<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(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, 1995
---------------------------
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transaction period from ____________ to ____________
Commission File Number 1-10540
------------------
Foundation Health Corporation
------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 68-0014772
- ----------------------------------- ------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
3400 Data Drive, Rancho Cordova, CA 95670
- --------------------------------------- -----------------------------------
(Address of principal executive offices) (Zip Code)
(916) 631-5000
- ----------------------------------------------------------
(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
------- -------
Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of April 30, 1995:
Common Stock, $0.01 par value 57,078,493
- ----------------------------- ------------------------------
Class Number of Shares
<PAGE>
FOUNDATION HEALTH CORPORATION
INDEX TO FORM 10-Q
PAGE
Part I - Financial Information
Item 1 - Financial Statements
Consolidated Balance Sheets - March 31, 1995 and
June 30, 1994 3
Consolidated Statements of Operations for the
Quarters and Nine Months Ended March 31, 1995 and 1994 4
Condensed Consolidated Statements of Cash Flows for
the Nine Months Ended March 31, 1995 and 1994 5
Notes to Consolidated Financial Statements 6 - 12
Item 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations 13 - 19
Part II - Other Information
Item 1 - Legal Proceedings 20
Item 6 - Exhibits and Reports on Form 8-K 21
Signature 22
Index to Exhibits 23
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
FOUNDATION HEALTH CORPORATION
CONSOLIDATED BALANCE SHEETS
(In thousands)
<TABLE>
<CAPTION>
March 31, June 30,
-------------- --------------
1995 1994
-------------- --------------
(Unaudited)
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 229,547 $ 165,209
Investments 581,931 600,363
Amounts receivable under
government contracts 76,933 136,188
Reinsurance receivable 100,157 122,046
Premium and patient receivables 99,049 93,127
Property and equipment, net 204,546 143,088
Goodwill and other intangible assets, net 407,762 105,535
Deferred income taxes 66,430 44,534
Other assets 141,111 88,418
-------------- --------------
$ 1,907,466 $ 1,498,508
-------------- --------------
-------------- --------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Reserves for claims, losses and loss
adjustment expenses $ 694,436 $ 615,742
Notes payable and capital leases 190,670 170,108
Amounts payable under government
contracts 40,933 50,953
Accrued dividends to policyholders 18,121 30,026
Other liabilities 255,951 209,236
-------------- --------------
1,200,111 1,076,065
-------------- --------------
STOCKHOLDERS' EQUITY:
Common stock and additional paid in
capita 514,014 264,976
Retained earnings 205,475 194,800
Net unrealized holding losses, net
of tax effect (9,087) --
Common stock held in treasury, at cost (3,047) (37,333)
-------------- --------------
707,355 422,443
-------------- --------------
$ 1,907,466 $ 1,498,508
-------------- --------------
-------------- --------------
</TABLE>
See Notes to Consolidated Financial Statements
3
<PAGE>
FOUNDATION HEALTH CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
Quarter Ended March 31, Nine Months Ended March 31,
---------------------------- -----------------------------
1995 1994 1995 1994
-------------- -------------- -------------- --------------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Revenues:
Commercial premiums $ 427,454 $ 360,259 $ 1,220,031 $ 983,602
Government contracts 40,889 99,549 134,836 526,242
Specialty services revenue 121,882 97,083 379,219 268,808
Patient service revenue, net 12,490 11,852 32,454 31,394
Investment and other income 12,914 10,139 42,013 27,657
-------------- -------------- -------------- --------------
615,629 578,882 1,808,553 1,837,703
-------------- -------------- -------------- --------------
Expenses:
Commercial health care services 330,655 280,494 953,252 768,211
Government contracts health care services 17,308 38,830 46,797 139,022
Government contracts subcontractor costs 12,859 39,377 55,502 268,616
Specialty services costs 102,335 89,791 325,523 256,145
Patient service costs 9,076 10,421 26,332 27,528
Selling, general and administrative 71,632 69,740 218,115 220,004
Amortization and depreciation 11,096 7,281 29,189 20,929
Interest expense 2,854 2,928 8,714 9,696
Acquisition and restructuring costs -- -- 124,822 --
-------------- -------------- -------------- --------------
557,815 538,862 1,788,246 1,710,151
-------------- -------------- -------------- --------------
Income before income taxes and minority interest 57,814 40,020 20,307 127,552
Provision for income taxes 21,523 15,742 7,370 49,969
Minority interest -- 1,909 2,262 5,598
-------------- -------------- -------------- --------------
Net income $ 36,291 $ 22,369 $ 10,675 $ 71,985
-------------- -------------- -------------- --------------
-------------- -------------- -------------- --------------
Earnings per share $ 0.63 $ 0.46 $ 0.20 $ 1.49
-------------- -------------- -------------- --------------
-------------- -------------- -------------- --------------
Weighted average shares outstanding 57,358,480 49,102,963 53,892,518 48,414,551
-------------- -------------- -------------- --------------
-------------- -------------- -------------- --------------
</TABLE>
See Notes to Consolidated Financial Statements
4
<PAGE>
FOUNDATION HEALTH CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
Nine Months Ended March 31,
------------------------------------
1995 1994
---------------- ----------------
(Unaudited)
<S> <C> <C>
Net cash provided by operating activities $ 197,359 $ 165,849
---------------- ----------------
Cash flows from investing activities:
Acquisition of property and equipment (68,562) (33,655)
Purchases of available for sale investments (582,475) --
Sales/maturities of available for sale investments 591,800 --
