<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, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ______________ TO ____________
COMMISSION FILE NUMBER 0-24276
FPA MEDICAL MANAGEMENT, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 33-0604264
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NUMBER)
INCORPORATION OR ORGANIZATION)
----------------
3636 NOBEL DRIVE
SUITE 200
SAN DIEGO, CA 92122
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
(ZIP CODE)
(619) 453-1000
(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 NOVEMBER 12, 1997 THERE WERE OUTSTANDING 39,743,845 SHARES OF THE
REGISTRANT'S COMMON STOCK, PAR VALUE $.002 PER SHARE.
================================================================================
<PAGE> 2
FPA MEDICAL MANAGEMENT, INC. AND SUBSIDIARIES
INDEX
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
PART I -- FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets..................................3
Condensed Consolidated Statements of Operations
(Unaudited).........................................................4
Condensed Consolidated Statements of Cash Flows
(Unaudited).........................................................5
Notes to Condensed Consolidated Financial Statements...................6
Item 2. -- Management's Discussion and Analysis of
Financial Condition and Results of
Operations..........................................................8
PART II -- OTHER INFORMATION
Item 4. Submission of matters to a Vote of Security
Holders............................................................18
Item 6. Exhibits and Reports on Form 8-K......................................18
Signatures..........................................................................19
</TABLE>
2
<PAGE> 3
ITEM 1. Financial Statements
FPA MEDICAL MANAGEMENT, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS [1]
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1996 1997
------------- -------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 16,305,477 $ 28,256,221
Marketable securities 40,000,000 1,195,990
Accounts receivable - net of allowance for uncollectible accounts 107,178,672 177,289,334
Accounts receivable - other 25,129,292 21,179,785
Notes receivable from affiliate 1,327,822 137,727
Prepaid expenses and other assets 7,038,463 6,267,675
Capitation deposits 15,409,771 --
Deferred income tax asset 3,478,751 4,658,691
------------- -------------
Total current assets 215,868,248 238,985,423
Property and equipment - net of accumulated depreciation 48,030,099 44,464,414
Restricted cash and deposits 488,535 500,000
Goodwill and intangible assets - net of accumulated amortization 302,262,391 349,272,764
Investment in HealthCor (formerly GLHP) 4,994,900 4,994,900
Deferred income tax asset 3,189,665 3,645,742
Other assets 10,104,006 8,572,005
------------- -------------
Total $ 584,937,844 $ 650,435,248
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 63,781,039 $ 64,266,673
Claims payable, including incurred but not reported claims 104,269,268 110,845,576
Accrued payroll and related liabilities 4,534,272 11,007,512
Income tax payable 2,294,159 --
Other current liabilities 13,218,704 --
Current portion of accrued liability for professional liability claims 1,297,790 1,534,000
Long-term debt, current portion 71,158,525 9,936,970
------------- -------------
Total current liabilities 260,553,757 197,590,731
Long-term debt, net of current portion 186,131,219 275,936,175
Accrued liability for professional liability claims, net of current portion 4,217,000 4,270,545
Other long-term liabilities 4,801,862 30,143,727
------------- -------------
Total liabilities 455,703,838 507,941,178
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,
33,139,009 and 34,436,654 shares issued and outstanding at
December 31, 1996 and September 30, 1997, respectively 66,278 68,873
Additional paid-in capital 207,122,827 223,243,814
Stock payable 534,600 534,600
Due from stockholder (427,000) (427,000)
Accumulated deficit (78,062,699) (80,926,217)
------------- -------------
Total stockholders' equity 129,234,006 142,494,070
------------- -------------
Total $ 584,937,844 $ 650,435,248
============= =============
</TABLE>
See notes to condensed consolidated statements.
[1] These financial statements include the balances of AHI Healthcare Systems,
Inc., HealthCap, Inc. and Axminster Medical Group, Inc. for all periods
presented. See Note 2.
3
<PAGE> 4
FPA MEDICAL MANAGEMENT, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) [1]
<TABLE>
<CAPTION>
NINE MONTHS ENDED THREE MONTHS ENDED
-------------------------------- --------------------------------
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
1996 1997 1996 1997
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Managed care revenue $ 287,119,411 $ 512,455,454 $ 119,381,728 $ 167,968,049
Fee-for-service revenue, net of
contractual deductions 123,395,818 211,392,556 46,145,736 72,654,385
------------- ------------- ------------- -------------
Operating revenue 410,515,229 723,848,010 165,527,464 240,622,434
Medical services expense 310,310,185 514,488,779 129,007,076 169,483,677
------------- ------------- ------------- -------------
100,205,044 209,359,231 36,520,388 71,138,757
General and administrative expense 91,171,352 145,020,310 34,236,322 45,065,505
Depreciation and amortization 8,428,722 17,361,672 3,291,171 4,313,806
Merger, restructuring and other
unusual charges 1,707,196 38,004,841 1,707,196 --
------------- ------------- ------------- -------------
Income (loss) from operations (1,102,226) 8,972,408 (2,714,301) 21,759,446
Other income (expense):
Interest and other income 1,508,082 5,421,501 500,424 642,576
Interest expense (2,917,465) (14,668,150) (1,242,397) (5,802,221)
------------- ------------- ------------- -------------
Total other income (expense) (1,409,383) (9,246,649) (741,973) (5,159,645)
Income (loss) before income taxes (2,511,609) (274,241) (3,456,274) 16,599,801
Income tax expense (5,126,049) (2,589,277) (1,951,001) (5,941,059)
------------- ------------- ------------- -------------
Net income (loss) $ (7,637,658) $ (2,863,518) $ (5,407,275) $ 10,658,742
============= ============= ============= =============
Net income (loss) per share $ (0.26) $ (0.08) $ (0.18) $ 0.29
============= ============= ============= =============
Weighted average shares outstanding 28,933,417 35,676,985 30,092,098 36,552,756
============= ============= ============= =============
</TABLE>
See notes to condensed consolidated statements.
