<PAGE> 1
UNITED STATES
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 SEPTEMBER 30, 1996.
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 0-24276
FPA MEDICAL MANAGEMENT, INC.
(EXACT NAME OF REGISTRANT SPECIFIED IN ITS CHARTER)
DELAWARE 33-0604264
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION
INCORPORATION OR ORGANIZATION) NUMBER)
2878 CAMINO DEL RIO SOUTH
SUITE 301
SAN DIEGO, CA 92108
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
(ZIP CODE)
(619) 295-7005
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
NONE
(FORMER NAME, FORMER ADDRESS AND FORMER FISCAL YEAR,
IF CHANGED SINCE LAST REPORT)
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.
[X] YES [ ] NO
AS OF OCTOBER 31, 1996 THERE WERE OUTSTANDING 20,674,133 SHARES OF THE
REGISTRANT'S COMMON STOCK, PAR VALUE $.002 PER SHARE.
<PAGE> 2
INDEX
<TABLE>
<CAPTION>
<S> <C>
PAGE
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets.................................. 1
Consolidated Statements of Operations........................ 2
Consolidated Statements of Cash Flows........................ 3
Notes to Consolidated Financial Statements................... 4
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.................................. 7
PART II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders.......... 13
Item 6. Exhibits and Reports on Form 8-K............................. 13
Signatures............................................................... 14
</TABLE>
<PAGE> 3
ITEM 1. FINANCIAL STATEMENTS
FPA MEDICAL MANAGEMENT, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
<S> <C> <C>
ASSETS DECEMBER 31, 1995 SEPTEMBER 30, 1995
(UNAUDITED)
Current Assets:
Cash.......................................................... $ -- $ 2,526,679
Marketable securities.......................................... 9,329,840 1,555,463
Accounts receivable - net of allowance for uncollectible
accounts of $337,353 and $1,328,321 at December 31, 1995
and September 30, 1996, respectively........................ 10,371,149 38,920,450
Accounts receivable - other................................... 1,664,114 10,814,110
Notes receivable from FPASD................................... 300,086 650,953
Income tax receivable......................................... 195,853 --
Prepaid expenses.............................................. 393,662 2,732,051
Deferred income tax asset..................................... 491,824 1,011,018
----------- ------------
Total current assets........................................ 22,746,528 58,210,724
Property and equipment - net.................................... 6,324,900 17,004,108
Restricted cash and deposits.................................... 3,285,000 7,804,728
Goodwill - net of accumulated amortization of $548,606 and
$2,444,042 at December 31, 1995 and September 30, 1996,
respectively.................................................. 33,023,607 88,808,062
Intangible assets - net of accumulated amortization of
$249,682 and $833,123 at December 31, 1995 and
September 30, 1996, respectively.............................. 5,988,579 6,620,909
Investment in GLHP.............................................. 1,994,900 4,994,900
Other assets.................................................... 434,770 1,816,136
----------- ------------
Total....................................................... $73,798,284 $185,259,567
=========== ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses......................... $ 3,485,348 $ 8,114,069
Claims payable, including incurred but not reported claims.... 10,247,476 47,474,955
Accrued payroll and related liabilities....................... 1,363,304 3,202,891
Income tax payable............................................ -- 2,273,591
Other liabilities............................................. -- 693,895
Borrowings on line of credit.................................. 788,325 --
Long-term debt, current portion............................... 5,336,253 34,839,279
----------- ------------
Total current liabilities................................... 21,220,706 96,598,680
Long-term debt, net of current portion.......................... 7,447,290 26,361,989
Deferred income tax liability................................... 992,748 1,746,461
Other long-term liabilities..................................... 43,849 1,001,784
Stockholders' equity:
Preferred stock, $.001 par value per share, 2,000,000 shares
authorized, no shares outstanding........................... -- --
Common stock, $.002 par value, 98,000,000 shares authorized,
11,101,045 and 12,541,751 shares issued and outstanding
at December 31, 1995 and September 30, 1996, respectively... 22,202 25,084
Additional paid-in capital.................................... 42,483,542 53,683,603
Stock payable................................................. 567,000 493,100
Accumulated earnings.......................................... 1,020,947 5,348,866
----------- ------------
Total stockholders' equity.................................. 44,093,691 59,550,653
----------- ------------
Total....................................................... $73,798,284 $185,259,567
=========== ============
</TABLE>
See notes to consolidated financial statements.
