<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
________________
FORM 8-K/A
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Date of report (Date of earliest event reported): June 17, 1994
FHP INTERNATIONAL CORPORATION
(Exact Name of Registrant as Specified in Charter)
Delaware 0-14796 33-0072502
(State or Other Jurisdiction (Commission (IRS Employer
of Incorporation) File Number) Identification No.)
9900 Talbert Avenue, Fountain Valley, California 92708
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (714) 963-7233
Not Applicable
(Former Name or Former Address, if Changed Since Last Report)
<PAGE>
Item 7 of the Registrant's Current Report on Form 8-K, event date
17, 1994, is amended to read in its entirety as follows:
Item 7. Financial Statements, Pro Forma Financial Information
and Exhibits.
Item 7(a). Financial Statements of Business Acquired.
Unaudited Consolidated Balance Sheet as of March 31,
1994, and Unaudited Consolidated Income Statement for
three months ended March 31, 1994.
<PAGE>
TAKECARE, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except per share data)
March 31, December 31,
1994 1993
ASSETS --------- ------------
(unaudited)
Current assets:
Cash and cash equivalents............. $91,896 $ 89,039
Short-term investments................ 69,864 70,819
Premiums receivable, less allowance
for uncollectible premiums......... 30,579 29,811
Deferred income taxes................. 19,671 22,971
Other current assets.................. 16,712 19,743
__________ __________
Total current assets............... 228,722 232,383
Intangible assets, net of accumulated
amortization.......................... 225,505 227,611
Furniture and equipment, at cost, net
of accumulated depreciation........... 16,720 15,133
Long-term investments................... 49,159 34,203
__________ __________
Total assets..................... $ 520,106 $ 509,330
========= ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Claims payable and incurred but not
reported claims.................... $ 110,635 $ 100,060
Accrued shared-risk pool incentive.... 18,743 19,751
Deferred premium revenue.............. 18,623 18,412
Other payable and accrued liabilities. 56,237 56,450
Income taxes payable.................. 5,617 5,388
Current portion of long-term debt..... 15,000 15,000
__________ __________
Total current liabilities.......... 224,855 215,061
Deferred income taxes................... 6,054 6,200
Long-term debt ......................... 22,500 35,000
Other liabilities....................... 1,463 1,571
Stockholders' equity:
Preferred stock, par value $1.00;
1,000 shares authorized;
none issued........................ --- ---
Common stock, par value $.10; 20,000
shares authorized; 12,912 shares
and 12,838 shares issued and
outstanding........................ 1,291 1,284
Additional paid-in capital............ 157,084 154,877
Retained earnings..................... 106,859 95,337
__________ __________
Total stockholders' equity......... 265,234 251,498
Total liabilities and
stockholders' equity.......... $ 520,106 $ 509,330
========= =========
See accompanying notes.
<PAGE>
TAKECARE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(unaudited)
Three Months Ended
March 31,
_________________________
1994 1993
__________ __________
Revenue:
Premium revenue....................... $ 300,767 $ 201,062
Other revenue......................... 2,630 2,607
Interest income....................... 1,548 1,447
_________ _________
Total revenue...................... 304,945 205,116
Expenses:
Health care expense................... 247,422 166,548
Marketing and administrative expense.. 33,315 22,321
Interest expense...................... 611 496
Amortization and depreciation ........ 3,294 1,638
_________ _________
Total expenses..................... 284,642 191,003
_________ _________
Income before income taxes.............. 20,303 14,113
Income taxes............................ (8,781) (6,215)
_________ _________
Net income ............................. $ 11,522 $ 7,898
========= =========
Earnings per share...................... $ .86 $ .70
Weighted average shares of common stock
and common stock equivalents
outstanding........................... 13,403 11,313
See accompanying notes.
<PAGE>
TAKECARE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
Three Months Ended
March 31,
______________________
1994 1993
_________ _________
Cash flows from operating activities:
Net income............................... $ 11,522 $ 7,898
Adjustments to reconcile net income
to net cash provided by
operating activities:
Amortization and depreciation.......... 3,294 1,638
Deferred income taxes.................. 3,154 409
Changes in operating assets and
liabilities:
Decrease(increase) in premiums
receivable ......................... (768) 2,818
Decrease in other current assets..... 3,031 2,119
Increase in long-term investments.... --- (1,469)
Increase in claims payable and
incurred but not reported claims.... 10,575 3,922
Increase (decrease) in accrued
shared-risk pool incentive.......... (1,008) 920
Increase in deferred premium revenue 211 1,961
Increase (decrease) in other payables
and accrued liabilities............. (213) 5,521
Increase in income taxes payable,
excluding income tax benefit from
exercise of stock options........... 2,023 2,429
_________ _________
Net cash provided by operating
activities........................ 31,821 28,166
Cash flows from investing activities:
Proceeds from sale of investments........ 24,011 46,913
Purchase of investments.................. (38,012) (75,370)
Purchase of furniture and equipment...... (2,775) (754)
_________ _________
Net cash used by investing activities (16,776) (29,211)
Cash flows from financing activities:
Principal payment of long-term debt...... (12,500) (1,800)
Exercise of stock options................ 420 61
Payment of other liabilities............. (108) ---
_________ _________
Net cash used by financing activities (12,188) (1,739)
_________ _________
Increase (decrease) in cash and cash
equivalents.............................. 2,857 (2,784)
Cash and cash equivalents:
Beginning of period...................... 89,039 86,697
_________ _________
End of period............................ $ 91,896 $ 83,913
========= =========
See accompanying notes.