[1] These financial statements include the balances of AHI Healthcare Systems,
Inc., HealthCap, Inc. and Axminster Medical Group, Inc. for all periods
presented. See Note 2.
4
<PAGE> 5
FPA MEDICAL MANAGEMENT, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) [1]
<TABLE>
<CAPTION>
NINE MONTHS ENDED
--------------------------------
SEPTEMBER 30, SEPTEMBER 30,
1996 1997
------------- -------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (7,637,658) $ (2,863,518)
Adjustments to reconcile net loss to net cash used
by operating activities:
Depreciation and amortization 8,428,722 17,361,672
Imputed interest on notes payable 98,023 --
Changes in assets and liabilities:
Accounts receivable (45,333,978) (64,321,124)
Income tax receivable/payable 3,525,022 (2,294,159)
Capitation deposit -- 15,409,771
Deferred income taxes 247,085 (1,636,017)
Accounts payable and accrued expenses 757,109 (14,347,051)
Claims payable, including incurred but not reported claims 40,390,479 576,308
Accrued liability for professional liability claims 1,627,000 289,755
Other liabilities (334,823) 9,992,457
Accrued payroll and related liabilities 1,725,587 6,473,240
Prepaid expenses and other (5,195,656) 2,304,589
------------- -------------
Total adjustments 5,934,570 (30,190,559)
------------- -------------
Net cash used by operating activities (1,703,088) (33,054,077)
Cash flows from investing activities:
Purchase of property and equipment (7,843,513) (12,324,902)
Net payments (to) from affiliate (1,162,768) 1,190,095
Net sale of marketable securities 6,673,325 38,804,010
Investment in HealthCor (formerly GLHP) (3,000,000) --
Cash paid for acquisitions, net of cash acquired (15,599,884) (16,633,279)
Payments escrowed for acquisition (4,519,728) 13,247
Other (565,000) --
------------- -------------
Net cash provided (used) by investing activities (26,017,568) 11,049,171
Cash flows from financing activities:
Proceeds from merger, net 37,835 --
Proceeds from issuance of preferred stock 150,000 --
Proceeds from issuance of long-term debt 48,180,427 18,235,908
Payments on long-term debt (43,450,105) (177,587,612)
Net borrowings/(payments) under bank line of credit (788,325) 187,820,105
Increase in bank overdrafts 1,257,441 --
Proceeds from exercise of stock options and warrants 8,057,854 5,487,249
------------- -------------
Net cash provided by financing activities 13,445,127 33,955,650
------------- -------------
Net increase (decrease) in cash (14,275,529) 11,950,744
Cash and cash equivalents, beginning of period 37,099,035 16,305,477
------------- -------------
Cash and cash equivalents, end of period $ 22,823,506 $ 28,256,221
============= =============
</TABLE>
See notes to condensed consolidated statements.
[1] These financial statements include the balances of AHI Healthcare Systems,
Inc., HealthCap, Inc. and Axminster Medical Group, Inc. for all periods
presented. See Note 2.
5
<PAGE> 6
FPA MEDICAL MANAGEMENT, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
In the opinion of management, the accompanying condensed 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 condensed 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 condensed consolidated financial statements for the three and nine
months ended September 30, 1996 and September 30, 1997 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, 1996 and the consolidated financial statements on Form 8-K/A
dated July 31, 1997.
Consolidation Policy - The Company's financial statements include the
activity of 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. These financial statements include the financial results of AHI
Healthcare Systems, Inc. ("AHI"), HealthCap, Inc. ("HealthCap") and Axminster
Medical Group, Inc. ("Axminster") for all periods presented (see Note 2).
Net Income (Loss) per Share - Net income (loss) per share is computed based
on the weighted average number of shares and share equivalents (options and
warrants) outstanding, giving retroactive effect to all stock splits and pooling
of interests transactions.
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards ("SFAS") No. 128, "Earnings Per Share". This
statement specifies the computation, presentation, and disclosure requirements
for earnings per share for entities with publicly held common stock. SFAS No.
128 is not in effect for the Company in the quarter ended September 30, 1997,
but will be in effect for financial statements issued for periods ending after
December 15, 1997, including interim periods. The Company does not expect the
adoption of SFAS No. 128 to have a material effect on its net income (loss) per
share.
2. SUBSEQUENT EVENTS
The following significant events have occurred subsequent to December 31,
1996:
On March 17, 1997, FPA acquired AHI in a stock-for-stock merger (the "AHI
Merger") accounted for as a pooling of interests in which 5,797,968 shares of
FPA common stock were issued in exchange for all of the outstanding shares of
AHI.
On June 30, 1997, FPA acquired HealthCap in a stock-for-stock merger
accounted for as a pooling of interests in which 2,300,000 shares of FPA common
stock were issued in exchange for all of the outstanding shares of HealthCap
(including shares covered by HealthCap vested options and outstanding warrants
at the effective date of the merger). In addition, FPA assumed certain
outstanding HealthCap options.
On September 2, 1997, FPA acquired Emergency Medical Care Incorporated
("EMC") for cash and shares of FPA common stock, subject to adjustment based on
certain performance criteria. The acquisition was accounted for as a purchase.
On September 30, 1997, FPA acquired Axminster in a stock-for-stock merger
accounted for as a pooling of interests in which shares of FPA common stock were
issued in exchange for all the outstanding shares of Axminster.
6
<PAGE> 7
On October 13, 1997, FPA acquired Health Partners, Inc. ("Health Partners")
in a stock-for-stock merger accounted for as a pooling of interests in which
5,227,273 shares of FPA common stock were issued in exchange for all outstanding
capital stock of Health Partners and all outstanding options to purchase Health
Partners common stock.
