-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: keymaster@town.hall.org Originator-Key-Asymmetric: MFkwCgYEVQgBAQICAgADSwAwSAJBALeWW4xDV4i7+b6+UyPn5RtObb1cJ7VkACDq pKb9/DClgTKIm08lCfoilvi9Wl4SODbR1+1waHhiGmeZO8OdgLUCAwEAAQ== MIC-Info: RSA-MD5,RSA, tN6uqaRbPHs6rNasR0j3aaE5/1lYSZ7bo1Iz+mwqtAHI68Q/5ARzNe+BlHPMSed5 Z3QVuci0/NZ2tUvVacu0EQ== 0000912057-95-003650.txt : 19950517 0000912057-95-003650.hdr.sgml : 19950516 ACCESSION NUMBER: 0000912057-95-003650 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19950331 FILED AS OF DATE: 19950512 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: FOUNDATION HEALTH CORPORATION CENTRAL INDEX KEY: 0000859493 STANDARD INDUSTRIAL CLASSIFICATION: HOSPITAL & MEDICAL SERVICE PLANS [6324] IRS NUMBER: 680014772 STATE OF INCORPORATION: DE FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-10540 FILM NUMBER: 95537903 BUSINESS ADDRESS: STREET 1: 3400 DATA DR CITY: RANCHO CORDOVA STATE: CA ZIP: 95670 BUSINESS PHONE: 9166315000 MAIL ADDRESS: STREET 1: 3400 DATA DRIVE CITY: RANCHO CORDOVA STATE: CA ZIP: 95670 10-Q 1 FORM 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (Mark One) (X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 1995 --------------------------- OR ( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transaction period from ____________ to ____________ Commission File Number 1-10540 ------------------ Foundation Health Corporation ------------------------------------------------------------------ (Exact name of registrant as specified in its charter) Delaware 68-0014772 - ----------------------------------- ------------------------------------ (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 3400 Data Drive, Rancho Cordova, CA 95670 - --------------------------------------- ----------------------------------- (Address of principal executive offices) (Zip Code) (916) 631-5000 - ---------------------------------------------------------- (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ------- ------- Indicate the number of shares outstanding of each of the issuer's classes of common stock as of April 30, 1995: Common Stock, $0.01 par value 57,078,493 - ----------------------------- ------------------------------ Class Number of Shares FOUNDATION HEALTH CORPORATION INDEX TO FORM 10-Q PAGE Part I - Financial Information Item 1 - Financial Statements Consolidated Balance Sheets - March 31, 1995 and June 30, 1994 3 Consolidated Statements of Operations for the Quarters and Nine Months Ended March 31, 1995 and 1994 4 Condensed Consolidated Statements of Cash Flows for the Nine Months Ended March 31, 1995 and 1994 5 Notes to Consolidated Financial Statements 6 - 12 Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations 13 - 19 Part II - Other Information Item 1 - Legal Proceedings 20 Item 6 - Exhibits and Reports on Form 8-K 21 Signature 22 Index to Exhibits 23 PART I - FINANCIAL INFORMATION Item 1. Financial Statements FOUNDATION HEALTH CORPORATION CONSOLIDATED BALANCE SHEETS (In thousands)
March 31, June 30, -------------- -------------- 1995 1994 -------------- -------------- (Unaudited) ASSETS Cash and cash equivalents $ 229,547 $ 165,209 Investments 581,931 600,363 Amounts receivable under government contracts 76,933 136,188 Reinsurance receivable 100,157 122,046 Premium and patient receivables 99,049 93,127 Property and equipment, net 204,546 143,088 Goodwill and other intangible assets, net 407,762 105,535 Deferred income taxes 66,430 44,534 Other assets 141,111 88,418 -------------- -------------- $ 1,907,466 $ 1,498,508 -------------- -------------- -------------- -------------- LIABILITIES AND STOCKHOLDERS' EQUITY Reserves for claims, losses and loss adjustment expenses $ 694,436 $ 615,742 Notes payable and capital leases 190,670 170,108 Amounts payable under government contracts 40,933 50,953 Accrued dividends to policyholders 18,121 30,026 Other liabilities 255,951 209,236 -------------- -------------- 1,200,111 1,076,065 -------------- -------------- STOCKHOLDERS' EQUITY: Common stock and additional paid in capita 514,014 264,976 Retained earnings 205,475 194,800 Net unrealized holding losses, net of tax effect (9,087) -- Common stock held in treasury, at cost (3,047) (37,333) -------------- -------------- 707,355 422,443 -------------- -------------- $ 1,907,466 $ 1,498,508 -------------- -------------- -------------- --------------
See Notes to Consolidated Financial Statements 3 FOUNDATION HEALTH CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS (Dollars in thousands, except per share amounts)
Quarter Ended March 31, Nine Months Ended March 31, ---------------------------- ----------------------------- 1995 1994 1995 1994 -------------- -------------- -------------- -------------- (Unaudited) (Unaudited) Revenues: Commercial premiums $ 427,454 $ 360,259 $ 1,220,031 $ 983,602 Government contracts 40,889 99,549 134,836 526,242 Specialty services revenue 121,882 97,083 379,219 268,808 Patient service revenue, net 12,490 11,852 32,454 31,394 Investment and other income 12,914 10,139 42,013 27,657 -------------- -------------- -------------- -------------- 615,629 578,882 1,808,553 1,837,703 -------------- -------------- -------------- -------------- Expenses: Commercial health care services 330,655 280,494 953,252 768,211 Government contracts health care services 17,308 38,830 46,797 139,022 Government contracts subcontractor costs 12,859 39,377 55,502 268,616 Specialty services costs 102,335 89,791 325,523 256,145 Patient service costs 9,076 10,421 26,332 27,528 Selling, general and administrative 71,632 69,740 218,115 220,004 Amortization and depreciation 11,096 7,281 29,189 20,929 Interest expense 2,854 2,928 8,714 9,696 Acquisition and restructuring costs -- -- 124,822 -- -------------- -------------- -------------- -------------- 557,815 538,862 1,788,246 1,710,151 -------------- -------------- -------------- -------------- Income before income taxes and minority interest 57,814 40,020 20,307 127,552 Provision for income taxes 21,523 15,742 7,370 49,969 Minority interest -- 1,909 2,262 5,598 -------------- -------------- -------------- -------------- Net income $ 36,291 $ 22,369 $ 10,675 $ 71,985 -------------- -------------- -------------- -------------- -------------- -------------- -------------- -------------- Earnings per share $ 0.63 $ 0.46 $ 0.20 $ 1.49 -------------- -------------- -------------- -------------- -------------- -------------- -------------- -------------- Weighted average shares outstanding 57,358,480 49,102,963 53,892,518 48,414,551 -------------- -------------- -------------- -------------- -------------- -------------- -------------- --------------