Purchases of held to maturity investments (29,697) --
Maturities of held to maturity investments 70,205 --
Purchases of short-term investments -- (688,259)
Sales/maturities of short-term investments -- 733,882
Purchases of fixed maturity investments -- (193,691)
Sales/maturities of fixed maturity investments -- 77,921
(Increase)decrease in goodwill and intangibles (60,488) --
Increase in other assets (27,711) (5,748)
Acquisition of businesses (41,874) (80,999)
---------------- ----------------
Net cash used for investing activities (148,802) (190,549)
---------------- ----------------
Cash flows from financing activities:
Principal payments on notes payable and capital leases (37,701) (19,144)
Proceeds from notes payable and capital leases, plus accrued interest 44,175 443
Proceeds from issuance of common stock 6,169 595
Proceeds from exercise of stock options 4,781 6,979
Tax benefits related to stock options exercised 1,404 2,524
Collection of subscription notes receivable, plus accrued interest -- 108
Dividends paid -- (2,000)
Purchase of treasury stock (3,047) (27,429)
---------------- ----------------
Net cash used for financing activities 15,781 (37,924)
---------------- ----------------
Net decrease in cash and cash equivalents 64,338 (62,624)
Cash and cash equivalents, beginning of period 165,209 185,664
---------------- ----------------
Cash and cash equivalents, end of period $ 229,547 $ 123,040
---------------- ----------------
---------------- ----------------
Supplemental cash flow disclosure:
Interest paid $ 8,389 $ 8,054
---------------- ----------------
---------------- ----------------
Income taxes paid $ 24,317 $ 53,572
---------------- ----------------
---------------- ----------------
Noncash investing and financing activities:
Assumption of stock options $ -- $ 367
---------------- ----------------
---------------- ----------------
Unrealized holding gains (losses) $ (68) $ --
---------------- ----------------
---------------- ----------------
Capital lease obligations $ -- $ 2,378
---------------- ----------------
---------------- ----------------
Acquisition of businesses:
Assets acquired $ 386,623 $ 527,892
Liabilities assumed (48,515) (439,128)
Amounts held in escrow -- (4,359)
Issuance of notes payable (9,600) --
Issuance of common stock (274,017) --
---------------- ----------------
Cash paid 54,491 84,405
Fees and expenses 6,586 4,479
Less cash acquired (19,203) (7,885)
---------------- ----------------
Net cash paid $ 41,874 $ 80,999
---------------- ----------------
---------------- ----------------
</TABLE>
See Notes to Consolidated Financial Statements
5
<PAGE>
FOUNDATION HEALTH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1 - BASIS OF PRESENTATION
In the opinion of management, the accompanying unaudited consolidated financial
statements include all adjustments (which, other than the acquisitions accounted
for as pooling of interests, as discussed below, consist only of normal
recurring adjustments) necessary for a fair presentation of the consolidated
financial position of Foundation Health Corporation (the "Company") and the
consolidated results of its operations and its cash flows for the interim
periods presented. Although the Company believes that the disclosures in these
financial statements are adequate to make the information presented not
misleading, 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 the rules and regulations
of the Securities and Exchange Commission ("SEC"). Results of operations for
the interim periods are not necessarily indicative of results to be expected for
the full year. For further information, refer to the consolidated financial
statements and footnotes thereto incorporated by reference in the Company's
Annual Report on Form 10-K for the year ended June 30, 1994, the Company's Joint
Proxy Statement/Prospectus dated September 30, 1994 included in the Registration
Statement on Form S-4 (No. 33-84330) and the restated Statements of Operations
contained in the Current Report on Form 8-K filed with the SEC on January 5,
1995.
Certain reclassifications have been made to prior year financial statements to
conform to current period presentation.
NOTE 2 - BUSINESS ACQUISITIONS
PURCHASE TRANSACTIONS
The following acquisitions have been accounted for under the purchase method of
accounting and, accordingly, the operations of the acquired companies have been
included in the Company's consolidated financial statements from their
respective dates of acquisition.
On July 1, 1994, the Company acquired all the outstanding common stock of The
Noetics Group and all of the assets of Reviewco for aggregate consideration
consisting of the issuance of 378,358 shares of the Company's common stock
valued at $16 million, the placing in escrow of 118,236 shares valued at $5
million and cash of $16 million. The release of the escrow shares is subject to
the attainment of certain profitability targets by Reviewco. The purchase price
resulted in goodwill of $27,773,000. The Noetics Group provides workers'
compensation third party administration services for self-funded
6
<PAGE>
employers. Reviewco operates a medical bill review and cost-containment
business for the workers' compensation industry.
On November 10, 1994, the Company acquired all the outstanding common stock of
Southern Colorado Health Plan, Inc. ("SCHP"), and its parent corporation for
consideration consisting of 241,672 shares of the Company's common stock valued
at $8,900,000. The purchase price resulted in goodwill of $6,755,000. At the
date of acquisition, SCHP provided health care services to 7,100 members through
its HMO based in Pueblo, Colorado.
On November 15, 1994, the Company acquired all the outstanding common stock of
Community Medical Plan, Inc. ("CMP") and certain affiliated medical centers for
aggregate consideration of $32.9 million, consisting of $25 million in cash and
the issuance of promissory notes aggregating $7.9 million due November 15, 1995.
At the date of acquisition, CMP served approximately 25,000 Medicaid
beneficiaries in Florida. The purchase price resulted in goodwill of
$32,752,000.
