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 December 31, 1993
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 0-14796
FHP INTERNATIONAL CORPORATION
a Delaware Corporation
I.R.S. Employer Identification No. 33-0072502
9900 Talbert Avenue, Fountain Valley, CA 92708-8000
(Address of principal executive offices) (Zip Code)
(714) 963-7233
(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 ___.
The registrant had 32,121,482 shares of common stock, par value
$0.05 per share, outstanding at February 10, 1994.
The Exhibit Index Appears on Page 17
<PAGE>
PART 1 - FINANCIAL INFORMATION
Item 1. Financial Statements
FHP INTERNATIONAL CORPORATION
CONSOLIDATED BALANCE SHEETS
(unaudited)
ASSETS
(amounts in thousands, December 31, June 30,
except share data) 1993 1993
_____________ __________
Cash and cash equivalents $ 173,269 $ 2,700
Short-term investments 187,474 174,057
Accounts receivable (net of
allowance for doubtful
accounts of $10,791 and $7,147
at December 31, 1993 and
June 30, 1993, respectively) 62,135 56,288
Inventories 12,511 11,658
Other current assets (Note 4) 26,468 22,167
__________ ________
Total current assets 461,857 266,870
__________ ________
Property and equipment 486,460 455,915
Less accumulated depreciation
and amortization 128,238 109,607
__________ ________
Property and equipment, net 358,222 346,308
__________ ________
Long-term investments 76,245 38,723
Restricted investments 75,153 67,025
Other assets (Notes 4 & 7) 35,419 26,758
__________ ________
Total assets $1,006,896 $745,684
============ ========
__________
See accompanying notes to consolidated financial statements.
<PAGE>
FHP INTERNATIONAL CORPORATION
CONSOLIDATED BALANCE SHEETS
(unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY
(amounts in thousands, December 31, June 30,
except share data) 1993 1993
_____________ ________
Current portion of long-term
obligations $ 147 $ 2,474
Accounts payable 29,617 39,935
Medical claims payable 168,384 149,060
Accrued salaries and employee
benefits 84,640 69,940
Deferred premiums 143,633 17,678
Other current liabilities 17,267 16,817
__________ ________
Total current liabilities 443,688 295,904
Long-term obligations 103,064 20,802
Other liabilities 72,519 64,556
__________ ________
Total liabilities 619,271 381,262
__________ ________
Commitments and contingencies
(Note 6)
Stockholders' equity:
Preferred stock, $0.05 par value;
5,000,000 shares authorized;
none outstanding
Common stock, $0.05 par value;
70,000,000 shares authorized;
33,109,582 and 32,836,079 shares
issued at December 31, 1993 and
June 30, 1993, respectively 1,655 1,642
Paid-in capital 224,066 222,375
Retained earnings 161,904 140,405
_________ _______
Total stockholders' equity 387,625 364,422
_________ _______
Total liabilities and
stockholders' equity $1,006,896 $745,684
========== ========
__________
See accompanying notes to consolidated financial statements.
<PAGE>
FHP INTERNATIONAL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(unaudited)
For The
(amounts in thousands, Three Months Ended
except per share data) December 31,
________________________
1993 1992
________ ________
Revenue $591,107 $464,509
________ ________
Expenses:
Primary health care 472,349 373,368
Other health care 22,779 20,587
General, administrative and
marketing 82,295 64,294
________ ________
Total expenses 577,423 458,249
________ ________
Operating income 13,684 6,260
Interest income, net (Note 5) 3,207 3,450
________ ________
Income before income taxes 16,891 9,710
Provision for income taxes (Note 4) 6,638 3,559
________ ________
Net income $ 10,253 $ 6,151
======== ========
Earnings per share (Note 2) $ 0.31 $ 0.19
====== ======
Weighted average number of common
shares and common share
equivalents 33,533 33,233
====== ======
__________
See accompanying notes to consolidated financial statements.
<PAGE>
FHP INTERNATIONAL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(unaudited)
For The
(amounts in thousands, Six Months Ended
except per share data) December 31,
_______________________________
1993 1992
__________ ________
Revenue $1,167,486 $908,676
__________ ________
Expenses:
Primary health care 934,219 731,191
Other health care 45,831 41,507
General, administrative and
marketing 160,268 123,452
__________ ________
Total expenses 1,140,318 896,150
__________ ________
Operating income 27,168 12,526
Interest income, net (Note 5) 7,331 7,300
__________ ________
Income before income taxes 34,499 19,826
Provision for income taxes (Note 4) 13,000 7,231
__________ _______
Net income $ 21,499 $ 12,595
========== ========
Earnings per share (Note 2) $ 0.64 $ 0.38
====== ======
Weighted average number of common
shares and common share
equivalents 33,515 33,059
====== ======
__________
See accompanying notes to consolidated financial statements.