1
<PAGE> 4
FPA MEDICAL MANAGEMENT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
Nine Months Ended Three Months Ended
---------------------------------- ---------------------------------
Sept. 30, 1995 Sept. 30, 1996 Sept. 30, 1995 Sept. 30, 1996
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Managed care revenue, assigned
from Professional Corporations.............. $28,878,594 $171,500,742 $13,719,802 $78,541,602
Fee-for-service revenue, assigned
from Professional Corporations,
net of contractual allowances............... 1,268,829 17,020,463 682,815 11,138,512
----------- ------------ ----------- -----------
Operating revenue, assigned from
Professional Corporations................... 30,147,423 188,521,205 14,402,617 89,680,114
Expenses:
Medical services expense --
Professional Corporations................. 4,120,715 15,971,210 1,692,412 6,619,382
Medical services expense --
others.................................... 18,073,568 124,139,590 8,572,489 60,998,382
----------- ------------ ----------- -----------
7,953,140 48,410,405 4,137,716 22,062,350
General and administrative
expenses.................................. 7,490,420 39,015,517 3,490,970 17,829,699
----------- ------------ ----------- -----------
Income from operations........................ 462,720 9,394,888 646,746 4,232,651
Other income (expense):
Interest income............................. 366,073 343,881 112,056 154,895
Interest expense............................ (166,220) (2,032,358) (104,298) (954,179)
----------- ------------ ----------- -----------
Total other income (expense),
net..................................... 199,853 (1,688,477) 7,758 (799,284)
----------- ------------ ----------- -----------
Income before income taxes.................... 662,573 7,706,411 654,504 3,433,367
Income tax expense............................ 304,433 3,378,492 300,273 1,493,758
----------- ------------ ----------- -----------
Net income.................................... $ 358,140 $ 4,327,919 $ 354,231 $ 1,939,609
=========== ============ =========== ===========
Net income per common share................... $ .05 $ .34 $ .05 $ .14
=========== ============ =========== ===========
Weighted average common shares
outstanding................................. 7,131,410 12,613,385 7,225,936 13,772,066
=========== ============ =========== ===========
</TABLE>
See notes to consolidated financial statements.
2
<PAGE> 5
FPA MEDICAL MANAGEMENT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Nine Months Ended
------------------------------
Sept. 30, 1995 Sept. 30, 1996
-------------- --------------
Cash flows from operating activities:
Net income................................... $ 358,140 $ 4,327,919
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization............ 532,643 3,897,497
Imputed interest on notes payable........ -- 98,023
Changes in assets and liabilities:
Accounts receivable...................... (3,198,372) (35,568,339)
Prepaid expenses......................... (90,926) (1,492,324)
Income taxes receivable/payable.......... 163,562 2,781,322
Deferred income taxes.................... 196,355 728,190
Accounts payable and accrued expenses.... 347,003 535,218
Claims payable, including incurred but
not reported claims.................... 3,449,051 37,227,479
Accrued payroll and related liabilities.. 109,901 1,839,587
Other.................................... 232,908 (948,311)
-------------- --------------
Total adjustments...................... 1,792,125 9,098,342
-------------- --------------
Net cash provided by operating
activities............................. 2,150,265 13,426,261
Cash flows from investing activities:
Purchase of property and equipment........... (803,729) (3,482,599)
Payments for intangible assets............... (858,930) (2,323,849)
Net payments (to) from FFASD................. 12,257 (350,867)
Net sale of marketable securities............ 7,209,053 7,774,377
Purchase of investment in GLHP............... (1,994,900) (3,000,000)
Acquisitions, net of cash acquired........... (4,788,791) (10,932,981)
Payments escrowed for acquisitions........... (1,143,526) (4,519,728)
-------------- --------------
Net cash used by investing activities...... (2,368,566) (16,835,647)
-------------- --------------
Cash flows from financing activities:
Issuance of note payable..................... -- 44,362,413
Payments on notes payable.................... (492,240) (39,201,356)
Payments on bank line of credit.............. -- (788,325)
Capital lease obligation incurred............ (72,730) --
Receipt of payment for stock subscriptions... 12,782 --
Net proceeds from exercise of stock
options.................................... -- 1,563,335
Deferred public offering costs............... (420,454) --
-------------- --------------
Net cash provided (used) by financing
activities............................... (972,642) 5,936,067
-------------- --------------
Net increase (decrease) in cash.............. (1,190,943) 2,526,679
Cash, beginning of period.................... 2,118,100 --
-------------- --------------
Cash, end of period.......................... $ 927,157 $ 2,526,679
============== ==============
Supplemental cash flow information:
Cash paid for interest..................... $ 47,090 $ 1,819,130
============== ==============
Cash paid for income taxes................. $ 9,350 $ 870,382
============== ==============
Effects of acquisitions:
Fair value of assets acquired............ $ 8,928,118 $ 66,990,907
Equipment acquired under capital leases.. (208,776) (1,137,712)
Liabilities assumed...................... (3,580,551) (46,406,934)
Common stock issued in connection
with acquisitions...................... (350,000) (8,513,280)
-------------- --------------
Net cash paid for acquisitions........... $ (4,788,791) $ (10,932,981)
============== ==============
See notes to consolidated financial statements.
3
<PAGE> 6
FPA MEDICAL MANAGEMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
In the opinion of management, the accompanying consolidated financial
statements include all adjustments (which consist only of normal recurring
adjustments) necessary for a fair presentation of the financial position of FPA
Medical Management, Inc. ("FPA") and subsidiaries and certain affiliated
professional corporations (collectively, the "Company"), and the results of its
operations and its cash flows for the interim periods presented. Although FPA
believes that the disclosures in these consolidated 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. Results of operations for the interim periods are not necessarily
indicative of results to be expected for any other interim period or for the
full year.
