<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 MARCH 31, 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 MAY 12, 1997 THERE WERE OUTSTANDING 30,867,750 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
Consolidated Balance Sheets............................................... 1
Consolidated Statements of Operations (Unaudited)......................... 2
Consolidated Statements of Cash Flows (Unaudited)......................... 3
Notes to Consolidated Financial Statements................................ 4
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations..................................................... 5
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
</TABLE>
<PAGE> 3
ITEM 1. Financial Statements
FPA MEDICAL MANAGEMENT, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS [1]
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1996 1997
------------- -------------
(UNAUDITED)
<S> <C> <C>
ASSETS
- ------
Current Assets:
Cash and cash equivalents $ 15,471,770 $ 20,135,507
Marketable securities 40,000,000 15,060,856
Accounts receivable - net of allowance for uncollectible accounts 106,298,672 133,567,261
Accounts receivable - other 25,095,247 25,215,528
Notes receivable from affiliate 512,822 --
Prepaid expenses and other assets 6,498,174 6,740,990
Capitation deposit 15,409,771 20,947,369
Deferred income tax asset 3,478,751 12,043,116
------------- -------------
Total current assets 212,765,207 233,710,627
Property and equipment - net of accumulated depreciation 46,495,863 41,714,485
Restricted cash and deposits 488,535 500,000
Goodwill - net of accumulated amortization 295,594,009 301,358,247
Intangible assets - net of accumulated amortization 6,667,269 5,456,098
Investment in GLHP 4,994,900 4,994,900
Deferred income tax asset 3,189,665 2,736,327
Other assets 9,468,006 8,452,417
------------- -------------
Total $ 579,663,454 $ 598,923,101
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
Current liabilities:
Accounts payable and accrued expenses $ 62,003,039 $ 78,191,686
Claims payable, including incurred but not reported claims 97,688,268 127,286,239
Accrued payroll and related liabilities 3,880,272 12,099,013
Income tax payable 2,294,159 --
Other current liabilities 13,218,704 13,099,616
Current portion of accrued liability for professional liability claims 1,297,790 1,147,878
Long-term debt, current portion 70,474,667 74,731,037
------------- -------------
Total current liabilities 250,856,899 306,555,469
Long-term debt, net of current portion 185,889,219 171,775,894
Accrued liability for professional liability claims, net of current portion 4,217,000 3,597,000
Other long-term liabilities 4,325,862 350,793
------------- -------------
Total liabilities 445,288,980 482,279,156
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, 30,596,218 and
30,856,155 shares issued and outstanding at December 31, 1996
and March 31, 1997, respectively 61,192 61,712
Additional paid-in capital 201,282,914 202,611,195
Stock payable 534,600 --
Due from stockholder (401,000) --
Accumulated deficit (67,103,232) (86,028,962)
------------- -------------
Total stockholders' equity 134,374,474 116,643,945
------------- -------------
Total $ 579,663,454 $ 598,923,101
============= =============
</TABLE>
See notes to consolidated financial statements.
[1] These financial statements include the balances of AHI Healthcare Systems,
Inc. for all periods presented.
1
<PAGE> 4
FPA MEDICAL MANAGEMENT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) [1]
<TABLE>
<CAPTION>
THREE MONTHS ENDED
--------------------------------------
MARCH 31, 1996 MARCH 31, 1997
------------- -------------
<S> <C> <C>
Managed care revenue $ 66,455,352 $ 157,314,519
Fee-for-service revenue, net of contractual deductions 37,497,463 65,525,095
------------- -------------
Operating revenue 103,952,815 222,839,614
Expenses:
Medical services expense 74,725,588 158,105,080
------------- -------------
29,227,227 64,734,534
General and administrative expense 26,477,739 51,705,602
Merger, restructuring and other unusual charges -- 36,833,586
------------- -------------
Income (loss) from operations 2,749,488 (23,804,654)
Other income (expense):
Interest and other income 510,858 934,664
Interest expense (684,331) (4,166,767)
------------- -------------
Total other income (expense) (173,473) (3,232,103)
------------- -------------
Income (loss) before income taxes 2,576,015 (27,036,757)
Income tax (expense) benefit (1,159,683) 8,111,027
------------- -------------
Net income (loss) $ 1,416,332 $ (18,925,730)
============= =============
Net income (loss) per share $ .05 $ (0.59)
============= =============
Weighted average shares outstanding 25,814,913 32,288,183
============= =============
</TABLE>
See notes to consolidated financial statements.