The Company entered into a Credit Agreement (the "Agreement") with
BankBoston, N.A., as administrative agent and several lenders who from time to
time are parties thereto (the "Lenders") dated as of June 30, 1997, as amended,
consisting of a $175 million three-year revolving line of credit and a $100
million four and one-quarter year term loan. The obligations of the Company
under the Agreement are secured by all the assets of the Company and all the
capital stock and assets of its subsidiaries. The Agreement contains customary
terms, events of default and covenants (including financial covenants) which,
among other things, limit payment of cash dividends, the consummation of certain
acquisitions and the incurrence of additional debt. Borrowings under the
Agreement bear interest at either Citibank, N.A.'s prime rate (the "Base Rate"),
plus the applicable margin or LIBOR plus the applicable margin, as defined in
the Agreement. As of September 30, 1997, the Company had drawn $187.8 million
under the Agreement and committed another $30 million for a standby letter of
credit.
7
<PAGE> 8
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 (i) the
payments made by health maintenance organizations and other prepaid health
insurance plans (collectively, "Payors") to the Professional Corporations and
certain of the Company's subsidiaries for managed care medical services, (ii)
fee-for-service revenues for the Company's medical centers in the managed care
business, and (iii) fee-for-service revenues from emergency department medical
services.
MANAGED CARE BUSINESS
The Company has two types of Payor contracts: contracts for both inpatient
and outpatient services ("global capitation" contracts) and those limited to
outpatient services or professional medical 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 hospital 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 relation to inpatient expense. Revenue
under global capitation contracts represented 30.7% and 24.8% for the three
months ended September 30, 1996 and 1997, respectively, and 21.8% and 22.4% for
the nine months ended September 30, 1996 and 1997, respectively, of managed care
business (division) operating revenue. Revenue under outpatient capitation
contracts represented 60.3% and 58.8% for the three months ended September 30,
1996 and 1997, respectively, and 70.9% and 61.4% for the nine months ended
September 30, 1996 and 1997, respectively, of managed care business operating
revenue.
The Company also generates fee-for-service revenue for the performance of
medical services through the Professional Corporations and certain of the
Company's subsidiaries. These revenues are presented net of contractual
deductions and represented 9.0% and 16.4% for the three months ended September
30, 1996 and 1997, respectively, and 7.3% and 16.2% for the nine months ended
September 30, 1996 and 1997, respectively, of managed care business operating
revenue. The increase in fee-for-service revenue is primarily a result of the
Company's recent acquisitions, as these companies have historically had greater
fee-for-service revenue than the Company. This trend is not expected to continue
as (i) the Company renegotiates contracts with existing payors to move from
fee-for-service to capitation and (ii) the Company enters into new Payor
contracts on a capitated basis.
Through the Professional Corporations and its subsidiaries, the Company
contracts with various healthcare providers to provide primary care and
specialty medical services to covered enrollees. Primary care physicians are
compensated on either a salary or capitation basis. Specialty care physician
services are paid on either a discounted fee-for-service or capitation basis.
EMERGENCY DEPARTMENT BUSINESS
Through the emergency department business, the Company provides contract
management and support services primarily to emergency departments. As of
September 30, 1997 the Company provided physician practice management services
on a contract basis to 132 emergency departments, one radiology department,
three correctional healthcare facilities and three rural health urgent care
clinics located in 24 states. The Company contracts with approximately 1,600
affiliated physicians who provide certain medical services to approximately 1.6
million patients annually pursuant to these contracts.
The Company's contractual arrangements with hospitals are primarily
fee-for-service contracts whereby hospitals generally agree, in exchange for the
Company's services, to authorize the Company and its contracted healthcare
professionals to bill and collect the professional component of the charges for
medical services rendered by the Company's contracted healthcare professionals.
Fee-for-service contracts may, depending on the hospital's patient volume and
payor mix, involve the payment of a subsidy to the Company by the hospital.
During the three months ended September 30, 1996 and 1997 and the nine months
ended September 30, 1996 and 1997, 83.3% and 80.0%, and 83.5% and 81.8%,
respectively, of the Company's emergency department business operating revenue
was earned on a fee-for-service basis, and the Company emphasized
fee-for-service contracts in its marketing activities.
8
<PAGE> 9
Medical services expense for the emergency department business consists
primarily of payments made to independent contractor and employee physicians
("Physician Costs") and, to a lesser extent the costs of medical supplies,
malpractice insurance and laboratory fees. During the three months ended
September 30, 1996 and 1997 and the nine months ended September 30, 1996 and
1997, Physician Costs accounted for 92.1% and 95.1%, and 92.8% and 94.4%,
respectively, of emergency department business medical services expense.
OPERATIONAL DEVELOPMENT
The future growth of FPA is largely dependent on a continued increase in
the number of new enrollees in the FPA network. This growth may come from (i)
affiliations with, or acquisitions of, individual or group physician practices
serving enrollees of Payors in the FPA network or of new Payors, (ii) increased
membership in plans of Payors with which the Professional Corporations have
contracts and whose members are patients of physicians in the FPA network or
(iii) agreements with Payors, physicians and hospitals in other geographic
markets. The process of identifying and consummating suitable acquisitions of,
or affiliations with, physician groups can be lengthy and complex. The
environment for such acquisitions and affiliations is subject to increasing
competitive pressures. There can be no assurance that FPA will be successful in
identifying, acquiring or affiliating with additional physician groups or
hospitals or that the Company will be able to contract with new Payors. In
addition, there can be no assurance that the Company's acquisitions will be
successfully integrated on a timely basis or that the anticipated benefits of
these acquisitions will be realized. Failure to effectively accomplish the
integration of acquired companies may have a material adverse effect on FPA's
results of operations and financial condition. FPA's ability to expand is also
dependent upon its ability to comply with legal and regulatory requirements in
the jurisdictions in which it operates or will operate and to obtain necessary
regulatory approvals, certificates and licenses.
In September 1997, the Company acquired Axminster, which serviced
approximately 17,000 enrollees, and EMC, which is a physician practice
management company ("PPM") engaged in the business of providing contract
management and support services primarily to hospital-based emergency
departments. In June 1997, the Company completed its merger with HealthCap,
which serviced approximately 85,000 enrollees. In March 1997, the Company
completed its merger with AHI, which serviced approximately 210,000 enrollees.