See Notes to Consolidated Financial Statements 4 FOUNDATION HEALTH CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands)
Nine Months Ended March 31, ------------------------------------ 1995 1994 ---------------- ---------------- (Unaudited) Net cash provided by operating activities $ 197,359 $ 165,849 ---------------- ---------------- Cash flows from investing activities: Acquisition of property and equipment (68,562) (33,655) Purchases of available for sale investments (582,475) -- Sales/maturities of available for sale investments 591,800 -- Purchases of held to maturity investments (29,697) -- Maturities of held to maturity investments 70,205 -- Purchases of short-term investments -- (688,259) Sales/maturities of short-term investments -- 733,882 Purchases of fixed maturity investments -- (193,691) Sales/maturities of fixed maturity investments -- 77,921 (Increase)decrease in goodwill and intangibles (60,488) -- Increase in other assets (27,711) (5,748) Acquisition of businesses (41,874) (80,999) ---------------- ---------------- Net cash used for investing activities (148,802) (190,549) ---------------- ---------------- Cash flows from financing activities: Principal payments on notes payable and capital leases (37,701) (19,144) Proceeds from notes payable and capital leases, plus accrued interest 44,175 443 Proceeds from issuance of common stock 6,169 595 Proceeds from exercise of stock options 4,781 6,979 Tax benefits related to stock options exercised 1,404 2,524 Collection of subscription notes receivable, plus accrued interest -- 108 Dividends paid -- (2,000) Purchase of treasury stock (3,047) (27,429) ---------------- ---------------- Net cash used for financing activities 15,781 (37,924) ---------------- ---------------- Net decrease in cash and cash equivalents 64,338 (62,624) Cash and cash equivalents, beginning of period 165,209 185,664 ---------------- ---------------- Cash and cash equivalents, end of period $ 229,547 $ 123,040 ---------------- ---------------- ---------------- ---------------- Supplemental cash flow disclosure: Interest paid $ 8,389 $ 8,054 ---------------- ---------------- ---------------- ---------------- Income taxes paid $ 24,317 $ 53,572 ---------------- ---------------- ---------------- ---------------- Noncash investing and financing activities: Assumption of stock options $ -- $ 367 ---------------- ---------------- ---------------- ---------------- Unrealized holding gains (losses) $ (68) $ -- ---------------- ---------------- ---------------- ---------------- Capital lease obligations $ -- $ 2,378 ---------------- ---------------- ---------------- ---------------- Acquisition of businesses: Assets acquired $ 386,623 $ 527,892 Liabilities assumed (48,515) (439,128) Amounts held in escrow -- (4,359) Issuance of notes payable (9,600) -- Issuance of common stock (274,017) -- ---------------- ---------------- Cash paid 54,491 84,405 Fees and expenses 6,586 4,479 Less cash acquired (19,203) (7,885) ---------------- ---------------- Net cash paid $ 41,874 $ 80,999 ---------------- ---------------- ---------------- ----------------
See Notes to Consolidated Financial Statements 5 FOUNDATION HEALTH CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) NOTE 1 - BASIS OF PRESENTATION In the opinion of management, the accompanying unaudited consolidated financial statements include all adjustments (which, other than the acquisitions accounted for as pooling of interests, as discussed below, consist only of normal recurring adjustments) necessary for a fair presentation of the consolidated financial position of Foundation Health Corporation (the "Company") and the consolidated results of its operations and its cash flows for the interim periods presented. Although the Company believes that the disclosures in these financial statements are adequate to make the information presented not misleading, certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission ("SEC"). Results of operations for the interim periods are not necessarily indicative of results to be expected for the full year. For further information, refer to the consolidated financial statements and footnotes thereto incorporated by reference in the Company's Annual Report on Form 10-K for the year ended June 30, 1994, the Company's Joint Proxy Statement/Prospectus dated September 30, 1994 included in the Registration Statement on Form S-4 (No. 33-84330) and the restated Statements of Operations contained in the Current Report on Form 8-K filed with the SEC on January 5, 1995. Certain reclassifications have been made to prior year financial statements to conform to current period presentation. NOTE 2 - BUSINESS ACQUISITIONS PURCHASE TRANSACTIONS The following acquisitions have been accounted for under the purchase method of accounting and, accordingly, the operations of the acquired companies have been included in the Company's consolidated financial statements from their respective dates of acquisition. On July 1, 1994, the Company acquired all the outstanding common stock of The Noetics Group and all of the assets of Reviewco for aggregate consideration consisting of the issuance of 378,358 shares of the Company's common stock valued at $16 million, the placing in escrow of 118,236 shares valued at $5 million and cash of $16 million. The release of the escrow shares is subject to the attainment of certain profitability targets by Reviewco. The purchase price resulted in goodwill of $27,773,000. The Noetics Group provides workers' compensation third party administration services for self-funded 6 employers. Reviewco operates a medical bill review and cost-containment business for the workers' compensation industry. On November 10, 1994, the Company acquired all the outstanding common stock of Southern Colorado Health