The consolidated financial statements for the three and nine months
ended September 30, 1995 and September 30, 1996 are unaudited and should be
read in conjunction with the consolidated financial statements and notes
thereto included in FPA's Annual Report on Form 10-K, as amended, for the year
ended December 31, 1995.
CONSOLIDATION OF SUBSIDIARIES--The Company's financial statements
include the activity of one majority-owned subsidiary, all of its wholly-owned
subsidiaries and certain affiliated professional corporations ("Professional
Corporations") over which the Company has direct or indirect unilateral and
perpetual control. FPA believes that consolidation of the financial statements
of the Professional Corporations is necessary to present fairly the financial
position and results of operations of the Company. All intercompany
transactions have been eliminated in consolidation.
NET INCOME PER COMMON SHARE--Net income per common share is computed
based on the weighted average number of shares outstanding, giving retroactive
effect to all stock splits, including a one-for-one Common Stock dividend
effective March 1, 1995.
2. SUBSEQUENT EVENTS
The following significant events have occurred subsequent to
December 31, 1995:
BORROWINGS--On January 29, 1996, the Company entered into a
$15,000,000 credit, security, guarantee and pledge agreement ("Credit
Agreement") with two financial institutions. Permitted Borrowings, as defined in
the Credit Agreement, generally include acquisitions and capital expenditures.
Fees of $150,000 were paid in connection with the Credit Agreement. On August
31, 1996, the Amended and Restated Credit, Security, Guarantee and Pledge
Agreement (as amended on September 30, 1996 by the first amendment, the "Amended
Credit Agreement") was executed, pursuant to which fees of $900,000 were paid.
The Amended Credit Agreement allows for borrowings up to $45,000,000. Borrowings
bear interest at rates ranging from either LIBOR plus 2 1/2%, 2 3/4% or 3%, or
prime rate plus 1%, 1 1/4%, or 1 1/2% as defined by the Amended Credit
Agreement. The balance outstanding is due on the earlier of December 31, 1996 or
the consummation of the acquisition of FHMS and Holding Company, as hereinafter
defined. Periodic payments of accrued interest are due during the term of the
Amended Credit Agreement. Additionally, the financial institutions were granted
a security interest in substantially all of the assets of the Company (excluding
those of FPA Medical Management of Michigan, Inc. d/b/a QualNet, Inc., and the
stock of certain subsidiaries of FPA and Professional Corporations was pledged.
The debt is also guaranteed by the Professional Corporations. In connection with
the Amended Credit Agreement,
4
<PAGE> 7
FPA MEDICAL MANAGEMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
the Company must maintain certain debt and equity ratios and profitability
thresholds. The Company issued to the financial institutions a warrant to
purchase 50,000 shares of Common Stock at $9.125 per share exercisable prior to
February 2, 2001, subject to certain anti-dilution provisions. At September 30,
1996, the Company had borrowed $18,421,756 under the Amended Credit Agreement.
On October 31, 1996, the Company executed a second amendment ("Second
Amendment") to the Amended Agreement, pursuant to which a third institution
participated, the loan amount was expanded to $55,000,000, and fees of $200,000
were paid. Concurrently, the Company drew down an additional $28,200,000,
resulting in a total outstanding balance of approximately $46,600,000.
On June 28, 1996, FPA borrowed $8,507,760 from a fourth financial
institution pursuant to a promissory note due on December 31, 1996 and bearing
interest per annum at the higher of the interbank Federal funds rate as
announced by such institution and the base rate of interest announced from time
to time by such institution. Payments under such promissory note were
guaranteed by Foundation Health Corporation.
CALIFORNIA AND ARIZONA ACQUISITIONS -- Effective in January 1996, a
Professional Corporation acquired the stock of three independent practice
associations ("IPAs") in new regions in California. All three were stock
acquisitions and were financed through notes payable issued by FPA to the
Professional Corporation. In connection with these transactions, FPA obtained
funding from the Credit Agreement for a cumulative amount of $6,400,000. The
purchase price of the first acquisition was $7,177,331 ($3,900,000 in cash and
the remainder through a ten-year note payable) and that acquisition provided
the Company access to the Los Angeles, California market. The second
acquisition was made for $6,159,015 ($500,000 in cash and the remainder through
a ten-year note payable) and that acquisition provided the Company access to
the Ventura county, California market. The purchase price of the third
acquisition was $10,063,654 ($7,000,000 in cash and the remainder through a
ten-year note payable) and that acquisition provided the Company access to the
Sacramento, California market.
In connection with these acquisitions, the Company opened new
administrative offices in the Los Angeles and Sacramento areas in January 1996.
These acquisitions have been accounted for using the purchase method of
accounting. The excess of the purchase price over the fair value of tangible
assets acquired has been treated as goodwill and is being amortized over the
expected periods of future benefit to the Company.
On June 28, 1996, FPA entered into a stock and note purchase agreement
with Foundation Health Corporation and certain of its affiliates (collectively,
"Foundation") to acquire all of the outstanding stock of Foundation Health
Medical Services, a California corporation ("FHMS") and FHMG/TDMC Medical
Group, a California Professional Corporation ("Holding Company"). FHMS provides
facilities management, non-physician health care professionals and other
administrative and management services to Holding Company and its subsidiaries.