Effective in December 1996, the Company and certain Professional Corporations
acquired two medical groups, one each in California and Arizona, providing
services to approximately 63,000 and 157,000 enrollees, respectively. In October
1996, the Company acquired Sterling Healthcare Group, Inc. ("Sterling"), which
was affiliated with approximately 1,000 affiliated physicians and provided PPM
services on a contract basis to 101 hospital-based emergency departments. In
July 1996, the Company acquired two independent practice associations, one each
in Arizona and Florida, providing services to approximately 14,000 and 4,000
enrollees, respectively. In June 1996, the Company acquired Physicians First,
Inc., operating 40 medical clinics in Florida, through which 110 primary care
physicians provided services to approximately 80,000 enrollees. In January 1996,
the Company acquired three independent practice associations in the Los Angeles,
Ventura and Sacramento regions of California, which serviced approximately
76,000 enrollees and included 570 primary care physicians.
9
<PAGE> 10
Listed below is a summary of enrollees, primary care physicians, and
emergency department business contracts (including seven radiology, urgent care
and correctional facility contracts) by state at September 30, 1997.
<TABLE>
<CAPTION>
NUMBER OF
NUMBER OF EMERGENCY
PRIMARY CARE DEPARTMENT
ENROLLEES PHYSICIANS CONTRACTS
--------- ------------ ----------
<S> <C> <C> <C>
Alabama -- 134 6
Arizona 187,021 431 2
California 314,936 1,570 --
Delaware 11,657 93 --
Florida 126,302 287 11
Georgia 32,103 117 5
Kentucky -- 56 4
Louisiana 932 179 17
Michigan 39,537 500 11
Mississippi -- 115 8
Missouri 14,979 153 12
Nevada 43,228 188 --
New Jersey 33,832 917 --
New York -- 63 2
North Carolina 10,876 188 11
Pennsylvania -- 356 1
South Carolina 5,981 182 2
Tennessee -- 95 8
Texas 119,008 714 12
Others -- 344 27
------- ----- ---
Total 940,392 6,682 139
======= ===== ===
</TABLE>
10
<PAGE> 11
RESULTS OF OPERATIONS
The following tables set forth for the three and nine months ended
September 30, 1996 and 1997 selected financial data (in thousands) and selected
financial data expressed as a percentage of operating revenue.
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30,
-------------------------------------------------------------------------------------
1996 1997
---------------------------------------- ---------------------------------------
MANAGED EMERGENCY MANAGED EMERGENCY
CARE DEPARTMENT CARE DEPARTMENT
BUSINESS BUSINESS TOTAL BUSINESS BUSINESS TOTAL
--------- ---------- --------- --------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
Operating
revenue $ 131,174 $ 34,353 $ 165,527 $ 200,855 $ 39,768 $ 240,623
Medical services
expense 104,499 24,508 129,007 139,253 30,230 169,483
General and
administrative
expense 28,269 5,967 34,236 39,067 5,999 45,066
Depreciation and
amortization 2,457 834 3,291 3,351 963 4,314
Merger,
restructuring
and other
unusual charges -- 1,707 1,707 -- -- --
--------- ---------- --------- --------- ---------- ---------
Income (loss)
from operations (4,051) 1,337 (2,714) 19,184 2,576 21,760
Other expense, net (548) (194) (742) (5,167) 7 (5,160)
--------- ---------- --------- --------- ---------- ---------
Income (loss)
before income
taxes (4,599) 1,143 (3,456) 14,017 2,583 16,600
Income tax
benefit (expense) (1,496) (455) (1,951) (5,941) -- (5,941)
--------- ---------- --------- --------- ---------- ---------
Net income (loss) $ (6,095) $ 688 $ (5,407) $ 8,076 $ 2,583 $ 10,659
========= ========== ========= ========= ========== =========
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30,
------------------------------------------------------------------------------------------
1996 1997
------------------------------------------ -----------------------------------------
MANAGED EMERGENCY MANAGED EMERGENCY
CARE DEPARTMENT CARE DEPARTMENT
BUSINESS BUSINESS TOTAL BUSINESS BUSINESS TOTAL
--------- ---------- --------- --------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
Operating
revenue 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Medical services
expense 79.7% 71.3% 77.9% 69.3% 76.0% 70.4%
General and
administrative
expense 21.6% 17.4% 20.7% 19.4% 15.1% 18.7%
Depreciation and
amortization 1.9% 2.4% 2.0% 1.7% 2.4% 1.8%
Merger,
restructuring
and other
unusual charges -- 5.0% 1.0% -- -- --
--------- ---------- --------- --------- ---------- ---------
Income (loss)
from operations (3.2%) 3.9% (1.6%) 9.6% 6.5% 9.1%
Other expense, net (0.4%) (0.6%) (0.4%) (2.6%) 0.0% (2.1%)
--------- ---------- --------- --------- ---------- ---------
Income (loss)
before income
taxes (3.6%) 3.3% (2.0%) 7.0% 6.5% 7.0%
Income tax
benefit (expense) (1.1%) (1.3%) (1.2%) (3.0%) -- (2.5%)
--------- ---------- --------- --------- ---------- ---------
Net income (loss) (4.7%) 2.0% (3.2%) 4.0% 6.5% 4.5%
========= ========== ========= ========= ========== =========
</TABLE>
11
<PAGE> 12
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------------------------------------------------------------
1996 1997
---------------------------------------- ---------------------------------------
MANAGED EMERGENCY MANAGED EMERGENCY
CARE DEPARTMENT CARE DEPARTMENT
BUSINESS BUSINESS TOTAL BUSINESS BUSINESS TOTAL
--------- ---------- --------- --------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
Operating
revenue $ 309,765 $ 100,750 $ 410,515 $ 611,804 $ 112,045 $ 723,849
Medical services
expense 240,625 69,685 310,310 430,777 83,712 514,489
General and
administrative
expense 70,505 20,666 91,171 127,276 17,745 145,021
Depreciation and
amortization 6,086 2,343 8,429 14,673 2,689 17,362
Merger,
restructuring
and other
unusual charges -- 1,707 1,707 38,005 -- 38,005