Plan, Inc. ("SCHP"), and its parent corporation for consideration consisting of 241,672 shares of the Company's common stock valued at $8,900,000. The purchase price resulted in goodwill of $6,755,000. At the date of acquisition, SCHP provided health care services to 7,100 members through its HMO based in Pueblo, Colorado. On November 15, 1994, the Company acquired all the outstanding common stock of Community Medical Plan, Inc. ("CMP") and certain affiliated medical centers for aggregate consideration of $32.9 million, consisting of $25 million in cash and the issuance of promissory notes aggregating $7.9 million due November 15, 1995. At the date of acquisition, CMP served approximately 25,000 Medicaid beneficiaries in Florida. The purchase price resulted in goodwill of $32,752,000. On November 1, 1994, the Company issued 13,124,027 shares of its common stock in exchange for all the outstanding common stock of Thomas-Davis Medical Centers, P.C. ("TDMC") (which included TDMC's ownership of 60.5% of the outstanding common stock of Intergroup Healthcare Corporation ("Intergroup")) and 7,577,336 shares for the purchase of the remaining 39.5% of the outstanding common stock of Intergroup (the "Intergroup Minority Interest"). The TDMC acquisition was accounted for as a pooling of interests. The purchase of the Intergroup Minority Interest, which was accounted for as a purchase, was valued at $249,109,000 and resulted in goodwill of $207,371,000. See "Pooling Transactions" below for a description of TDMC and Intergroup. The unaudited proforma combined total revenues, net income and earnings per share of the Company and the Intergroup Minority Interest, assuming the Company had acquired the Intergroup Minority Interest on July 1, 1993, are as follows (in thousands, except per share amounts):
Proforma Quarter Performa Nine Months Ended March 31, Ended March 31, 1994 1995 1994 ---- ---- ---- Total Revenues $578.9 $1808.6 $1837.7 ------ ------- -------- ------ ------- -------- Net Income $ 24.5 $ 11.8 $ 78.2 ------ ------- -------- ------ ------- -------- Earnings Per Share $ 0.44 $ 0.21 $ 1.41 ------ ------- -------- ------ ------- --------
This unaudited proforma information reflects the elimination of the Intergroup Minority Interest and the amortization of the goodwill related to the purchase of the Intergroup Minority Interest. 7 The unaudited proforma results of operations are not necessarily indicative of the combined results that would have occurred had the acquisition taken place on July 1, 1993, nor are they necessarily indicative of results that may occur in the future. Effective January 1, 1995, California Compensation Insurance Company, the Company's workers' compensation subsidiary, ("CalComp") acquired a 50-state licensed property and casualty company for an aggregate purchase price of $13,201,351 consisting of the fair market value of investments and intangible assets which was paid in cash at closing. This company had no insurance business in force at closing and will enable CalComp to geographically expand its managed care workers' compensation products. This acquisition was accounted for as a purchase. No goodwill was recorded as a result of this transaction. POOLING TRANSACTIONS On October 31, 1994, 6,862,051 shares of the Company's common stock were issued in exchange for all the outstanding common stock of CareFlorida Health Systems, Inc. ("Care-Florida"). This acquisition was accounted for as a pooling of interests. At the date of acquisition, CareFlorida had 58,000 HMO members and provided managed care services through its preferred provider organization ("PPO") to 85,000 eligible individuals covered by other funding arrangements. As described above at "Purchase Transactions," on November 1, 1994, 20,701,363 shares of the Company's common stock were issued in exchange for all the outstanding common stock of Intergroup and TDMC, its majority stockholder. In addition, all outstanding Intergroup options were exchanged for options to purchase 500,290 shares of the Company's common stock. TDMC employs approximately 190 physicians who provide health care services to patients in Arizona through 15 primary care centers, five urgent care centers, two behavioral health centers and one surgery center. Intergroup is a managed health care company which arranges for the delivery of a comprehensive range of medical services. At the date of acquisition, these services were provided to 379,000 eligible individuals in Arizona and Utah, primarily through Intergroup's HMO and indemnity insurance subsidiaries. In addition, Intergroup provided managed care services through its Utah PPO to approximately 104,000 individuals covered by other funding arrangements and provided third party administration services to approximately 18,000 individuals in Arizona. In connection with the acquisitions of TDMC, Intergroup and CareFlorida, the Company charged $124.8 million to operations during the quarter ended December 31, 1994 for acquisition and restructuring costs. These one-time costs include $67.5 million in transaction costs which the Company is obligated to pay as a result of the acquisitions and $57.3 million relating to the integration and restructuring of the combined entities. The integration and restructuring costs consist primarily of (i) the write-off of obsolete and duplicate computer hardware and software, (ii) costs associated with terminating leases of duplicate facilities and (iii) severance and other personnel related costs. At March 31, 1995 the liability for unpaid acquisition and restructuring costs was $62.1 million. Management believes that the liability 8 for unpaid acquisition and restructuring costs is adequate to cover remaining acquisition related expenses and planned integration and restructuring activities. In accordance with the pooling of interests method of accounting the Company's consolidated financial statements and notes thereto have been restated to include the results of TDMC (including its 60.5% interest in Intergroup) and CareFlorida for all periods presented. Separate and combined unaudited results of the Company ("FHC"), CareFlorida and TDMC for the periods prior to consummation of the acquisitions are (in thousands):