<PAGE>
FHP INTERNATIONAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
For The
Six Months Ended
(amounts in thousands) December 31,
______________________
1993 1992
________ ________
Operating Activities
Net income $ 21,499 $ 12,595
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation and amortization 21,104 14,379
Loss on disposal of equipment 1,285 427
Amortization of restricted stock awards 220
Deferred income taxes (1,948) (111)
Effect on cash of changes in
operating assets and liabilities,
net of effects of purchase of Colorado
health maintenance organization (HMO)
(Note 7):
Accounts receivable, net (5,706) (1,585)
Inventories (853) (1,429)
Other current assets (4,492) (959)
Other assets (3,814) (17,237)
Accounts payable (10,671) (1,766)
Medical claims payable 17,553 3,040
Accrued salaries and employee
benefits 14,700 2,834
Deferred premiums 125,805 112,938
Other liabilities 8,386 6,508
________ ________
Net cash provided by operating
activities 182,848 129,854
________ ________
Investing Activities
Increase in short-term investments (9,588) (706)
Purchases of property and equipment (35,416) (44,361)
Increase in long-term and
restricted investments (45,495) (21,172)
Purchase of Colorado HMO
(net of cash acquired) (3,419)
Payments received on notes receivable
from Employee Stock Ownership Trust 4,150
________ ________
Net cash used in investing activities (93,918) (62,089)
________ ________
<PAGE>
FHP INTERNATIONAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
(unaudited)
For The
Six Months Ended
(amounts in thousands) December 31,
________________________
1993 1992
_________ ________
Financing Activities
Issuance of common stock $ 13 $ 15
Proceeds from issuance of Senior Notes 100,000
Payments on long-term obligations (20,065) (1,896)
Exercise of stock options 1,691 1,559
________ ________
Net cash provided by (used in)
financing activities 81,639 (322)
________ ________
Increase in cash and cash
equivalents 170,569 67,443
Cash and cash equivalents at beginning
of period 2,700 73,560
________ ________
Cash and cash equivalents at end of period $173,269 $141,003
======== ========
Supplemental cash flow information:
Interest payments (net of portion
capitalized) $ 2,476 $ 1,147
Income tax payments (net of refunds) $ 17,803 $ 13,142
Note: Certain amounts previously classified as property, plant and
equipment of $3,039,000 were reclassified to other assets during the six
months ended December 31, 1993.
__________
See accompanying notes to consolidated financial statements.
<PAGE>
FHP INTERNATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
NOTE 1. Accounting Policies
Interim periods are viewed as an integral part of the annual period
of FHP International Corporation and subsidiaries (the "Company").
Accordingly, the results for the interim periods reported are based on
the accounting principles and practices followed by the Company as
presented in its Annual Report on Form 10-K for the year ended June 30,
1993. In the opinion of management, all adjustments necessary to fairly
present the financial position and the results of operations for the
three and six months ended December 31, 1993 and 1992 are included in
these consolidated financial statements.
NOTE 2. Earnings Per Share
Earnings per share for the three and six months ended December 31,
1993 and 1992 are computed by dividing net income by the weighted
average number of common shares and dilutive common stock options, which
are considered common share equivalents, outstanding during the periods.
NOTE 3. Reclassifications
Certain prior period amounts have been reclassified to conform to
the current period financial statement presentation.
NOTE 4. Income Taxes
The Company adopted Statement of Financial Accounting Standards
(SFAS) No. 109, Accounting for Income Taxes, effective as of July 1,
1993. This Statement supersedes Accounting Principles Board (APB)
Opinion No. 11, Accounting for Income Taxes. Under SFAS No. 109, income
taxes are recognized for (a) the amount of taxes payable or refundable
for the current year, and (b) deferred tax liabilities and assets for
the future tax consequences of events that have been recognized in the
Company's financial statements or tax returns. The effects of income
taxes are measured based on enacted tax law and rates. No cumulative
effect of the accounting change was recorded because the amount of
deferred tax assets and liabilities computed under the new method is not
significantly different from the amount recorded under the former method
using APB Opinion No. 11.
