1996
-------- --------
NET CASH FLOWS FROM OPERATING ACTIVITIES $ 1,957 $ (363)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Receipts from sale of investments 308 8,929
Payments for purchase of investments (5,295) (8,002)
Other (734) (646)
-------- --------
Net cash (used in) provided by
investing activities (5,721) 281
-------- --------
NET DECREASE IN CASH AND CASH EQUIVALENTS (3,764) (82)
CASH AND CASH EQUIVALENTS, beginning of period 38,597 12,622
-------- --------
CASH AND CASH EQUIVALENTS, end of period $ 34,833 $ 12,540
======== ========
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 The ChoiceCare
Foundation (the "Foundation"), an Ohio not-for-profit
corporation (formerly named Tristate Foundation for Health and, prior
to that, Midwest Foundation Independent Physicians Association). The
Foundation was organized in 1978 as a not-for-profit health maintenance
organization.
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.
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 Annual Report on Form 10-K for the year ended December 31,
1996.
Certain reclassifications have been made to the 1996 financial
statements to conform with the 1997 presentation.
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 to the consolidated financial statements included in the
aforementioned Annual Report on Form 10-K 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
Loss per share are based on the weighted average number of shares of
common stock outstanding during the periods and the dilutive effect of
the assumed exercise of stock options, if any.
NOTE 4. LONG TERM STOCK INCENTIVE PLAN
On March 5, 1997, the Company's Board of Directors (the "Board")
committed to grant, subject to certain conditions, no more than
approximately 666,000 stock options during 1997 under the terms of the
1996 Long Term Stock Incentive Plan. Such options are anticipated to be
granted at fair market value, as determined by the Board, during the
second quarter.
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NOTE 5. COMMITMENTS AND CONTINGENCIES
EMPLOYEE AGREEMENTS - The Company currently has in effect employment
agreements with its executive officers and certain of its other
officers which provide for severance or other payments in the event
that employment is terminated for reasons other than for cause.
Payments to officers other than the Chief Executive Officer would
include base pay for a period of six months to one year, depending upon
the officer. The Chief Executive Officer's agreement provides that, in
the event that employment is terminated for reasons other than for
cause, he would generally be paid all amounts which would otherwise be
due him under the terms of his agreement. In addition, his agreement
provides that he will be granted no less than 142,697 stock options in
1998.
In addition, the agreements also contain provisions related to a change
in control (as defined in the employment agreements), including
lump-sum retention incentive payments and, in the agreements of
executive officers, lump-sum change in control severance payments. The
maximum contingent liabilities of the Company related to such retention
incentive payments and change in control severance payments, pursuant
to the employment agreements, are currently estimated at approximately
$5.0 million and $10.5 million, respectively.
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 consolidated financial
position.
NOTE 6. SUBSEQUENT EVENT
ADMINISTRATIVE SERVICES MANAGEMENT AGREEMENT - As announced in
September 1996, a customer accounting for approximately 36% of the
Company's total self-funded members did not renew the administrative
services management agreement between the Company and the customer,
which expired March 31, 1997. Management services revenue received from
the customer during the three months ended March 31, 1997 and 1996 were
approximately $937 and $994, respectively. Contributions to operating
income from the contract have historically not been material to the
Company's total results of operations due to the operating expense
associated with the administration of the contract and providing
services to the customer's members.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
An increase in member months for the Company's prepaid commercial products and
an increase in premium rates for such products, resulted in the Company
experiencing a 5.7% increase in premium revenue from prepaid commercial products
in the three month period ended March 31, 1997 (the "1997 period"), compared to
the three month period ended March 31, 1996 (the "1996 period"). Despite a
decrease in member months for the Company's self-funded products, management
services revenue increased 12.1% primarily due to rate increases which took
effect for the first quarter of 1997. In addition, the Company experienced an
improvement in overall health care services expense levels in the 1997 period.
These positive trends, as well as a net retention rate of approximately 95% for
groups renewing during the first three months of 1997, were achieved in a
continued increasingly competitive environment within the Company's service
area. Offsetting the effects of this growth and increase in premium rates for
renewing fully-insured groups were the following factors, which combined to
yield an operating loss of $1,956 and a net loss of $362 during the 1997 period,
an improvement compared to the 1996 period which reflected an operating loss of
$3,544 and a net loss of $2,394:
- loss of premium revenues recognized from the Company's Special
Health Medicaid product as a result of the June, 30, 1996
assignment of the Medicaid contract -- $5,410 during the 1996
period;
- decreased self-funded membership, as discussed below;
- continuation of industry-wide health care cost inflation
trends, particularly pharmacy benefits; and
- expenses of approximately $1,850 in the 1997 period related to
the start-up of the Company's new managed Medicare ("Senior
Health") and Workers' Compensation products, both of which
began covering their first member/covered life in March 1997,
and the continuing expansion efforts into the Dayton, Ohio
service area, in which product offerings commenced May 1,
1997.
