FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
_______________________
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______________ to ____________
Commission file number 000-22393
TALBERT MEDICAL MANAGEMENT HOLDINGS CORPORATION
a Delaware Corporation
I.R.S. Employer Identification No. 33-0730363
3540 Howard Way, Costa Mesa, CA 92626-1417
(Address of principal executive offices) (Zip Code)
(714) 436-4800
(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 No X
----- -----
The registrant had 3,000,758 shares of common stock, par value $0.01
per share, outstanding at August 12, 1997.
The Exhibit Index Appears on Page 30
1
PART 1 - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
TALBERT MEDICAL MANAGEMENT HOLDINGS CORPORATION
CONSOLIDATED BALANCE SHEETS
(unaudited)
ASSETS
(amounts in thousands, JUNE 30, DECEMBER 31,
except share data) 1997 1996
--------- ------------
Cash and cash equivalents $ 67,457 $ 41,212
Accounts receivable, net 4,446 8,473
Receivables from FHP (Note 2) 5,122 2,791
Inventories 6,676 7,302
Deferred income taxes (Note 3) -- 8,771
Prepaid expenses and other
current assets 5,531 5,530
---------- ----------
Total current assets 89,232 74,079
Property and equipment, net 8,642 8,075
Deferred rent 4,990 3,995
Other assets 506 550
---------- ----------
Total assets $ 103,370 $ 86,699
---------- ----------
---------- ----------
- ----------
See accompanying notes to consolidated financial statements.
2
TALBERT MEDICAL MANAGEMENT HOLDINGS CORPORATION
CONSOLIDATED BALANCE SHEETS
(unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY
(amounts in thousands, JUNE 30, DECEMBER 31,
except share data) 1997 1996
--------- ------------
Accounts payable $ 10,452 $ 12,121
Payables to FHP/PacifiCare (Note 2) 7,820 --
Medical claims payable 14,134 15,538
Accrued salaries and employee
benefits 24,546 21,113
Other current liabilities 1,985 2,255
Advances from FHP (Note 5) -- 39,162
---------- ----------
Total current liabilities 58,937 90,189
Deferred income taxes (Note 3) -- 1,934
Other liabilities -- 113
---------- ----------
Total liabilities 58,937 92,236
Stockholders' deficit:
Preferred Stock, $0.01 par value; 1,200,000
authorized; no shares outstanding at
June 30, 1997 and December 31, 1996,
respectively --- ---
Common Stock, $0.01 par value;
15,000,000 shares authorized; issued and
outstanding 3,000,758 and 3,000,000
shares at June 30, 1997 and December 31,
1996, respectively 30 30
Paid in capital (Note 5) 72,929 5,922
Deferred stock compensation expense (Note 5) (2,900) (3,510)
Retained deficit (25,626) (7,979)
---------- ----------
Total stockholders' equity (deficit) 44,433 (5,537)
---------- ----------
Total liabilities and
stockholders' equity (deficit) $ 103,370 $ 86,699
---------- ----------
---------- ----------
- ----------
See accompanying notes to consolidated financial statements.
3
TALBERT MEDICAL MANAGEMENT HOLDINGS CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(unaudited)
FOR THE
(amounts in thousands, THREE MONTHS ENDED
except per share data) JUNE 30,
1997 1996
-------- --------
Revenue:
Capitation from FHP $ 81,091 $ 95,519
Copayments, fee for service 20,661 23,578
-------- --------
Total revenue 101,752 119,097
Expenses:
Affiliated medical services 28,489 35,435
Purchased medical services 28,206 27,758
Dental services 6,463 7,040
Optometry, pharmacy and other
primary health care services 24,884 28,079
Clinic Operations 16,735 17,001
-------- --------
Total cost of health care 104,777 115,313
Marketing, general and administrative 7,999 7,007
-------- --------
Operating loss (11,024) (3,223)
Interest income 1,366 420
-------- --------
Loss before income tax benefit (9,658) (2,803)
Income tax benefit -- 1,173
-------- --------
Net Loss $ (9,658) $ (1,630)
-------- --------
-------- --------
Loss per common and common equivalent share $ (3.15) $ (0.54)
(Note 4)
-------- --------
-------- --------
- ----------
See accompanying notes to consolidated financial statements.