On November 1, 1994, the Company issued 13,124,027 shares of its common stock in
exchange for all the outstanding common stock of Thomas-Davis Medical Centers,
P.C. ("TDMC") (which included TDMC's ownership of 60.5% of the outstanding
common stock of Intergroup Healthcare Corporation ("Intergroup")) and 7,577,336
shares for the purchase of the remaining 39.5% of the outstanding common stock
of Intergroup (the "Intergroup Minority Interest"). The TDMC acquisition was
accounted for as a pooling of interests. The purchase of the Intergroup
Minority Interest, which was accounted for as a purchase, was valued at
$249,109,000 and resulted in goodwill of $207,371,000. See "Pooling
Transactions" below for a description of TDMC and Intergroup. The unaudited
proforma combined total revenues, net income and earnings per share of the
Company and the Intergroup Minority Interest, assuming the Company had acquired
the Intergroup Minority Interest on July 1, 1993, are as follows (in thousands,
except per share amounts):
<TABLE>
<CAPTION>
Proforma Quarter Performa Nine Months
Ended March 31, Ended March 31,
1994 1995 1994
---- ---- ----
<S> <C> <C> <C>
Total Revenues $578.9 $1808.6 $1837.7
------ ------- --------
------ ------- --------
Net Income $ 24.5 $ 11.8 $ 78.2
------ ------- --------
------ ------- --------
Earnings Per Share $ 0.44 $ 0.21 $ 1.41
------ ------- --------
------ ------- --------
</TABLE>
This unaudited proforma information reflects the elimination of the Intergroup
Minority Interest and the amortization of the goodwill related to the purchase
of the Intergroup Minority Interest.
7
<PAGE>
The unaudited proforma results of operations are not necessarily indicative of
the combined results that would have occurred had the acquisition taken place on
July 1, 1993, nor are they necessarily indicative of results that may occur in
the future.
Effective January 1, 1995, California Compensation Insurance Company, the
Company's workers' compensation subsidiary, ("CalComp") acquired a 50-state
licensed property and casualty company for an aggregate purchase price of
$13,201,351 consisting of the fair market value of investments and intangible
assets which was paid in cash at closing. This company had no insurance
business in force at closing and will enable CalComp to geographically expand
its managed care workers' compensation products. This acquisition was accounted
for as a purchase. No goodwill was recorded as a result of this transaction.
POOLING TRANSACTIONS
On October 31, 1994, 6,862,051 shares of the Company's common stock were issued
in exchange for all the outstanding common stock of CareFlorida Health Systems,
Inc. ("Care-Florida"). This acquisition was accounted for as a pooling of
interests. At the date of acquisition, CareFlorida had 58,000 HMO members and
provided managed care services through its preferred provider organization
("PPO") to 85,000 eligible individuals covered by other funding arrangements.
As described above at "Purchase Transactions," on November 1, 1994, 20,701,363
shares of the Company's common stock were issued in exchange for all the
outstanding common stock of Intergroup and TDMC, its majority stockholder. In
addition, all outstanding Intergroup options were exchanged for options to
purchase 500,290 shares of the Company's common stock. TDMC employs
approximately 190 physicians who provide health care services to patients in
Arizona through 15 primary care centers, five urgent care centers, two
behavioral health centers and one surgery center. Intergroup is a managed
health care company which arranges for the delivery of a comprehensive range of
medical services. At the date of acquisition, these services were provided to
379,000 eligible individuals in Arizona and Utah, primarily through Intergroup's
HMO and indemnity insurance subsidiaries. In addition, Intergroup provided
managed care services through its Utah PPO to approximately 104,000 individuals
covered by other funding arrangements and provided third party administration
services to approximately 18,000 individuals in Arizona.
In connection with the acquisitions of TDMC, Intergroup and CareFlorida, the
Company charged $124.8 million to operations during the quarter ended December
31, 1994 for acquisition and restructuring costs. These one-time costs include
$67.5 million in transaction costs which the Company is obligated to pay as a
result of the acquisitions and $57.3 million relating to the integration and
restructuring of the combined entities. The integration and restructuring costs
consist primarily of (i) the write-off of obsolete and duplicate computer
hardware and software, (ii) costs associated with terminating leases of
duplicate facilities and (iii) severance and other personnel related costs. At
March 31, 1995 the liability for unpaid acquisition and restructuring costs was
$62.1 million. Management believes that the liability
8
<PAGE>
for unpaid acquisition and restructuring costs is adequate to cover remaining
acquisition related expenses and planned integration and restructuring
activities.
In accordance with the pooling of interests method of accounting the Company's
consolidated financial statements and notes thereto have been restated to
include the results of TDMC (including its 60.5% interest in Intergroup) and
CareFlorida for all periods presented.
Separate and combined unaudited results of the Company ("FHC"), CareFlorida and
TDMC for the periods prior to consummation of the acquisitions are (in
thousands):
<TABLE>
<CAPTION>
Quarter Ended Nine Months Ended Four Months Ended
March 31, 1994 March 31, 1994 October 31, 1994
-------------- ----------------- -----------------
<S> <C> <C> <C>
Total Revenues:
FHC $403,559 $1,375,200 $539,322
TDMC 136,067 349,181 195,080
CareFlorida 44,175 124,072 61,503
Reclassifications (4,919) ( 10,750) ( 5,592)
-------- ---------- --------
Combined $578,882 $1,837,703 $790,313
-------- ---------- --------
-------- ---------- --------
Net Income:
FHC $ 19,589 $ 63,125 $ 26,602
TDMC 539 3,205 2,385
CareFlorida 2,241 5,655 2,497
-------- ---------- --------
Combined $ 22,369 $ 71,985 $ 31,484
-------- ---------- --------
-------- ---------- --------
</TABLE>
Certain reclassifications are required to conform the separate results of TDMC
and CareFlorida to FHC's presentation.