Holding Company holds the stock of Foundation Health Medical Group, Inc., a
California Professional Corporation and Thomas Davis Medical Centers, P.C., an
Arizona Professional Corporation. As consideration for the acquisitions, FPA is
expected to pay approximately $200,000,000, comprised of $5,000,000 in cash,
$75,000,000 in FPA Common Stock and $120,000,000 in notes. The sources of the
cash payment is expected to be working capital. The acquisition will be
accounted for using the purchase method of accounting. The acquisition is
expected to close on or about December 1, 1996, subject to the satisfaction of
certain conditions.
Effective July 1, 1996, the Company acquired from Foundation an IPA
with approximately 14,000 enrollees in Arizona for $4 million ($600,000 in cash
and the remainder through a twelve-month note payable). The transaction has
been accounted for using the purchase method of accounting.
Effective October 1, 1996, a Professional Corporation and FPA assumed
substantially all of the assets and liabilities of Family Practice Associates
of San Diego, an Osteopathic Corporation ("FPASD"), owned by officers of
the Company. The purchase price was supported by an independent valuation.
5
<PAGE> 8
FPA MEDICAL MANAGEMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
FLORIDA ACQUISITIONS -- Effective June 1, 1996, FPA acquired all of
the outstanding stock of Physicians First, Inc., a wholly owned
subsidiary of Physician Corporation of America, operating 40 primary
care clinics in Florida. At the time of acquisition, the clinics had
approximately 125 primary care physicians which provided services to
approximately 80,000 enrollees. As consideration for the acquisition and
a related agreement not to compete, FPA paid approximately $21,600,000,
comprised of a $15,000,000 note payable by FPA, 525,000 shares of FPA
common stock and warrants to purchase up to 250,000 shares of FPA common
stock. The acquisition has been accounted for using the purchase method
of accounting.
Effective July 1, 1996, the Company acquired from Foundation an IPA
with approximately 6,000 enrollees for $16,000,000 ($2,400,000 in cash
and the remainder through a twelve-month note payable). The transaction
has been accounted for using the purchase method of accounting.
MERGER -- On October 31, 1996, FPA completed the merger (the "Merger")
of Sterling Acquisition Corporation, a Delaware corporation and a
wholly-owned subsidiary of FPA ("Acquisition Sub"), with and into
Sterling Healthcare Group, Inc., a Florida corporation ("Sterling").
Pursuant to the Merger, Sterling became a wholly-owned subsidiary of
FPA and each outstanding share of Sterling Common Stock was converted
into .951 shares of FPA common stock. The shares of FPA common stock to
be issued to the Sterling stockholders have been registered on a
Registration Statement on Form S-4 filed under the Securities Act of
1933, as amended. The Merger will be treated as a tax-free
reorganization and accounted for as a pooling of interests.
PROPOSED MERGER -- On November 8, 1996, FPA entered into an Agreement
and Plan of Merger (the "Proposed Merger Agreement") providing for the
merger (the "Proposed Merger") of FPA Acquisition Corp., a Delaware
corporation and a wholly-owned subsidiary of FPA, with and into AHI
Healthcare Systems, Inc., a Delaware corporation ("AHI"). Pursuant to
the Proposed Merger, AHI will become a wholly-owned subsidiary of FPA
and each outstanding share of AHI common stock will be exchanged for
$8.75 worth of shares of FPA common stock, subject to adjustment in the
event that the value of FPA common stock per share is above $22.38 or
below $14.38 during a specified period prior to the closing date of the
Proposed Merger, as provided in the Proposed Merger Agreement. The
shares of FPA common stock to be issued to the AHI stockholders will be
registered on a Registration Statement on Form S-4 filed under the
Securities Act of 1933, as amended. The consummation of the Proposed
Merger may be subject to approval by both companies' stockholders,
receipt of all necessary regulatory approvals, satisfactory confirmation
that the Proposed Merger will be accounted for as a pooling of interests
and other customary conditions. The Proposed Merger Agreement may be
terminated by the parties if the Proposed Merger is not consummated by
April 30, 1997.
LICENSURE -- On February 15, 1996, the Company, on behalf of Family
and Senior Care, Inc., one of its wholly-owned subsidiaries, completed
and filed its restricted license application with the California
Department of Corporations (the "Department"). On November 5, 1996, in
response to additional comments from the Department, the Company, on
behalf of Family and Senior Care, Inc., filed an amendment to such
application. The Department is currently reviewing the application.
GREAT LAKES HEALTH PLAN ("GLHP") -- On March 7, 1996, FPA made an
additional capital contribution of $3,000,000 to GLHP in connection with
the acquisition by GLHP of a clinic health plan and a number of clinics
in Michigan. The acquired plan currently services approximately 16,000
Medicaid enrollees. In the third quarter of 1996, GLHP was licensed as a
health maintenance organization in the state of Michigan.
