<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 June 30, 1996.
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
COMMISSION FILE NUMBER 0-24276
FPA MEDICAL MANAGEMENT, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 33-0604264
(State or other jurisdiction of incorporation (I.R.S. Employer
or organization) Identification 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 AUGUST 9, 1996 THERE WERE OUTSTANDING 12,078,888 SHARES OF THE
REGISTRANT'S COMMON STOCK, PAR VALUE $.002 PER SHARE.
<PAGE> 2
INDEX
PART I - FINANCIAL INFORMATION PAGE
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 12
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 12
SIGNATURES 13
<PAGE> 3
ITEM 1. FINANCIAL STATEMENTS
FPA MEDICAL MANAGEMENT, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, 1995 JUNE 30, 1996
----------------- -------------
(Unaudited)
<S> <C> <C>
ASSETS
Current Assets:
Cash $ - $ 1,530,975
Marketable securities 9,329,840 1,716,530
Accounts receivable - net of allowance for
uncollectible accounts of $337,353 and $1,382,481
at December 31, 1995 and June 30, 1996, respectively 10,371,149 36,180,482
Accounts receivable - other 1,664,114 5,534,598
Notes receivable from FPASD 300,086 611,054
Income tax receivable 195,853 -
Prepaid expenses 393,662 1,170,902
Deferred income tax asset 491,824 1,146,311
------------ ------------
Total current assets 22,746,528 47,890,852
Property and equipment - net 6,324,900 16,277,659
Restricted cash and deposits 3,285,000 3,200,000
Goodwill - net of accumulated amortization of $548,606 and
$1,694,829 at December 31, 1995 and June 30, 1996, respectively 33,023,607 67,815,581
Intangible assets - net of accumulated amortization of $249,682 and
$573,110 at December 31, 1995 and June 30, 1996, respectively 5,988,579 6,390,798
Investment in GLHP 1,994,900 4,994,900
Other assets 434,770 1,239,289
------------ ------------
Total $ 73,798,284 $147,809,079
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 3,485,348 $ 9,333,935
Claims payable, including incurred but not reported claims 10,247,476 30,575,983
Accrued payroll and related liabilities 1,363,304 4,202,411
Income tax payable - 1,343,169
Other liabilities - 925,000
Borrowings on line of credit 788,325 -
Long-term debt - current portion 5,336,253 28,457,948
------------ ------------
Total current liabilities 21,220,706 74,838,446
Long-term debt - net of current portion 7,447,290 16,131,540
Deferred income tax liability 992,748 1,492,703
Other long-term liabilities 38,949 1,155,190
Minority interest 4,900 -
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 12,048,688 shares issued and
outstanding at December 31, 1995 and June 30, 1996,
respectively 22,202 24,097
Additional paid-in capital 42,483,542 50,610,846
Stock payable 567,000 147,000
Accumulated earnings 1,020,947 3,409,257
------------ ------------
Total stockholders' equity 44,093,691 54,191,200
------------ ------------
Total $ 73,798,284 $147,809,079
============ ============
</TABLE>
See notes to consolidated financial statements
1
<PAGE> 4
FPA MEDICAL MANAGEMENT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED THREE MONTHS ENDED
---------------- ------------------
JUNE 30,1995 JUNE 30, 1996 JUNE 30, 1995 JUNE 30, 1996
------------ ------------- ------------- -------------
<S> <C> <C> <C> <C>
Managed care revenue, assigned from
Professional Corporations $ 15,158,792 $ 92,959,140 $ 10,016,007 $ 55,429,886
Fee-for-service revenue, assigned from
Professional Corporations, net of
contractual allowances 586,014 5,881,951 245,646 3,597,683
------------ ------------ ------------ ------------
Operating revenue, assigned from Professional
Corporations 15,744,806 98,841,091 10,261,653 59,027,569
Expenses:
Medical services expense - Professional
Corporations 2,428,303 9,351,828 1,248,136 5,589,658
Medical services expense - others 9,501,079 63,141,208 6,475,435 38,057,126
------------ ------------ ------------ ------------
3,815,424 26,348,055 2,538,082 15,380,785
General and administrative expenses 3,999,450 21,185,818 2,241,001 12,227,393
------------ ------------ ------------ ------------
Income (loss) from operations (184,026) 5,162,237 297,081 3,153,392
Other income (expense):
Interest income 254,017 188,986 111,099 82,854
Interest expense (61,922) (1,078,179) (40,537) (695,148)
------------ ------------ ------------ ------------
Total other income (expense), net 192,095 (889,193) 70,562 (612,294)
------------ ------------ ------------ ------------
Income before income taxes 8,069 4,273,044 367,643 2,541,098
Income tax expense 4,160 1,884,734 135,475 1,114,018
------------ ------------ ------------
Net income $ 3,909 $ 2,388,310 $ 232,168 $ 1,427,080
============ ============ ============ ============
Net income per common share $ * $ .20 $ .03 $ .11
============ ============ ============ ============
Weighted average common shares outstanding 7,046,313 12,162,197 7,069,285 12,699,558
============ ============ ============ ============
</TABLE>
* less than $.01 per share.
