<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 September 30, 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 October 31, 1995:
Common Stock, $0.01 par value 57,062,421
----------------------------- ----------------
Class Number of Shares
1
<PAGE>
FOUNDATION HEALTH CORPORATION
INDEX TO FORM 10-Q
PAGE
Part I - Financial Information
Item 1 - Financial Statements
Condensed Consolidated Balance Sheets -
September 30, 1995 and June 30, 1995 3
Condensed Consolidated Statements of Operations for the
Quarters Ended September 30, 1995 and 1994 4
Condensed Consolidated Statements of Cash Flows for the
Quarters Ended September 30, 1995 and 1994 5
Notes to Condensed Consolidated Financial Statements 6 - 7
Item 2 - Management's Discussion and Analysis of Financial
Condition and Results of Operations 8 - 15
Part II - Other Information
Item 1 - Legal Proceedings 16
Item 6 - Exhibits and Reports on Form 8-K 17
Signature 18
Index to Exhibits 19
2
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
FOUNDATION HEALTH CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
September 30, June 30,
-------------- --------------
1995 1995
-------------- --------------
(Unaudited) (Audited)
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 262,360 $ 203,937
Investments 563,015 591,341
Amounts receivable under government contracts 85,547 81,089
Reinsurance receivable 95,072 98,255
Premium and patient receivables, net 118,353 100,727
Property and equipment, net 245,508 230,278
Goodwill and other intangible assets, net 414,368 409,342
Deferred income taxes 56,794 65,673
Other 236,515 183,565
-------------- --------------
$ 2,077,532 $ 1,964,207
-------------- --------------
-------------- --------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Reserves for claims, losses and loss adjustment expenses $ 713,588 $ 700,281
Notes payable and capital leases 224,480 180,054
Amounts payable under government contracts 38,533 47,584
Accrued dividends to policyholders 9,919 16,405
Other liabilities 307,304 262,984
-------------- --------------
1,293,824 1,207,308
-------------- --------------
Stockholders' Equity:
Common stock and additional paid-in capital 504,343 518,671
Retained earnings 283,654 244,249
Unrealized investment gains and losses, net of taxes (1,242) (2,974)
Common stock held in treasury, at cost (3,047) (3,047)
-------------- --------------
783,708 756,899
-------------- --------------
$ 2,077,532 $ 1,964,207
-------------- --------------
-------------- --------------
</TABLE>
See Notes to Condensed Consolidated Financial Statements
3
<PAGE>
FOUNDATION HEALTH CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
Quarter Ended September 30,
------------------------------
1995 1994
-------------- --------------
(Unaudited) (Unaudited)
<S> <C> <C>
Revenues:
Commercial premiums $ 459,575 $ 390,789
Government contracts 81,019 47,978
Specialty services revenue 157,424 130,258
Patient service revenue, net 11,675 9,249
Investment and other income 12,672 16,101
-------------- --------------
722,365 594,375
-------------- --------------
Expenses:
Commercial health care services 367,398 309,644
Government contracts health care services 27,041 12,253
Government contracts subcontractor costs 18,216 27,206
Specialty services costs 138,452 114,381
Patient service costs 9,080 8,649
Selling, general and administrative 85,029 72,090
Amortization and depreciation 13,441 7,907
Interest expense 4,044 2,907
-------------- --------------
662,701 555,037
-------------- --------------
Income before income taxes and minority interest 59,664 39,338
Provision for income taxes 20,259 13,917
Minority interest 1,770
-------------- --------------
Net income $ 39,405 $ 23,651
-------------- --------------
-------------- --------------
Earnings per share $ 0.69 $ 0.48
-------------- --------------
-------------- --------------
Weighted average common and common
stock equivalent shares outstanding 57,427,162 49,709,634
-------------- --------------
-------------- --------------
</TABLE>
See Notes to Condensed Consolidated Financial Statements
4
<PAGE>
FOUNDATION HEALTH CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
Quarter Ended September 30,
------------------------------
1995 1994
-------------- --------------
(Unaudited) (Unaudited)
<S> <C> <C>
Net cash provided by operating activities $ 59,812 $ 143,851
-------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of property and equipment (22,957) (39,278)
Purchases of available for sale investments (111,315) (237,690)
Sales/maturities of available for sale investments 135,138 196,592
Purchases of held to maturity investments (2,508) (18,254)
Maturities of held to maturity investments 8,559 19,337
Increase in other assets (24,437) (18,847)
Acquisition of businesses, net of cash acquired (6,034) (15,489)
-------------- --------------
Net cash used for investing activities (23,554) (113,629)
-------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of notes payable and capital leases 40,016
Principal payments on notes payable and capital leases (2,319) (2,091)