Quarter Ended Nine Months Ended Four Months Ended March 31, 1994 March 31, 1994 October 31, 1994 -------------- ----------------- ----------------- Total Revenues: FHC $403,559 $1,375,200 $539,322 TDMC 136,067 349,181 195,080 CareFlorida 44,175 124,072 61,503 Reclassifications (4,919) ( 10,750) ( 5,592) -------- ---------- -------- Combined $578,882 $1,837,703 $790,313 -------- ---------- -------- -------- ---------- -------- Net Income: FHC $ 19,589 $ 63,125 $ 26,602 TDMC 539 3,205 2,385 CareFlorida 2,241 5,655 2,497 -------- ---------- -------- Combined $ 22,369 $ 71,985 $ 31,484 -------- ---------- -------- -------- ---------- --------
Certain reclassifications are required to conform the separate results of TDMC and CareFlorida to FHC's presentation. 9 NOTE 3 - INVESTMENTS Investments comprised the following (in thousands):
March 31, 1995 June 30, 1994 -------------- ------------- (Unaudited) (Unaudited) Available for sale $529,602 Held to maturity 52,329 Short-term investments -- $ 25,094 Fixed maturities -- 575,269 -------- -------- $581,931 $600,363 -------- -------- -------- --------
Effective July 1, 1994, the Company adopted Statement of Financial Accounting Standards ("SFAS") No. 115, "Accounting for Certain Investments in Debt and Equity Securities." The adoption of SFAS No. 115 did not have a material effect on the Company's consolidated financial position or results of operations. During the quarter and nine months ended March 31, 1995 the separate component of stockholders' equity representing net unrealized holding losses on investments available for sale decreased by $7.6 million and $0.1 million, net of tax effect. For purposes of calculating realized gains and losses on sales of investments available for sale, the amortized cost of each investment sold is used. As of March 31, 1995, the amortized cost, fair value, unrealized holding gains and unrealized holding losses of the Company's debt and equity investments classified as available for sale and held to maturity are as follows (in thousands): 10
AVAILABLE FOR SALE INVESTMENTS: - ------------------------------- At Fair Value At Amortized Cost ------------------------------------------------ ------------------------------------------------- Years to Maturity Years to Maturity ------------------------------------------------ ------------------------------------------------- Less One Over Five Over Less One Over Five Over Than to Five to Ten Than to Five to Ten One Year Years Ten Years Years One Year Years Ten Years Years --------- --------- --------- --------- --------- --------- --------- --------- U.S. government and agencies $ 5,536 $ 87,513 $ 13,067 $ 213 $ 5,552 $ 90,138 $ 13,721 $ 203 Obligations of states and other political subdivisions 79,472 96,037 136,035 84,183 79,662 97,348 140,638 85,750 Corporate securities 300 3,426 3,630 650 301 3,519 3,909 705 Equity securities 3,770 4,089 Other debt securities 15,770 15,770 --------- --------- --------- --------- --------- --------- --------- --------- Total available for sale $ 104,848 $ 186,976 $ 152,732 $ 85,046 $ 105,374 $ 191,005 $ 158,268 $ 86,658 --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- HELD TO MATURITY INVESTMENTS: - ----------------------------- At Fair Value At Amortized Cost ------------------------------------------------ ------------------------------------------------- Years to Maturity Years to Maturity ------------------------------------------------ ------------------------------------------------- Less One to Over Five Over Less One to Over Five Over Than Five to Ten Than Five to Ten One Year Years Ten Years Years One Year Years Ten Years Years --------- --------- --------- --------- --------- --------- --------- --------- U.S. government and agencies $ 9,498 $ 5,753 $ 2,590 $ 9,377 $ 5,795 $ 2,646 Obligations of states and other political subdivisions 10,786 8,355 5,867 $ 3,617 10,797 8,451 5,997 $ 3,726 Corporate securities 360 100 641 347 100 597 Other debt securities 4,396 100 4,396 100 --------- --------- --------- --------- --------- --------- --------- --------- Total Held to Maturity $ 24,680 $ 14,468 $ 8,657 $ 4,258 $ 24,570 $ 14,593 $ 8,843 $ 4,323 --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- GROSS UNREALIZED HOLDING GAINS AND LOSSES: - ------------------------------------------ Available for Sale Held to Maturity ------------------------------------------------ ------------------------------------------------- Gross Gross Gross Gross Unrealized Unrealized Unrealized Unrealized Amortized Holding Holding Fair Amortized Holding Holding Fair Cost Gains Losses Value Cost Gains Losses Value --------- --------- --------- --------- --------- --------- --------- --------- U.S. government and agencies $ 109,614 $ 158 $ 3,444 $ 106,328 $ 17,818 $ 185 $ 163 $ 17,840 Obligations of states and other political subdivisions 403,399 167 7,837 395,729 28,971 29 375 28,625 Corporate securities 8,433 52 479 8,006 1,044 58 1,102 Equity securities 4,089 39 359 3,769 0 Other debt securities 15,770 15,770 4,496 4,496 ------------------------------------------------ ------------------------------------------------ Total $ 541,305 $ 416 $ 12,119 $ 529,602 $ 52,329 $ 272 $ 538 $ 52,063 --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- ---------
11 NOTE 4 - CAPITAL STOCK On November 15, 1994, the Company's stockholders approved amendments to the 1990 Stock Option Plan (the "1990 Plan") which increased the number of shares available for the granting of options from 3,025,000 to 5,525,000, and added technical changes to conform the 1990 Plan to the deductibility requirements of Section 162(m) of the Internal Revenue Code. On January 28, 1995, the Company's Board of Directors authorized the retirement of 1,647,898 shares of common stock held in treasury and such shares were returned to the status of authorized but unissued shares. As a result, the $35,730,000 value assigned to treasury stock has been eliminated with a corresponding decrease in common stock and additional paid in capital. 