<PAGE>
TAKECARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1994
(unaudited)
1. Basis of presentation
The interim consolidated financial statements have been prepared
without audit, pursuant to the rules and regulations of the
Securities and Exchange Commission (SEC). 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
SEC rules and regulations; nevertheless, management believes that
the disclosures herein are adequate to make the information
presented not misleading. These consolidated financial
statements should be read in conjunction with the consolidated
financial statements and notes thereto included in the Company's
1993 Annual Report on Form 10-K filed with the SEC in March 1994.
In the opinion of management, all adjustments, consisting only of
normal recurring adjustments, necessary to fairly present the
consolidated financial position of the Company as of March 31,
1994, and the consolidated results of its operations and its
consolidated cash flows for the periods shown in the interim
consolidated financial statements, have been included herein.
The results of operations for the interim periods are not
necessarily indicative of the results for the full years.
2. Investments
In May 1993 the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 115, "Accounting
for Certain Investments in Debt and Equity Securities,"
(Statement 115), which was implemented by the Company effective
January 1, 1994. The Company has classified substantially all of
its investment portfolio as "available-for-sale." In accordance
with Statement 115, investments classified as "available-for-
sale" are recorded at fair value, and unrealized gains or losses
are reported on a separate caption in stockholders' equity.
Implementation of Statement 115 has had no material impact on the
Company's financial statements, since unrealized gains and losses
at March 31, 1994 were not material.
3. Intangible assets
Intangible assets consist primarily of the excess of the purchase
price of acquired subsidiaries over the net tangible assets
acquired and represent the long-term earning capacity of the
businesses acquired. Intangible assets are amortized on a
straight-line basis over 30 years.
<PAGE>
4. Long-term debt
The Company established a credit facility in May 1992, which was
amended in August 1993, and which consists of a term loan, the
outstanding balance of which was $31.5 million at March 31, 1994,
and a reducing revolving line of credit, the outstanding balance
of which was $6.0 million at March 31, 1994, each terminating
June 30, 1997. The credit facility is secured by substantially
all assets of the Company. There is an unused balance of $34.0
million available under the line of credit at March 31, 1994.
Borrowings under the credit facility bear interest at a floating
rate that is based primarily on the principal lender's prime rate
in the London interbank market.
The term loan requires prepayments in addition to quarterly
installments if assets or subsidiaries are sold, or if debt or
capital stock is issued. Prepayments are also required if there
is cash flow in excess of certain defined amounts. The credit
facility is subject to covenants that include maintaining certain
financial ratios, various restrictions regarding sales of assets,
liens, guarantees, dividends, etc. and limitations regarding
investments, annual lease obligations and annual capital
expenditures.
5. Acquisition
The Company acquired all of the outstanding stock of Comprecare,
Inc. (Comprecare) on September 9, 1993. The acquisition was
treated as a purchase for accounting purposes. Accordingly, the
consolidated financial statements include the operations of
Comprecare, which consists primarily of an HMO, beginning
September 9, 1993. The purchase price was approximately $49.5
million in cash, 1,817,000 shares of the Company's common stock,
and options to purchase approximately 151,000 shares of the
Company's common stock for $3.70 per share. The Company financed
the cash portion of the purchase price, as well as its repayment
of Comprecare's outstanding long-term debt, the balance of which
was $15.5 million, through borrowings under its credit facility
(see Note 3).
The following table summarizes the pro forma consolidated results
of operations of the Company as though the acquisition of
Comprecare had occurred on January 1, 1993. The pro forma
consolidated results of operations shown below do not necessarily
represent what the consolidated results of operations of the
Company would have been if the acquisition of Comprecare had
actually occurred on January 1, 1993, nor do they represent a
forecast of the consolidated results of operations of the Company
for any future period.
<PAGE>
Three Months Ended March 31, 1993
(in thousands, except per share data)
Premium revenue........................$ 268,600
Income before income taxes............. 15,700
Net income............................. 8,600
Earnings per share..................... .65
6. Merger
On March 3, 1994, the Company entered into an agreement and plan
of merger with FHP International Corporation (FHP) under which
FHP agreed to acquire all the outstanding common stock of the
Company. FHP agreed to exchange 1.6 shares of its convertible
preferred stock, $28 in cash, and between .41379 and .48000
shares of its common stock, depending upon the average closing
price of FHP's common stock near the effective date of the
merger, for each outstanding share of the Company's common stock.