4
TALBERT MEDICAL MANAGEMENT HOLDINGS CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(unaudited)
FOR THE
(amounts in thousands, SIX MONTHS ENDED
except per share data) JUNE 30,
1997 1996
-------- --------
Revenue:
Capitation from FHP $168,290 $191,719
Copayments, fee for service and other 38,334 44,773
-------- --------
Total revenue 206,624 236,492
Expenses:
Affiliated medical services 59,507 71,175
Purchased medical services 54,883 56,787
Dental services 13,217 13,613
Optometry, pharmacy, and other primary
health care services 50,964 55,295
Clinic operations 33,728 32,295
-------- --------
Total cost of health care 212,299 229,165
Marketing, general and administrative 16,031 12,799
-------- --------
Operating loss (21,706) (5,472)
Interest income 2,336 651
-------- --------
Loss before income tax benefit (19,370) (4,821)
Income tax benefit 1,723 2,017
-------- --------
Net loss $(17,647) $ (2,804)
-------- --------
-------- --------
Loss per common and common equivalent
share (Note 4) $ (5.79) $ (0.93)
-------- --------
-------- --------
- -----------
See accompanying notes to consolidated financial statements.
5
TALBERT MEDICAL MANAGEMENT HOLDINGS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOW
(unaudited)
FOR THE
SIX MONTHS ENDED
(amounts in thousands) JUNE 30,
1997 1996
---------- ---------
OPERATING ACTIVITIES
Net loss $(17,647) $ (2,804)
Adjustments to reconcile
net loss to net cash
provided by operating activities:
Depreciation and amortization 706 505
Change in allowance for doubtful
accounts receivable 680 (286)
Amortization of deferred stock
compensation expense 611 --
Deferred income taxes 6,837 1,008
Effect on cash of changes
in operating assets and
liabilities:
Accounts receivable 3,347 --
Accounts receivable from FHP (2,331) (2,572)
Other current assets 625 (3,705)
Other assets (951) 257
Accounts payable (1,670) (3,673)
Payables to FHP/PacifiCare 7,820 --
Medical claims payable (1,404) 9,363
Accrued salaries and
employee benefits 3,433 3,929
Other liabilities (383) 1,731
-------- --------
Net cash (used in) provided by
operating activities (327) 3,753
-------- --------
INVESTING ACTIVITIES
Purchase of property and equipment (1,273) (4,790)
-------- --------
6
TALBERT MEDICAL MANAGEMENT HOLDINGS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS(continued)
(unaudited)
FOR THE
SIX MONTHS ENDED
(amounts in thousands) JUNE 30,
1997 1996
---------- ---------
FINANCING ACTIVITIES
Issuance of common stock -- 99
Exercise of stock options 7 --
Advances from FHP (39,162) 28,579
Capital contribution by FHP 67,000 5,055
-------- --------
Net cash provided by
financing activities 27,845 33,733
-------- --------
Increase in cash and
cash equivalents 26,245 32,696
Cash and cash equivalents at
beginning of period 41,212 --
-------- --------
Cash and cash equivalents at end
of period $ 67,457 $ 32,696
-------- --------
-------- --------
Supplemental cash flow information:
Non-cash transactions:
Recapitalization of the Company by
FHP - Assumption of medical claims
payable by FHP $ -- $ 12,831
-------- --------
-------- --------
__________
See accompanying notes to consolidated financial statements.
7
TALBERT MEDICAL MANAGEMENT HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1. Organization and Significant Accounting Policies
Talbert Medical Management Holdings Corporation ("TMMHC", and with its
subsidiaries, the "Company") through its subsidiaries Talbert Medical
Management Corporation ("TMMC") and Talbert Health Services Corporation
("THSC"), organizes and manages physician and dentist practice groups that
contract with HMOs and other payors to provide health care services to their
members. Under long-term management services agreements with its affiliated
practice groups (the "Talbert Medical Groups"), the Company provides
management systems and services, nonphysician health care personnel,
facilities and equipment to the Talbert Medical Groups in return for a
reimbursement of certain clinic operations costs, plus a management fee based
on the Talbert Medical Groups' revenues net of certain reimbursed clinic
operations costs, except for the California Talbert Medical Group, where TMMC
receives a management fee based on gross revenues. Pharmacy, radiology,
optometry, laboratory, home health, hospice, rehabilitation and physical
therapy services are also available through contracts with THSC.