6
<PAGE> 9
FPA MEDICAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
GENERAL
FPA Medical Management, Inc. and its subsidiaries and certain
consolidated Professional Corporations (collectively, the "Company") derive
substantially all of their operating revenue from the assignment by the
Professional Corporations to FPA of (i) the payments made by payors to the
Professional Corporations for medical services and (ii) fee-for-service
revenues generated by the Professional Corporations for medical services.
The Company has two types of payor contracts: contracts for both
inpatient and outpatient services ("global capitation" contracts) and those
limited to outpatient services ("outpatient capitation" contracts). Under
global capitation contracts, the Company receives a fixed monthly amount per
enrollee for which the Company is financially responsible to provide the
enrollees with all necessary inpatient and outpatient care. Under outpatient
capitation contracts, the Company receives a fixed monthly amount per enrollee
for which the Company is financially responsible to provide the enrollees with
all necessary outpatient care. Additionally, under these outpatient capitation
contracts, the Company is a party to shared risk arrangements with payors which
generally reward the Company for the efficient utilization of inpatient
services. Under these shared risk arrangements, the Company shares any surplus
or, in some cases, deficit, of amounts pre-established by the payor in excess
of inpatient cost. Total revenue under global capitation contracts represented
44.6% and 18.4% for the three months ended September 30, 1996 and 1995,
respectively, and 34.8% and 17.2% for the nine months ended September 30, 1996
and 1995, respectively, of total operating revenues assigned from Professional
Corporations. Total revenue under outpatient capitation contracts represented
43.0% and 76.9% for the three months ended September 30, 1996 and 1995,
respectively, and 56.2% and 78.6% for the nine months ended September 30, 1996
and 1995, respectively, of total operating revenue assigned from Professional
Corporations.
As a result of physician acquisitions, the Company also generates
fee-for-service revenue through the Professional Corporations. These revenues
are presented net of contractual deductions, and represent 12.4% and 4.7% for
the three months ended September 30, 1996 and 1995, respectively, of the total
operating revenues assigned from Professional Corporations. Fee-for-service
revenues represent 9.0% and 4.2% for the nine months ended September 30, 1996
and 1995, respectively.
Through the Professional Corporations, the Company contracts with
various healthcare providers to provide medical services to covered enrollees.
Primary care physicians are compensated by the Company under compensation
arrangements with the Professional Corporations on either a salary or
capitation basis. The costs of referrals to specialty care physicians are paid
for on either a discounted fee-for-service or per diem basis. Medical services
expense paid for on a capitation basis (for certain primary care and specialty
care services) or fixed salary basis (for primary care only) totaled 22.6% and
28.3% for the three months ended September 30, 1996 and 1995, respectively, and
25.8% and 35.8% for the nine months ended September 30, 1996 and 1995,
respectively, of operating revenues assigned from Professional Corporations,
with the remainder of medical services expense (for primary care, specialty
care, ancillary services, inpatient and outpatient services, lab charges, etc.)
paid for on a discounted fee-for-service or per diem basis.
The Company expects to continue expanding the FPA network through
increased market penetration and the acquisition of, and affiliation with,
individual and group physician practices and IPAs and related businesses,
including, but not limited to, the proposed transaction with Foundation Health
Corporation. In January 1996, the Company acquired three independent practice
associations in the Los Angeles, Ventura and Sacramento regions of California,
which now service approximately 76,000 enrollees and include 570 primary care
physicians. In June, 1996, FPA acquired Physicians First, Inc., operating 40
clinics in Florida, through which 110 primary care physicians then provided
services to approximately 80,000 enrollees. In July 1996, the Company acquired
two independent practice
7
<PAGE> 10
FPA MEDICAL MANAGEMENTS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS - (Continued)
associations, one each in Arizona and Florida, providing services to
approximately 14,000 and 4,000 enrollees, respectively.
Listed below is a breakdown of enrollees, payors, primary care physicians
and specialists by region at October 31, 1996.
<TABLE>
<CAPTION>
Number of Number of Number
Payor Primary Care of
Enrollees Contracts Physicians Specialists
--------- --------- ------------ -----------
<S> <C> <C> <C> <C>
California....... 133,059 20 697 2,530
Arizona.......... 25,299 3 322 472
New Jersey....... 39,679 4 922 408
Delaware......... 8,397 1 73 58
South Carolina... 11,051 3 185 28
Texas............ 44,946 6 52 411
Florida.......... 82,980 2 117 491
Michigan......... 16,150 1 96 464
North Carolina... 12,331 1 51 --
--------- --------- ------------ -----------
Total........ 373,892 41 2,515 4,862
========= ========= ============ ===========
</TABLE>
RESULTS OF OPERATIONS
The following table sets forth for the three and nine months ended
September 30, 1995 and September 30, 1996 selected financial data expressed
as a percentage of operating revenue assigned from Professional Corporations.