[1] These financial statements include the balances of AHI Healthcare Systems,
Inc. for all periods presented.
2
<PAGE> 5
FPA MEDICAL MANAGEMENT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) [1]
<TABLE>
<CAPTION>
THREE MONTHS ENDED
------------------
MARCH 31, 1996 MARCH 31, 1997
-------------- --------------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 1,416,332 $(18,925,730)
Adjustments to reconcile net income (loss) to net cash
used by operating activities:
Depreciation and amortization 2,375,785 5,865,269
Imputed interest on notes payable 22,475 --
Changes in assets and liabilities:
Accounts receivable (12,351,446) (27,388,870)
Income tax receivable/payable 1,009,570 --
Capitation deposit -- (5,537,598)
Deferred income taxes (25,110) (10,405,186)
Accounts payable and accrued expenses (1,209,942) 16,188,647
Claims payable, including incurred but not reported claims 8,590,460 23,737,238
Accrued liability for professional liability claims -- (769,912)
Accrued payroll and related liabilities 71,188 8,218,741
Prepaid expenses and other (1,585,631) (1,974,057)
------------ ------------
Total adjustments (3,102,651) 7,934,272
------------ ------------
Net cash used by operating activities (1,686,319) (10,991,458)
Cash flows from investing activities:
Purchase of property and equipment (2,207,334) (3,263,073)
Payments for intangible assets (1,007,580) --
Net payments (to) from affiliate (306,535) --
Net sale of marketable securities 5,149,845 24,939,144
Acquisitions, net of cash required (11,270,677) --
------------ ------------
Net cash provided (used) by investing activities (9,642,281) 21,676,071
Cash flows from financing activities:
Proceeds from merger, net 1,945 --
Issuance of notes payable 8,400,000 8,176,152
Payments on long-term debt (3,560,516) (15,392,229)
Net payments under bank line of credit (788,325) --
Proceeds from exercise of stock options and warrants 738,794 1,195,201
Increase in bank overdrafts 214,395 --
------------ ------------
Net cash provided (used) by financing activities 5,006,293 (6,020,876)
------------ ------------
Net increase (decrease) in cash (6,322,307) 4,663,737
Cash, beginning of period 34,780,225 15,471,770
------------ ------------
Cash, end of period $ 28,457,918 $ 20,135,507
============ ============
Supplemental cash flow information
Cash paid for interest $ 413,695 $ 2,431,388
Cash paid for income taxes 44,740 --
Equipment acquired under capital leases 247,901 --
Common stock issued in connection with acquisitions 420,000 --
Effects of acquisitions:
Fair value of assets acquired 24,310,738 8,778,943
Liabilities assumed 13,040,061 8,778,943
------------ ------------
Net cash paid for acquisitions $ 11,270,677 $ --
============ ============
</TABLE>
See notes to consolidated financial statements.
[1] These financial statements include the balances of AHI Healthcare Systems,
Inc. for all periods presented.
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 months ended March 31,
1996 and March 31, 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.
Consolidation of Subsidiaries - 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 balances of AHI Healthcare
Systems, Inc. ("AHI") for all periods presented (see Note 2).
Net Income per Common Share - Net income per common 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
poolings of interests.
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 first quarter of 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 completed the merger (the "Merger") of FPA
Acquisition Corp., a Delaware corporation and a wholly-owned subsidiary of FPA,
with and into AHI. Pursuant to the Merger, AHI became a wholly-owned subsidiary
of FPA and each outstanding share of AHI Common Stock was exchanged for .391
shares of FPA Common Stock. The shares of FPA Common Stock issued to the AHI
stockholders were registered on a Registration Statement on Form S-4 filed under
the Securities Act of 1933, as amended. The Merger was treated as a tax-free
reorganization and accounted for as a pooling of interests.
4
<PAGE> 7
ITEM 2. Management's Discussion And Analysis Of Financial Condition And Results
Of Operations.