See notes to consolidated financial statements.
2
<PAGE> 5
FPA MEDICAL MANAGEMENT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
------------------------------
JUNE 30, 1995 JUNE 30, 1996
------------- -------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 3,909 $ 2,388,310
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 294,045 2,253,739
Imputed interest on notes payable - 74,834
Changes in assets and liabilities:
Accounts receivable (1,441,153) (27,725,138)
Income taxes receivable/payable 163,560 1,850,900
Deferred income taxes (51,127) 339,139
Accounts payable and accrued expenses 354,057 1,767,309
Claims payable, including incurred but not reported claims 2,006,157 20,328,507
Accrued payroll and related liabilities 70,067 2,839,107
Other liabilities (1,091) 239,241
Prepaid expenses and other assets 45,212 (163,970)
------------ ------------
Total adjustments 1,439,727 1,803,668
------------ ------------
Net cash provided by operating activities 1,443,636 4,191,978
Cash flows from investing activities:
Purchase of property and equipment (684,806) (2,894,014)
Payments for intangible assets (453,339) (1,709,493)
Net payments (to) from FPASD 9,139 (310,968)
Net sale of marketable securities 4,444,697 7,613,310
Purchase of investment in GLHP (1,994,900) (3,000,000)
Acquisitions, net of cash acquired (1,925,162) (6,718,900)
Payments escrowed for acquisitions (1,588,240) 85,000
Other - (4,900)
------------ ------------
Net cash used by investing activities (2,192,611) (6,939,965)
------------ ------------
Cash flows from financing activities:
Net proceeds from issuance of common stock - 1,069,591
Issuance of notes payable - 16,907,760
Payments on notes payable (379,329) (12,910,064)
Net payments under bank line of credit - (788,325)
Receipt of payment for stock subscriptions 8,439 -
Payments on long-term debt (14,946) -
Deferred public offering costs (48,399) -
------------ ------------
Net cash provided (used) by financing activities (434,235) 4,278,962
------------ ------------
Net increase (decrease) in cash (1,183,210) 1,530,975
Cash, beginning of period 2,118,100 -
============ ============
Cash, end of period $ 934,890 $ 1,530,975
============ ============
Supplemental cash flow information:
Cash paid for interest $ 9,350 $ 902,052
============ ============
Cash paid for income taxes $ 40,338 $ 201,950
============ ============
Equipment acquired under capital leases $ 332,867 $ 495,900
============ ============
Common stock issued in connection with acquisitions $ - $ 8,933,280
============ ============
Effects of acquisitions:
Fair value of assets acquired $ 4,276,991 $ 46,557,016
Liabilities assumed (2,351,829) (39,838,116)
============ ============
Net cash paid for acquisitions $ (1,925,162) $ (6,718,900)
============ ============
</TABLE>
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 six months
ended June 30, 1995 and June 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:
Credit Agreement - 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.