9
<PAGE>
NOTE 3 - INVESTMENTS
Investments comprised the following (in thousands):
<TABLE>
<CAPTION>
March 31, 1995 June 30, 1994
-------------- -------------
(Unaudited) (Unaudited)
<S> <C> <C>
Available for sale $529,602
Held to maturity 52,329
Short-term investments -- $ 25,094
Fixed maturities -- 575,269
-------- --------
$581,931 $600,363
-------- --------
-------- --------
</TABLE>
Effective July 1, 1994, the Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 115, "Accounting for Certain Investments in Debt and
Equity Securities." The adoption of SFAS No. 115 did not have a material effect
on the Company's consolidated financial position or results of operations.
During the quarter and nine months ended March 31, 1995 the separate component
of stockholders' equity representing net unrealized holding losses on
investments available for sale decreased by $7.6 million and $0.1 million, net
of tax effect.
For purposes of calculating realized gains and losses on sales of investments
available for sale, the amortized cost of each investment sold is used.
As of March 31, 1995, the amortized cost, fair value, unrealized holding gains
and unrealized holding losses of the Company's debt and equity investments
classified as available for sale and held to maturity are as follows (in
thousands):
10
<PAGE>
<TABLE>
<CAPTION>
AVAILABLE FOR SALE INVESTMENTS:
- -------------------------------
At Fair Value At Amortized Cost
------------------------------------------------ -------------------------------------------------
Years to Maturity Years to Maturity
------------------------------------------------ -------------------------------------------------
Less One Over Five Over Less One Over Five Over
Than to Five to Ten Than to Five to Ten
One Year Years Ten Years Years One Year Years Ten Years Years
--------- --------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. government and agencies $ 5,536 $ 87,513 $ 13,067 $ 213 $ 5,552 $ 90,138 $ 13,721 $ 203
Obligations of states and
other political
subdivisions 79,472 96,037 136,035 84,183 79,662 97,348 140,638 85,750
Corporate securities 300 3,426 3,630 650 301 3,519 3,909 705
Equity securities 3,770 4,089
Other debt securities 15,770 15,770
--------- --------- --------- --------- --------- --------- --------- ---------
Total available for sale $ 104,848 $ 186,976 $ 152,732 $ 85,046 $ 105,374 $ 191,005 $ 158,268 $ 86,658
--------- --------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- --------- ---------
<CAPTION>
HELD TO MATURITY INVESTMENTS:
- -----------------------------
At Fair Value At Amortized Cost
------------------------------------------------ -------------------------------------------------
Years to Maturity Years to Maturity
------------------------------------------------ -------------------------------------------------
Less One to Over Five Over Less One to Over Five Over
Than Five to Ten Than Five to Ten
One Year Years Ten Years Years One Year Years Ten Years Years
--------- --------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. government and agencies $ 9,498 $ 5,753 $ 2,590 $ 9,377 $ 5,795 $ 2,646
Obligations of states and
other political
subdivisions 10,786 8,355 5,867 $ 3,617 10,797 8,451 5,997 $ 3,726
Corporate securities 360 100 641 347 100 597
Other debt securities 4,396 100 4,396 100
--------- --------- --------- --------- --------- --------- --------- ---------
Total Held to Maturity $ 24,680 $ 14,468 $ 8,657 $ 4,258 $ 24,570 $ 14,593 $ 8,843 $ 4,323
--------- --------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- --------- ---------
<CAPTION>
GROSS UNREALIZED HOLDING GAINS AND LOSSES:
- ------------------------------------------
Available for Sale Held to Maturity
------------------------------------------------ -------------------------------------------------
Gross Gross Gross Gross
Unrealized Unrealized Unrealized Unrealized
Amortized Holding Holding Fair Amortized Holding Holding Fair
Cost Gains Losses Value Cost Gains Losses Value
--------- --------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. government and
agencies $ 109,614 $ 158 $ 3,444 $ 106,328 $ 17,818 $ 185 $ 163 $ 17,840
Obligations of states
and other political
subdivisions 403,399 167 7,837 395,729 28,971 29 375 28,625
Corporate securities 8,433 52 479 8,006 1,044 58 1,102
Equity securities 4,089 39 359 3,769 0
Other debt securities 15,770 15,770 4,496 4,496
------------------------------------------------ ------------------------------------------------
Total $ 541,305 $ 416 $ 12,119 $ 529,602 $ 52,329 $ 272 $ 538 $ 52,063
--------- --------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- --------- ---------
</TABLE>
11
<PAGE>
NOTE 4 - CAPITAL STOCK
On November 15, 1994, the Company's stockholders approved amendments to the 1990
Stock Option Plan (the "1990 Plan") which increased the number of shares
available for the granting of options from 3,025,000 to 5,525,000, and added
technical changes to conform the 1990 Plan to the deductibility requirements of
Section 162(m) of the Internal Revenue Code.
On January 28, 1995, the Company's Board of Directors authorized the retirement
of 1,647,898 shares of common stock held in treasury and such shares were
returned to the status of authorized but unissued shares. As a result, the
$35,730,000 value assigned to treasury stock has been eliminated with a
corresponding decrease in common stock and additional paid in capital.