<PAGE>
FHP INTERNATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(unaudited)
NOTE 5. Capitalized Interest
The Company capitalizes interest costs as part of the cost of
constructing major facilities. Interest costs of $100,000 and $700,000
were capitalized during the three months ended December 31, 1993 and
1992, respectively. Interest costs of $496,000 and $1,421,000 were
capitalized during the six months ended December 31, 1993 and 1992
respectively.
NOTE 6. Commitments and Contingencies
During the ordinary course of business, the Company and its
subsidiaries have become party to pending and threatened legal actions
and proceedings, a significant portion of which involve alleged claims
of medical malpractice. Management is of the opinion that the outcome
of such legal actions and proceedings will not have a material effect on
the consolidated financial statements of the Company and its
subsidiaries.
NOTE 7. Acquisition
In October 1993, the Company acquired an approximately 4,700-member
health maintenance organization based in Denver, Colorado for
approximately $3.5 million. The acquisition, which has been accounted
for as a purchase, was financed through cash generated from operations
of the Company. As a result of the purchase, the Company recorded costs
in excess of net assets acquired of approximately $1,000,000. The
Company also obtained a covenant not to compete for which it paid
$500,000.
NOTE 8. Subsequent Event
On January 10, 1994, the Company announced it had reached an
agreement in principle to acquire TakeCare, Inc. ("TakeCare"), a health
maintenance organization serving over 755,000 commercial members in
California, Colorado, Illinois and Ohio. The agreement in principle
called for aggregate consideration of more than $800 million, or $62 per
share of TakeCare common stock. Under the terms of the agreement in
principle, TakeCare was required to negotiate exclusively with the
Company through February 7, 1994.
On February 8, 1994, TakeCare announced that it had not entered into
a definitive merger agreement with the Company and that, as a result,
the agreement in principle with the Company had terminated. TakeCare
also announced that its Board of Directors had concluded that TakeCare
should engage in discussions with other companies that have expressed an
interest in acquiring TakeCare before the TakeCare Board of Directors
reaches a decision as to the execution of any further agreement relating
to the sale or merger of TakeCare.
<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Three Months Ended December 31, 1993 Compared to
the Three Months Ended December 31, 1992
Revenue
Substantially all of the Company's revenue is generated by premiums
received for health care services provided to its HMO members. Revenue
for the three months ended December 31, 1993 totaled $591.1 million,
increasing 27.3% over revenue of $464.5 million for the same period in
the previous fiscal year.
Approximately 4.0% of the Company's revenue for the three months
ended December 31, 1993 was derived from its subsidiaries' indemnity
health and life insurance and workers' compensation products. This
compares to 3.4% for the same period during the previous fiscal year.
This increase reflected the March 1993 acquisition of an insurance
company specializing in providing workers' compensation coverage.
Commercial HMO revenue growth for the three months ended December
31, 1993 was generated by membership increases and premium rate
increases. Commercial per member per month revenue on average increased
3.0% over the prior year period, and is expected to average
approximately the same over the balance of fiscal 1994. The Company's
ability to increase commercial HMO premiums continues to be impacted by
increasing competition among HMOs and insurers in the Company's service
areas and by pressure from some large employers and other groups to
minimize rate increases or even reduce existing rates. The Company
expects to mitigate this impact by restructuring HMO benefits, and
offering additional managed care products and services.
Senior Plan revenue growth for the three months ended December 31,
1993 was generated by membership increases and rate increases on
premiums paid to the Company by the Health Care Financing Administration
("HCFA") for its Senior Plan members (individuals eligible for benefits
under the federal Medicare program). Revenue per Senior Plan member is
substantially higher than revenue per commercial plan member because
Senior Plan members use substantially more health care services.
The Company receives Senior Plan premium rate increases on January 1
of each year. Effective January 1, 1993, the Company received an
average 11.6% rate increase. Effective January 1, 1994, the Company
will receive an average annual premium rate increase of approximately
2.0% for its Senior Plan members. In an effort to offset this low rate
increase, the Company has modified Senior Plan benefits and introduced
new premium plans for Senior Plan members.
HMO Membership
The Company experienced a 13.7% growth in total HMO membership to
877,000 members at December 31, 1993 from 771,000 members at December
31, 1992. Senior Plan membership increased by 16.4% to 319,000 from
274,000, primarily in the Company's IPA and mixed models in California,
Arizona and Nevada. Commercial plan membership increased by 12.3% to
558,000 from 497,000, primarily in the Company's IPA and mixed models in
California and Nevada and in the staff model in Utah. Total staff model
membership grew 4.5% to 345,000 at December 31, 1993 from 330,000 at
December 31, 1992. Total IPA and mixed model membership grew 20.6% to
532,000 at December 31, 1993 from 441,000 at December 31, 1992. In
addition, in October 1993, the Company acquired an approximately 4,700-
member HMO in Denver, Colorado.