As the new Medicare and Workers' Compensation products were
not offered until March 1997, revenues recognized in the 1997
period from such products were not significant. It is
anticipated that these new products, as well as the expansion
into the Dayton service area, will negatively impact operating
income for the year ending December 31, 1997, offsetting
otherwise anticipated profitable operations for the Cincinnati
Commercial Health Plan.
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RESULTS OF OPERATIONS
The following table sets forth selected operating data, expressed as a
percentage of total operating revenues and/or on a per member per month ("PMPM")
basis, selected member data and medical-expense ratios:
THREE MONTHS
ENDED MARCH 31,
1997 1996
----------- -----------
OPERATING REVENUES:
Premiums 94.4% 95.2%
Management services revenue 5.3 4.6
Other .3 .2
----------- -----------
Total 100.0 100.0
----------- -----------
OPERATING EXPENSES:
Health care services 79.8 85.0
Selling, general and administrative 22.9 19.8
----------- -----------
Total 102.7 104.8
----------- -----------
Operating loss (2.7) (4.8)
Investment income, net 1.9 1.6
----------- -----------
Loss before income taxes (.8) (3.2)
Income tax benefit .3 --
----------- -----------
Net loss (.5%) (3.2%)
=========== ===========
MEDICAL-EXPENSE RATIO* 84.5% 89.3%
MEMBER MONTHS FOR THE PERIOD:
Prepaid
Commercial 584,526 571,068
Medicaid -- 38,812
----------- -----------
584,526 609,880
Self-funded 232,421 261,605
----------- -----------
Total 816,947 871,485
=========== ===========
PMPM DATA:
Premium revenue - Commercial $ 117.67 $ 113.99
Premium revenue - Medicaid -- 139.39
Management services revenue 16.49 13.07
Health care services expense 99.38 103.19
Selling, general and administrative expense 20.43 16.83
* Health care services expense as a percentage of premiums.
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PREMIUM REVENUE -
The 2.5% net decrease in premium revenue during the 1997 period results
primarily from the assignment of the Company's Special Health Medicaid product
on June 30, 1996. Excluding Special Health Medicaid premium revenues of $5,410
from the 1996 period, premium revenues for the first quarter of 1997 increased
5.7% over the same period last year. This increase is attributable to a 2.4%
increase in prepaid commercial member months and a 3.2% increase in the weighted
average PMPM premium for such products, reflecting a recently improved pricing
environment as compared to flat or decreasing pricing during 1996.
MANAGEMENT SERVICES REVENUE -
The 12.1% increase in management services revenue from self-funded employer
groups and the 26.2% increase in such revenue on a PMPM basis, result primarily
from increases in administration fee rates. The increase in rates is offset by
an 11.2% decrease in self-funded membership, due largely to the 22.1% decrease
in membership of a large self-funded employer group which, consistent with the
July 1996 announcement of its multi-year renewal commitment, opted to offer its
employees an additional competitor's managed care plan as of January 1, 1997.
Self-funded membership, excluding the effects of the customer discussed in Note
6 of Notes to Consolidated Financial Statements, totaled approximately 49,750 at
March 31, 1997.
HEALTH CARE SERVICES EXPENSE -
The 7.7% net decrease in total health care services expense during the 1997
period reflects 1) the assignment of the Medicaid contract, which had higher
PMPM medical expenses relative to commercial membership; 2) a 3.2% decrease in
physician expenses on a PMPM basis, due primarily to decreased average cost per
service resulting from changes in the mix of service provided; 3) an 11.4%
decrease in hospital expenses on a PMPM basis; and 4) a 17.4% increase in
pharmacy expenses on a PMPM basis, resulting primarily from continued
industry-wide drug cost inflation and slightly higher utilization levels.
The 11.4% decrease in hospital expenses on a PMPM basis reflects the net effects
of:
- increased utilization and decreased cost per service;
- decrease in hospital service reimbursement rates paid to
certain core hospitals;
- a decrease in amounts earned in connection with the Company's
hospital risk/reward sharing arrangements, due to the
hospitals' performance against established cost of hospital
services and quality targets; and
- a refinement downward in the 1997 period of the Company's
prior year's estimate of hospital claims expense.
