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CALIFORNIA / News and Insight on Business in the Golden
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FHS Says Profit Will Fall Short of Forecasts

November 04, 1998|From Bloomberg News

Foundation Health Systems Inc. said Tuesday that it will take $117 million in charges and report earnings below forecasts as it moves to exit unprofitable businesses to help boost profits at its largest health plans.

The Woodland Hills-based company, one of the largest U.S. managed-care firms, also said it expects to have positive cash flow for the last two quarters of 1998 and all of 1999. It reported negative cash flow of $356 million from operating activities for the first half of this year.

The company's new chief executive, Jay Gellert, is trying to turn the company around. But earnings continue to suffer as Foundation sheds unprofitable units such as its workers' compensation business, closes money-losing health maintenance organizations marketed to patients on the government's Medicare program for the elderly, and focuses on its HMOs in California and the Northeast.

"If I were in their position, I think I'd do what they did, which is to write off everything but the kitchen sink," said Kent Simons, a fund manager at Neuberger & Berman, which holds 1.9 million Foundation shares. "The fact that they're cash-flow-positive is long overdue and a good sign."

The company said it expects to report next week profit from continuing operations of 24 cents a share, less than the 28-cent average estimate of analysts polled by First Call Corp.

The charges it is taking will total $175 million before taxes. That's greater than the $75 million to $125 million the company told investors about a month ago, said Edward Keaney, an analyst with Volpe Brown Whelan & Co.

Foundation shares fell 50 cents to close at $11.75 on the New York Stock Exchange.

The announcement was the latest in a series of earnings disappointments for Foundation, which was formed in April 1997 through the $1.3-billion merger of Foundation Health Corp. and Health Systems International Inc.

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