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
------------------------------- -------------------------------
Sept. 30, 1995 Sept. 30, 1996 Sept. 30, 1995 Sept. 30, 1996
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Operating revenue, assigned
from Professional
Corporations............... 100.0% 100.0% 100.0% 100.0%
Medical Services Expense..... 71.3 75.4 73.6 74.3
28.7 24.6 26.4 25.7
General and administrative
expense.................... 24.2 19.8 24.8 20.7
Income from operations....... 4.5 4.8 1.6 5.0
Other income (expense)....... * (.9) .6 (.9)
-------------- -------------- -------------- --------------
Income before income taxes... 4.5 3.9 2.2 4.1
Income tax expense........... 2.0 1.7 1.0 1.8
-------------- -------------- -------------- --------------
2.5% 2.2% 1.2% 2.3%
============== ============== ============== ==============
</TABLE>
- --------------
* Less than .1%
THREE MONTHS ENDED SEPTEMBER 30, 1996
Operating Revenue Assigned from Professional Corporations. The Company's
operating revenue assigned from Professional Corporations increased to
$89,680,114 for the three months ended September 30, 1996 from $14,402,617
for the three months ended September 30, 1995. This increase resulted primarily
from the increase in average enrollment to 361,511 for the three months ended
September 30, 1996 from 66,483 for the three months September 30, 1995. The
increase resulted from the addition of (i) approximately 57,000 additional
enrollees in 1996 in the Los Angeles, California, Ventura, California and
8
<PAGE> 11
FPA MEDICAL MANAGEMENT, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS -- (CONTINUED)
Sacramento, California regions, (ii) approximately 44,000 and 15,000 additional
enrollees in Texas and Arizona, respectively, as a result of 1995 acquisitions,
(iii) growth in the East Coast enrollment of approximately 39,000 enrollees,
(iv) approximately 38,000 additional enrollees in the San Diego region, (v)
approximately 16,000 enrollees in Michigan, and (vi) approximately 86,000
enrollees in Florida. In the third quarter of 1996, the Company generated net
fee-for-service revenue assigned from Professional Corporations of
approximately $11,138,512 compared to third quarter 1995 net fee-for-service
revenue of approximately $683,000. The increase is a result of acquisitions of
physicians' practices during 1995, primarily the Florida acquisition, the full
effect of which is included in the operating results for the three months ended
September 30, 1996.
Medical Services Expense. Medical services expense for the three months
ended September 30, 1996 was $67,617,764 or 75.4% of operating revenue assigned
from Professional Corporations compared to $10,264,901 or 71.3% of operating
revenue assigned from Professional Corporations for the three months ended
September 30, 1995. The increase in medical services expense from the third
quarter of 1995 to the third quarter of 1996 resulted primarily from
significantly increased membership under global capitation contracts in the
Eastern States, which experience a higher medical loss ratio than outpatient
only capitation contracts. Excluding the effect of these contracts, medical
services expense as a percentage of operating revenue assigned from
Professional Corporations decreased from 71.3% for the three months ended
September 30, 1995 to 70.9% for the three months ended September 30, 1996, as a
result of moderate improvements in medical loss ratios in other regions.
General and Administrative Expenses. General and administrative expense
for the third quarter of 1996 was $17,829,699 or 19.8% of operating revenue
assigned from Professional Corporations as compared to $3,490,970 or 24.2% of
operating revenue assigned from Professional Corporations in the comparable
period in 1995. The 4.4% decrease in general and administrative costs as a
percentage of operating revenue assigned from Professional Corporations resulted
primarily from economies of scale reached as the Company's membership grew. In
1995 the Company hired senior management and other personnel in new regions
prior to the addition of a significant number of enrollees.
Net Income. For the three months ended September 30, 1996, the Company
generated net income of $1,939,609 or $.14 per share as compared to $354,231 or
$.05 per share for the three months ended September 30, 1995.
NINE MONTHS ENDED SEPTEMBER 30, 1996
Operating Revenue Assigned from Professional Corporations. The
Company's operating revenue assigned from Professional Corporations increased
to $188,521,205 for the nine months ended September 30, 1996 from $30,147,423
for the nine months ended September 30, 1995. This increase resulted primarily
from the increase in average enrollment to 284,395 for the nine months ended
September 30, 1996 from 52,460 for the nine months ended September 30, 1995.
This increase resulted from the addition of (i) approximately 82,000 additional
enrollees in 1996 in the Los Angeles, California, Ventura, California and
Sacramento, California regions, (ii) approximately 41,000 and 13,000 additional
enrollees in Texas and Arizona, respectively, as a result of 1995 acquisitions,
(iii) growth in East Coast enrollment of approximately 29,000 enrollees, (iv)
approximately 16,000 additional enrollees in the San Diego region, (v)
approximately 12,000 enrollees in Michigan, and (vi) approximately 38,000
enrollees in Florida. In the first nine months of 1996 the Company generated
net fee-for-service revenues assigned from Professional Corporations of
approximately $17,020,463 as compared to approximately $1,268,829 for the same
period in the prior year. The increase is a result of the acquisitions of
physicians' practices during 1995, the full effect of which is included in the
operating results for the nine months ended September 30, 1996.