8
The accompanying consolidated financial statements of the Company
include the accounts of TMMC, THSC and the Talbert Medical Groups. TMMC has
direct or indirect unilateral and perpetual control over the assets and
non-medical operations of the Talbert Medical Groups by means other than
owning the majority of voting stock. TMMC and the Talbert Medical Groups
have entered into 20-40 year practice management agreements with provisions
for extensions under certain circumstances. Because of control by means
other than equity ownership, consolidation of the Talbert Medical Groups is
necessary to present fairly the financial position and results of operations
of TMMC.
In the opinion of management of the Company, the foregoing consolidated
financial statements reflect all adjustments necessary for a fair statement
of the results of the Company and its subsidiaries for the periods shown and
such adjustments are of a normal recurring nature. Results of operations for
the first six months of fiscal 1997 are not necessarily indicative of
results to be expected for the full year.
SEPARATION FROM FHP
From January 1, 1996 through February 14, 1997, TMMC and THSC operated
as subsidiaries of FHP International Corporation ("FHP"), providing practice
management and ancillary services to the medical groups that were a part of
FHP's staff model operations. On August 4, 1996, FHP agreed to merge (the
"Merger") with PacifiCare Health Systems, Inc. ("PacifiCare"). The Merger
was completed on February 14, 1997.
In connection with the Merger between FHP and PacifiCare, FHP sold its
92.4% of the common stock of TMMC and THSC to TMMHC in exchange for
transferable rights to acquire 92.4% of the Company for $21.50 per share,
plus a note for $59,598,000 (the "Talbert Note"). On May 20, 1997, TMMHC
completed its Stock Rights Offering (the "Offering") to the stockholders of
FHP. FHP stockholders received one right for
9
every 21.19154 shares of FHP common stock and one right for every 26.27752
shares of FHP preferred stock. The maximum number of shares issued was
2,772,000. The Company received $59,598,000 from the Offering, which was
used to retire the Talbert Note.
10
NOTE 2. Receivables from/payable to FHP
Receivables from FHP at June 30, 1997 and December 31, 1996 are comprised of the
following:
(amounts in thousands) June 30, December 31,
1997 1996
------------ ------------
Hospital Incentives $ 3,120 $ 2,791
Capitation - Net 614 --
Fee for service claims 497 --
Other 891 --
------------ ------------
Total $ 5,122 $ 2,791
------------ ------------
------------ ------------
Payables to FHP/PacifiCare at June 30, 1997 of $7,820,000 are comprised
primarily of pharmacy claims, subcapitation payables, building occupancy
expenses (i.e., rent, taxes, utilities) and other items.
11
NOTE 3. Deferred Income Taxes
For the year ended December 31, 1996, the results of the operations of
TMMC, THSC and the Talbert Medical Groups were included in the consolidated
federal and state income tax returns of FHP. A tax allocation was made to
the Company in accordance with the method utilized by FHP's consolidated
group. Under this method, the tax expense of the group is allocated to its
members based on the members' profit or loss, including the recording of
benefits for tax losses utilized in the consolidated groups tax return. Upon
separation from FHP, management has determined that the Company will not
likely recognize tax benefits from losses due to the uncertainty of when the
Company will generate sufficient taxable income to realize such benefits.
The accrued tax benefits were retained by FHP and the Company received cash
in exchange.
12
NOTE 4. Per Share Calculations
The per common and common equivalent share calculations have been
computed by dividing net loss by the weighted average number of common shares
and common share equivalents outstanding during the periods. Common share
equivalents included in determining loss per share include shares issuable
upon exercise of stock options.
Pursuant to the Securities and Exchange Commission Staff Accounting
Bulletin Topic 4:D, stock options granted during the twelve-month period
prior to the date of the initial filing of the Company's Form S-1
Registration Statement have been included in the calculation of common
equivalent shares using the treasury stock method as if the shares were
outstanding for all periods presented.