During the last three fiscal quarters, the Company has experienced
declining membership in certain staff model medical centers in Southern
California. The decline has been primarily among commercial members and
management believes this has been caused by increased competition, the
economic recession and substantial employment reductions in several
industry sectors. In January 1994, effective in the third quarter of
fiscal 1994, the Company signed a contract with the California
Department of Health Services that will allow it to enroll up to a
maximum of 10,000 Medi-Cal beneficiaries in Los Angeles County. The
Medi-Cal members will be served by the Company's five staff model
medical centers in Los Angeles County. Enrollment is expected to build
slowly over calendar 1994. In Arizona, commercial enrollment growth
slowed to approximately 3.8% over the year ended December 31, 1993, due
primarily to aggressive pricing by major competitors and a maturing
market. The Company's Senior Plan growth in Arizona has been
constrained by a HCFA rule that senior membership may not exceed
commercial membership. At December 31, 1993, Senior Plan membership in
Arizona equalled commercial membership.
Cost of Health Care
Health care costs increased 25.7% to $495.1 million for the three
months ended December 31, 1993 from $394.0 million for the three months
ended December 31, 1992. Health care costs decreased as a percent of
revenue to 83.8% in the current period from 84.8% in the same period
last year. This decrease resulted primarily from lower hospital costs
in the Company's California, Arizona, and New Mexico regions, as well as
a decrease in pharmacy and health care operations costs as a percentage
of revenue. Although the Company's California staff model operations
continued to be unfavorably impacted by fixed operating and delivery
system costs in certain medical centers, health care costs as a
percentage of revenue improved over the prior year period. The
Company's Utah operations incurred higher health care costs as a
percentage of revenue mainly due to the opening of a new hospital in
August 1993.
General, Administrative and Marketing Costs
General, administrative and marketing ("G & A") expenses increased
28.0% to $82.3 million for the second quarter of fiscal 1994 from $64.3
million for the second quarter of fiscal 1993. The increase resulted
primarily from growth in the Company's operations, increased advertising
expenses, costs associated with a small reduction in the Company's work
force, and the inclusion of G & A costs for Great States Insurance
Company ("GSIC") which was acquired in March 1993. G & A expenses for
the three months ended December 31, 1993 increased slightly as a
percentage of revenue to 13.9% from 13.8% for the same period in the
prior year.
Six Months Ended December 31, 1993
Compared to the Six Months Ended December 31, 1992
Revenue
Revenue for the six months ended December 31, 1993 totaled $1,167.5
million, increasing 28.5% over revenue of $908.7 million for the same
period in the previous year. Approximately 4.5% of the revenue for the
six months ended December 31, 1993, was related to the Company's
indemnity health insurance, workers' compensation and life insurance
programs.
Cost of Health Care
Health care costs increased 26.8% to $980.1 million for the six
months ended December 31, 1993, from $772.7 million for the comparable
six months ended December 31, 1992. Health care costs during the six-
month period decreased to 83.9% of total revenue from 85.0% of total
revenue in the same period last year primarily as a result of lower
hospital and health care operations costs. Although the Company's
California staff model operations continued to be unfavorably impacted
by fixed operating and delivery system costs in certain medical centers,
health care costs as a percentage of revenue improved over the prior
year period. The Company's Utah operations incurred higher health care
costs as a percentage of revenue mainly due to the opening of a new
hospital in August 1993.
General, Administrative and Marketing Costs
G & A expenses increased 29.8% to $160.3 million from $123.5 million
in the previous year, due to continuing expansion of the Company's
operations. G & A expenses were 13.7% of total revenue for the six
months ended December 31, 1993 versus 13.6% of total revenue for the
comparable period in the previous year. The increase resulted primarily
from the inclusion of G & A costs for GSIC which was acquired in March
1993.
Interest Income
Net interest income was $7.3 million in the first half of fiscal
1994 versus $7.3 million in the first half of fiscal 1993. Net interest
income remained constant primarily as the result of higher average
invested cash balances during the period offset by the interest expense
of the $100 million of 7% senior 10-year notes (the "Notes") issued in
September 1993. Also, capitalized interest decreased approximately $1.0
million year-over-year, due to the completion of several major
construction projects.