--------- ---------- --------- --------- ---------- ---------
Income (loss)
from operations (7,451) 6,349 (1,102) 1,073 7,899 8,972
Other expense, net (759) (650) (1,409) (9,206) (41) (9,247)
--------- ---------- --------- --------- ---------- ---------
Income (loss)
before income
taxes (8,210) 5,699 (2,511) (8,133) 7,858 (275)
Income tax
benefit (2,892) (2,234) (5,126) (2,589) -- (2,589)
--------- ---------- --------- --------- ---------- ---------
(expense)
Net income (loss) $ (11,102) $ 3,465 $ (7,637) $ (10,722) $ 7,858 $ (2,864)
========= ========== ========= ========= ========== =========
</TABLE>
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
------------------------------------------------------------------------------------------
1996 1997
------------------------------------------ -----------------------------------------
MANAGED EMERGENCY MANAGED EMERGENCY
CARE DEPARTMENT CARE DEPARTMENT
BUSINESS BUSINESS TOTAL BUSINESS BUSINESS TOTAL
--------- ---------- --------- --------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
Operating
revenue 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Medical services
expense 77.7% 69.2% 75.6% 70.4% 74.7% 71.1%
General and
administrative
expense 22.8% 20.5% 22.2% 20.8% 15.8% 20.0%
Depreciation and
amortization 2.0% 2.3% 2.1% 2.4% 2.4% 2.4%
Merger,
restructuring
and other
unusual charges -- 1.7% .4% 6.2% -- 5.3%
--------- ---------- --------- --------- ---------- ---------
Income (loss)
from operations (2.5%) 6.3% (0.3%) 0.2% 7.1% 1.2%
Other expense, net (0.2%) (0.6%) (0.3%) (1.5%) (0.1%) (1.3%)
--------- ---------- --------- --------- ---------- ---------
Income (loss)
before income
taxes (2.7%) 5.7% (0.6%) (1.3%) 7.0% (0.1%)
Income tax
benefit (expense) (0.9%) (2.2%) (1.2%) (0.4%) -- (0.4%)
--------- ---------- --------- --------- ---------- ---------
Net income (loss) (3.6%) 3.5% (1.8%) (1.7%) 7.0% (0.5%)
========= ========== ========= ========= ========== =========
</TABLE>
12
<PAGE> 13
MANAGED CARE BUSINESS
THREE MONTHS ENDED SEPTEMBER 30, 1996 AND SEPTEMBER 30, 1997
Operating Revenue - The Company's managed care business operating revenue
increased to $200.9 million for the three months ended September 30, 1997 from
$131.2 million for the three months ended September 30, 1996. The revenue
increase resulted primarily from the increase in average enrollment for the
quarter to 948,000 for the three months ended September 30, 1997. At September
30, 1997 compared to September 30, 1996, enrollment increases resulted primarily
from the addition of (i) approximately 51,000 enrollees in California as a
result of acquisitions (excluding pooling transactions), (ii) approximately
144,000 enrollees in Arizona as a result of acquisitions (excluding pooling
transactions) and approximately 17,000 enrollees as a result of internal growth
in Arizona, and (iii) approximately 43,000 enrollees in Florida as a result of
internal growth. For the three months ended September 30, 1997, the Company
generated fee-for-service revenue, net of contractual deductions, of $32.9
million compared to fee-for-service revenue, net of contractual deductions, for
the three months ended September 30, 1996 of $11.8 million. The increase in
fee-for-service revenue is primarily a result of the Company's recent
acquisitions, as these companies have historically had greater fee-for-service
revenue than the Company. This trend is not expected to continue as (i) the
Company renegotiates contracts with existing payors to move from fee-for-service
to capitation and (ii) the Company enters into new Payor contracts on a
capitated basis.
Medical Services Expense - Medical services expense for the three months
ended September 30, 1997 was $139.3 million or 69.3% of managed care business
operating revenue as compared to $104.5 million or 79.7% of such operating
revenue for the three months ended September 30, 1996. The decrease in medical
services expense as a percent of operating revenue resulted primarily from more
effective utilization of physician services (both primary care and specialist),
the increase in subcapitation of selected specialists and a continued decline in
hospital utilization.
General and Administrative Expense - General and administrative expense for
the three months ended September 30, 1997 was $39.1 million or 19.4% of managed
care business operating revenue as compared to $28.3 million or 21.6% of such
operating revenue for the comparable period in 1996. The percentage decrease
resulted from integration of acquired companies, achievement of synergies and an
increase in efficiencies.
Depreciation and Amortization Expense - Depreciation and amortization
expense for the three months ended September 30, 1997 was $3.4 million or 1.7%
of managed care business operating revenue as compared to $2.5 million or 1.9%
of such operating revenue for the comparable period in 1996.
Merger, Restructuring and Other Unusual Charges - During the third quarter
of 1997, there were no merger, restructuring or other unusual charges incurred
by the managed care business of the Company. Such charges were approximately
$1.7 million for the three months ended September 30, 1996.
Income (Loss) from Operations - For the three months ended September 30,
1997, the managed care business of the Company generated income from operations
of $19.2 million as compared to a loss from operations of $4.1 million for the
three months ended September 30, 1996. The increase in managed care business
income from operations for the three months ended September 30, 1997, results
primarily from the increase in average enrollment, growth through acquisitions
and reduction in operating expenses through increased efficiencies.