GENERAL
FPA Medical Management, Inc., its subsidiaries and the Professional
Corporations derive substantially all of their operating revenue from (i) the
payments made by health maintenance organizations or other prepaid health
insurance plans (collectively, "Payors") to the Professional Corporations for
managed care medical services, (ii) fee-for-service revenues for 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 9.6% and 22.3% for the three
months ended March 31, 1996 and March 31, 1997, respectively, of managed care
business operating revenue. Revenue under outpatient capitation contracts
represented 84.5% and 61.9% for the three months ended March 31, 1996 and March
31, 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 its subsidiaries.
These revenues are presented net of contractual deductions and represented 5.9%
and 15.8% for the three months ended March 31, 1996 and March 31, 1997,
respectively, of managed care business operating revenue.
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 for on either a discounted fee-for-service or capitation
basis. Managed care business medical services expense paid for on a capitation
basis (for certain primary care and specialty care services) or fixed salary
basis totaled 48.1% and 35.8% for the three months ended March 31, 1996 and
March 31, 1997, respectively, of managed care business operating revenues, with
the remainder of medical services expense (for primary care, specialty care,
ancillary services, inpatient and outpatient services, lab charges, etc.) paid
for on a discounted fee-for-service or per diem basis.
EMERGENCY DEPARTMENT BUSINESS
Through the emergency department business, the Company provides contract
management and support services primarily to emergency departments. As of March
31, 1997 the Company provided physician practice management services on a
contract basis to 109 emergency departments, one anesthesia department, three
correctional health care facilities and two rural health urgent care clinics
located in 22 states. The Company contracts with approximately 1300 affiliated
physicians who provide certain medical services to approximately 1.4 million
patients annually.
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 each of the three months ended March 31, 1996 and March 31, 1997, 83.2%
of the Company's emergency department operating revenue was earned on a
fee-for-service basis, and the Company emphasized fee-for-service contracts in
its marketing activities.
5
<PAGE> 8
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 and
malpractice insurance and laboratory fees. During the three months ended March
31, 1996 and March 31, 1997, Physician Costs accounted for 93.0% and 94.3%,
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
marketplace 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 Professional Corporations 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 could 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 March 1997, the Company completed its merger with AHI Healthcare Systems,
Inc., which serviced approximately 210,000 enrollees. In January 1996, the
Company acquired three independent practice associations in the Los Angeles,
Ventura and Sacramento regions of California, which now service approximately
76,000 enrollees and include 570 primary care physicians. In June 1996, FPA
acquired Physicians First, Inc., operating 40 medical clinics in Florida,
through which 110 primary care physicians provided services to approximately
80,000 enrollees. In July 1996, the Company acquired two independent practice
associations, one in Arizona and Florida, providing services to approximately
14,000 and 4,000 enrollees, respectively. In October 1996, FPA and Sterling
Healthcare Group, Inc. completed a merger. 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.
Listed below is a breakdown of enrollees, Payors, primary care physicians,
specialty care physicians, and emergency department business contracts
(including anesthesiology, urgent care and correctional facility business
contracts) by region at March 31, 1997.
<TABLE>
<CAPTION>
NUMBER OF NUMBER OF
NUMBER OF NUMBER OF SPECIALTY EMERGENCY
PAYOR PRIMARY CARE CARE DEPARTMENT
ENROLLEES CONTRACTS PHYSICIANS PHYSICIANS CONTRACTS
--------- --------- ---------- ---------- ---------
<S> <C> <C> <C> <C> <C>
California 314,777 53 1,640 5,213 --
Arizona 198,409 5 495 1,101 --
New Jersey 34,257 4 934 447 --
Delaware 9,082 1 76 75 --
South Carolina 8,094 3 186 60 2
North Carolina 14,844 1 152 24 9
Texas 134,044 14 1,254 2,496 15
Florida 110,024 3 539 2,521 8
</TABLE>
6
<PAGE> 9
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
Michigan 33,969 2 476 1,028 7
Louisiana 7,023 2 228 156 17
Mississippi -- -- 102 -- 9
Tennessee -- -- 124 -- 7
Alabama -- -- 123 -- 6
Kentucky -- -- 47 -- 3
Pennsylvania -- -- 351 -- --
Georgia 253 1 237 863 4
Others -- -- 245 -- 22
------- -- ----- ------ ---
Total 864,776 89 7,209 13,984 109
======= == ===== ====== ===
</TABLE>
RESULTS OF OPERATIONS
The following table sets forth for the quarters ended March 31, 1996 and
March 31, 1997 selected financial data expressed as a percentage of operating
revenue.