Borrowings under the Credit Agreement bear interest at either LIBOR plus 2 1/4%
or prime rate plus 3/4%, as defined in the Credit Agreement. Fees of $150,000
were paid in connection with the Credit Agreement. Fees of up to an additional
$300,000 may be incurred if additional borrowings are made. The balance
outstanding is due in full on December 31, 1998, unless the total Permitted
Borrowings exceed $5,000,000 and no Interim Repayment, as defined in the Credit
Agreement, has occurred prior to February 1, 1997, in which case the balance
will be due December 31, 1997. Periodic payments of accrued interest are due
during the term of the Credit Agreement. Additionally, the financial
institutions were granted a security interest in substantially all of the assets
of the Company (excluding those of Gonzaba Management Services Organization,
Inc., FPA Medical Management of Michigan, Inc. d/b/a QualNet, Inc., and OPSU,
Inc., d/b/a Gonzaba Surgery Center), 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 Credit Agreement, 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 June 30, 1996,
there was no balance outstanding under the Credit Agreement.
4
<PAGE> 7
On June 28, 1996, FPA borrowed $8,507,760 from a third financial
institution pursuant to a promissory note due on September 30, 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.
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 the Company to
the Professional Corporation. In connection with these transactions, the Company
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
provides 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 provides 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
provides 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 will be accounted for using the purchase method of
accounting. The excess of the purchase price over the fair value of tangible
assets acquired will be treated as goodwill and 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 healthcare 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 million, comprised of $5 million in cash, $75
million in FPA Common Stock and $120 million in notes. The source 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 October 1, 1996, subject to the receipt of regulatory approvals and
satisfaction of certain other conditions.
Effective July 1, 1996, the Company acquired an IPA with approximately
14,000 enrollees in Arizona for $4.0 million ($600,000 in cash and the remainder
through a twelve-month note payable). The transaction will be accounted for
using the purchase method of accounting.
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.
The clinics have approximately 125 primary care physicians which provide
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 common stock
and warrants to purchase up to 250,000 shares of FPA Common Stock. The
acquisition will be accounted for using the purchase method of accounting.
Effective July 1, 1996, the Company acquired an IPA with
approximately 6,000 enrollees in Florida for $16.0 million ($2.4 million in cash
and the remainder through a twelve-month note payable). The transaction will be
accounted for using the purchase method of accounting.
Proposed Merger - On May 19, 1996, FPA entered into an Agreement and
Plan of Merger (the "Merger Agreement") providing for 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
5
<PAGE> 8
corporation ("Sterling"). Pursuant to the Merger, Sterling will become a
wholly-owned subsidiary of FPA and each outstanding share of Sterling Common
Stock will be converted into 1.4 shares of FPA Common Stock subject to
adjustment. There will be no adjustment if the average of the closing price of
FPA Common Stock for the fifteen consecutive trading days ending on the date
that is five trading days prior to the closing date ("Average Closing Price") is
greater than or equal to $14.87 but less than or equal to $16.43. If, however,
the Average Closing Price is less than $14.87 or greater than $16.43, the
exchange ratio will be adjusted as defined in the Merger Agreement. The
companies also have certain rights to terminate the Merger Agreement under
certain circumstances if the price per share of FPA's Common Stock is above
$18.00 or below $13.30 during a specified period prior to the closing date of
the Merger, as provided in the Merger Agreement. The shares of FPA Common Stock
to be issued to the Sterling 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 Merger is subject to approval by both companies'
stockholders, receipt of all necessary regulatory approvals, satisfactory
confirmation that the Merger will be treated as a tax-free reorganization and
accounted for as a pooling of interests and other customary conditions. The
Merger Agreement may be terminated by the parties if the Merger is not
consummated by December 31, 1996.
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 July 19, 1996, in response to 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 15,000 Medicaid enrollees. In
July 1996, GLHP was licensed as a health maintenance organization in the state
of Michigan.