12
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
The Company operates an integrated multi-state managed care organization. The
Company's operations are focused on its commercial HMO and PPO operations,
government-sponsored managed care programs, and specialty services operations.
Commercial HMO and PPO operations are characterized by the assumption of
underwriting risk in return for premium revenue. Government-sponsored managed
care programs consist of contractual services to state and federal government
programs such as CHAMPUS and Medicaid in which the Company receives revenues for
administrative and management services and, under certain of the contracts, also
accepts financial responsibility for health care costs. Specialty services
consists both of operations in which the Company assumes underwriting risk in
return for premium revenue, including managed care workers' compensation
insurance and behavioral health, dental and vision HMO products, and operations
in which the Company provides administrative services only, including certain of
the behavioral health and pharmacy benefits management programs, workers'
compensation third party administration and bill review services and
administrative-only products and services.
The Company consummated the following acquisitions of complementary businesses
during the nine months ended March 31, 1995 to increase its geographic and
product diversity:
Type of
Date of Acquisition Nature of Business Consideration Consideration
- ------------------- ------------------ ------------- ------------------
PURCHASE TRANSACTIONS
July 1994 Workers' compensation $37 million Cash plus stock
bill review and third-
party administration
November 1994 Colorado-based managed $8.9 million Stock
care company
November 1994 Florida - Medicaid $32.9 million Cash plus
managed care company promissory note
November 1994 39.5% minority interest $249.1 million Stock
in Arizona and Utah-
based managed care
company ("Intergroup
Healthcare Corporation")
January 1995 Property and casualty $13.2 million Cash
insurance company
13
<PAGE>
POOLING TRANSACTIONS
Date of Type of
Acquisition Nature of Business Consideration Consideration
- ----------- ------------------ ------------- -------------
October 1994 Florida - managed care $226.4 million Exchange of
company ("CareFlorida Stock
Health Systems, Inc.")
November 1994 Arizona professional $438.9 million Exchange of
corporation ("Thomas- Stock
Davis Medical Centers,
P.C.") and its 60.5%
interest in Intergroup
Healthcare Corporation
The Company's consolidated financial information has been restated to include
the accounts of CareFlorida Health Systems, Inc. ("CareFlorida") and Thomas-
Davis Medical Centers, P.C., ("TDMC") and its 60.5% interest in Intergroup
Healthcare Corporation ("Intergroup"), for all periods presented, as these
acquisitions were each accounted for as a pooling of interests.
In connection with the acquisitions of TDMC, Intergroup and CareFlorida, the
Company charged $124.8 million to operations during the quarter ended December
31, 1994 for acquisition and restructuring costs. These one-time costs include
$67.5 million in transaction costs that the Company is obligated to pay as a
result of the acquisitions and $57.3 million relating to the integration and
restructuring of the combined entities. The integration and restructuring costs
consist primarily of (i) the write-off of obsolete and duplicate computer
hardware and software, (ii) costs associated with terminating leases of
duplicate facilities and (iii) severance and other personnel related costs.
The Company's CHAMPUS Reform Initiative Contract ("CRI Contract") expired
January 31, 1994 with a wind-down and termination period after expiration.
During this wind-down period the Company is being reimbursed by the government
for administrative expenses incurred plus a negotiated fixed fee.
In September 1994, the Company was awarded a contract to establish a managed
care program for 230,000 eligible beneficiaries of CHAMPUS in Oregon and
Washington ("the Oregon/Washington Contract"). Implementation of the contract
commenced in September 1994 and the provision of health care services began on
March 1, 1995. The contract has a term of up to five years, and is subject to
adjustments to reflect recent reductions in coverage for eligible beneficiaries
under the contract. In April 1995, the Company was awarded a contract to
establish a similar program for 590,000 eligible CHAMPUS beneficiares, 103,000
of which are currently covered under another government contract administered by
the Company, in Oklahoma and most of Arkansas, Louisiana and Texas. The
contract has a term of up to five years with health care services scheduled to
begin November 1, 1995.
The Company's profitability depends in large part on accurately predicting and
controlling health care expenditures, effectively managing utilization of health
care services and negotiating favorable provider contracts. Changes in health
care practices, inflation, new technologies and numerous other factors affecting
the delivery and cost of health care, including proposed health care reforms
14
<PAGE>
and legislative initiatives, may adversely affect the Company's ability to
predict and control health care costs and claims. Pressures by large employer
groups for premium rate decreases and continued intense competition for
enrollees may affect the Company's operating results, including increased
medical loss ratios. In addition, changes in federal and state government
health care policies or practices could result in the gain, loss or repricing of
significant government contracts, e.g. Medicaid or CHAMPUS, which could have a
material effect on the Company's operating results.
RESULTS OF OPERATIONS
Total revenues increased by $36.7 million, or 6.3%, for the quarter ended March
31, 1995 over the same period in fiscal year 1994 due to increases in commercial
and specialty services revenues offset in part by a decrease in government
revenues as a result of the expiration of the CRI Contract. Total revenues
decreased $29.2 million, or 1.6%, for the nine months ended March 31, 1995 over
the comparable period in fiscal year 1994 primarily as a result of the
expiration of the CRI Contract.