Proceeds and tax benefits from issuance of common stock
and exercise of stock options 2,025 570
Stock repurchase and other merger related adjustments (17,557)
-------------- --------------
Net cash provided by (used for) financing activities 22,165 (1,521)
-------------- --------------
Net increase in cash and cash equivalents 58,423 28,701
Cash and cash equivalents, beginning of quarter 203,937 165,209
-------------- --------------
Cash and cash equivalents, end of quarter $ 262,360 $ 193,910
-------------- --------------
-------------- --------------
SUPPLEMENTAL CASH FLOW DISCLOSURE:
Interest paid $ 993 $ 1,457
-------------- --------------
-------------- --------------
Income taxes paid $ 1,678 $ 9,216
-------------- --------------
-------------- --------------
Noncash investing and financing activities:
Unrealized holding gains (losses) $ 1,732 $ (4,434)
-------------- --------------
-------------- --------------
Acquisition of businesses:
Assets acquired $ 7,074 $ 33,077
Liabilities assumed (854) (961)
Issuance of common stock (16,000)
-------------- --------------
Cash paid 6,220 16,116
Less cash acquired (186) (627)
-------------- --------------
Net cash paid $ 6,034 $ 15,489
-------------- --------------
-------------- --------------
</TABLE>
See Notes to Condensed Consolidated Financial Statements
5
<PAGE>
FOUNDATION HEALTH CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1 - BASIS OF PRESENTATION
In the opinion of management, the accompanying unaudited consolidated financial
statements include all 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"). For further information
refer to the consolidated financial statements and notes thereto in the
Company's Annual Report on Form 10-K for the year ended June 30, 1995. Results
of operations for the interim periods are not necessarily indicative of results
to be expected for the full year.
Certain reclassifications have been made to prior year financial statements to
conform to current period presentation.
NOTE 2 - RESTRUCTURING COSTS
In connection with several mergers in November 1994 the Company recorded a
charge of $124.8 million to operations during the quarter ended December 31,
1994 which represents the costs of acquiring and consolidating the companies'
management information systems and administrative functions and positioning the
Company to take advantage of best practices in health care delivery systems and
managed care techniques after the mergers. As of September 30, 1995, $75.2
million in merger, integration and restructuring costs had been paid or
otherwise charged against the $124.8 million accrual. The remaining
restructuring obligations are expected to be paid as due through the fourth
quarter of 1996 utilizing existing resources of the Company. The amounts set
forth represent management's best estimate of the restructuring costs to be
incurred and the timing of the restructuring and integration plan (the "Plan").
The progress of the Plan and the actual amounts incurred could vary from these
estimates if future developments differ from the underlying assumptions used by
management in developing the recorded accrual.
6
<PAGE>
NOTE 3 - INVESTMENTS
Investments comprised the following (in thousands):
<TABLE>
<CAPTION>
September 30, June 30, 1995
------------- -------------
1995
----
<S> <C> <C>
Available for sale $519,414 $541,596
Held to maturity 43,601 49,745
-------- --------
$563,015 $591,341
-------- --------
-------- --------
</TABLE>
For purposes of calculating realized gains and losses on sales of investments
available for sale, the amortized cost of each investment sold is used.
NOTE 4 - CAPITAL STOCK
On September 7, 1995, the Company's Board of Directors approved amendments to
the 1993 Nonstatutory Stock Option Plan which, among other matters, increased
the number of shares available for the granting of options from 600,000 to
1,600,000.
The Company has a stock repurchase program to acquire from time to time up to
5.7 million shares of the Company's common stock in the open market. As of
September 30, 1995 the Company had repurchased a total of 1,795,500 shares
pursuant to this program. During the quarter ended September 30, 1995, the
Company charged common stock and additional paid-in capital for the repurchase
and retirement of 250,000 shares of its common stock and other merger related
adjustments.
7
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
GENERAL
Foundation Health Corporation (the "Company") is an integrated managed care
organization which administers the delivery of managed health care services.
The Company's operations consist of three primary lines of business: (i) group,
Medicaid, individual and Medicare health maintenance organization ("HMO") and
preferred provider organization ("PPO") plans; (ii) government contracts; and
(iii) specialty services, which includes managed care products related to
workers' compensation insurance, administration and cost-containment, behavioral
health, dental, vision and pharmaceutical products and services.