12 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS GENERAL The Company operates an integrated multi-state managed care organization. The Company's operations are focused on its commercial HMO and PPO operations, government-sponsored managed care programs, and specialty services operations. Commercial HMO and PPO operations are characterized by the assumption of underwriting risk in return for premium revenue. Government-sponsored managed care programs consist of contractual services to state and federal government programs such as CHAMPUS and Medicaid in which the Company receives revenues for administrative and management services and, under certain of the contracts, also accepts financial responsibility for health care costs. Specialty services consists both of operations in which the Company assumes underwriting risk in return for premium revenue, including managed care workers' compensation insurance and behavioral health, dental and vision HMO products, and operations in which the Company provides administrative services only, including certain of the behavioral health and pharmacy benefits management programs, workers' compensation third party administration and bill review services and administrative-only products and services. The Company consummated the following acquisitions of complementary businesses during the nine months ended March 31, 1995 to increase its geographic and product diversity: Type of Date of Acquisition Nature of Business Consideration Consideration - ------------------- ------------------ ------------- ------------------ PURCHASE TRANSACTIONS July 1994 Workers' compensation $37 million Cash plus stock bill review and third- party administration November 1994 Colorado-based managed $8.9 million Stock care company November 1994 Florida - Medicaid $32.9 million Cash plus managed care company promissory note November 1994 39.5% minority interest $249.1 million Stock in Arizona and Utah- based managed care company ("Intergroup Healthcare Corporation") January 1995 Property and casualty $13.2 million Cash insurance company 13 POOLING TRANSACTIONS Date of Type of Acquisition Nature of Business Consideration Consideration - ----------- ------------------ ------------- ------------- October 1994 Florida - managed care $226.4 million Exchange of company ("CareFlorida Stock Health Systems, Inc.") November 1994 Arizona professional $438.9 million Exchange of corporation ("Thomas- Stock Davis Medical Centers, P.C.") and its 60.5% interest in Intergroup Healthcare Corporation The Company's consolidated financial information has been restated to include the accounts of CareFlorida Health Systems, Inc. ("CareFlorida") and Thomas- Davis Medical Centers, P.C., ("TDMC") and its 60.5% interest in Intergroup Healthcare Corporation ("Intergroup"), for all periods presented, as these acquisitions were each accounted for as a pooling of interests. In connection with the acquisitions of TDMC, Intergroup and CareFlorida, the Company charged $124.8 million to operations during the quarter ended December 31, 1994 for acquisition and restructuring costs. These one-time costs include $67.5 million in transaction costs that the Company is obligated to pay as a result of the acquisitions and $57.3 million relating to the integration and restructuring of the combined entities. The integration and restructuring costs consist primarily of (i) the write-off of obsolete and duplicate computer hardware and software, (ii) costs associated with terminating leases of duplicate facilities and (iii) severance and other personnel related costs. The Company's CHAMPUS Reform Initiative Contract ("CRI Contract") expired January 31, 1994 with a wind-down and termination period after expiration. During this wind-down period the Company is being reimbursed by the government for administrative expenses incurred plus a negotiated fixed fee. In September 1994, the Company was awarded a contract to establish a managed care program for 230,000 eligible beneficiaries of CHAMPUS in Oregon and Washington ("the Oregon/Washington Contract"). Implementation of the contract commenced in September 1994 and the provision of health care services began on March 1, 1995. The contract has a term of up to five years, and is subject to adjustments to reflect recent reductions in coverage for eligible beneficiaries under the contract. In April 1995, the Company was awarded a contract to establish a similar program for 590,000 eligible CHAMPUS beneficiares, 103,000 of which are currently covered under another government contract administered by the Company, in Oklahoma and most of Arkansas, Louisiana and Texas. The contract has a term of up to five years with health care services scheduled to begin November 1, 1995. The Company's profitability depends in large part on accurately predicting and controlling health care expenditures, effectively managing utilization of health care services and negotiating favorable provider contracts. Changes in health care practices, inflation, new technologies and numerous other factors affecting the delivery and cost of health care, including proposed health care reforms 14 and legislative initiatives, may adversely affect the Company's ability to predict and control health care costs and claims. Pressures by large employer groups for premium rate decreases and continued intense competition for enrollees may affect the Company's operating results, including increased medical loss ratios. In addition, changes in federal and state government health care policies or practices could result in the gain, loss or repricing of significant government contracts, e.g. Medicaid or CHAMPUS, which could have a material effect on the Company's operating results. RESULTS OF OPERATIONS Total revenues increased by $36.7 million, or 6.3%, for the quarter ended March 31, 1995 over the same period in fiscal year 1994 due to increases in commercial and specialty services revenues offset in part by a decrease in government revenues as a result of the expiration of the CRI Contract. Total revenues decreased $29.2 million, or 1.6%, for the nine months ended March 31, 1995 over the comparable period in fiscal year 1994 primarily as a result of the expiration of the CRI Contract. Commercial premiums for the quarter ended March 31, 1995 increased $67.2 million, or 18.7%, over the comparable period in fiscal year 1994 due primarily to a greater than 176,000 member increase in commercial enrollment from over 