6
<PAGE> 9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
The Company derives substantially all of its 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. Managed care revenue assigned from the Professional Corporations
consists primarily of capitation payments and additional compensation derived
from shared risk pool agreements with payors based upon efficient utilization of
hospital services provided to enrollees in the FPA network. Under payor
contracts, in some regions, the Company is responsible for the provision of all
medical care for enrollees, including hospital services. Under these
arrangements, the Company does not participate in shared risk pools, but
receives revenue to cover the services typically paid for by the shared risk
pools. The percentage of total operating revenue assigned from Professional
Corporations representing capitation revenue, shared risk revenue and
fee-for-service revenue was 89.6%, 4.3% and 6.1% for the three months ended June
30, 1996; 89.4%, 4.7% and 5.9% for the six months ended June 30, 1996; 90.6%,
7.0% and 2.4% for the three months ended June 30, 1995 and 90.5%, 5.8% and 3.7%
for the six months ended June 30,1995, respectively. Medical services expense
incurred consists primarily of capitation payments to primary care physicians
and certain specialty care and ancillary providers, payments to non-capitated
providers for specialty care paid for on a discounted fee-for-service basis, and
payments made to Professional Corporations for medical care provided.
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 merger with Sterling Healthcare
Group, Inc. and 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 added
approximately 82,000 enrollees and 450 primary care physicians to the FPA
network. In June, 1996, FPA acquired Physicians First, Inc., operating 40
clinics in Florida, through which 125 primary care physicians provide service to
approximately 80,000 enrollees. In July 1996, the Company acquired two
independent practice associations, one each in Arizona and Florida providing
services to approximately 14,000 and 6,000 enrollees, respectively.
Listed below is a breakdown of enrollees, payors, primary care
physicians and specialists by region at July 31, 1996.
<TABLE>
<CAPTION>
ENROLLEES NUMBER OF NUMBER OF NUMBER OF
--------- --------- --------- ---------
PAYORS PRIMARY CARE SPECIALISTS
------ ------------ -----------
PHYSICIANS
----------
<S> <C> <C> <C> <C>
California 136,582 18 658 2,135
Arizona 21,229 3 241 350
New Jersey 39,121 3 906 238
Delaware 7,689 1 86 22
South Carolina 2,146 1 158 28
Texas 44,472 5 48 410
Florida 95,266 2 143 13
Michigan 15,197 1 63 417
TOTAL 361,702 34 2,303 3,613
</TABLE>
7
<PAGE> 10
RESULTS OF OPERATIONS
The following table sets forth for the three and six months ended June
30, 1995 and June 30, 1996 selected financial data expressed as a percentage of
operating revenue assigned from Professional Corporations.
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
------------------ ----------------
JUNE 30, 1995 JUNE 30,1996 JUNE 30, 1995 JUNE 30, 1996
------------- ------------ ------------- -------------
<S> <C> <C> <C> <C>
Operating revenue, assigned from
Professional Corporations 100.0% 100.0% 100.0% 100.0%
Medical services expense 75.3 73.9 75.8 73.3
---------------- ---------------- ---------------- ----------------
24.7 26.1 24.2 26.7
General and administrative expense 21.8 20.8 25.4 21.5
---------------- ---------------- ---------------- ----------------
Income (loss) from operations 2.9 5.3 (1.2) 5.2
Other income (expense) .7 (1.0) 1.2 (.9)
---------------- ---------------- ---------------- ----------------
Income before income taxes 3.6 4.3 0 4.3
Income tax expense 1.3 1.9 * 1.9
---------------- ---------------- ---------------- ----------------
2.3% 2.4% * 2.4%
================ ================ ================ ================
</TABLE>
* Less than .1%
THREE MONTHS ENDED JUNE 30, 1996
The Company's operating revenue assigned from Professional Corporations
increased to $59,027,569 for the three months ended June 30, 1996 from
$10,261,653 for the three months ended June 30, 1995. This increase resulted
primarily from the increase in average enrollment to 274,287 for the three
months ended June 30, 1996 from 55,470 for the three months ended June 30, 1995.
The 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 42,000 and 13,000 additional
enrollees in Texas and Arizona, respectively, as a result of 1995 acquisitions,
(iii) growth in East Coast enrollment of approximately 25,000 enrollees, (iv)
approximately 13,000 additional enrollees in the San Diego region, (v)
approximately 15,000 enrollees in Michigan, and (vi) approximately 87,000
enrollees in Florida for the month of June, which is an average of 29,000 for
the three month period. In the second quarter of 1996, the Company generated net
fee-for-service revenue assigned from Professional Corporations of approximately
$3,598,000 compared to 1995 net fee-for-service revenue of approximately
$246,000. The increase is a result of acquisitions of physicians' practices
during 1995, the full effect of which is included in the operating results for
the three months ended June 30, 1996.