The merger is contingent upon customary closing conditions,
including approval by the stockholders of both the Company and
FHP (at stockholder meetings scheduled to occur on June 10,
1994), regulatory approvals, and FHP obtaining financing.
<PAGE>
Audited Consolidated Balance Sheets as of December 31,
1993 and December 31, 1992, and Audited Statements
of Operations, Stockholders' Equity, and Cash Flows
for the years ended December 31, 1993, December 31, 1992
and December 31, 1991.
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors
TakeCare, Inc.
We have audited the accompanying consolidated balance sheets of
TakeCare, Inc. as of December 31, 1993 and 1992, and the related
consolidated statements of operations, stockholders' equity, and
cash flows for each of the three years in the period ended
December 31, 1993. These financial statements are the responsibility
of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to
above present fairly, in all material respects, the consolidated
financial position of TakeCare, Inc. at December 31, 1993 and
1992, and the consolidated results of its operations and its cash
flows for each of the three years in the period ended December
31, 1993, in conformity with generally accepted accounting
principles.
/s/ Ernst & Young LLP
Walnut Creek, California
February 23, 1994, except for Notes 8 and 9, as to which the date is
March 3, 1994 and August 3, 1994, respectively.
<PAGE>
TAKECARE, INC.
CONSOLIDATED BALANCE SHEETS
December 31, 1993 and 1992
(in thousands, except per share data)
December 31,
___________________
1993 1992
_______ ________
ASSETS
Current assets:
Cash and cash equivalents. . . . . . . . . . . . . . . $ 89,039 $ 86,697
Short-term investments . . . . . . . . . . . . . . . . 70,819 49,535
Premiums receivable, less allowance for uncollectible
premiums of $3,417 and $2,031. . . . . . . . . . . . 29,811 25,509
Deferred income taxes (Note 3) . . . . . . . . . . . . 22,971 11,129
Other current assets . . . . . . . . . . . . . . . . . 19,743 15,127
________ ________
Total current assets . . . . . . . . . . . . . . 232,383 187,997
Intangible assets, net of accumulated amortization of
$12,258 and $6,370 . . . . . . . . . . . . . . . . . . 227,611 133,589
Furniture and equipment, at cost, net of accumulated
depreciation of $3,487 and $1,143. . . . . . . . . . . 15,133 7,920
Long-term investments. . . . . . . . . . . . . . . . . . 34,203 6,880
________ ________
Total assets . . . . . . . . . . . . . . . . . . $509,330 $336,386
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Claims payable and incurred but not reported claims. . $100,060 $ 84,780
Accrued shared-risk pool incentive . . . . . . . . . . 19,751 18,685
Deferred premium revenue . . . . . . . . . . . . . . . 18,412 11,590
Other payables and accrued liabilities . . . . . . . . 56,450 27,597
Income taxes payable . . . . . . . . . . . . . . . . . 5,388 1,916
Current portion of long-term debt. . . . . . . . . . . 15,000 6,960
________ ________
Total current liabilities. . . . . . . . . . . . 215,061 151,528
Deferred income taxes (Note 3) . . . . . . . . . . . . . 6,200 5,768
Long-term debt . . . . . . . . . . . . . . . . . . . . . 35,000 28,343
Other liabilities. . . . . . . . . . . . . . . . . . . . 1,571 ---
Commitments and contingencies (Note 4) . . . . . . . . . --- ---
Stockholders' equity (Notes 5 and 6):
Preferred stock, par value $1.00; 1,000 shares
authorized; none issued. . . . . . . . . . . . . . . --- ---
Common stock, par value $.10; 20,000 shares
authorized; 12,838 shares and 10,876 shares issued
and outstanding. . . . . . . . . . . . . . . . . . . 1,284 1,088
Additional paid-in capital . . . . . . . . . . . . . . 154,877 91,946
Retained earnings. . . . . . . . . . . . . . . . . . . 95,337 57,713
-------- --------
Total stockholders' equity . . . . . . . . . . . 251,498 150,747
-------- --------
Total liabilities and stockholders' equity . . . $509,330 $336,386
======== ========
See accompanying notes.
<PAGE>
TAKECARE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
Years ended December 31, 1993, 1992 and 1991
(in thousands, except per share data)
Year ended December 31,
____________________________
1993 1992 1991
______ ______ ______
Revenue:
Premium revenue. . . . . . . . . . . . . . . . $910,484 $606,412 $287,419
Other revenue. . . . . . . . . . . . . . . . . 10,714 8,744 ---
Interest income. . . . . . . . . . . . . . . . 6,073 5,289 5,653
________ ________ ________
Total revenue . . . . . . . . . . . . . 927,271 620,445 293,072
Expenses:
Medical services . . . . . . . . . . . . . . . 370,400 253,882 121,042
Hospital services. . . . . . . . . . . . . . . 294,588 190,545 84,121
Other health care expense. . . . . . . . . . . 80,605 61,368 30,516
Marketing and administrative expense . . . . . 105,074 63,029 25,894
Interest expense . . . . . . . . . . . . . . . 2,190 3,566 1,752
Amortization and depreciation. . . . . . . . . 8,318 4,449 1,145
________ ________ ________
Total expenses . . . . . . . . . . . . . 861,175 576,839 264,470
________ ________ ________
Income before income taxes . . . . . . . . . . . 66,096 43,606 28,602
Income taxes (Note 3). . . . . . . . . . . . . . (28,472) (18,258) (11,727)
________ ________ ________
Net income. . . . . . . . . . . . . . . . . . . $ 37,624 $ 25,348 $ 16,875
======== ======== ========
Earnings per share. . . . . . . . . . . . . . . $ 3.14 $ 2.49 $ 1.88
======== ======== ========
Weighted average shares of common stock and
common stock equivalents outstanding. . . . . 11,982 10,164 8,954
======== ======== ========
See accompanying notes.