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
--------------------------------------------------------------------------------------------
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 73.7% 68.1% 71.9% 70.4% 73.6% 71.0%
General and
administrative
expenses 25.9% 24.4% 25.5% 24.0% 19.2% 23.2%
Merger,
restructuring
and other
unusual charges -- -- -- 19.7% -- 16.5%
----- ----- ----- ----- ----- -----
Income (loss)
from operations 0.4% 7.5% 2.6% (14.1%) 7.2% (10.7%)
Other income
(expense) 0.1% (0.7%) (0.1%) (1.7%) (0.1%) (1.4%)
----- ----- ----- ----- ----- -----
Income (loss)
before income taxes 0.5% 6.8% 2.5% (15.8%) 7.1% (12.1%)
Income tax
benefit (expense) (0.4%) (2.7%) (1.1%) 4.3% -- 3.6%
----- ----- ----- ----- ----- -----
Net income (loss) 0.1% 4.1% 1.4% (11.5%) 7.1% (8.5%)
===== ===== ===== ===== ===== =====
</TABLE>
MANAGED CARE BUSINESS
THREE MONTHS ENDED MARCH 31, 1996 AND MARCH 31, 1997
Operating Revenue -- The Company's managed care business operating revenue
increased to $186.8 million for the three months ended March 31,1997 from $70.6
million for the three months ended March 31, 1996. The revenue increase resulted
primarily from the increase in average enrollment for the quarter to 853,000 for
the three months ended March 31, 1997 from 380,000 for the comparable period in
1996. The 1997 increase resulted from the addition of (i) approximately 56,000
enrollees in California primarily as a result of acquisitions, (ii)
approximately 157,000 enrollees in Arizona as a result of a December
1996 acquisition, and approximately 30,000 enrollees as a result of internal
growth (iii) enrollment of 36,000 and 51,000 enrollees, respectively, in the
Mid-Atlantic region and Texas as a result of internal growth, (iv) approximately
84,000 enrollees in Florida as a result of acquisitions and 28,000 enrollees as
a result of internal growth and (v) approximately 31,000 enrollees in other
regions. For the three months ended March 31, 1997, the Company generated net
fee-for-service revenue of $29.5 million
7
<PAGE> 10
compared to net fee-for-service revenue for the three months ended March 31,
1996 of $4.1 million. The growth in fee-for-service revenue is attributable to
the increasing number of medical facilities managed by FPA.
Medical Services Expense - Medical services expense for the three months
ended March 31, 1997 was $131.6 million or 70.4% of managed care business
operating revenue as compared to $52.0 million or 73.7% of such operating
revenue for the three months ended March 31, 1996. The decrease in medical
services expense as a percent of such operating revenue for the three months
ended March 31, 1997 compared to the comparable period in 1996 resulted
primarily from the lower medical loss ratio in the expanding Florida market and
in medical groups in Sacramento and Tucson acquired since the first quarter of
1996.
General and Administrative Expense -- General and administrative expense
for the three months ended March 31, 1997 was $44.8 million or 24.0% of managed
care business operating revenue as compared to $18.3 million or 25.9% of such
operating revenue for the comparable period in 1996, as the Company achieved
economies of scale in its operations.
Merger, Restructuring and Other Unusual Charges - During the first quarter
of 1997, the managed care business of the Company incurred approximately $36.8
million in merger, restructuring and other unusual charges. Approximately $5.3
million related to costs of legal fees, accounting fees, investment bankers'
fees and other costs associated with the Merger. As the 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 Merger.
Approximately $5.6 million of the charges resulted from conformance of
accounting policies and other related costs associated with the Merger.
Approximately $1.5 million related to miscellaneous unusual charges.
Income (Loss) from Operations - For the three months ended March 31, 1997,
the managed care business of the Company generated a loss from operations of
$26.4 million including merger, restructuring and other unusual charges.