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standard No. 128, "Earnings per Share"
(SFAS 128) which is effective for financial statements issued for periods
ending after December 15, 1997. SFAS 128 simplifies the previous standards
for computing earnings per share and requires the disclosure of basic and
diluted earnings per share. For the three month period ended June 30, 1997,
and the six month period ended June 30, 1997, the amount reported as net
income per common and common equivalent share is not materially different
than that which would have been reported for basic and diluted earnings per
share in accordance with SFAS 128.
The issued and outstanding of the Company's Common Stock are as follows:
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30 JUNE 30
----------------------- ------------------------
1997 1996 1997 1996
---- ---- ---- ----
Total shares 3,061,606 3,000,000 3,044,555 3,000,000
Total shares, assuming
full dilution 3,065,322 3,000,000 3,061,848 3,000,000
13
NOTE 5. Capitalization
At December 31, 1996, the Company had cash balances of $41.2 million and
a stockholders' deficit of approximately $5.5 million. On February 14, 1997
and immediately prior to the Merger, the Company received a capital
contribution from FHP of $67 million. Immediately following the Merger, the
Company settled amounts due to FHP of approximately $23 million and made a
final settlement of intercompany balances in May 1997 to reimburse FHP for
medical service and other costs paid on behalf of the Company. The Company
intends to use the remainder of the capital contribution to fund operating
losses and for working capital and other general corporate purposes.
14
Note 6. Commitments and Contingencies
LITIGATION
During the ordinary course of business, the Company has become a party
to pending and threatened legal actions and proceedings. Management of the
Company is of the opinion that the outcome of the currently known legal
actions and proceedings will not, singly or in the aggregate, have a material
effect on the consolidated financial position and operating results of the
Company.
On April 2, 1997, six former FHP stockholders filed a class action
lawsuit entitled BRADY, ET. AL. v. ANDERSON, ET. AL. in U.S. District Court
for the Central District of California. The lawsuit alleged certain
violations of federal securities laws and common law by certain of the former
directors and officers of FHP (many of whom are directors and/or officers of
the Company), including material misrepresentations in connection with FHP
acquisition by PacifiCare and the separation of the Company from FHP. The
plaintiffs sought unspecified damages and other relief. The Company was not
named as a defendant in the lawsuit. Pursuant to the terms of the Merger
Agreement, PacifiCare assumed the defense of this action. On July 28, 1997,
the court granted defendants' motion to dismiss the complaint. Plaintiffs
may file an amended complaint within thirty days of this ruling.
LEASES
The Company and FHP have entered into a Real Estate and Equipment Master
Transfer Agreement (the "Master Lease Agreement") to provide for the lease,
sublease or assignment by FHP to TMMC of facilities and equipment used by the
Talbert Medical Groups that are either owned or leased by FHP. The leases
are accounted for as operating leases. The Company and FHP have agreed to
certain amendments of the Master Lease Agreement, which include (i) the
extension, at prevailing market rates, of the existing terms of the
individual leases to December 31, 2005, with the exception of leases with
respect to up to 90,000 square feet (of a total of approximately 472,000)
square feet) that the Company may elect not to renew; (ii) two five-year
extension options at prevailing market rates, exercisable solely at
15
the Company's discretion; (iii) a right of first offer for the Company to
purchase the furniture, fixtures and equipment subject to the Master Lease
Agreement ("FF&E"). The parties have also agreed to enter into a separate
lease agreement with respect to FF&E that will expire on December 31, 2000.
The Company has also entered into leases with third parties and has assumed
the obligations of FHP under certain other leases with third parties.
16
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
TMMC, THSC and the Talbert Medical Groups, subsidiaries and affiliates of
the Company, commenced operations on January 1, 1996, and were formed as part
of a plan announced by FHP in June 1995 to restructure its operations (the
"Restructuring Plan"). The Restructuring Plan included the transformation of
FHP's staff model operations (except for FHP's staff model operations in
Guam) into a physician practice management company (now known as TMMC), an
ancillary clinical services provider (now known as THSC), and a number of
affiliated medical and dental provider practice groups (now known as the
Talbert Medical Groups). TMMC and THSC were originally formed as
subsidiaries of FHP. The Talbert Medical Groups comprise a number of
professional corporations organized in California, Utah, Arizona and Nevada
to succeed to FHP's staff model business in each of those states. In New
Mexico, TMMC directly employs physicians and acts as the Talbert Medical
Group in that state. The Talbert Medical Groups are solely and exclusively
in control of and responsible for all aspects of the practice of medicine and
the delivery of medical services. TMMC and THSC facilitate the delivery of
medical care by providing practice management and ancillary clinical
services. Approximately 4,000 of FHP's employees, including health care
professionals, became employees of TMMC, THSC or the Talbert Medical Groups.