Commercial premiums for the quarter ended March 31, 1995 increased $67.2
million, or 18.7%, over the comparable period in fiscal year 1994 due primarily
to a greater than 176,000 member increase in commercial enrollment from over
944,000 at March 31, 1994 to 1,120,000 at March 31, 1995. The third quarter
increase in commercial premiums over the comparable prior year period is lower
than increases experienced in the first and second quarters due to premiums
related to Gem Insurance Company ("Gem") which was purchased by Intergroup
effective January 1, 1994. The year-to-date increase in commercial premiums
over the nine months ended March 31, 1994 of $236.4 million, or 24%, is
attributable primarily to increases in enrollment and to $17.7 million in
premiums related to Gem. The commercial loss ratio (commercial health care
services expenses as a percentage of commercial premiums), which includes both
HMO medical and indemnity revenues and health care expenses, decreased from
77.9% for the quarter ended March 31, 1994 to 77.4% for the quarter ended March
31, 1995, due to continued health care cost management, changes in the
enrollment composition in Arizona and Florida, and Medicare premium increases.
Commercial health care services expenses for the quarter ended March 31, 1995
increased by $50.2 million, or 17.9%, over the comparable prior year period
primarily as a result of increased enrollment in the medical HMO, higher
pharmacy costs and higher payments to capitated providers. These commercial
health care trends for the nine months ended March 31, 1995 resulted in a
commercial loss ratio of 78.1% which is consistent with the comparable prior
period.
Government contracts revenue is impacted by semi-annual bid price adjustments,
annual price increases, risk sharing provisions and various other price
adjustments under the CHAMPUS contracts. Government contracts revenue
decreased by $58.7 million, or 58.9%, for the quarter ended March 31, 1995 over
the prior year quarter as a result of the expiration of the CRI Contract
effective January 31, 1994, offset in part by the net effect of revenues
generated by the expansion
15
<PAGE>
of the Company's New Orleans Contract to cover the Base Realignment and Closure
areas of Alexandria, Louisiana and the areas of Austin and Forth Worth, Texas
(the "BRAC expansion"), which commenced May 1, 1993, and revenues related to the
Oregon/Washington Contract. The expiration of the CRI Contract also contributed
to the decrease in government contracts revenue for the nine months ended March
31, 1995 over the prior year period of $391.4 million, or 74.4%.
Total government contracts expenses (government contracts subcontractor costs
plus government contracts health care services expenses) decreased by $48
million, or 61.4%, and $305.3 million, or 74.9%, for the quarter and nine months
ended March 31, 1995 over the comparable prior year periods. The decrease in
total CHAMPUS expenses for the periods was due to the expiration of the CRI
contract offset in part by expenses under the BRAC expansion and the
implementation of the Oregon/Washington Contract in which health care delivery
began in March 1995.
Specialty services revenue increased by $24.8 million, or 25.5%, for the quarter
ended March 31, 1995 and by $110.4 million, or 41.1%, for the nine months ended
March 31, 1995 over the comparable periods in fiscal year 1994. This increase
was primarily attributable to workers' compensation insurance premiums generated
by California Compensation Insurance Company, the Company's workers'
compensation insurance subsidiary ("CalComp"), which totaled $70.3 million and
$188.2 million for the quarter and eight months (commencing August 1, 1993, the
date of acquisition) ended March 31, 1994 and $85.4 million and $270.4 million
for the quarter and nine months ended March 31, 1995. The increase in CalComp
net premium revenues was a result of strong policy growth as well as a reduction
in premiums previously ceded to reinsurers under a quota share agreement. The
premium increase was offset in part by a 16% mandatory reduction in premiums for
policies effective October 1, 1994 and the effect of new California regulations
that allow premium rates to be set on a competitive basis for new policies
effective after January 1, 1995. Also contributing to the increase in specialty
services revenues were revenues generated by Reviewco, which was purchased on
July 1, 1994, which totaled $4.5 million and $14 million for the quarter and
nine months ended March 31, 1995. Specialty services costs, which includes
health care and administrative costs, increased $12.5 million, or 14%, for the
quarter ended March 31, 1995 and $69.4 million, or 27.1%, for the nine months
ended March 31, 1995 over the comparable prior year periods primarily as a
result of increased enrollment related to CalComp and the Company's dental and
behavioral health care subsidiaries and to $2.5 million and $7.8 million in
specialty services costs related to Reviewco. The specialty services ratio
(specialty services costs as a percentage of specialty services revenues)
decreased from 92.5% and 95.3% for the quarter and nine months ended March 31,
1994 to 84% and 85.8% for the quarter and nine months ended March 31, 1995. The
improvement in the specialty services ratio was due primarily to the successful
implementation of managed care in the workers' compensation environment,
resulting in favorable claims experience and lower sales costs for CalComp,
improved dental plan costs, and the addition of Reviewco which has a lower
specialty services ratio than most specialty services subsidiaries.
Selling, general and administrative ("SG&A") expenses increased by $1.9 million,
or 2.7%, for the quarter ended March 31, 1995 over the comparable prior year
period primarily due to SG&A expenses related to Community Medical Plan, Inc.
("CMP"), which was purchased by the Company
16
<PAGE>
effective November 15, 1994. SG&A expenses decreased by $1.9 million, or 0.9%,
for the nine months ended March 31, 1995 over the same periods in fiscal year
1994 due to the expiration of the CRI Contract offset in part by increased SG&A
expenses related to Gem and CMP. SG&A expenses as a percentage of total
revenues (the "SG&A ratio") were 11.6% and 12% for the quarters ended March 31,
1995 and 1994 and 12.1% and 12% for the nine months ended March 31, 1995 and
1994. The decrease in the SG&A ratio for the quarter ended March 31, 1995
compared to the prior year quarter is due to commercial premium revenue growth
while continuing to contain SG&A expenses. The increase in the SG&A ratio for
the nine months ended March 31, 1995 compared to the prior year quarter is due
primarily to the expiration of the CRI contract.