Medical Services Expense. Medical services expense was $140,110,800 or
74.3% of operating revenue assigned from Professional Corporations for the nine
months ended September 30, 1996 as
9
<PAGE> 12
FPA MEDICAL MANAGEMENT, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS--(Continued)
compared to $22,194,283 or 73.6% of operating revenue assigned from
Professional Corporations for the nine months ended September 30, 1995. Medical
services expense increased as a percentage of operating revenue assigned from
Professional Corporations during the first nine months of 1996 as a result of
significantly increased membership under global capitation contracts in the
Eastern states, which experience a higher medical loss ratio than outpatient
only capitation contracts. Excluding the effect of these contracts, medical
services expense as a percentage of operating revenue assigned from
Professional Corporations decreased from 73.6% for the nine months ended
September 30, 1995 to 70.0% for the nine months ended September 30, 1996, as a
result of the lower medical loss ratio experienced in the Texas region acquired
in November 1995.
General and Administrative Expenses. General and administrative expenses
for the first nine months of 1996 was $39,015,317 or 20.7% of operating revenue
assigned from Professional Corporation as compared to $7,490,420 or 24.8% of
operating revenue assigned from Professional Corporations in the comparable
period during 1995. The 1996 decrease in general and administrative expense as
a percentage of operating revenue from Professional Corporations resulted from
the growth of the Company through geographic expansion and the acquisition of
additional physician practices without requiring increased senior management
and infrastructure.
Net Income. The Company generated income of $4,327,919 or $.34 per
share for the nine months ended September 30, 1996, compared to net income of
$358,140 or $.05 per share for the nine months ended September 30, 1995.
QUARTERLY RESULTS
The following table presents financial information for the eight
quarters ended September 30, 1996. In the opinion of management, this
information has been prepared on the same basis as the audited financial
statements appearing elsewhere in this document and all necessary adjustments,
consisting only of normal recurring adjustments, have been included in the
amounts presented below to present fairly the quarterly results when read in
conjunction with the audited financial statements of the Company and notes
thereto. The Company's quarterly results have in the past been subject to
fluctuation and as a result, the operating results for any quarter are not
necessarily indicative of results for any future period.
<TABLE>
<CAPTION>
Quarter Ended
----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Dec. 31, March 31, June 30, Sept. 30, Dec. 31, March 31, June 30, Sept. 30,
1994 1995 1995 1995 1995 1996 1996 1996
---------- ---------- ----------- ----------- ----------- ----------- ----------- -----------
Operating revenue, assigned
from Professional
Corporations............... $5,799,350 $5,483,153 $10,261,653 $14,402,617 $22,544,532 $39,813,522 $59,027,569 $89,680,114
Medical services expense..... 4,474,043 4,205,811 7,723,571 10,264,901 15,562,961 28,846,252 43,646,784 67,617,784
---------- ---------- ----------- ----------- ----------- ----------- ----------- -----------
1,325,307 1,277,342 2,538,082 4,137,716 6,981,571 10,967,270 15,380,785 22,062,350
General and administrative
expenses................... 1,462,253 1,758,449 2,241,001 3,490,970 5,819,966 8,958,425 12,227,393 17,829,699
---------- ----------- ---------- ----------- ----------- ----------- ----------- -----------
Income (loss) from
operations................. (136,946) (481,107) 297,081 646,746 1,161,605 2,008,845 3,153,392 4,252,651
Other income (expense)....... 70,717 121,533 70,562 7,758 (10,128) (276,809) (612,294) (799,284)
---------- ---------- ----------- ----------- ----------- ----------- ----------- -----------
Income (loss) before taxes... (66,229) (359,574) 367,643 654,504 1,151,477 1,731,946 2,541,098 3,433,367
Income tax (benefit)
expense.................... (220) (131,315) 135,475 300,273 507,155 770,716 1,114,018 1,493,758
---------- ---------- ----------- ----------- ----------- ----------- ----------- -----------
Net income (loss)............ $ (66,009) $ (228,259) $ 232,168 $ 354,231 $ 644,231 $ 961,230 $ 1,427,080 $ 1,939,609
========== ========== =========== =========== =========== =========== =========== ===========
</TABLE>
Operating revenue assigned from Professional Corporations and medical services
expense during the first and third quarters have been and continue to be
affected by movements of members in payor plans from
10
<PAGE> 13
FPA MEDICAL MANAGEMENT, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS -- (Continued)
one plan to another during periods of open enrollment for payors. Retroactive
capitation rate increases generally take effect during the second quarter,
while medical services expense increases tend to occur ratably throughout the
year. Quarterly results may be affected by final settlements of shared risk
distributions accrued in the previous year. From time to time, the Professional
Corporations may receive amounts which differ from such estimated amounts. As
the Company adds new payors into the FPA network, the timing of these
adjustments may vary and, consequently, quarterly results may be affected in
the future, especially due to the start-up of operations in new regions where
there is no operating history. Similarly, if medical expense varies from
amounts previously accrued for claims incurred but not reported ("IBNR"),
quarterly operating results may fluctuate. A portion of the Company's expansion
strategy includes the acquisition of individual and group physician practices by
the FPA network, and any such acquisition may materially affect quarterly
operating results, causing quarterly fluctuations.
Liquidity and Capital Resources
The Company requires capital primarily to develop physician networks,
acquire physician practices and establish an infrastructure in new regions.