<PAGE>
TAKECARE, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years ended December 31, 1993, 1992 and 1991
(in thousands)
Additional
Common Stock Paid-in Retained
Shares Amount Capital Earnings Total
Balances at December 31, 1990. . . 7,075 $ 707 $ 4,293 $15,490 $20,490
Net income . . . . . . . . . . . . --- --- --- 16,875 16,875
Issuance of common stock in
public offering . . . . . . . . . 1,750 175 30,364 --- 30,539
Exercise of stock options. . . . . 194 20 802 --- 822
Income tax benefit from exercise
of stock options. . . . . . . . . --- --- 1,008 --- 1,008
_____ ______ ________ _______ ________
Balances at December 31, 1991. . . 9,019 902 36,467 32,365 69,734
Net income . . . . . . . . . . . . --- --- --- 25,348 25,348
Issuance of common stock in
public and private offerings . . 1,707 171 52,650 --- 52,821
Exercise of stock options. . . . . 150 15 720 --- 735
Income tax benefit from exercise
of stock options. . . . . . . . . --- --- 2,109 --- 2,109
_____ ______ ________ _______ ________
Balances at December 31, 1992. . . 10,876 1,088 91,946 57,713 150,747
Net income . . . . . . . . . . . . --- --- --- 37,624 37,624
Issuance of common stock . . . . . 1,817 182 59,783 --- 59,965
Exercise of stock options. . . . . 145 14 651 --- 665
Income tax benefit from exercise
of stock options. . . . . . . . . --- --- 2,497 --- 2,497
______ _______ ________ ________ ________
Balances at December 31, 1993. . . 12,838 $ 1,284 $154,877 $ 95,337 $251,498
====== ======= ======== ======== ========
See accompanying notes.
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TAKECARE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31, 1993, 1992 and 1991
(in thousands)
Year ended December 31,
________________________________
1993 1992 1991
_______ _______ _______
Cash flows from operating activities:
Net income . . . . . . . . . . . . . . . . . $ 37,624 $ 25,348 $ 16,875
Adjustments to reconcile net income to net
cash provided by operating activities:
Amortization and depreciation . . . . . . 8,318 4,449 1,145
Deferred income taxes . . . . . . . . . . (2,295) (2,130) (2,551)
Changes in operating assets and liabilities, net
of effects of acquisitions:
Decrease (increase) in premiums receivable 4,424 (2,189) 2,025
Decrease (increase) in other current assets (4,027) 2,610 (484)
Increase in deferred income taxes. . . . (8,169) --- ---
Increase in long-term investments. . . . --- (176) ---
Increase in claims payable and incurred
but not reported claims. . . . . . . . 3,781 45,449 3,274
Increase (decrease) in deferred premium
revenue. . . . . . . . . . . . . . . . 5,997 (3,029) 1,049
Increase in accrued shared-risk pool
incentive . . . . . . . . . . . . . . 762 4,409 3,698
Increase in other payables and accrued
liabilities . . . . . . . . . . . . . 22,734 7,490 2,822
Increase (decrease) in income taxes
payable, excluding income tax benefit
from exercise of stock options . . . . 2,788 4,025 (1,494)
______ _______ _______
Net cash provided by operating
activities . . . . . . . . . . . . . 71,937 86,256 26,359
Cash flows from investing activities:
Cost of acquisitions, net of cash acquired . (98,504)(150,303) ---
Proceeds from sale of investments. . . . . . 216,300 136,298 81,928
Purchase of investments. . . . . . . . . . . (242,482) (95,997) (122,424)
Purchase of furniture and equipment. . . . . (4,558) (3,191) (512)
_______ ________ ________
Net cash used by investing activities. (129,244)(113,193) (41,008)
Cash flows from financing activities:
Proceeds from long-term borrowings . . . . . 66,000 108,300 ---
Issuance of common stock and stock options . 59,965 52,821 30,539
Exercise of stock options. . . . . . . . . . 665 735 822
Principal payment of long-term debt. . . . . (66,755) (93,081) (8,800)
Payment of other long-term liabilities . . . (226) --- ---
_______ _______ _______
Net cash provided by financing activities. 59,649 68,775 22,561
_______ _______ _______
Increase in cash and cash equivalents . . . . 2,342 41,838 7,912
Cash and cash equivalents:
Beginning of year . . . . . . . . . . . . . . 86,697 44,859 36,947
_______ _______ _______
End of year. . . . . . . . . . . . . . . . . . $ 89,039 $ 86,697 $ 44,859
======== ======== ========
Supplemental disclosure of cash flow information:
Cash paid during the year for interest . . . . $ 2,105 $ 3,622 $ 2,099
Cash paid during the year for income taxes . . 32,025 15,702 16,480
See accompanying notes.