In connection with the acquisitions of TDMC, Intergroup and CareFlorida, the
Company charged $124.8 million to operations during the quarter ended December
31, 1994 for acquisition and restructuring costs. These one-time costs include
$67.5 million in transaction costs which the Company is obligated to pay as a
result of the acquisitions and $57.3 million relating to the integration and
restructuring of the combined entities. The integration and restructuring costs
consist primarily of (i) the write-off of obsolete and duplicate computer
hardware and software, (ii) costs associated with terminating leases of
duplicate facilities, and (iii) severance and other personnel related costs.
The Company's income before income taxes and minority interest and before the
one-time acquisition and restructuring costs increased $17.8 million, or 44.5%,
and $17.6 million, or 13.8%, and increased as a percentage of total revenues
from 6.9% to 9.4% and from 6.9% to 8% for the quarter and nine months ended
March 31, 1995 over the same periods in fiscal year 1994. These increases
resulted from the increased profitability of the specialty services operations,
primarily related to CalComp, profitability of the commercial HMO and PPO
operations, and increased investment and other income offset in part by the
expiration of the CRI Contract. After the one-time charge, income before income
taxes and minority interest increased $17.8 million, or 44.5%, for the quarter
ended March 31, 1995 and decreased $107.2 million, or 84.1%, for the nine months
ended March 31, 1995 as compared to the comparable periods in fiscal year 1994.
Net income before the one-time acquisition and restructuring costs and related
tax effects increased by $13.9 million, or 62.2%, and increased as a percentage
of total revenues from 3.9% to 5.9% for the quarter ended March 31, 1995 and
increased by $18.1 million, or 25.1%, and increased as a percentage of total
revenues from 3.9% to 5% for the nine months ended March 31, 1995 over the same
periods in fiscal year 1994. After the one-time charge and related tax effects,
net income increased by $13.9 million, or 62.2%, and increased as a percentage
of total revenues from 3.9% to 5.9% for the quarter ended March 31, 1995 and
decreased by $61.3 million, or 85.2%, and decreased as a percentage of total
revenues from 3.9% to 0.6% for the nine months ended March 31, 1995 over the
same periods in fiscal year 1994.
17
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
Cash provided by operating activities was $197.4 million for the nine months
ended March 31, 1995 as compared to $165.8 million for the comparable period in
fiscal year 1994 due primarily to the Company's profitable operations during the
period.
Excess operating cash has been invested in investment grade securities. The
Company is negotiating with several banks for the financing and construction of
up to $60 million for health care and corporate facilities. The Company will
enter into operating leases upon completion of construction of the various
facilities and, at the end of the lease term, will be obligated to either
purchase the facilities or sell them to third parties at agreed upon prices. To
the extent the Company consummates this transaction, its capital expenditures
for the remainder of fiscal year 1995 for construction of primary care medical
and corporate facilities are expected to be approximately $3 million. The
Company expects other capital expenditures for the remainder of fiscal year 1995
to approximate $1.9 million. The net costs of operating and managing the medical
facilities for the remainder of fiscal year 1995 will approximate $8 million and
will be offset in part by health care cost savings realized by the California
HMO. The Company expects capital expenditures for fiscal year 1996 to
approximate $30 million. In addition, the Company has start-up HMO and workers'
compensation operations in a number of states outside California and in the
United Kingdom. These operations have required and will continue to require
significant cash expenditures related to start-up costs in creating the
infrastructure for operations at each location, hiring and training personnel
and establishing minimum statutory capital requirements. The Company paid $25
million in cash for the acquisition of CMP on November 15, 1994 and issued
promissory notes aggregating $7.9 million for the balance of the purchase price
to be paid November 15, 1995. During the quarter ended March 31, 1995, the
Company contributed an additional $35 million, $20 million of which was obtained
under the line of credit, to CalComp's surplus to meet regulatory and rating
agency requirements.
The Company has a $300 million unsecured revolving credit agreement with
Citicorp USA, Inc. as Administrative Agent for the lenders thereto (the "Credit
Agreement") which expires December 5, 1999 to assist in funding the construction
and operation of the medical facilities and the Company's other start-up
operations. The Credit Agreement contains customary terms, events of default
and affirmative and negative covenants (including financial covenants related to
net worth, fixed charge coverage and total debt to total capitalization).
Principal amounts outstanding under the Credit Agreement bear interest, at the
Company's option, at either Citibank's base rate or the Eurodollar rate plus a
margin depending upon the Company's public debt rating or level of total debt to
total capitalization. Any interest payments are due quarterly and principal is
due at maturity. As of March 31, 1995, the Company has drawn $20 million on the
Credit Agreement. Management of the Company continually evaluates opportunities
to expand the Company's commercial and specialty services operations; however,
the Company currently has no material commitments for future use of its current
or expected levels of available cash resources except as described above. The
Company's expansion options may include additional acquisitions and internal
development of new products and programs.
18
<PAGE>
The Company has a stock repurchase program to acquire from time to time shares
of the Company's outstanding common stock in the open market. As of March 31,
1995 the Company had repurchased a total of 1,545,500 shares, since the March
1993 program inception, and is authorized to purchase up to 5.6 million
additional shares at prices deemed appropriate by management and subject to
market conditions and other relevant factors.