NINE MONTHS ENDED SEPTEMBER 30, 1996 AND SEPTEMBER 30, 1997
Operating Revenue - The Company's managed care business operating revenue
increased to $611.8 million for the nine months ended September 30, 1997 from
$309.8 million for the nine months ended September 30, 1996. The revenue
increase resulted primarily from the increase in average enrollment for the
quarter to 943,000 for the three months ended September 30, 1997. At September
30, 1997 compared to September 30, 1996, enrollment increases resulted primarily
from the addition of (i) approximately 51,000 enrollees in California as a
result of acquisitions (excluding pooling transactions), (ii) approximately
144,000 enrollees in Arizona as a result of acquisitions (excluding pooling
transactions) and approximately 17,000 enrollees as a result of internal growth
in Arizona, and (iii) approximately 43,000 enrollees in Florida as a result of
internal growth. For the nine months ended September 30, 1997, the Company
generated fee-for-service revenue, net of contractual deductions, of $99.3
million compared to fee-for-service revenue, net of contractual deductions, for
the nine months ended September 30, 1996 of $22.6 million. The increase in
fee-for-service revenue is primarily a result of the Company's recent
acquisitions, as these companies have historically had greater fee-for-
13
<PAGE> 14
service revenue than the Company. This trend is not expected to continue as (i)
the Company renegotiates contracts with existing payors to move from
fee-for-service to capitation and (ii) the Company enters into new Payor
contracts on a capitated basis.
Medical Services Expense - Medical services expense for the nine months
ended September 30, 1997 was $430.8 million or 70.4% of managed care business
operating revenue as compared to $240.6 million or 77.7% of such operating
revenue for the nine months ended September 30, 1996. The decrease in medical
services expense as a percent of operating revenue resulted primarily from more
effective utilization of physician services (both primary care and specialist),
increase in subcapitation of selected specialists and continued decline in
hospital utilization.
General and Administrative Expense - General and administrative expense for
the nine months ended September 30, 1997 was $127.3 million or 20.8% of managed
care business operating revenue as compared to $70.5 million or 22.8% of such
operating revenue for the comparable period in 1996. The percentage decrease
resulted from integration of acquired companies, achievement of synergies and an
increase in efficiencies.
Depreciation and Amortization Expense - Depreciation and amortization
expense for the nine months ended September 30, 1997 was $14.7 million or 2.4%
of managed care business operating revenue as compared to $6.1 million or 2.0%
of such operating revenue for the comparable period in 1996.
Merger, Restructuring and Other Unusual Charges - During the first nine
months of 1997, the managed care business of the Company incurred approximately
$38.0 million in merger, restructuring and other unusual charges. Approximately
$36.8 million related to costs of legal fees, accounting fees, investment
bankers' fees, severance payments, lease payments and other costs associated
with the merger with AHI (the "AHI Merger") completed in March 1997. As the AHI
Merger was accounted for as a pooling of interests, generally accepted
accounting principles require that transaction costs be expensed in the period
in which the merger is consummated. Approximately $24.4 million arose from the
costs of severance payments, facilities and equipment lease terminations and
other costs associated with consolidating facilities and reducing staffing as a
result of the AHI Merger. Approximately $5.6 million of the charges resulted
from other related costs associated with the AHI Merger. Approximately $1.5
million related to miscellaneous unusual charges. Such charges were
approximately $1.7 million for the nine months ended September 30, 1996.
Income (Loss) from Operations - For the nine months ended September 30,
1997, the managed care business of the Company generated income from operations
of $1.1 million including merger, restructuring and other unusual charges.
Excluding such merger, restructuring and other unusual charges, for the nine
months ended September 30, 1997 income from operations was $39.1 million as
compared to a loss from operations of $7.5 million for the nine months ended
September 30, 1996. The increase in managed care business income from
operations, excluding merger, restructuring and other unusual charges, for the
nine months ended September 30, 1997, results primarily from the increase in
average enrollment, growth through acquisitions and reduction in operating
expenses through increased efficiencies.
EMERGENCY DEPARTMENT BUSINESS
THREE MONTHS ENDED SEPTEMBER 30, 1996 AND SEPTEMBER 30, 1997
Operating Revenue - Emergency department business operating revenue
consists of gross patient revenue, net of contractual deductions, plus other
revenue, which consists principally of hospital subsidy payments, flat-rate
hospital contract revenue and non-patient generated revenues. Operating revenue
increased to $39.8 million for the three months ended September 30, 1997 from
$34.4 million for the three months ended September 30, 1996.
Medical Services Expense - Medical services expense increased to $30.2
million for the three months ended September 30, 1997 from $24.5 million for the
three months ended September 30, 1996 due primarily to the increase in the
number of healthcare professionals under contract, resulting from the increase
in the number of the Company's emergency department contracts, as well as
negotiated increases in fees paid to certain healthcare professionals. Medical
services expense as a percentage of emergency department business operating
revenue was 76.0% for the three months ended September 30, 1997 compared to
71.3% of such operating revenue for the three months ended September 30, 1996.
The increase in medical costs as a percentage of operating revenue for the three
months ended September 30, 1997 results from the inclusion of certain primary
care medical groups, which experienced a lower medical loss ratio than the
emergency department business, in the three months ended September 30, 1996 and
14
<PAGE> 15
not in the three months ended September 30, 1997. These medical groups are now
included in the Company's managed care business segment. The medical services
expense as a percentage of operating revenue for the emergency department
business has remained stable from period to period.
General and Administrative Expense - General and administrative expense was
$6.0 million or 15.1% of emergency department business operating revenue for the
three months ended September 30, 1997 as compared to $6.0 million or 17.4% of
such operating revenue for the corresponding period of the prior year. The
decrease in general and administrative expense as a percentage of emergency
department business operating revenue is primarily attributable to internal
growth without added administrative infrastructure and reductions in expense as
a result of the merger with Sterling.
Depreciation and Amortization Expense - Depreciation and amortization
expense was $1.0 million or 2.4% of emergency department business operating
revenue for the three months ended September 30, 1997 as compared to $0.8
million or 2.4% of such operating revenue for the corresponding period of the
prior year.