<PAGE>
TAKECARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1993
1. Summary of significant accounting policies
Organization
TakeCare, Inc. (the Company) owns and operates several
health maintenance organizations (HMOs) and other related
businesses. The consolidated financial statements include the
accounts of the Company and its subsidiaries, all of which are
wholly-owned. All significant intercompany transactions have
been eliminated. See Note 7 for a description of significant
acquisitions by the Company during 1992 and 1993.
Cash equivalents and short-term investments
Cash equivalents consist of marketable securities with
maturity dates less than three months after the date of purchase.
Short-term investments consist of marketable securities with
maturity dates less than one year after the date of purchase.
Cash equivalents and short-term investments are stated at cost
which approximates market. In the opinion of management, there
is no significant concentration of credit risk in these
marketable securities as of December 31, 1993.
Intangible assets
Intangible assets consist primarily of the excess of the
purchase price of acquired subsidiaries over the net tangible
assets acquired and represent the long-term earning capacity of
the businesses acquired. Intangible assets are amortized on a
straight-line basis over 30 years. Intangible assets are
assessed at each balance sheet date to determine whether there has
been an impairment thereof.
Furniture and equipment
Furniture and equipment is recorded at cost, and depreciated
on a straight-line basis over five to ten years, except for
certain computer software, which is depreciated on an accelerated
basis over five years.
Claims payable and incurred but not reported claims
The liability for claims payable and incurred but not
reported claims is estimated using the most recent data available
for claims incurred prior to but not yet paid as of the balance
sheet date. The accrued shared-risk pool incentive liability is
based in part on the estimate of incurred but not reported
claims.
Revenue recognition
Premium revenue is recognized during the applicable month of
coverage. Deferred premium revenue represents cash received from
employer groups in advance of the applicable period of coverage.
In the opinion of management, there is no significant
concentration of credit risk in the premiums receivable from
employer groups.
Major customers
One employer group accounted for 11% of the Company's
premium revenue during 1993. There were no employer groups that
accounted for 10% or more of the Company's premium revenue during
1992 or 1991.
Health care expenses
The Company's HMO subsidiaries provide incentives for the
participating medical groups and physicians to control health
care expenses through the use of various risk-sharing
arrangements. Incentive payments are made to medical groups and
physicians based on their performance in controlling health care
costs. Expenses related to these risk-sharing arrangements are
recorded in the period in which the related health care expenses
are incurred.
The Company's HMO subsidiaries purchase reinsurance to cover
hospital expenses in excess of a specified annual amount per member.
Reinsurance premiums are reported as health care expenses and
related reinsurance recoveries are reported as reductions in
health care expenses.
Pension plan
The Company has a Savings and Retirement Plan (the 401(k)
Plan) available to employees. Eligible employees can make
elective contributions to a trust, provided the annual
contribution to each employee's account does not exceed the
maximum allowed by the Internal Revenue Code. During 1993, 1992
and 1991 the Company made $837,000, $557,000 and $111,000 of
matching contributions to the 401(k) Plan, which is included in
marketing and administrative expense.
Earnings per share
Earnings per share is calculated by dividing net income by
the weighted average number of shares of common stock and common
stock equivalents outstanding during the period. The number of
common shares outstanding in 1991 has been adjusted for the stock
split described in Note 6. Common stock equivalents consist of
stock options granted to key executives and participating medical
groups (see Note 5).
Fair value of financial instruments
In the opinion of management, the balances of cash and cash
equivalents, short-term investments, premiums receivable, long-
term investments, and long-term debt all approximate their
respective fair values.
Unrealized gains and losses
In May 1993 the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 115, "Accounting
for Certain Investments in Debt and Equity Securities" (Statement
115), which establishes a new method of accounting for unrealized
gains and losses on investments. The Company has not yet
implemented Statement 115, but is required to do so effective
January 1, 1994. Implementation of Statement 115 is not expected
to have a material effect on the Company's financial statements,
since unrealized gains and losses on investments have not been
material.