As a result of the 3.7% decrease in health care services expense on a PMPM
basis, in conjunction with the 1.8% increase in the weighted average PMPM
premium, the Company's medical-expense ratio decreased to 84.5% in the 1997
period from 89.3% in the 1996 period.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES -
The 13.8% increase in expenses for selling, general and administrative costs in
the 1997 period reflects the continued impact of expenses incurred for
investment in new products and geographic expansion, and to manage medical cost
inflation. Included are approximately $1,850 of expenses incurred in connection
with the Senior Health and Workers' Compensation products and expansion into the
Dayton service area, as previously discussed -- an approximate $1,330, or
greater than three-fold, increase in such expenses over the 1996 period.
Increased expenses are substantially comprised of 1) compensation, primarily due
to salary increases in the normal course
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of business and a shift in the relative mix of the Company's work force, largely
as a result of the aforementioned new initiatives; 2) advertising and printed
materials, primarily related to the new products and Dayton service area
expansion; and 3) higher depreciation and amortization expense, relating to
computer hardware and software and payments related to the Company's medical
group assistance program.
INVESTMENT INCOME -
During the 1997 period, the Company experienced a 19.3% increase in investment
income as compared to the 1996 period. This period-over-period increase can
primarily be attributed to an increase in the average outstanding cash, cash
equivalent and investment portfolio balance, due largely to the proceeds from
the May 1, 1996 stock offering and the June 30, 1996 assignment of the Special
Health Medicaid contract and, to a lesser extent, higher short-term interest
rates in 1997.
INCOME TAX BENEFIT -
The income tax benefit has been recorded at the rate applicable to the Company,
currently estimated at an effective tax rate of approximately 38%. This rate may
ultimately be adjusted based upon 1997 full year results.
FINANCIAL CONDITION
Net cash totaling $1,957 was provided by operations during the 1997 period,
resulting primarily from the net activity in certain of the Company's balance
sheet components since year end 1996. Most significant was a net increase in
provider risk pool liabilities, offset by net payments of accounts payable and
accruals. The cash provided by operations was more than offset by $5,721 of cash
used in investing activities, reflecting the net cash impact of investment
portfolio transactions and capital expenditures.
As of March 31, 1997, the Company's investment portfolio was comprised of debt
securities (73.9%), equity-based mutual funds (10.9%) and fixed income mutual
funds (15.2%), all of which are available to meet current obligations and
classified as securities available-for-sale in the accompanying Consolidated
Balance Sheets. Higher interest rates reducing the fair market value of
fixed-rate debt securities and mutual funds, and decreases in market values of
equity-based mutual funds, resulted in unrealized losses on the investment
portfolio totaling $586, net of tax, as of March 31, 1997 compared to unrealized
losses totaling $21 as of December 31, 1996. Such net unrealized losses are
reflected as a separate component of equity in the accompanying Consolidated
Balance Sheets. The Company believes that its cash and cash equivalents,
investment portfolio and the $15 million available under its debt facility will
be sufficient to fund its liquidity needs for at least the next 12 months.
CAUTIONARY STATEMENT
The information set forth above may include "forward-looking" information, as
defined in the Private Securities Litigation Reform Act of 1995. The Cautionary
Statement filed by the Company on November 12, 1996 as part of its Form 10-Q for
the period ended September 30, 1996 is incorporated herein by reference, and
investors are specifically referred to such Cautionary Statement for a
discussion of factors which could affect the Company's operations and
"forward-looking" statements contained herein.
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PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10(ii)(A)(1) Amended and Restated Employment Agreement between the
Company and Daniel A. Gregorie, M.D., effective
January 1, 1997.
10(ii)(A)(2) Amended and Restated Employment Agreement between the
Company and Thomas D. Anthony, Esq., effective
January 1, 1997.
10(ii)(A)(3) Amended and Restated Employment Agreement between the
Company and Jane E. Rollinson, effective January 1,
1997.
10(ii)(A)(5) Amended and Restated Employment Agreement between the
Company and Michael J. Barber, M.D., effective
January 1, 1997.
10(ii)(A)(6) Amended and Restated Supplemental Executive
Retirement Agreement between the Company and Daniel
A. Gregorie, M.D., effective January 1, 1997.
10(iii)(A)(5) Supplemental Executive Retirement Plan for Executive
Officers, effective January 1, 1997.
27 Financial Data Schedule.
(b) Reports on Form 8-K
The Company did not file any reports on Form 8-K during the quarter
ended March 31, 1997.
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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: May 14, 1997 By: /s/ Juan M. Fraiz
-----------------------------------------
Juan M. Fraiz
Vice President and Chief Financial
Officer (Principal Financial Officer)
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