Commercial HMO and PPO operations are characterized by the assumption of
underwriting risk in return for premium revenue. Government contracts 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 most 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.
In fiscal year 1995, the Company was awarded two contracts to establish
managed care programs for up to 230,000 eligible CHAMPUS beneficiaries in
Washington and Oregon (the "Washington/Oregon Contract") and up to 590,000
eligible CHAMPUS beneficiaries in Oklahoma and most of Arkansas, Louisiana
and Texas (the "Region 6 Contract"). Implementation of the Washington/Oregon
Contract commenced in September 1994 and the delivery of health care services
commenced in March 1995. Implementation of the Region 6 Contract commenced in
April 1995 and the delivery of health care services commenced in November
1995. Each of these contracts has a five year term. In August 1995, the
Company was awarded a contract to establish a managed care program for up to
720,000 eligible CHAMPUS beneficiaries in California and Hawaii (the
"California/Hawaii Contract"). Implementation of the contract commenced in
September 1995 with the provision of health care services scheduled to begin
in April 1996. The contract has a term of up to five years. In October
1995, the Company was awarded four Medicaid contracts to establish a managed
care program to cover up to approximately 1.8 million eligible beneficiaries
in four California counties. Certain of these Medicaid contracts are being
protested by unsuccessful bidders. Implementation of the contracts is
scheduled to commence in July 1996 subject to the State of California's
receipt of a waiver from the federal Health Care Financing Administration.
The annual contracts run through March 2002.
8
<PAGE>
CONSOLIDATED OPERATING RESULTS
The Company achieved significant increases in revenues and earnings for the
quarter ended September 30, 1995 over the same period in fiscal year 1995. The
growth in revenues was primarily driven by commercial enrollment gains,
especially from the Company's individual and Medicare risk products, growth in
net earned workers' compensation premium revenue due to growth in the number of
policies written and implementation of the Washington/Oregon and Region 6
Contracts.
The Company's selling, general and administrative ("SG&A") expenses in the
quarter ended September 30, 1995 increased due primarily to the new government
contracts and increased commercial enrollment in existing service areas and
geographic expansion.
The decrease in the SG&A ratio for the quarter ended September 30, 1995 compared
to the prior year quarter is due to revenue growth while continuing to contain
SG&A expenses.
As of September 30, 1995, $75.2 million in merger, integration and restructuring
costs had been paid or otherwise charged against the $124.8 million accrual.
The remaining restructuring obligations are expected to be paid as due through
the fourth quarter of 1996 utilizing existing resources of the Company. The
amounts accrued represent management's best estimate of the restructuring costs
to be incurred and the timing of the restructuring and integration plan (the
"Plan"). The progress of the Plan and the actual amounts incurred could vary
from these estimates if future developments differ from the underlying
assumptions used by management in developing the recorded accrual. The Company
expects that this restructuring will result in operating cost savings in excess
of the amount of the charge.
As a result of the factors described above and the Company's continued focus on
cost containment while increasing revenues, the Company's income before income
taxes and minority interest increased over the same period in fiscal year 1995.
The Company's ability to expand its business is dependent, in part, on
competitive premium pricing and its ability to secure cost-effective contracts
with providers. Achieving these objectives is becoming increasingly difficult
due to the competitive environment. In addition, the Company's profitability is
dependent, in part, on its ability to maintain effective control over healthcare
costs while providing members with quality care. Factors such as health care
reform, integration of acquired companies, regulatory changes, utilization, new
technologies, hospital costs, major epidemics and numerous other external
influences may affect the Company's operating results. Accordingly, past
financial performance is not necessarily a reliable indicator of future
performance, and investors should not use historical records to anticipate
results or future period trends.
9
<PAGE>
LINE OF BUSINESS REPORTING
The Company operates in a single industry segment, managed health care. The
following table presents financial information reflecting the Company's
operations by its three primary lines of business: (i) commercial operations;
(ii) government contracts; and (iii) specialty services.