2. Long-term debt
Long-term debt consists of the following (in thousands):
December 31,
___________________
1993 1992
______ ______
Credit Facility . . . . . . . . . $ 50,000 $ 35,303
Less current portion. . . . . . 15,000 6,960
________ ________
Long-term debt. . . . . . . . . $ 35,000 $ 28,343
======== ========
Scheduled debt maturities at December 31, 1993 are as follows
(in thousands):
1994. . . . . . . . . . . . . . . . . . . . . . $ 15,000
1995. . . . . . . . . . . . . . . . . . . . . . 15,000
1996. . . . . . . . . . . . . . . . . . . . . . 14,000
1997. . . . . . . . . . . . . . . . . . . . . . 6,000
________
Total . . . . . . . . . . . . . . . . . . . $ 50,000
========
The credit facility consists of a term loan, the outstanding
balance of which was $44.0 million at December 31, 1993, and a
reducing revolving line of credit, the outstanding balance of
which was $6.0 million at December 31, 1993, each terminating
June 30, 1997. The credit facility is secured by substantially
all assets of the Company. There is an unused balance of $34.0
million available under the line of credit at December 31, 1993.
Borrowings under the credit facility bear interest at a floating
rate that is based primarily on the principal lender's prime rate
in the London interbank market. The weighted average interest
rate on the outstanding balance of the term loan at December 31,
1993 was 4.9%.
The term loan requires prepayments in addition to quarterly
installments if assets or subsidiaries are sold, or if debt or
capital stock is issued. Prepayments are also required if there
is cash flow in excess of certain defined amounts. The credit
facility is subject to covenants that include maintaining certain
financial ratios, various restrictions regarding sales of assets,
liens, guarantees, dividends, etc. and limitations regarding
investments, annual lease obligations and annual capital
expenditures.
<PAGE>
3. Income taxes
Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes (Statement 109)" was implemented
effective January 1, 1993, which changed the Company's method of
accounting for income taxes from the deferred method to the
liability method. Implementation of Statement 109 resulted in no
material effect on the Company's financial statements.
Deferred income taxes reflect the tax effects of temporary
differences in the recognition of certain revenues and expenses
for financial reporting and income tax purposes. Significant
components of the Company's deferred tax assets and liabilities
as of December 31, 1993 are as follows (in thousands):
Deferred tax assets:
Health care expenses . . . . . . . $ 18,928
Bad debt expense . . . . . . . . . 1,107
State income taxes . . . . . . . . 703
Accrued bonus. . . . . . . . . . . 657
Other. . . . . . . . . . . . . . . 1,576
________
Total . . . . . . . . . . . 22,971
Valuation allowance. . . . . . . . ---
________
Deferred tax assets, net of
valuation allowance. . 22,971
Deferred tax liabilities:
Amortization and depreciation . . . 6,200
________
Net deferred tax assets . . . $ 16,771
========
There was no change in the valuation allowance during the
year ended December 31, 1993.
<PAGE>
Significant components of the provision for income taxes are
as follows (in thousands):
Liability
Method Deferred Method
________________
1993 1992 1991
_________ _______ _______
Current: Federal . . . . $25,818 $15,956 $11,119
State . . . . . 4,949 4,432 3,159
Deferred: Federal . . . . (1,882) (1,737) (2,109)
State . . . . . (413) (393) (442)
_______ _______ _______
Total . . . . . $28,472 $18,258 $11,727
======= ======= =======
Significant components of the provision for deferred income
taxes for the years ended December 31, 1992 and 1991 are as
follows (in thousands):
1992 1991
_______ _______
Amortization and depreciation . . . $ 1,415 $ 1,437
Health care expenses. . . . . . . . (5,380) (3,555)
Losses of operations held for sale. 1,835 ---
Premium revenue . . . . . . . . . . --- (854)
Other, net. . . . . . . . . . . . . --- 421
_______ _______
Total. . . . . . . . . . $(2,130) $(2,551)
======== ========
The reconciliation of income taxes computed at the federal
statutory tax rates to income tax expense is as follows (in
thousands):
Liability
Method Deferred Method
________________
1993 1992 1991
_________ _______ _______
Federal statutory rate. . . 35.0% 34.0% 34.0%
State income taxes, net of
federal benefit . . . . . 4.8 6.0 6.1
Amortization of intangible
assets . . . . . . . . . 2.3 1.9 0.9
Other, net. . . . . . . . . 1.0 -- --
____ ____ ____
Total. . . . . . . 43.1% 41.9% 41.0%
==== ==== ====
The Company has received a notice of proposed adjustment
from the Internal Revenue Service with respect to its tax returns
for 1988 through 1991. In the opinion of management, any such
adjustment will not have a material effect on the Company's
financial statements.
4. Commitments and contingencies
Professional liability
The Company has professional liability insurance for
potential claims incurred in connection with its operations,
which covers claims made during the policy period. The Company
intends to keep the current insurance policy in force during the
foreseeable future. In the opinion of management, there are no
professional liability claims outstanding which, individually or
in the aggregate, would have a material adverse effect on the
Company's financial statements.