944,000 at March 31, 1994 to 1,120,000 at March 31, 1995. The third quarter increase in commercial premiums over the comparable prior year period is lower than increases experienced in the first and second quarters due to premiums related to Gem Insurance Company ("Gem") which was purchased by Intergroup effective January 1, 1994. The year-to-date increase in commercial premiums over the nine months ended March 31, 1994 of $236.4 million, or 24%, is attributable primarily to increases in enrollment and to $17.7 million in premiums related to Gem. The commercial loss ratio (commercial health care services expenses as a percentage of commercial premiums), which includes both HMO medical and indemnity revenues and health care expenses, decreased from 77.9% for the quarter ended March 31, 1994 to 77.4% for the quarter ended March 31, 1995, due to continued health care cost management, changes in the enrollment composition in Arizona and Florida, and Medicare premium increases. Commercial health care services expenses for the quarter ended March 31, 1995 increased by $50.2 million, or 17.9%, over the comparable prior year period primarily as a result of increased enrollment in the medical HMO, higher pharmacy costs and higher payments to capitated providers. These commercial health care trends for the nine months ended March 31, 1995 resulted in a commercial loss ratio of 78.1% which is consistent with the comparable prior period. Government contracts revenue is impacted by semi-annual bid price adjustments, annual price increases, risk sharing provisions and various other price adjustments under the CHAMPUS contracts. Government contracts revenue decreased by $58.7 million, or 58.9%, for the quarter ended March 31, 1995 over the prior year quarter as a result of the expiration of the CRI Contract effective January 31, 1994, offset in part by the net effect of revenues generated by the expansion 15 of the Company's New Orleans Contract to cover the Base Realignment and Closure areas of Alexandria, Louisiana and the areas of Austin and Forth Worth, Texas (the "BRAC expansion"), which commenced May 1, 1993, and revenues related to the Oregon/Washington Contract. The expiration of the CRI Contract also contributed to the decrease in government contracts revenue for the nine months ended March 31, 1995 over the prior year period of $391.4 million, or 74.4%. Total government contracts expenses (government contracts subcontractor costs plus government contracts health care services expenses) decreased by $48 million, or 61.4%, and $305.3 million, or 74.9%, for the quarter and nine months ended March 31, 1995 over the comparable prior year periods. The decrease in total CHAMPUS expenses for the periods was due to the expiration of the CRI contract offset in part by expenses under the BRAC expansion and the implementation of the Oregon/Washington Contract in which health care delivery began in March 1995. Specialty services revenue increased by $24.8 million, or 25.5%, for the quarter ended March 31, 1995 and by $110.4 million, or 41.1%, for the nine months ended March 31, 1995 over the comparable periods in fiscal year 1994. This increase was primarily attributable to workers' compensation insurance premiums generated by California Compensation Insurance Company, the Company's workers' compensation insurance subsidiary ("CalComp"), which totaled $70.3 million and $188.2 million for the quarter and eight months (commencing August 1, 1993, the date of acquisition) ended March 31, 1994 and $85.4 million and $270.4 million for the quarter and nine months ended March 31, 1995. The increase in CalComp net premium revenues was a result of strong policy growth as well as a reduction in premiums previously ceded to reinsurers under a quota share agreement. The premium increase was offset in part by a 16% mandatory reduction in premiums for policies effective October 1, 1994 and the effect of new California regulations that allow premium rates to be set on a competitive basis for new policies effective after January 1, 1995. Also contributing to the increase in specialty services revenues were revenues generated by Reviewco, which was purchased on July 1, 1994, which totaled $4.5 million and $14 million for the quarter and nine months ended March 31, 1995. Specialty services costs, which includes health care and administrative costs, increased $12.5 million, or 14%, for the quarter ended March 31, 1995 and $69.4 million, or 27.1%, for the nine months ended March 31, 1995 over the comparable prior year periods primarily as a result of increased enrollment related to CalComp and the Company's dental and behavioral health care subsidiaries and to $2.5 million and $7.8 million in specialty services costs related to Reviewco. The specialty services ratio (specialty services costs as a percentage of specialty services revenues) decreased from 92.5% and 95.3% for the quarter and nine months ended March 31, 1994 to 84% and 85.8% for the quarter and nine months ended March 31, 1995. The improvement in the specialty services ratio was due primarily to the successful implementation of managed care in the workers' compensation environment, resulting in favorable claims experience and lower sales costs for CalComp, improved dental plan costs, and the addition of Reviewco which has a lower specialty services ratio than most specialty services subsidiaries. Selling, general and administrative ("SG&A") expenses increased by $1.9 million, or 2.7%, for the quarter ended March 31, 1995 over the comparable prior year period primarily due to SG&A expenses related to Community Medical Plan, Inc. ("CMP"), which was purchased by the Company 16 effective November 15, 1994. SG&A expenses decreased by $1.9 million, or 0.9%, for the nine months ended March 31, 1995 over the same periods in fiscal year 1994 due to the expiration of the CRI Contract offset in part by increased SG&A expenses related to Gem and CMP. SG&A expenses as a percentage of total revenues (the "SG&A ratio") were 11.6% and 12% for the quarters ended March 31, 1995 and 1994 and 12.1% and 12% for the nine months ended March 31, 1995 and 1994. The decrease in the SG&A ratio for the quarter ended March 31, 1995 compared to the prior