In June 1993, the Company issued $125 million of Senior Notes due June 1, 2003
(the "Senior Notes"). The Senior Notes bear interest at 7 3/4% which is due
semi-annually on December 1 and June 1. The Senior Notes are general unsecured
obligations of the Company, will rank PARI PASSU with all future unsecured and
unsubordinated indebtedness of the Company and are effectively subordinated to
creditors of the Company's subsidiaries. The indenture contains certain
covenants that, among other things, (i) restrict the ability of the Company and
its Restricted Subsidiaries (as defined) to (a) pay dividends and make other
distributions and certain investments, (b) grant liens on their assets, (c)
enter into or permit certain sale and lease-back transactions or (d) engage in
certain mergers, consolidations and sales of assets, and (ii) restrict the
ability of the Company's Restricted Subsidiaries to incur additional
indebtedness or issue shares of preferred stock.
Certain of the Company's subsidiaries must comply with minimum capital and
surplus requirements under applicable state HMO and insurance laws and
regulations and certain subsidiaries must maintain ratios of current assets to
current liabilities of 1:1 pursuant to certain government contracts. The
Company believes it is in material compliance with these contractual and
regulatory requirements.
19
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In the ordinary course of its business, the Company is a party to
claims and legal actions by enrollees, providers and others. The
Company also undergoes governmental audits with respect to its
government contracts and with respect to operations of its HMO,
insurance and specialty services subsidiaries. After consulting with
legal counsel, the Company is of the opinion that any liability that
may ultimately be incurred as a result of these claims, legal actions
or audits will not have a material adverse effect on the consolidated
financial position or results of operations of the Company.
On April 14, 1995 the Company and the State of California Attorney
General's office reached an amicable settlement of the allegations against
DentiCare of California, Inc. regarding the arrangement of certain dental
services to Medicaid beneficiaries between March 1, 1991 and January 31,
1993. The Attorney General's office issued a statement that said in part:
"Since the period of time involved in the allegations, DentiCare was bought
by and became a wholly owned subsidiary of Foundation Health Corporation.
Subsequent to the acquisition by Foundation, new management systems and
improved quality control measures were implemented that adequately
addressed the concerns raised in the allegations." This matter was
concluded with no material effect on the Company's consolidated financial
position or results of operations.
See "Government Regulations" and "Legal Proceedings" in the Company's
Annual Report on Form 10-K for the fiscal year ended June 30, 1994 and the
Joint Proxy Statement/Prospectus dated September 30, 1994 included in the
Registration Statement on Form S-4 (No. 33-84330) for further description
of audits and legal proceedings to which the Company and certain of its
subsidiaries are subject.
20
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
11 - Earnings Per Share Computation
(b) Reports on Form 8-K
On January 5, 1995, the Company filed a report on Form 8-K with respect to
the restated statements of operations of the Company.
21
<PAGE>
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.
FOUNDATION HEALTH CORPORATION
Date: By: /s/
------------------------------- -----------------------------------
Jeffrey L. Elder
Senior Vice President and Chief
Financial Officer (Principal
Financial and Accounting Officer)
22
<PAGE>
FOUNDATION HEALTH CORPORATION
INDEX TO EXHIBITS
EXHIBIT NO. PAGE
11 Earnings Per Share Computation
23
<PAGE>
FOUNDATION HEALTH CORPORATION
EXHIBIT 11
Earnings Per Share Computation
Utilizing the Treasury Stock Method
(Dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
Nine Months Ended
Quarter Ended March 31, March 31,
---------------------------- ---------------------------
1995 1994 1995 1994
------------- ------------- ------------- ------------
<S> <C> <C> <C> <C>
Proceeds upon exercise of options outstanding $ 47,954 $ 57,056
------------- -------------
------------- -------------
Average market price of common stock $ 30.63 $ 37.86
------------- -------------
------------- -------------
Weighted average common shares outstanding 57,017,649 48,025,121
Issued shares - exercise of options 1,906,568 2,584,774
Shares assumed to be repurchased with
proceeds from exercise (1,565,737) (1,506,932)
------------- ------------- ------------- ------------
Weighted average shares outstanding (A) 57,358,480 49,102,963 53,892,518 48,414,551
------------- ------------- ------------- ------------
------------- ------------- ------------- ------------
Net income for the quarter (B) $ 36,291 $ 22,369 $ 10,675 $ 71,985
------------- ------------- ------------- ------------
------------- ------------- ------------- ------------
Earnings per share (B) / (A) $ 0.63 $ 0.46 $ 0.20 $ 1.49
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
The schedule contains summary financial information extracted from the
Form 10-Q filed by Foundation Health Corporation for the Quarter ended
March 31, 1995 and is qualified in its entirety by reference to such
financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUN-30-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> MAR-31-1995
<CASH> 229,547
<SECURITIES> 581,931
<RECEIVABLES> 276,139
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 204,546<F1>
<DEPRECIATION> 0
<TOTAL-ASSETS> 1,907,466
<CURRENT-LIABILITIES> 0
<BONDS> 190,670
<COMMON> 571
0
0
<OTHER-SE> 706,784
<TOTAL-LIABILITY-AND-EQUITY> 1,907,466
<SALES> 602,715
<TOTAL-REVENUES> 615,629
<CGS> 0
<TOTAL-COSTS> 554,961
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,854
<INCOME-PRETAX> 57,814
<INCOME-TAX> 21,523
<INCOME-CONTINUING> 36,291
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 36,291
<EPS-PRIMARY> 0.63
<EPS-DILUTED> 0
<FN>
<F1>NET PP&E
</FN>
</TABLE>