FHP's staff model operations had no separate legal status prior to the
organization of TMMC, THSC, and the Talbert Medical Groups. However, through
its subsidiaries FHP had offered health care services to FHP members as a staff
model HMO since 1961. Effective January 1, 1996, and pursuant to its management
services agreements with the Talbert Medical Groups, TMMC began providing a
broad range of practice management services in return for a management fee. At
the same time, the Talbert Medical Groups became responsible for providing all
physician-related covered medical care for each FHP member enrolled with a
Talbert Medical Group in exchange for a prepaid monthly
17
capitation payment for each such member. The Talbert Medical Groups are not
limited to serving only FHP members. However, they have continuously served
FHP members who received their health care in the former FHP staff model
operations.
TRANSFERS TO TMMC AND THSC. In connection with their commencement of
operations on January 1, 1996, FHP recapitalized TMMC and THSC to eliminate a
stockholder's deficit of approximately $17.9 million and transferred to TMMC
and THSC certain assets and liabilities related to the operations of the
Company's predecessor businesses. These transfers included current assets of
approximately $27.5 million (including approximately $5.1 million in cash,
accounts receivable of approximately $5 million, inventories of approximately
$7.4 million, deferred income taxes of approximately $6.4 million, and
prepaid expenses and other current assets of approximately $3.6 million), all
of which were transferred at their historical cost to FHP.
THE MERGER. From January 1, 1996 through February 14, 1997, TMMC and
THSC operated as subsidiaries of FHP providing practice management and
ancillary services to the medical groups that were a part of FHP's staff
model operations. On August 4, 1996, FHP agreed to merge with PacifiCare.
Upon completion of the Merger on February 14, 1997, TMMHC acquired FHP's
92.4% equity interest in TMMC and THSC in exchange for Rights to purchase
92.4% of the Company's Common Stock, plus the Talbert Note. Immediately
prior to the Merger, TMMC received the capital contribution of $67 million
from FHP. The Company and FHP also entered into a number of other agreements
in connection with the Merger, including with respect to Common Stock
acquired by FHP, administrative services, and the allocation of liabilities,
taxes and employee benefits obligations between the Company and FHP. These
transactions were effected for the purpose of separating TMMC and THSC from
FHP concurrently with the FHP Merger.
THE OFFERING. Beginning on April 21, 1997, the Rights to purchase 92.4%
of the Company's Common Stock were distributed to the FHP stockholders of
record as of the
18
effective time of the Merger, pursuant to the Company's Registration
Statement on Form S-1. Each Right entitled the holder to purchase one share
of the Company's Common Stock at a price of $21.50 per share. The Offering
was completed on May 20, 1997 and the Company received proceeds of
$59,598,000 from the Offering, which were used to retire the Talbert Note.
19
RESULTS OF OPERATIONS
MEMBERSHIP
The Company's revenue is largely dependent on the number of enrollees for
whom the Talbert Medical Groups receive monthly capitation payments. The
table below sets forth the number of capitated enrollees for each of the
states in which the Company does business:
CAPITATED ENROLLEES
JUNE 30, DECEMBER 31, JUNE 30,
1996 1996 1997
California 135,266 124,749 114,957
Utah 114,640 105,840 94,853
Arizona 28,774 34,866 33,183
New Mexico 25,783 24,315 24,008
Nevada 4,655 4,067 3,089
------- ------- -------
Total 309,118 293,837 270,090
------- ------- -------
------- ------- -------
Currently, FHP is the primary payor for the Talbert Medical Groups,
accounting for approximately 98% of capitated enrollees and revenues for the
three month period ended June 30, 1997. The Company believes FHP will
continue to be the primary source of capitated revenue for the forseeable
future.