Operating leases
The Company is obligated for office and equipment rental
under the terms of various operating leases. Operating lease
expense was $4,063,000, $3,231,000, and $802,000 for the years
ended December 31, 1993, 1992 and 1991. At December 31, 1993,
minimum rental payments under noncancelable operating leases were
as follows (in thousands):
1994 . . . . . . . . . . $ 4,305
1995 . . . . . . . . . . 3,928
1996 . . . . . . . . . . 2,952
1997 . . . . . . . . . . 1,767
1998 and thereafter. . . 2,372
_______
Total. . . . . . . $15,324
=======
Subsequent to December 31, 1993, the Company entered into an
operating lease agreement for office space under which it became
obligated for minimum aggregate rental payments of $9,529,000
during the period from 1994 to 1998, in excess of the commitments
shown above.
Litigation
The Company is involved in various legal actions in the
normal course of business. In the opinion of management, such
legal actions will not have a material effect on the Company's
financial statements.
5. Stockholders' equity
Stock options
The Company granted options to purchase shares of
outstanding common stock of its subsidiary, TakeCare Health Plan,
Inc. (THP), to key executives and certain participating medical
groups (PMGs) during the period from 1988 to 1991. Activity in
such stock options during 1991 was as follows:
Number Weighted Average
of Shares Exercise Price
_________ _________________
Outstanding at December 31, 1990 . 3,008,900 $ 1.17
Granted during 1991 . . . . . . . 50,000 2.50
Terminated during 1991 . . . . . . (3,058,900) 1.20
__________ _______
Outstanding at December 31, 1991 . --- $ ---
========== =======
During 1991, outstanding options to purchase 3,058,900
shares of THP's outstanding common stock at a weighted average
exercise price of $1.20 per share were terminated and replaced
with options to purchase 734,566 shares of the Company's common
stock at a weighted average exercise price of $4.98 per share
(the Replacement Options). Stock option activity in 1991, 1992
and 1993 was as follows:
Number Weighted Average
of Shares Exercise Price
_________ ________________
Granted to replace terminated
options during 1991 ........ 734,566 $ 4.98
Granted during 1991 .......... 165,000 18.50
Exercised during 1991 ........ (193,918) 4.24
Expired during 1991 .......... (40,700) 9.56
________ _______
Outstanding at
December 31, 1991 ........ 664,948 8.27
Granted during 1992 .......... 157,000 25.28
Exercised during 1992 ........ (149,637) 4.91
Expired during 1992 .......... (16,875) 23.33
________ _______
Outstanding at
December 31, 1992 ........ 655,436 12.72
Granted during 1993 .......... 65,000 43.46
Issued in acquisition of
Comprecare, Inc. ........... 151,487 3.70
Exercised during 1993 ........ (145,415) 4.58
Expired during 1993 .......... (15,000) 42.75
________ _______
Outstanding at
December 31, 1993......... 711,508 $ 14.64
======== =======
All of the stock options outstanding at December 31, 1993
become exercisable either at the rate of 25% within two years
after the date of grant and an additional 25% each year there-
after, or at the rate of 20% within three years after the date of
grant and an additional 20% each year thereafter, based on the
date of grant of the original options in the case of the Replace-
ment Options and the options issued in the acquisition of
Comprecare, Inc. (the Comprecare Options), except for outstanding
options to purchase 20,821 shares which are exercisable at any
time after the date of grant. Outstanding stock options at
December 31, 1993 were granted in the following years, based on
the date of grant of the original options in the case of the
Replacement Options and the Comprecare Options:
Number Weighted Average
of Shares Exercise Price
_________ ________________
1988 ................. 168,056 $ 4.08
1989 ................. --- ---
1990 ................. 36,000 10.00
1991 ................. 293,811 11.96
1992 ................. 163,641 22.45
1993 ................. 50,000 43.68
_________ _______
Total .......... 711,508 $ 14.64
========= =======
Outstanding options at December 31, 1993 expire at the
earlier of the date the option holder ceases to be an employee,
director or PMG, as the case may be, or eight to ten years after
the date of grant, based on the date of grant of the original
options in the case of the Replacement Options and the Comprecare
Options. Options to purchase 227,973 shares at a weighted
average exercise price of $6.21 per share were exercisable at
December 31, 1993. All outstanding options granted by the
Company have an exercise price that is equal to the fair market
value of the Company's common stock on the date of grant.
Outstanding Comprecare Options have an exercise price that is
equal to the fair market value of the common stock of Comprecare,
Inc. on the date of grant of the original options.
The Company adopted the 1990 Stock Option Plan (the 1990
Plan) effective February 15, 1991. Under the 1990 Plan, 600,000
shares of common stock have been reserved for issuance upon
exercise of options to be granted thereunder. Options to
purchase 387,000 shares, of which options to purchase 352,000
shares are outstanding at December 31, 1993, have been granted
under the 1990 Plan as of December 31, 1993. The Company adopted
the 1993 Stock Option Plan (the 1993 Plan) effective May 3, 1993.
Under the 1993 Plan, 151,487 shares of common stock have been
reserved for issuance upon exercise of options to be granted
thereunder. Options to purchase 151,487 shares, of which options
to purchase 146,077 shares are outstanding at December 31, 1993,
have been granted under the 1993 Plan at December 31, 1993.