year quarter is due to commercial premium revenue growth while continuing to contain SG&A expenses. The increase in the SG&A ratio for the nine months ended March 31, 1995 compared to the prior year quarter is due primarily to the expiration of the CRI contract. In connection with the acquisitions of TDMC, Intergroup and CareFlorida, the Company charged $124.8 million to operations during the quarter ended December 31, 1994 for acquisition and restructuring costs. These one-time costs include $67.5 million in transaction costs which the Company is obligated to pay as a result of the acquisitions and $57.3 million relating to the integration and restructuring of the combined entities. The integration and restructuring costs consist primarily of (i) the write-off of obsolete and duplicate computer hardware and software, (ii) costs associated with terminating leases of duplicate facilities, and (iii) severance and other personnel related costs. The Company's income before income taxes and minority interest and before the one-time acquisition and restructuring costs increased $17.8 million, or 44.5%, and $17.6 million, or 13.8%, and increased as a percentage of total revenues from 6.9% to 9.4% and from 6.9% to 8% for the quarter and nine months ended March 31, 1995 over the same periods in fiscal year 1994. These increases resulted from the increased profitability of the specialty services operations, primarily related to CalComp, profitability of the commercial HMO and PPO operations, and increased investment and other income offset in part by the expiration of the CRI Contract. After the one-time charge, income before income taxes and minority interest increased $17.8 million, or 44.5%, for the quarter ended March 31, 1995 and decreased $107.2 million, or 84.1%, for the nine months ended March 31, 1995 as compared to the comparable periods in fiscal year 1994. Net income before the one-time acquisition and restructuring costs and related tax effects increased by $13.9 million, or 62.2%, and increased as a percentage of total revenues from 3.9% to 5.9% for the quarter ended March 31, 1995 and increased by $18.1 million, or 25.1%, and increased as a percentage of total revenues from 3.9% to 5% for the nine months ended March 31, 1995 over the same periods in fiscal year 1994. After the one-time charge and related tax effects, net income increased by $13.9 million, or 62.2%, and increased as a percentage of total revenues from 3.9% to 5.9% for the quarter ended March 31, 1995 and decreased by $61.3 million, or 85.2%, and decreased as a percentage of total revenues from 3.9% to 0.6% for the nine months ended March 31, 1995 over the same periods in fiscal year 1994. 17 LIQUIDITY AND CAPITAL RESOURCES Cash provided by operating activities was $197.4 million for the nine months ended March 31, 1995 as compared to $165.8 million for the comparable period in fiscal year 1994 due primarily to the Company's profitable operations during the period. Excess operating cash has been invested in investment grade securities. The Company is negotiating with several banks for the financing and construction of up to $60 million for health care and corporate facilities. The Company will enter into operating leases upon completion of construction of the various facilities and, at the end of the lease term, will be obligated to either purchase the facilities or sell them to third parties at agreed upon prices. To the extent the Company consummates this transaction, its capital expenditures for the remainder of fiscal year 1995 for construction of primary care medical and corporate facilities are expected to be approximately $3 million. The Company expects other capital expenditures for the remainder of fiscal year 1995 to approximate $1.9 million. The net costs of operating and managing the medical facilities for the remainder of fiscal year 1995 will approximate $8 million and will be offset in part by health care cost savings realized by the California HMO. The Company expects capital expenditures for fiscal year 1996 to approximate $30 million. In addition, the Company has start-up HMO and workers' compensation operations in a number of states outside California and in the United Kingdom. These operations have required and will continue to require significant cash expenditures related to start-up costs in creating the infrastructure for operations at each location, hiring and training personnel and establishing minimum statutory capital requirements. The Company paid $25 million in cash for the acquisition of CMP on November 15, 1994 and issued promissory notes aggregating $7.9 million for the balance of the purchase price to be paid November 15, 1995. During the quarter ended March 31, 1995, the Company contributed an additional $35 million, $20 million of which was obtained under the line of credit, to CalComp's surplus to meet regulatory and rating agency requirements. The Company has a $300 million unsecured revolving credit agreement with Citicorp USA, Inc. as Administrative Agent for the lenders thereto (the "Credit Agreement") which expires December 5, 1999 to assist in funding the construction and operation of the medical facilities and the Company's other start-up operations. The Credit Agreement contains customary terms, events of default and affirmative and negative covenants (including financial covenants related to net worth, fixed charge coverage and total debt to total capitalization). Principal amounts outstanding under the Credit Agreement bear interest, at the Company's option, at either Citibank's base rate or the Eurodollar rate plus a margin depending upon the Company's public debt rating or level of total debt to total capitalization. Any interest payments are due quarterly and principal is due at maturity. As of March 31, 1995, the Company has drawn $20 million on the Credit Agreement. Management of the Company continually evaluates opportunities to expand the Company's commercial and specialty services operations; however, the Company currently has no material commitments for future use of its current or expected levels of available cash resources except as described above. The Company's expansion options may include additional acquisitions and internal development of new products and programs. 