TMMC has, however, established approximately 28 contractual relationships
with other HMO's on behalf of the Talbert Medical Groups. In addition, TMMC has
negotiated in excess of 45 PPO payor contracts on behalf of one or more of the
Talbert Medical Groups. Under a typical PPO contract, the payor agrees to list
one of the Talbert Medical Groups on its panel of authorized practice groups.
These new payor relationships do not yet constitute a significant source of
revenues for TMMC.
20
REVENUE
PROVIDER AGREEMENTS. The Talbert Medical Groups have provided health
care services to FHP members since their formation pursuant to provider
agreements with FHP. The Company derives nearly all of its revenues from
FHP, either through capitated payments directly from FHP or copayments, fee
for service or other revenue from FHP members. Pursuant to the terms of the
Merger, the Talbert Medical Groups entered into the new FHP Provider
Agreements, which took effect as of March 1, 1997. The new FHP Provider
Agreements will result in significantly lower revenue to the Company. On a
pro forma basis, the new FHP Provider Agreements would have decreased the
Company's revenue from $119.1 million to $109.3 million and increased its
operating loss from $2.8 million to $14.3 million for the three months ended
June 30, 1996.
THREE MONTHS ENDED JUNE 30, 1997 COMPARED TO THE THREE MONTHS ENDED
JUNE 30, 1996
REVENUE. Total revenue decreased $17.3 million, or 14.6%, to $101.8
million for the three months ended June 30, 1997 from $119.1 million for the
three months ended June 30, 1996. This decrease primarily reflects a decline
in FHP capitated enrollment and a reduction in FHP capitated rates as a
result of the new FHP Provider Agreements which became effective on March 1,
1997. Total FHP capitated enrollment declined by 14.7%, from 309,118 at June
30, 1996 to 263,589 at June 30, 1997, and was responsible for $5.4 million of
the capitated revenue decline. Capitated enrollment from non-FHP payors
increased to 6,501 enrollees and produced $819,000 in additional capitated
revenue for the three months ended June 30, 1997. The new FHP Provider
Agreements decreased the Company's capitated revenue by $9.8 million for the
three months ended June 30, 1997. Copayment and fee for service revenue
decreased by a net $2.9 million, or 12.4%, to $20.7 million for the three
months ended June 30, 1997. This decrease reflects lower copayment and fee
for service revenue from vision and pharmacy services as a result of the
lower enrollment, partially offset by increased fee for service business in
Utah.
21
COST OF HEALTH CARE. Total cost of health care declined $10.5 million,
or 9.1%, to $104.8 million for the three months ended June 30, 1997, from
$115.3 million for the three months ended June 30, 1996. Lower capitated
enrollment levels during the three months ended June 30, 1997 caused
affiliated medical services expense and optometry, pharmacy and other primary
health care service expense to decline by $6.9 million and $3.2 million,
respectively. Purchased medical services expense for the three months ended
June 30, 1997 remained approximately the same as the previous year. However,
the FHP Provider Agreements required the Company to provide additional
medical services which increased purchased medical service expense by $2.0
million, which amount was offset by savings from existing contracted provider
agreements.
MARKETING, GENERAL AND ADMINISTRATIVE EXPENSE. Marketing, general and
administrative expense increased $992,000, or 14.2%, to $8.0 million (7.9% of
revenue) for the three months ended June 30, 1997, from $7.0 million (5.9% of
revenue) for the three months ended June 30, 1996. The increase was attributed
primarily to additional marketing costs of $642,000 and the recognition of stock
compensation expense of $306,000 in connection with the capital contribution of
$67.0 million.
INTEREST INCOME. Net interest income increased $946,000, to $1.4 million
for the three months ended June 30, 1997, compared to the same period in the
previous year. This increase is a result of growth in the Company's cash
balances as a result of the $67.0 million capital contribution made in
February 1997.