Excluding such merger, restructuring and other unusual charges, for the three
months ended March 31, 1997 income from operations was $10.5 million as compared
to income from operations of $0.3 million for the three months ended March 31,
1996.
EMERGENCY DEPARTMENT BUSINESS
THREE MONTHS ENDED MARCH 31, 1996 and 1997
Operating Revenue -- Emergency department business operating revenue
consists of gross patient revenue, net of contractual deductions and estimated
uncollectible accounts, plus other revenue, which consists principally of
hospital subsidy payments, flat-rate hospital contract revenue and non-patient
generated revenues. Operating revenue increased to $36.0 million for the three
months ended March 31, 1997 from $33.3 million for the three months ended March
31, 1996. On a percentage basis, the emergency department business' operating
revenue grew 8.0% in 1997. The increase was primarily attributable to the
increases in the number of the Company's emergency department contracts from 91
at March 31, 1996 to 109 at March 31, 1997.
Medical Services Expense -- Medical services expense increased to $26.5
million for the three months ended March 31, 1997 from $22.7 million for the
three months ended March 31, 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 operating revenue was 73.6% for the three months
ended March 31, 1997 compared to 68.1% for the three months ended March 31,
1996. The increase in medical costs as a percentage of operating revenue results
from the fact that in 1996, the operations of certain primary care centers were
reported
8
<PAGE> 11
under the emergency department business, while in 1997, they are included in the
managed care business, due to a change in the reporting structure of these
medical groups. These medical groups experienced a lower medical loss ratio than
the core emergency department business. The medical loss ratio as a percentage
of operating revenue for the emergency department business has remained stable.
General and Administrative Expense -- General and administrative expense was
$6.9 million for the three months ended March 31, 1997 as compared to $8.1
million or 24.4% of operating revenue for the corresponding period of the prior
year. The decrease in general and administrative expenses as a percentage of
operating revenue is primarily attributable to internal growth without added
administrative infrastructure and reductions in expense as a result of the
Sterling/FPA merger.
Net Income from Operations - For the three months ended March 31, 1997, the
emergency department business of the Company generated income from operations of
$2.6 million as compared to $2.5 million for the three months ended March
31, 1996.
QUARTERLY RESULTS
The following table presents financial information for the eight quarters ended
March 31, 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 numbers in the following table are in
thousands and retroactively include all AHI activity.
<TABLE>
<CAPTION>
QUARTER ENDED
-------------------------------------------------------------------------------------------------------------
June 30, September 30, December 31, March 31, June 30, September 30, December 31, March 31,
1995 1995 1995 1996 1996 1996 1996 1997
-------- ------------- ------------ --------- --------- ------------- ------------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Operating revenue $ 66,984 $ 74,435 $ 86,737 $ 103,953 $ 120,496 $ 154,025 $ 179,692 $ 222,840
Medical services
expense 49,344 53,002 61,487 74,726 91,981 120,477 143,494 158,105
General and
administrative
expenses 17,011 19,033 23,711 26,478 30,141 34,125 48,905 51,706
Merger,
restructuring
and other
unusual charges -- -- 1,590 -- -- 1,707 50,864 36,834
-------- -------- -------- --------- --------- --------- --------- ---------
Income (loss)
from operations 629 2,400 (51) 2,749 (1,626) (2,284) (63,571) (23,805)
Other income
(expense) (523) (839) 67 (173) (571) (762) (2,666) (3,232)
-------- -------- -------- --------- --------- --------- --------- ---------
Income (loss)
before taxes 106 1,561 16 2,576 (2,197) (3,046) (66,237) (27,037)
Income tax
(expense) benefit 281 (970) (554) (1,160) (2,006) (1,949) 4,035 8,111
-------- -------- -------- --------- --------- --------- --------- ---------
Net income (loss) $ 387 $ 591 $ ( 538) $ 1,416 $ (4,203) $ (4,995) $ (62,202) $ (18,926)
======== ======== ======== ========= ========= ========= ========= =========
</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 quarter
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"),
9
<PAGE> 12
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 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 generally lags by 90 to 120 days.