10
<PAGE>
FOUNDATION HEALTH CORPORATION
LINE OF BUSINESS FINANCIAL INFORMATION
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
Quarter Ended
Quarter Ended September 30, 1995 September 30, 1994
--------------------------------------------------------------------
Percent Percent Percent
Amount or of Total Increase Amount or of Total
Percent Revenue (Decrease) Percent Revenue
-------------- ----------- ----------- ------------- -----------
<S> <C> <C> <C> <C> <C>
Revenues:
Commercial premiums $ 459,575 63.6 % 17.6 % $ 390,789 65.7 %
Government contracts 81,019 11.2 68.9 47,978 8.1
Specialty services revenue 157,424 21.8 20.9 130,258 21.9
Patient service revenue, net 11,675 1.6 26.2 9,249 1.6
Investment and other income 12,672 1.8 (21.3) 16,101 2.7
-------------- ----------- ------------- -----------
722,365 100.0 21.5 594,375 100.0
-------------- ----------- ------------- -----------
Expenses:
Commercial health care services 367,398 50.9 18.7 309,644 52.1
Government contracts health care services 27,041 3.7 120.7 12,253 2.1
Government contracts subcontractor costs 18,216 2.5 (33.0) 27,206 4.6
Specialty services costs 138,452 19.2 21.0 114,381 19.2
Patient service costs 9,080 1.3 5.0 8,649 1.5
Selling, general and administrative ("SG&A") 85,029 11.8 17.9 72,090 12.1
Amortization and depreciation 13,441 1.8 70.0 7,907 1.3
Interest expense 4,044 0.5 39.1 2,907 0.5
-------------- ----------- ------------- -----------
662,701 91.7 19.4 555,037 93.4
-------------- ----------- ------------- -----------
Income before income taxes and minority interest 59,664 8.3 51.7 39,338 6.6
Provision for income taxes 20,259 2.8 45.6 13,917 2.3
Minority interest (100.0) 1,770 0.3
-------------- ----------- ------------- -----------
Net income $ 39,405 5.5 % 66.6 $ 23,651 4.0 %
-------------- ----------- ------------- -----------
-------------- ----------- ------------- -----------
Earnings per share $ 0.69 43.8 $ 0.48
-------------- -------------
-------------- -------------
Weighted average common and common
stock equivalent shares outstanding 57,427,162 15.5 49,709,634
-------------- -------------
-------------- -------------
Operating ratios:
Commercial loss ratio 79.9 % 79.2 %
Government contracts ratio 55.9 82.2
Specialty services ratio 87.9 87.8
Patient service ratio 77.8 93.5
SG&A to total revenues 11.8 12.1
Effective tax rate 34.0 35.4
Enrollment (in thousands):
Commercial:
Group and individual 1,042 22.0 854
Medicare risk 75 41.5 53
Medicaid 110 (4.3) 115
-------------- -------------
1,227 20.1 1,022
-------------- -------------
Government
CHAMPUS PPO and indemnity 237 178.8 85
CHAMPUS HMO 100 300.0 25
-------------- -------------
337 206.4 110
-------------- -------------
Combined 1,564 38.2 % 1,132
-------------- -------------
-------------- -------------
</TABLE>
11
<PAGE>
COMMERCIAL OPERATIONS
Revenues generated by the Company's commercial operations increased in the
quarter ended September 30, 1995 over the quarter ended September 30, 1994 due
in part to a 20.1% increase in enrollment from existing lines of business and
geographic expansion offset by reductions in commercial premium revenue per
member due to competitive price pressures.
The Company expects continued pressure from employer groups and government
agencies to reduce premiums. Effective July 1, 1995, Medicaid HMO rates in
Florida were reduced by approximately 18%, which will affect commercial premium
revenues. As a result of the Company's continued medical cost management
efforts health care costs on a per member basis decreased for the quarter ended
September 30, 1995 as compared to the quarter ended September 30, 1994. The
commercial loss ratio, however, increased from 79.2% for the quarter ended
September 30, 1994 to 79.9% for the quarter ended September 30, 1995. The
slight increase in the ratio was due to the competitive premium pressures in
California offset in part by the greater profitability of the Company's Florida
and Arizona HMOs. The Company believes that the pressures on margins will
continue, which may adversely affect the commercial loss ratio; however, the
Company will seek to mitigate any increase in the loss ratio by the cost
management efforts described above. In addition, as the Company's Medicare risk
business increases, the loss ratio may increase as historically this product has
a higher loss ratio than the Company's other HMO and indemnity insurance
business.
GOVERNMENT CONTRACTS
Government contracts revenue increased in the quarter ended September 30, 1995
over the quarter ended September 30, 1994 primarily due to the Washington/Oregon
and Region 6 Contracts and expansion of the Base Realignment and Closure
("BRAC") Contract offset in part by the decrease in revenue as a result of
expiration of the CHAMPUS Reform Initiative ("CRI") Contract.