Income from Operations - For the three months ended September 30, 1997, the
emergency department business of the Company generated income from operations of
$2.6 million as compared to $1.3 million for the three months ended September
30, 1996. The increase in emergency department business income from operations
for the three months ended September 30, 1997, results primarily from the
increase in emergency department contracts, internal growth and reduction in
operating expenses through increased efficiencies.
NINE MONTHS ENDED SEPTEMBER 30, 1996 AND SEPTEMBER 30, 1997
Operating Revenue - Emergency department business operating revenue
consists of gross patient revenue, net of contractual deductions, plus other
revenue, which consists principally of hospital subsidy payments, flat-rate
hospital contract revenue and non-patient generated revenues. Operating revenue
increased to $112.0 million for the nine months ended September 30, 1997 from
$100.8 million for the nine months ended September 30, 1996.
Medical Services Expense - Medical services expense increased to $83.7
million for the nine months ended September 30, 1997 from $69.7 million for the
nine months ended September 30, 1996 due primarily to the increase in the number
of healthcare professionals under contract, resulting from the increase in the
number of the Company's emergency department contracts, as well as negotiated
increases in fees paid to certain healthcare professionals. Medical services
expense as a percentage of emergency department business operating revenue was
74.7% for the nine months ended September 30, 1997 compared to 69.2% of such
operating revenue for the nine months ended September 30, 1996. The increase in
medical costs as a percentage of operating revenue for the nine months ended
September 30, 1997 results from the inclusion of certain primary care medical
groups, which experienced a lower medical loss ratio than the emergency
department business, in the nine months ended September 30, 1996 and not in the
nine months ended September 30, 1997. These medical groups are now included in
the Company's managed care business segment. The medical services expense as a
percentage of operating revenue for the emergency department business has
remained stable from period to period.
General and Administrative Expense - General and administrative expense was
$17.7 million or 15.8% of emergency department business operating revenue for
the nine months ended September 30, 1997 as compared to $20.7 million or 20.5%
of operating revenue for the corresponding period of the prior year. The
decrease in general and administrative expense as a percentage of emergency
department business operating revenue is primarily attributable to internal
growth without added administrative infrastructure and reductions in expense as
a result of the merger with Sterling.
Depreciation and Amortization Expense - Depreciation and amortization
expense was $2.7 million or 2.4% of emergency department business operating
revenue for the nine months ended September 30, 1997 as compared to $2.3 million
or 2.3% of operating revenue for the corresponding period of the prior year.
Income from Operations - For the nine months ended September 30, 1997, the
emergency department business of the Company generated income from operations of
$7.9 million as compared to $6.3 million for the nine months ended September 30,
1996. The increase in emergency department business income from operations for
the nine months ended September 30, 1997, results primarily from the increase in
emergency department contracts, internal growth and reduction in operating
expenses through increased efficiencies.
15
<PAGE> 16
QUARTERLY RESULTS
The following table presents financial information for the eight quarters
ended September 30, 1997. In the opinion of management, this information has
been prepared on the same basis as the audited consolidated financial statements
and all necessary adjustments, consisting only of normal recurring adjustments
(unless otherwise noted), have been included in the amounts presented below to
present fairly the quarterly results when read in conjunction with the audited
consolidated 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. All amounts in the following table are in
thousands and include the financial results of AHI, HealthCap and Axminster for
all periods presented.
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31, JUNE 30, SEPTEMBER 30,
1995 1996 1996 1996
------------ --------- --------- -------------
<S> <C> <C> <C> <C>
Operating revenue $ 93,657 $ 113,836 $ 131,152 $ 165,527
Medical services
expense 67,062 81,747 99,556 129,007
General and
administrative
expense 24,594 26,551 30,384 34,236
Depreciation and
amortization 1,978 2,431 2,707 3,291
Merger,
restructuring
and other
unusual charges 1,590 -- -- 1,707
------------ --------- --------- -------------
Income (loss)
from operations (1,567) 3,107 (1,495) (2,714)
Other income
(expense) 234 (138) (529) (742)
------------ --------- --------- -------------
Income (loss)
before taxes (1,333) 2,969 (2,024) (3,456)
Income tax
(expense) (554) (1,160) (2,015) (1,951)
------------ --------- --------- -------------
benefit
Net income (loss) $ (1,887) $ 1,809 $ (4,039) $ (5,407)
============ ========= ========= =============
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31, JUNE 30, SEPTEMBER 30,
1996 1997 1997 1997
------------ --------- --------- -------------
<S> <C> <C> <C> <C>
Operating revenue $ 192,137 $ 234,680 $ 248,546 $ 240,623
Medical services
expense 154,488 167,712 177,294 169,483
General and
administrative
expense 49,650 50,689 49,266 45,066
Depreciation and
amortization 4,684 6,157 6,891 4,314
Merger,
restructuring
and other
unusual charges 50,865 36,834 1,171 --
------------ --------- --------- -------------
Income (loss)
from operations (67,550) (26,712) 13,924 21,760
Other income
(expense) (2,657) (3,219) (868) (5,160)
------------ --------- --------- -------------
Income (loss)
before taxes (70,207) (29,931) 13,056 16,600
Income tax
(expense) 4,035 8,110 (4,758) (5,941)
------------ --------- --------- -------------
benefit
Net income (loss) $ (66,172) $ (21,821) $ 8,298 $ 10,659
============ ========= ========= =============
</TABLE>
Operating revenue 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 distributions which generally occur in the second and third quarters
of the year after which they are estimated. From time to time, final settlements
may 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.
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 FPA generally
receives capitation revenue prior to paying 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. Fee-for-service revenues also negatively impact cash flow
because payment for services rendered is generally not collected until 90 to 120
days after the service is provided.