At March 31, 1997, the Company had cash, cash equivalents and marketable
securities of $35.2 million and a working capital deficit (current liabilities
in excess of current assets) of $72.9 million compared to cash, cash equivalents
and marketable securities of $55.5 million and working capital deficit of $38.1
million at December 31, 1996. Of the $72.9 million working capital deficit,
approximately $27.8 million results from the addition of AHI's balance sheet
(which had a working capital deficit of $26.5 million at December 31, 1996),
approximately $35.0 million relates to accrued merger, restructuring and other
unusual charges and approximately $9.0 million relates to increased IBNR claims.
Non-operating sources of cash include 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 $2.6
million, and proceeds from the issuance of stock options and warrants of
approximately $1.2 million. Non-operating uses of cash include the purchase of
property and equipment for approximately $3.3 million and the payment of
approximately $15.4 million in long-term debt.
At March 31, 1997 approximately 41% 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 $97.7
million at December 31, 1996 to $127.3 million at March 31, 1997 resulted
primarily from increased membership and a shift in Payor mix of enrollees in
which enrollees incurred varying levels of IBNR claims.
During 1996, the Company entered into a $55.0 million credit, security,
guarantee and pledge agreement (the "Credit 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 and
March 31, 1997, the Company had borrowed the maximum of $55.0 million under 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 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 and purchased an additional $5.5 million of the
debentures with identical terms.
10
<PAGE> 13
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 1997. The Company intends to obtain additional financing to support
planned expansion through an expansion of a line of credit facility to
approximately $100.0 million 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 increased
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.
FORWARD-LOOKING STATEMENTS
Certain Statements contained in this Quarterly Report are forward-looking.
Although FPA Medical Management, Inc. 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.
11
<PAGE> 14
ITEM 4. Submission of matters to a Vote of Security Holders
At a special meeting of FPA stockholders held on March 17, 1997, two
matters were voted upon by the FPA stockholders. The FPA stockholders adopted
an agreement and plan of merger pursuant to which AHI Healthcare Systems, Inc.
became a wholly-owned subsidiary of FPA. The vote to adopt such agreement and
plan of merger was as follows:
<TABLE>
<CAPTION>
<S> <C>
FOR 15,530,374
AGAINST 38,512
WITHHELD -
ABSTENTIONS 19,024
BROKER NON-VOTES -
</TABLE>
The second matter voted upon was the approval of amendments to the Omnibus
Stock Option Plan to increase the total number of shares of FPA Common Stock
issuable upon exercise of options granted under such plan by 1,500,000 to
6,500,000. The vote to approve such amendment was as follows:
<TABLE>
<CAPTION>
<S> <C>
FOR 13,361,987
AGAINST 2,171,741
WITHHELD -
ABSTENTIONS 54,182
BROKER NON-VOTES -
</TABLE>
ITEM 6. Exhibits And Reports On Form 8-K
(b) Reports on Form 8-K: The Company filed the following Reports on
Form 8-K since December 31, 1996:
Date of Report Items Reported
-------------- --------------
March 17, 1997 2, 7
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)
SIGNATURE TITLE DATE
- --------- ----- ----
/s/ SETH FLAM Chief Executive Officer May 15, 1997
- ---------------------- (Principal Executive officer)
Seth Flams
/s/ STEVEN M. LASH Chief Financial Officer May 15, 1997
- ---------------------- (Principal Financial officer)
Steven M. Lash
13
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<CASH> 20,135,507
<SECURITIES> 15,060,856
<RECEIVABLES> 158,782,789
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 233,710,627
<PP&E> 41,714,485
<DEPRECIATION> 0
<TOTAL-ASSETS> 598,923,101
<CURRENT-LIABILITIES> 306,555,469
<BONDS> 0
<COMMON> 61,712
0
0
<OTHER-SE> 116,582,233
<TOTAL-LIABILITY-AND-EQUITY> 598,923,101
<SALES> 0
<TOTAL-REVENUES> 222,839,614
<CGS> 0
<TOTAL-COSTS> 158,105,080
<OTHER-EXPENSES> 88,539,188
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (3,232,103)
<INCOME-PRETAX> (27,036,757)
<INCOME-TAX> (8,111,027)
<INCOME-CONTINUING> (18,925,730)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (18,925,730)
<EPS-PRIMARY> (.59)
<EPS-DILUTED> (.59)
</TABLE>