Medical services expense for the three months ended June 30, 1996 was
$43,646,784 or 73.9% of operating revenue assigned from Professional
Corporations compared to $7,723,571 or 75.3% of operating revenue assigned from
Professional Corporations for the three months ended June 30, 1995. The
significant decrease in medical loss ratio from the second quarter of 1995 to
the second quarter of 1996 resulted primarily from (i) the capitation of more
specialists in the FPA network, thus limiting specialty care costs, (ii) the
continuing improvement in medical loss ratio in the East Coast, Los Angeles,
California and Sacramento, California regions as a result of the maturity of
operations which utilized specialist and hospital services appropriately in
those regions, (iii) acquisition of mature managed healthcare companies, and
(iv) increased average revenue per enrollee in new markets.
General and administrative expense for the second quarter of 1996 was
$12,227,393 or 20.8% of operating revenue assigned from Professional
Corporations as compared to $2,241,001 or 21.8% of operating revenue assigned
from Professional Corporations in the comparable period in 1995. The 1.0%
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.
For the three months ending June 30, 1996, the Company generated net
income of $1,427,080 or $.11 per share as compared to $232,168 or $.03 per share
for the three months ending June 30, 1995.
8
<PAGE> 11
SIX MONTHS ENDED JUNE 30, 1996
Operating Revenue Assigned from Professional Corporations. The
Company's operating revenue assigned from Professional Corporations increased to
$98,841,091 for the six months ended June 30, 1996 from $15,744,806 for the six
months ended June 30, 1995. This increase resulted primarily from the increase
in average enrollment to 245,837 for the six months ended June 30, 1996 from
45,449 for the six months ended June 30, 1995. This increase resulted from the
addition of (i) approximately 85,000 additional enrollees in 1996 in the Los
Angeles, California, Ventura, California and Sacramento, California regions,
(ii) approximately 38,000 and 13,000 additional enrollees in Texas and
Arizona, respectively, as a result of 1995 acquisitions, (iii) growth in East
Coast enrollment of approximately 24,000 enrollees, (iv) approximately 16,000
additional enrollees in the San Diego region, (v) approximately 10,000 enrollees
in Michigan, and (vi) approximately 87,000 enrollees in Florida for the month of
June, which is an average of 14,000 for the six month period. In the first six
months of 1996 the Company generated net fee-for-service revenues assigned from
Professional Corporations of approximately $5,882,000 as compared to
approximately $586,000 for the same period in the prior year. The increase is a
result of the acquisitions of physician practices during 1995, the full effect
of which is included in the operating results for the six months ended June 30,
1996.
Medical Services Expense. Medical services expense was $72,493,036 or
73.3% of operating revenue assigned from Professional Corporations for the six
months ended June 30, 1996 as compared to $11,929,382 or 75.8% of operating
revenue assigned from Professional Corporations for the six months ended June
30, 1995. Medical services expense decreased as a percentage of operating
revenue assigned from Professional Corporations during the first six months of
1996 as a result of improved medical loss ratios in the California region as
the IPAs acquired in January began operating more efficiently and thus
contributing profitability.
General and Administrative Expense. General and administrative expense
for the first six months of 1996 increased to $21,185,818 or 21.5% of operating
revenue assigned from Professional Corporations compared to $3,999,450 or 25.4%
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 $2,338,310 or $.20 per
share for the six months ended June 30, 1996, compared to net income of $3,909
or less than $.01 per share for the six months ended June 30, 1995.
QUARTERLY RESULTS
The following table presents certain quarterly financial information
for the eight quarters ended June 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.