At September 30, 1997, the Company had cash, cash equivalents and
marketable securities of $29.5 million and a working capital surplus (current
assets in excess of current liabilities) of $41.4 million compared to cash, cash
equivalents and marketable securities of $56.3 million and working capital
deficit of $44.7 million at December 31, 1996.
16
<PAGE> 17
During the nine months ended September 30, 1997, non-operating sources of
cash include advances on the Credit Agreement (as described below) of
approximately $187.8 million, proceeds of approximately $5.5 million from the
exercise by the underwriters of the overallotment of convertible subordinated
debentures, issuance of a note payable of approximately $18.2 million, and
proceeds from the exercise of stock options and warrants of approximately $5.5
million. Non-operating uses of cash include the purchase of property and
equipment for approximately $12.3 million and the payment of approximately
$177.6 million in long-term debt.
At September 30, 1997, approximately 56% of the Company's current
liabilities consist of amounts accrued as payable to specialty care physicians,
ancillary providers, hospital and other providers of medical services. 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 claims
payable, including incurred but not reported claims, from approximately $104.3
million at December 31, 1996 to $110.8 million at September 30, 1997 resulted
primarily from increased membership and a shift in Payor mix of enrollees in
which enrollees incurred varying levels of IBNR claims.
On June 30, 1997, the Company entered into a credit agreement for a $175
million three-year revolving line of credit ("Line of Credit") and a $100
million four and one-quarter year term loan ("Term Loan") (collectively, the
"Credit Agreement"). A maximum of $155 million and $30 million of the proceeds
of the Line of Credit can be used to refinance debt and to secure the Company's
capitation deposits, respectively. The remaining proceeds of the Line of Credit
can be used for working capital. The proceeds of the Term Loan may be used to
refinance debt. The borrowings bear interest based on the prime rate plus 50-75
basis points or the Interbank Eurodollar rate plus 150-175 basis points, as
defined in the Credit Agreement. The Credit Agreement contains customary terms,
events of default and covenants (including financial covenants) which, among
other things, limit payment of cash dividends, the consummation of certain
acquisitions and the incurrence of additional debt. The obligations of the
Company under the Credit Agreement are secured by the assets of the Company and
the capital stock and assets of its subsidiaries.
During 1996, the Company entered into a $55.0 million credit, security,
guarantee and pledge agreement with four 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 2-1/2%, 2-3/4% or 3%, or prime rate plus 1%, 1-1/4% or 1-1/2%,
as defined in the agreement. At December 31, 1996, the Company had borrowed the
maximum of $55.0 million under this agreement. At June 30, 1997, this agreement
was paid in full in conjunction with the entering into of the Credit Agreement.
In December 1996, the Company issued $75.0 million of convertible
subordinated debentures, which resulted in net proceeds to the Company of
approximately $73.0 million. The debentures bear interest at 6-1/2%, payable
semiannually, and are convertible into shares of the Company's common stock at
$25.95 per share. The debentures are redeemable by the Company after December
20, 1999. Upon the occurrence of a Repurchase Event, as defined in the
debentures, each holder has the right to require repayment of the debentures at
100% of the principal amount plus accrued interest. In January, 1997, the
underwriters exercised their overallotment option and purchased an additional
$5.5 million of the debentures with identical terms.
The Company believes that its cash on hand, anticipated cash flows from its
operations and financings available under the Credit Agreement will be
sufficient to meet the Company's operating capital needs through 1997. The
Company may obtain additional financing to support planned expansion through an
increase of its credit facilities or through other potential financing
alternatives, including private and public offerings of debt and equity-related
securities. There can be no assurance that the Company will be able to obtain
such an increase to its credit facility or that it will be able to issue debt or
equity-related securities on terms satisfactory to it. 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.
17
<PAGE> 18
FORWARD-LOOKING STATEMENTS
Certain statements contained in this Quarterly Report on Form 10Q are
forward-looking. Although the Company believes that its expectations are based
on reasonable assumptions within the bounds of its knowledge of its business and
operations, there can be no assurance that actual results will not differ
materially from its expectations. Factors that could cause actual results to
differ from expectations include the difficulty in controlling healthcare costs,
integrating new operations from acquired companies and the possible negative
effects of prospective healthcare reform. For other important factors that may
cause actual results to differ materially from expectations and underlying
assumptions, see reports by FPA Medical Management, Inc. filed with the
Securities and Exchange Commission.
ITEM 4. Submission of matters to a Vote of Security Holders
The information required by this Item was included in the Company's
Quarterly Report on Form 10-Q for the quarter ended June 30, 1997.
ITEM 6. Exhibits And Reports On Form 8-K
(b) Reports on Form 8-K: The Company filed the following Current Report on
Form 8-K since June 30, 1997:
DATE OF REPORT ITEMS REPORTED
-------------- --------------
July 31, 1997 7
18
<PAGE> 19
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)
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ SETH FLAM Chief Executive Officer November 14, 1997
- ----------------------------------- (Principal Executive officer)
Seth Flam
/s/ STEVEN M. LASH Chief Financial Officer November 14, 1997
- ----------------------------------- (Principal Financial officer)
Steven M. Lash
</TABLE>
19
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JUL-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 28,256,221
<SECURITIES> 1,195,990
<RECEIVABLES> 198,469,119
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 238,985,423
<PP&E> 44,464,414
<DEPRECIATION> 0
<TOTAL-ASSETS> 650,435,248
<CURRENT-LIABILITIES> 197,590,731
<BONDS> 0
<COMMON> 68,873
0
0
<OTHER-SE> 142,425,197
<TOTAL-LIABILITY-AND-EQUITY> 650,435,248
<SALES> 0
<TOTAL-REVENUES> 240,622,434
<CGS> 0
<TOTAL-COSTS> 169,483,677
<OTHER-EXPENSES> 49,379,311
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (5,159,645)
<INCOME-PRETAX> 16,599,801
<INCOME-TAX> (5,941,059)
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 10,658,742
<EPS-PRIMARY> 0.29
<EPS-DILUTED> 0.00
</TABLE>