Capitation arrangements positively impact cash flow because the physician
networks receive capitation revenue prior to incurring costs associated with
services provided under those agreements. However, shared risk arrangements
negatively impact cash flow because settlements in connection with these
arrangements are typically not collected until significantly after the end of
the period in which they were accrued.
At September 30, 1996, the Company had cash and marketable securities
of $4,082,142 and a working capital deficit (current liabilities in excess of
current assets) of $38,887,955 compared to cash and marketable securities of
$9,329,840 and working capital of $1,525,822 at December 31, 1995. The decrease
in cash and marketable securities of $5,247,698 results primarily from
(i) approximately $10,933,000 of cash payments in connection with acquisitions,
(ii) approximately $3,843,000 for the acquisition of property and equipment,
(iii) approximately $2,324,000 used to purchase intangible assets,
(iv) approximately $351,000 advanced to an affiliate, (v) approximately
$3,000,000 invested in GLHP, (vi) approximately $39,201,000 in payments on
notes payable related to acquisitions, and (vii) approximately $788,000 in net
payments under a bank line of credit, partially offset by approximately
$13,426,000 provided by operations and $44,362,000 borrowed under arrangements
with financial institutions, and approximately $1,563,000 received from the
exercise of stock options. At September 30, 1996 approximately 49% of the
Company's current liabilities consist of amounts accrued as payable to
specialty care physicians and ancillary providers. These accrued liabilities
include claims received by the Company which have not yet been paid as well as
an estimate of costs for covered medical benefits incurred by enrollees but not
yet reported by providers. These amounts are not due and payable until after
the provider has presented a claim and are typically paid within 45 business
days of receipt of such claims. The increase in IBNR claims and claims payable
from approximately $10,247,000 at December 31, 1995 to approximately
$47,475,000 at September 30, 1996 resulted primarily from significant increased
membership.
On January 29, 1996, the Company entered into a $15,000,000 credit,
security, guarantee and pledge agreement (the "Amended Credit Agreement") with
two financial institutions. Permitted Borrowings, as defined in the Amended
Credit Agreement, generally include acquisitions and capital expenditures.
Borrowings under this agreement bear interest at either LIBOR plus 2 1/2%,
2 3/4% or 3%, or prime rate plus 1%, 1 1/4% or 1 1/2%, as defined in the
agreement. At September 30, 1996, the Company had borrowed $18,421,756 under
the Credit Agreement. On October 31, 1996, the Company executed a second
amendment ("Second Amendment") to the Amended Agreement, pursuant to which a
third institution participated, the loan amount was expanded to $55,000,000, and
fees of $200,000 were paid. Concurrently, the Company drew down an additional
$28,200,000, resulting in a total outstanding balance of approximately
$46,600,000.
11
<PAGE> 14
FPA MEDICAL MANAGEMENT, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS -- (Continued)
On June 28, 1996, FPA borrowed approximately $8,508,000 from a third
financial institution pursuant to a promissory note due on December 31, 1996
and bearing interest per annum at the higher of the interbank Federal funds
rate as announced by such institution and the base rate of interest announced
from time to time by such institution. Payments under such promissory note are
guaranteed by Foundation Health Corporation.
The increase in long-term debt from approximately $12,784,000 at
December 31, 1995 to approximately $61,201,000 at September 30, 1996 results
primarily from approximately $44,362,000 in borrowings under arrangements with
financial institutions and the issuance of notes payable and assumption of
long-term debt in connection with acquisitions of physician practice assets of
approximately $44,947,000 net of repayments of acquisition debt of
approximately $39,201,000.
The Company believes that its cash on hand and anticipated cash flows
from its operations will be sufficient to meet the Company's operating capital
needs through approximately the first quarter of 1997. The Company intends to
obtain additional financing to support planned expansion including the proposed
transaction with Foundation Health Corporation through an expansion of a line
of credit facility to approximately $100 million or through other potential
financing alternatives including private and public offerings of debt
and equity-related securities. To the extent that additional financing is not
available, the Company may delay certain potential acquisitions or certain
geographic expansion or may seek alternate sources of financing.
The strategy to expand the FPA network involves the acquisition of
individual and group physician practice assets and related businesses. Such
acquisitions may be consummated using cash, stock, notes or any combination
thereof. Management does not believe that inflation will have a material effect
on the operations of the Company.
12
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> SEP-30-1996
<CASH> 2,527
<SECURITIES> 1,555
<RECEIVABLES> 49,735
<ALLOWANCES> 1,328
<INVENTORY> 0
<CURRENT-ASSETS> 58,211
<PP&E> 19,037
<DEPRECIATION> 2,033
<TOTAL-ASSETS> 185,260
<CURRENT-LIABILITIES> 96,599
<BONDS> 26,362
0
0
<COMMON> 25
<OTHER-SE> 59,526
<TOTAL-LIABILITY-AND-EQUITY> 185,260
<SALES> 0
<TOTAL-REVENUES> 188,521
<CGS> 140,111
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 39,016
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,688
<INCOME-PRETAX> 7,706
<INCOME-TAX> 3,378
<INCOME-CONTINUING> 4,328
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,328
<EPS-PRIMARY> .34
<EPS-DILUTED> .34
</TABLE>