The government contracts ratio improved during the quarter ended September 30,
1995 compared to the quarter ended September 30, 1994. This was due primarily
to several of the contracts being in the implementation period. Comparability
of the government contracts ratio between periods is dependent on the mix of the
contracts that are in the implementation phase versus contracts that are in the
health care delivery phase. Administrative expenses relating to both phases are
recorded as part of SG&A. Once the delivery of health care services begins the
expenses related to health care services are recorded either as government
contracts health care services or as government contracts subcontractor costs.
The government contracts ratio is expected to increase during the remainder of
fiscal year 1996 as a result of a full year of delivery of health care services
under the Washington/Oregon Contract and delivery of health care services under
the Region 6 Contract which commenced in November 1995 and the
California/Hawaii Contract which is scheduled to commence in April 1996.
12
<PAGE>
SPECIALTY SERVICES
Specialty services revenues increased in the quarter ended September 30, 1995
over the quarter ended September 30, 1994 due to increased workers'
compensation insurance premiums generated by California Compensation
Insurance Company ("CalComp"), the Company's workers' compensation insurance
subsidiary and to increased revenue generated by the Company's pharmaceutical
subsidiary. CalComp's net premium revenue totaled $106 million for the
quarter ended September 30, 1995 compared to $95 million for the quarter
ended September 30, 1994, an 11.6% increase. The increase in CalComp's net
premium revenue was a result of growth in the number of new workers'
compensation policies written in California and other states. The premium
increase was offset in part by a 16% mandatory reduction in premiums for all
policies in force effective October 1, 1994 and the effect of deregulation in
the California workers' compensation market which allows premium rates to be
set on a competitive basis for new policies written after January 1, 1995.
Revenues generated by the pharmaceutical subsidiary totaled $14.7 million for
the quarter ended September 30, 1995 compared to $4.2 million for the quarter
ended September 30, 1994 primarily due to increased pharmaceutical rebate
revenue earned. Specialty services costs, which includes health care and
administrative costs, increased $24.1 million for the quarter ended September
30, 1995 over the comparable prior year period as a result of an increase in
CalComp's workers' compensation claims experience consistent with increased
net premium revenue and pharmaceutical rebate costs corresponding to the
increased rebate revenue.
The specialty services ratio (specialty services costs as a percentage of
specialty services revenues) for the quarter ended September 30, 1995 was
consistent with the quarter ended September 30, 1994.
Four ratios are traditionally used to measure underwriting performance of
workers' compensation companies: the loss and loss adjustment expense ratio, the
underwriting expense ratio and the policyholder dividend ratio, which when added
together constitute the combined ratio. A combined ratio of greater than 100%
reflects an underwriting loss, while a combined ratio of less than 100%
indicates an underwriting profit.
The following table sets forth CalComp's underwriting experience as measured by
its combined ratio and its components (computed on a generally accepted
accounting principles basis) for the quarters ended September 30, 1995 and 1994:
<TABLE>
<CAPTION>
September 30,
-------------
1995 1994
---- ----
<S> <C> <C>
Loss and loss adjustment expense ratio 65.7% 61.7%
Underwriting expense ratio 21.8 25.0
Policy holder dividend ratio 2.7 1.2
----- -----
Combined ratio 90.2% 87.9%
----- -----
</TABLE>
13
<PAGE>
The increase in CalComp's loss and loss adjustment expense ratio is due to
the negative impacts on net premium revenue earned from the price competition
in 1995 caused by the newly deregulated California workers' compensation
market place. As CalComp has now operated for nine months in the deregulated
market, its net premium revenue and loss and loss adjustment ratio are being
impacted by policies being renewed in 1995 at premium rates significantly
less than the pricing for workers' compensation policies written in
California in 1994.
In response to the increased price competition in the market, the decrease in
the underwriting expense ratio to 21.8% from 25.0% is due to a reduction in the
commission rate CalComp is paying to its brokers on new and renewal workers'
compensation insurance policies in 1995.
The increase in the combined ratio reflects the effect of the regulatory
changes in 1995 to the workers' compensation market in California.
LIQUIDITY AND CAPITAL RESOURCES
Cash provided by operating activities was $59.8 million for the quarter ended
September 30, 1995 as compared to $143.9 million for the comparable period in
fiscal year 1995 due to amounts received in the quarter ended September 30, 1994
related to the CRI Contract that terminated in 1994. The Company's cash and
investments increased from $795.3 million at June 30, 1995 to $825.4 million at
September 30, 1995. The Company invests its cash in investment grade
securities.