Liquidity and Capital Resources
The Company's cash, cash equivalents and short-term investments
increased by $183.9 million to $360.7 million at December 31, 1993 from
$176.8 million at June 30, 1993. This increase reflects the early
receipt in December 1993 of $130.0 million in premiums from HCFA due on
January 1, 1994 for medical services to be provided to Senior Plan
members in January 1994. Other major sources of cash during the six
months ended December 31, 1993, included cash generated from operations
of $52.8 million (excluding the early receipt of the HCFA premiums of
$130.0 million) and net proceeds from the "Notes" in September 1993.
Major uses of cash during the period included $35.4 million for capital
expenditures and $45.5 million in long-term and restricted investments.
The Company generally receives premiums on a prepaid basis and
therefore operates with relatively large cash balances. The Company
believes that the cash flow generated by its operations, current cash
balances and short-term investments will be sufficient to fund
continuing operations during fiscal 1994.
The net proceeds from the sale of the Notes was used to repay, in
full, certain outstanding indebtedness of approximately $21 million.
The Company has used $25.0 million of the remaining net proceeds to
increase the net surplus of an indirect insurance subsidiary of the
Company, with the balance available for general corporate purposes,
including possible acquisitions.
Effects of Regulatory Changes and Inflation
Effective January 1, 1994, the Company will receive an average
annual premium rate increase of approximately 2.0% for its Senior Plan
members. Over calendar years 1992 and 1993, average annual Senior Plan
premium increases granted by HCFA were approximately 5.0% and 11.6%,
respectively. The Company periodically evaluates the effects of HCFA
premium adjustments on its liquidity and capital resources, and
incorporates the actual and anticipated impact of such adjustments into
its planning process.
Effects of Southern California Earthquake
The Company is currently assessing the impact of the January, 1994,
earthquake in Southern California. After the earthquake, the Company
experienced an interruption in its rate of enrollment in the effected
areas of Southern California. The Company also lost some contract
provider and contract hospital capacity, and experienced some temporary
increase in emergency room usage. One company-operated facility was
temporarily affected. At this time, the Company does not have
sufficient information to fully assess the effect of the earthquake on
the Company's earnings for the year. However, management does not
believe the effect of the earthquake will have a material adverse effect
on the consolidated financial position of the Company.
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
Information relating to certain litigation as set forth in
Note 6 of Notes to Consolidated Financial Statements in Part I of this
report is incorporated herein by this reference.
Item 2. Changes in Securities.
None.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Submission of Matters to a Vote of Security Holders.
(a) The Annual Meeting of Stockholders was held on
November 18, 1993.
(b) Burke F. Gumbiner and Warner Heineman were elected as
Directors to serve three-year terms ending in 1996. Other Directors
whose terms of office continued after the meeting were Westcott W. Price
III, Joseph F. Prevratil, Mark Hacken, Robert Gumbiner and Richard M.
Rodnick.
(c) The Stockholders elected Burke F. Gumbiner as a
Director by vote of 22,897,884 for and 193,189 authority withheld. The
Stockholders elected Warner Heineman as a Director by a vote of
22,859,096 for and 231,977 authority withheld.
The Stockholders approved by a vote of 22,996,609 for,
48,255 against, 46,197 abstaining and 12 broker non-votes, the
ratification of the appointment of Deloitte & Touche as independent
auditors of the Company for the fiscal year ending June 30, 1994.
Item 5. Other Information.
Information relating to the possible acquisition of
TakeCare, Inc. as set forth in Note 8 of Notes to Consolidated Financial
Statements in Part I of this report is incorporated herein by this
reference.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits. See Index to Exhibits at
page 17 of this report.
(b) Reports on Form 8-K. None filed during
the second quarter of Fiscal 1994.
<PAGE>
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.
FHP INTERNATIONAL CORPORATION
Dated: February 14, 1994 By: /s/ VALERIE A. FLETCHER
________________________________
Valerie A. Fletcher, Controller
(Chief Accounting Officer)
<PAGE>
INDEX TO EXHIBITS
Exhibit
Number
*4.1 Specimen Common Stock Certificate (Exhibit 4.1 to Form S-3
Registration Statement No. 33-39984).
4.2 Registrant agrees to furnish to the Commission upon request a
copy of each instrument with respect to issues of long-term debt
of the Registrant, the authorized principal amount of which does
not exceed 10% of total assets of Registrant.
10.1 Employment Contract dated as of November 1, 1993, between the
Company, FHP, Inc. and Mark B. Hacken.
11.1 Statement Re: Computation of Earnings Per Share.