18 The Company has a stock repurchase program to acquire from time to time shares of the Company's outstanding common stock in the open market. As of March 31, 1995 the Company had repurchased a total of 1,545,500 shares, since the March 1993 program inception, and is authorized to purchase up to 5.6 million additional shares at prices deemed appropriate by management and subject to market conditions and other relevant factors. In June 1993, the Company issued $125 million of Senior Notes due June 1, 2003 (the "Senior Notes"). The Senior Notes bear interest at 7 3/4% which is due semi-annually on December 1 and June 1. The Senior Notes are general unsecured obligations of the Company, will rank PARI PASSU with all future unsecured and unsubordinated indebtedness of the Company and are effectively subordinated to creditors of the Company's subsidiaries. The indenture contains certain covenants that, among other things, (i) restrict the ability of the Company and its Restricted Subsidiaries (as defined) to (a) pay dividends and make other distributions and certain investments, (b) grant liens on their assets, (c) enter into or permit certain sale and lease-back transactions or (d) engage in certain mergers, consolidations and sales of assets, and (ii) restrict the ability of the Company's Restricted Subsidiaries to incur additional indebtedness or issue shares of preferred stock. Certain of the Company's subsidiaries must comply with minimum capital and surplus requirements under applicable state HMO and insurance laws and regulations and certain subsidiaries must maintain ratios of current assets to current liabilities of 1:1 pursuant to certain government contracts. The Company believes it is in material compliance with these contractual and regulatory requirements. 19 PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS In the ordinary course of its business, the Company is a party to claims and legal actions by enrollees, providers and others. The Company also undergoes governmental audits with respect to its government contracts and with respect to operations of its HMO, insurance and specialty services subsidiaries. After consulting with legal counsel, the Company is of the opinion that any liability that may ultimately be incurred as a result of these claims, legal actions or audits will not have a material adverse effect on the consolidated financial position or results of operations of the Company. On April 14, 1995 the Company and the State of California Attorney General's office reached an amicable settlement of the allegations against DentiCare of California, Inc. regarding the arrangement of certain dental services to Medicaid beneficiaries between March 1, 1991 and January 31, 1993. The Attorney General's office issued a statement that said in part: "Since the period of time involved in the allegations, DentiCare was bought by and became a wholly owned subsidiary of Foundation Health Corporation. Subsequent to the acquisition by Foundation, new management systems and improved quality control measures were implemented that adequately addressed the concerns raised in the allegations." This matter was concluded with no material effect on the Company's consolidated financial position or results of operations. See "Government Regulations" and "Legal Proceedings" in the Company's Annual Report on Form 10-K for the fiscal year ended June 30, 1994 and the Joint Proxy Statement/Prospectus dated September 30, 1994 included in the Registration Statement on Form S-4 (No. 33-84330) for further description of audits and legal proceedings to which the Company and certain of its subsidiaries are subject. 20 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits 11 - Earnings Per Share Computation (b) Reports on Form 8-K On January 5, 1995, the Company filed a report on Form 8-K with respect to the restated statements of operations of the Company. 21 SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. FOUNDATION HEALTH CORPORATION Date: By: /s/ ------------------------------- ----------------------------------- Jeffrey L. Elder Senior Vice President and Chief Financial Officer (Principal Financial and Accounting Officer) 22 FOUNDATION HEALTH CORPORATION INDEX TO EXHIBITS EXHIBIT NO. PAGE 11 Earnings Per Share Computation 23 EX-11 2 EXHIBIT 11 FOUNDATION HEALTH CORPORATION EXHIBIT 11 Earnings Per Share Computation Utilizing the Treasury Stock Method (Dollars in thousands, except per share amounts)
Nine Months Ended Quarter Ended March 31, March 31, ---------------------------- --------------------------- 1995 1994 1995 1994 ------------- ------------- ------------- ------------ Proceeds upon exercise of options outstanding $ 47,954 $ 57,056 ------------- ------------- ------------- ------------- Average market price of common stock $ 30.63 $ 37.86 ------------- ------------- ------------- ------------- Weighted average common shares outstanding 57,017,649 48,025,121 Issued shares - exercise of options 1,906,568 2,584,774 Shares assumed to be repurchased with proceeds from exercise (1,565,737) (1,506,932) ------------- ------------- ------------- ------------ Weighted average shares outstanding (A) 57,358,480 49,102,963 53,892,518 48,414,551 ------------- ------------- ------------- ------------ ------------- ------------- ------------- ------------ Net income for the quarter (B) $ 36,291 $ 22,369 $ 10,675 $ 71,985 ------------- ------------- ------------- ------------ ------------- ------------- ------------- ------------ Earnings per share (B) / (A) $ 0.63 $ 0.46 $ 0.20 $ 1.49 ------------- ------------- ------------- ------------- ------------- ------------- ------------- -------------
EX-27 3 EXHIBIT 27
5 The schedule contains summary financial information extracted from the Form 10-Q filed by Foundation Health Corporation for the Quarter ended March 31, 1995 and is qualified in its entirety by reference to such financial statements. 1,000 9-MOS JUN-30-1995 JAN-01-1995 MAR-31-1995 229,547 581,931 276,139 0 0 0 204,546 0 1,907,466 0 190,670 571 0 0 706,784 1,907,466 602,715 615,629 0 554,961 0 0 2,854 57,814 21,523 36,291 0 0 0 36,291 0.63 0 NET PP&E
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