During fiscal year 1996, the Company expects capital expenditures to approximate
$67.8 million, primarily consisting of $47.7 million for the purchase of
computer hardware and software systems; $15.3 million for the purchase of
furniture and equipment primarily for health care centers and the hospitals; and
$4.8 million for other requirements. The Company anticipates the net costs of
operating and managing the health care centers for fiscal year 1996 will
approximate $20 million, offset in part by health care cost savings anticipated
to be realized by the Company's HMOs. Effective September 1, 1995, the Company
purchased a medical practice and related facilities in Arizona for approximately
$6.2 million, which was paid in cash. Other assets increased over the amount at
June 30, 1995 due to increases in the amounts outstanding under credit
agreements with affiliated professional services corporations, increased
pharmacy rebates receivable and other receivables. Other liabilities increased
over the amount at June 30, 1995 due to increases in the Company's accounts
payable and unearned revenues offset by amounts charged against the
restructuring accrual.
The anticipated level of capital expenditures in fiscal year 1996 for
construction of health care centers and corporate facilities has been impacted
as a result of the Company's $60 million tax-
14
<PAGE>
retention operating lease financing with NationsBank of Texas, N.A., as
Administrative Agent for the lenders thereto and First Security Bank of Utah,
N.A., as Owner Trustee (the "TROL" financing). The Company expects that up to
$32 million of the TROL financing will be used during fiscal year 1996 for the
construction of health care centers and corporate facilities.
In December 1994, the Company established a $300 million unsecured revolving
credit agreement with Citicorp USA, Inc. as Administrative Agent for the lenders
thereto (the "Credit Agreement"). As of September 30, 1995, the Company has
drawn $60 million on the Credit Agreement.
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.
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.
15
<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.
See "Government Regulations" and "Legal Proceedings" in the Company's
Annual Report on Form 10-K for the fiscal year ended June 30, 1995 for a
further description of audits and legal proceedings to which the Company
and certain of its subsidiaries are subject.
16
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
11 - Earnings Per Share Computation
(b) Reports on Form 8-K
There were no reports on Form 8-K filed by Foundation Health Corporation
during the quarter ended September 30, 1995.
17
<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
Dated: November 14, 1995 By: /S/
--------------------------
JEFFREY L. ELDER
SENIOR VICE PRESIDENT AND
CHIEF FINANCIAL OFFICER
18
<PAGE>
FOUNDATION HEALTH CORPORATION
INDEX TO EXHIBITS
EXHIBIT NO. PAGE
11 Earnings Per Share Computation 20
19
<PAGE>
FOUNDATION HEALTH CORPORATION
EXHIBIT 11
EARNINGS PER SHARE COMPUTATION
UTILIZING THE TREASURY STOCK METHOD
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
Quarter Ended September 30,
--------------------------------
1995 1994
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<S> <C> <C>
Proceeds upon exercise of options outstanding $ 73,168 $ 49,207
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-------------- --------------
Average market price of common stock $ 33.25 $ 36.42
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Weighted average common shares outstanding 57,018,779 49,070,593
Issued shares-excercise of options 2,608,786 1,990,267
Shares assumed to be repurchased with proceeds from exercise (2,200,403) (1,351,226)
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Weighted average shares outstanding (A) 57,427,162 49,709,634
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Net income for the quarter (B) $ 39,405 $ 23,651
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Earnings per share (B)/(A) $ 0.69 $ 0.48
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</TABLE>
20
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FORM 10Q
FILED BY FOUNDATION HEALTH CORPORATION FOR THE QUARTER END SEPTEMBER 30, 1995
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1996
<PERIOD-START> JUL-01-1995
<PERIOD-END> SEP-30-1995
<CASH> 262,360
<SECURITIES> 563,015
<RECEIVABLES> 298,972
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 245,508<F1>
<DEPRECIATION> 0
<TOTAL-ASSETS> 2,077,532
<CURRENT-LIABILITIES> 0
<BONDS> 224,480
<COMMON> 570
0
0
<OTHER-SE> 783,138
<TOTAL-LIABILITY-AND-EQUITY> 2,077,532
<SALES> 709,693
<TOTAL-REVENUES> 722,365
<CGS> 0
<TOTAL-COSTS> 658,657
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 4,044
<INCOME-PRETAX> 59,664
<INCOME-TAX> 20,259
<INCOME-CONTINUING> 39,405
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 39,405
<EPS-PRIMARY> .69
<EPS-DILUTED> 0
<FN>
<F1>NET PPE
</FN>
</TABLE>