9
<PAGE> 12
<TABLE>
<CAPTION>
QUARTER ENDED
------------------------------------------------------------------------------------------------------
SEPT. 30, DEC. 31, MARCH 31, JUNE 30, SEPT. 30, DEC. 31, MARCH 31, JUNE 30,
1994 1994 1995 1995 1995 1995 1996 1996
------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Operating revenue, assigned
from Professional
Corporations $4,341,721 $5,799,350 $5,483,153 $10,261,653 $14,402,617 $22,544,532 $39,813,522 $59,027,569
Medical services expense 3,140,202 4,474,043 4,205,811 7,723,571 10,264,901 15,562,961 28,846,252 43,646,784
---------- ---------- ---------- ----------- ----------- ----------- ----------- -----------
1,201,519 1,325,307 1,277,342 2,538,082 4,137,716 6,981,571 10,967,270 15,380,785
General and administrative
expense 1,275,256 1,462,253 1,758,449 2,241,001 3,490,970 5,819,966 8,958,425 12,227,393
---------- ---------- ---------- ----------- ----------- ----------- ----------- -----------
Income (loss) from
operations (73,737) (136,946) (481,107) 297,081 646,746 1,161,605 2,008,845 3,153,392
Other income (expense) (418) 70,717 121,533 70,562 7,758 (10,128) (276,899) (612,294)
---------- ---------- ---------- ----------- ----------- ----------- ----------- -----------
Income (loss) before taxes (74,155) (66,229) (359,574) 367,643 654,504 1,151,477 1,731,946 2,541,098
Income tax (benefit)
expense (21,596) (220) (131,315) 135,475 300,273 507,155 770,716 1,114,018
---------- ---------- ---------- ----------- ----------- ----------- ----------- -----------
Net income (loss) $ (52,559) $ (66,009) $ (228,259) $ 232,168 $ 354,231 $ 644,322 $ 961,230 $ 1,427,080
========== ========== ========== =========== =========== =========== =========== ===========
</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 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 pool 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 services 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 pool 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 June 30, 1996, the Company had cash and marketable securities of
$3,247,505 and a working capital deficit (current liabilities in excess of
current assets) of $26,947,594 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 $6,082,335 results primarily from (i)
approximately $6,719,000 of cash payments in connection with acquisitions, (ii)
approximately $2,894,000 for the acquisition of property and equipment, (iii)
approximately $1,710,000 used to purchase intangible assets, (iv) approximately
$311,000 advanced to an affiliate, (v) approximately $3,000,000 invested in
GLHP, (vi) approximately $12,910,000 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 $4,192,000 provided by operations
and $16,908,000 borrowed under arrangements with financial institutions, and
approximately $1,070,000 received as net proceeds from the sale of stock. At
June 30, 1996 approximately 41% 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.
10
<PAGE> 13
The increase in IBNR claims and claims payable from approximately $10,247,000 at
December 31, 1995 to approximately $30,576,000 at June 30, 1996 resulted
primarily from significantly increased membership.
On January 29, 1996, the Company entered into a $15,000,000 credit,
security, guarantee and pledge agreement (the "Credit Agreement") with two
financial institutions. Permitted Borrowings, as defined in the Credit
Agreement, generally include acquisitions and capital expenditures. Borrowings
under this agreement bear interest at either LIBOR plus 2 1/4% or prime rate
plus 3/4%, as defined in the agreement. At June 30, 1996, there was no balance
outstanding under the Credit Agreement.
On June 28, 1996, FPA borrowed approximately $8,508,000 from a third
financial institution pursuant to a promissory note due on September 30, 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 $44,590,000 at June 30, 1996 results
primarily from approximately 16,908,000 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 $27,237,000 net of repayments of acquisition debt of approximately
$12,910,000.
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 third quarter of 1996. 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 $150 million. To the extent that this
additional financing is not available, the Company may delay certain potential
acquisitions or certain geographic expansion or may seek alternate sources of
financing. Additionally, management is reviewing the opportunities for and
timing of a permanent capital 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.
11
<PAGE> 14
PART II - OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the annual meeting of stockholders on June 6, 1996, the following matters
were submitted to a vote of the Registrant's stockholders:
1. Election of Directors: The following directors were elected until the
annual meeting of stockholders in 1999 and until their respective successors are
duly elected and qualified.