22
SIX MONTHS ENDED JUNE 30, 1997 COMPARED TO THE SIX MONTHS ENDED JUNE 30, 1996
REVENUE. Total revenue decreased $29.9 million or 12.6%, to $206.6
million, for the six months ended June 30, 1997, from $236.5 million at June 30,
1996. This decrease primarily reflects a decrease in FHP capitated enrollment
and a reduction in capitated rates from the new FHP Provider Agreements which
went into effect on March 1, 1997. Total capitated revenue declined by $23.4
million, or 12.2%, to $168.3 for the six months ended June 30, 1997 from $191.7
million for the six months ended June 30, 1996. FHP enrollment declines were
responsible for $11.6 million of the decrease in capitated revenue and the rate
decrease from the new FHP Provider Agreements was responsible for $13.1 million
in lower capitated revenue during the six month period ended June 30, 1997.
Capitated revenue from non-FHP payors totaled $1.3 million for the six months
ended June 30, 1997. Copayment and fee for service revenue decreased $6.4
million to $38.3 million, or 14.4%, from $44.8 million for the six months ended
June 30, 1996. This decrease reflects lower pharmacy and vision copayment and
fee for service revenue attributed with the declining enrollment levels during
the period, partially offset by increased fee for service business in Utah.
COST OF HEALTH CARE. Total cost of health care decreased by $16.9 million,
or 7.4%, to $212.3 million for the six months ended June 30, 1997 from $229.2
million at June 30, 1996. Lower capitated enrollment levels during the six
months ended June 30, 1997, caused affiliated medical services expense and
optometry, pharmacy and other primary care services expense to decline by $11.7
million and $4.3 million, respectively. Overall, purchased medical services
expense decreased slightly by $1.9 million, or 3.4%, to $54.9 million,
reflecting lower utilization of services as a result of lower enrollment, as
well as lower rates received from the new FHP Provider contracts. However,
these reductions in purchased services expense were offset by an increase in
costs associated with the added medical services
23
required to be provided by the Talbert Medical Groups under the new FHP
Provider Agreements.
MARKETING, GENERAL AND ADMINISTRATIVE EXPENSE. Marketing, general and
administrative expense increased $3.2 million, or 25.3%, to $16.0 million (7.8%
of revenue) for the six months ended June 30, 1997, from $12.8 million (5.4% of
revenue) for the six months ended June 30, 1996. The increase was attributable
to increased marketing costs of $1.1 million, added costs of $891,000 attributed
to the implementation of new patient billing and claims processing systems, the
recognition of stock compensation expense of $611,000 in connection with the
capital contribution of $67.0 million and added financial administrative costs
of $561,000.
INTEREST INCOME. Net interest income increased $1.7 million, to $2.3
million for the six months ended June 30, 1997, compared to $651,000 for the
same period in the previous year. This increase is a result of growth in the
Company's cash balances as a result of the $67.0 million capital contribution
made in February 1997.
24
LIQUIDITY AND CAPITAL RESOURCES
The Company's consolidated cash and cash equivalents increased by $26.2
million to $67.5 million at June 30, 1997, from $41.2 million at June 30,
1996. This increase primarily reflects the capital contribution of $67.0
million the Company received on February 14, 1997, less reimbursements of
approximately $39.0 million the Company made to settle amounts due FHP for
medical service and other costs paid on behalf of the Company in connection
with the Company's separation from FHP. Reimbursements to FHP during the
period include the $23 million settlement immediately following the Merger
and a final settlement of intercompany balances made in May 1997.
The Company generates cash flow principally from monthly payments from
HMO's for their members who are serviced by the Talbert Medical Groups.
FHP's staff model operations, which comprise the Company's predecessor
businesses, experienced substantial operating losses over the last five
years. Subsidies from FHP have partially offset losses incurred in these
periods, but FHP has not provided such subsidies since March 1, 1997. In
addition, FHP's membership, including enrollees served by the Company, has
declined at unanticipated rates following the announcement of the Merger. If
such declines continued and were not offset by comparable gains in revenues
from other sources, they would adversely affect the Company's operations.
The new FHP Provider Agreements, executed pursuant to the terms of the
Merger, have resulted in lower revenues and higher expenses per enrollee.
Management, therefore, anticipates that the Company will incur substantial
losses in 1997 and 1998 and will not generate positive cash flow for those
periods.
The Company does not have a credit facility in place and there can be no
assurance that the Company will be able to obtain such a facility in the
future. The Company also does not have significant tangible assets, other
than computer equipment and tenant improvements. It, therefore, does not
anticipate that credit
25
facilities would be readily available to it without significant improvements
in its results of operations and cash flows.
Although the Company has experienced significant membership losses over
the past year, the trend of these losses appears to have improved in May,
June, and July of this year. The Company believes that its existing cash
resources will be sufficient to meet the Company's anticipated expansion and
working capital needs for the next several years. However, this belief
assumes that the Company's enrollment trends do not worsen, that expenses do
not increase in excess of anticipated amounts and that competitive pressures
or other factors do not further depress revenues
FORWARD-LOOKING STATEMENTS
Certain statements contained in Management's Discussion and Analysis of
Financial Condition and Results of Operations, particularly in the preceding
four paragraphs entitled "Liquidity and Capital Resources" and elsewhere in
this quarterly report on Form 10-Q, are forward-looking statements.
Statements in this quarterly report on Form 10-Q which address activities,
events or developments that the Company expects or anticipates will or may
occur in the future, including such things as results of operations and
financial condition, the consummation of acquisition and financing
transactions and the effect of such transactions on the Company's business
and the Company's plans and objectives for future operations and expansion.
These forward-looking statements are subject to risks and uncertainties,
including those identified as "Risk Factors" in the Company's Pre-Effective
Amendment No. 3 to the Registration Statement on Form S-1 filed on April 21,
1997. The foregoing should not be construed as an exhaustive list of all
factors which could cause actual results to differ materially from those
expressed in forward-looking statements made by the Company. Actual results
may materially differ from anticipated results described in these statements.
26
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
Information relating to certain litigation as set form in Note 6 of
Notes to Consolidated Financial Statements in Part I of this report is
incorporated herein by this reference.
On April 2, 1997, six former FHP International Corporation ("FHP")
stockholders filed a class action lawsuit entitled BRADY, ET. AL. v.
ANDERSON, ET. AL. in U.S. District Court for the Central District of
California. The lawsuit alleged certain violations of federal securities
laws and common law by certain of the former directors and officers of FHP
(many of whom are directors and/or officers of the Registrant), including
material misrepresentations in connection with FHP acquisition by PacifiCare
Health Systems, Inc. ("PacifiCare") and the separation of the Registrant from
FHP. The plaintiffs sought unspecified damages and other relief. The
Registrant was not named as a defendant in the lawsuit. Pursuant to the
terms of the acquisition agreement, PacifiCare assumed the defense of this
action. On July 28, 1997, the Court granted defendants' motion to dismiss
the complaint. Plaintiffs may file an amended complaint within thirty days
of this ruling.
ITEM 2. CHANGES IN SECURITIES.
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
ITEM 5. OTHER INFORMATION.
27
On June 12, 1997, the Registrant amended the Rights Agreement dated as of
May 21, 1997 by and between the Registrant and American Stock Transfer & Trust
Company. The Rights Agreement, as amended, is attached as Exhibit 4.1 to this
report.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits. See Index to Exhibits at page 30 of this report.
(b) Reports on Form 8-K. The Registrant filed a report on Form 8-K
on May 9, 1997, reporting its financial and operating results for the quarter
ended March 31, 1997. The Registrant also availed itself of the safe harbor
provided in the Securities Act of 1933 and the Securities Exchange Act of 1934
with respect to forward-looking statements by enumerating certain factors which
could cause events described in forward-looking statements to differ materially
form those expressed or implied in such forward-looking statements.
28
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.
TALBERT MEDICAL MANAGEMENT HOLDINGS CORPORATION
Dated: August 12, 1997 By: /s/ Kenneth S. Ord
--------------------------------------
Executive Vice President and
Chief Financial Officier
29
INDEX TO EXHIBITS
EXHIBIT
NUMBER
- --------
4.1 Rights Agreement, as amended, dated as of May 21, 1997 between
Talbert Medical Management Holdings Corporation and American Stock
Transfer & Trust Company.
10.1 Form of Employment Agreement between Talbert Medical Management
Holdings Corporation and Kenneth S. Ord, Russell D. Phillips, Jr.,
and Peter W. McKinley, dated May 19, 1997, May 21, 1997, and
June 16, 1997, respectively.
11.1 Statement Re: Computation of Earnings Per Share.
27.1 Financial Data Schedule.
30