<TABLE>
<CAPTION>
NAME OF DIRECTORS VOTES FOR VOTES WITHHELD
- ----------------- --------- --------------
<S> <C> <C>
Dr. Seth Flam 10,752,829 166,009
Dr. Howard Hassman 10,752,829 166,009
Sheldon Derezin 10,752,829 166,009
</TABLE>
Dr. Sol Lizerbram, Dr. Michael Feinstein, Dr. Kevin Ellis and Harvey Wilson
continue as directors of the Registrant.
2. Amendment of the Registrant's Certificate of Incorporation, as amended and
restated, to increase the number of shares of Common Stock, $.002 par value per
share, from 18,000,000 to 98,000,000.
<TABLE>
<CAPTION>
VOTES FOR VOTES AGAINST ABSTENTIONS
- --------- ------------- -----------
<C> <C> <C>
9,554,343 1,248,111 43,378
</TABLE>
3. Amendment of the Registrant's Certificate of Incorporation, as amended and
restated, to authorize the Board of Directors, without any vote or action by the
stockholders, to cause Preferred Stock to be issued in series with such voting
rights and such designations, preferences and relative participating, optional
or other special rights as the Board may determine.
<TABLE>
<CAPTION>
VOTES FOR VOTES AGAINST ABSTENTIONS
- --------- ------------- -----------
<C> <C> <C>
5,671,444 2,703,485 348,884
</TABLE>
4. Amendment of the Registrant's Omnibus Stock Option Plan (the "Omnibus Plan")
to increase from 1,500,000 to 2,500,000 the number of shares of the Registrant's
Common Stock for which options may be granted under the Omnibus Plan.
<TABLE>
<CAPTION>
VOTES FOR VOTES AGAINST ABSTENTIONS
- --------- ------------- -----------
<C> <C> <C>
6,008,925 2,471,369 54,691
</TABLE>
5. Ratification of the selection of Deloitte & Touche LLP as the Registrant's
independent auditors for the year ending December 31, 1996.
<TABLE>
<CAPTION>
VOTES FOR VOTES AGAINST ABSTENTIONS
- --------- ------------- -----------
<C> <C> <C>
10,900,271 6,600 11,967
</TABLE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(b) Reports on Form 8-K and Form 8-KA: The Company filed the
following Reports on Form 8-K since March 31, 1996:
<TABLE>
<CAPTION>
Date of Report Item Reported
-------------- -------------
<S> <C>
May 19, 1996 5,7
June 21, 1996 2,5,7
</TABLE>
12
<PAGE> 15
SIGNATURES
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.
FPA MEDICAL MANAGEMENT, INC.
----------------------------
(Registrant)
DATE: August 13, 1996 /S/ SETH FLAM
-------------------------------------
SETH FLAM
CHIEF EXECUTIVE OFFICER
(PRINCIPAL EXECUTIVE OFFICER)
DATE: August 13, 1996 /S/ STEVEN M. LASH
-------------------------------------
STEVEN M. LASH
CHIEF FINANCIAL OFFICER
(PRINCIPAL FINANCIAL OFFICER)
13
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE BALANCE
SHEET AND INCOME STATEMENT AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> JUN-30-1996
<CASH> 1,531
<SECURITIES> 1,717
<RECEIVABLES> 43,098
<ALLOWANCES> (1,383)
<INVENTORY> 0
<CURRENT-ASSETS> 47,891
<PP&E> 17,603
<DEPRECIATION> (1,325)
<TOTAL-ASSETS> 147,809
<CURRENT-LIABILITIES> 74,839
<BONDS> 16,132
0
0
<COMMON> 24
<OTHER-SE> 54,167
<TOTAL-LIABILITY-AND-EQUITY> 147,809
<SALES> 0
<TOTAL-REVENUES> 98,841
<CGS> 72,493
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 21,186
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 889
<INCOME-PRETAX> 4,273
<INCOME-TAX> 1,885
<INCOME-CONTINUING> 2,388
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,388
<EPS-PRIMARY> 0.20
<EPS-DILUTED> 0.20
</TABLE>