Restricted Assets
All of the Company's HMO subsidiaries and certain of its
other subsidiaries are subject to state regulatory requirements
to maintain a minimum amount of capital surplus or tangible net
equity, and in certain states, restricted deposits. Such
regulatory requirements, together with certain other contractual
requirements, restricted the Company's ability to transfer an
aggregate of approximately $47.5 million of net assets from the
Company's subsidiaries to the Company at December 31, 1993.
6. Recapitalization
An amendment to the Company's certificate of incorporation
was filed on March 4, 1991 to (i) increase the authorized common
stock to 20,000,000 shares; (ii) create a new class of preferred
stock consisting of 1,000,000 authorized shares; (iii) effect a
stock split of 1,415 shares of common stock for each share then
outstanding; and (iv) effect certain other amendments to the
certificate. All share and per share amounts in these consoli-
dated financial statements have been restated to give retroactive
effect to the recapitalization and the 1,415-for-1 stock split.
7. Acquisitions
The Company acquired all of the outstanding stock of Lincoln
National Administrative Services Corporation (LNASC) on May 8,
1992 and all of the outstanding stock of two corporations that
were affiliates of LNASC during May and June 1992. The acquisi-
tions of the LNASC stock, effective April 30, 1992, and of the
related stock are treated as purchases for accounting purposes.
The consolidated financial statements include the operations of
LNASC and its affiliates, which consist primarily of HMOs,
beginning April 30, 1992. The purchase price was approximately
$145 million, subject to certain post-closing adjustments,
including an addition to the purchase price of between $3 million
and $7.4 million, and was financed through a private placement of
500,000 shares of common stock in which the Company received $10
million, a long-term $105 million credit facility with a group of
banks, which was paid in full in 1993, and internally generated
funds.
In connection with this acquisition, the Company retained
HMOs operating in California, Colorado, Illinois, and Ohio and
intended, within one year of the acquisition, to divest itself of
nine smaller HMOs that were also acquired (the Disposition HMOs).
Eight of the Disposition HMOs were sold during 1992, and the
remaining Disposition HMO was sold on June 30, 1993.
As of the acquisition date, the Company established a
reserve of $4.5 million for the estimated operating losses of the
Disposition HMOs prior to their disposition by the Company, and
for the estimated net gain or loss on the sale of the Disposition
HMOs, which was added to intangible assets and a corresponding
accrued liability. During the period from April 30, 1992 to
December 31, 1993 the operating losses incurred by the Disposi-
tion HMOs, net of operating gains, were $4.3 million, the gain on
the sale of the Disposition HMOs, net of losses, was $5.8
million, and the reserve was reduced by $6.0 million, which
resulted in a corresponding reduction in intangible assets during
1993. As a result, there is no remaining reserve at December 31,
1993.
As of the acquisition date, the Company recorded intangible
assets of $118.0 million, which included estimated acquisition
costs and the $4.5 million reserve for estimated losses on the
operation and sale of the Disposition HMOs. During the period
from April 30, 1992 to December 31, 1993, intangible assets were
reduced by $6.6 million due to a gain on the retirement of
outstanding preferred stock of one of the Disposition HMOs,
reduced by $6.0 million due to a reduction in the reserve for
estimated losses on the operation and sale of the Disposition
HMOs, reduced by $3.7 million due to post-closing adjustments to
the purchase price, and increased by $2.8 million due to actual
acquisition costs that exceeded the original estimate. As a
result, intangible assets resulting from the acquisition, before
accumulated amortization, were $104.5 million at December 31,
1993.
The Company acquired all of the outstanding stock of
Comprecare, Inc. (Comprecare) on September 9, 1993. The
acquisition is treated as a purchase for accounting purposes.
The consolidated financial statements include the operations of
Comprecare, which consist primarily of an HMO in Colorado,
beginning September 9, 1993. The purchase price was approxi-
mately $49.5 million in cash, 1,817,000 shares of the Company's
common stock, and options to purchase approximately 151,000
shares of the Company's common stock for $3.70 per share. The
cash portion of the purchase price, and the repayment of
Comprecare's outstanding long-term debt of $15.5 million, was
financed through borrowings under a credit facility with a group
of banks (see Note 2).
As of the acquisition date, the Company recorded intangible
assets of $103.9 million, which included estimated acquisition
costs. During the four months ended December 31, 1993, intan-
gible assets were increased by $0.6 million due to additional
acquisition costs. As a result, intangible assets resulting from
the acquisition, before accumulated amortization, were $104.5
million at December 31, 1993.
The following table summarizes the unaudited pro forma
consolidated results of operations of the Company as though the
acquisitions of LNASC and its affiliates and Comprecare had
occurred on January 1, 1992. The unaudited pro forma consoli-
dated results of operations shown below do not necessarily
represent what the consolidated results of operations of the
Company would have been if the acquisitions had actually occurred
on January 1, 1992, nor do they represent a forecast of the
consolidated results of operations of the Company for any future
period.
(in thousands, except
per share data)
1993 1992
___________ ___________
Premium revenue ............. $ 1,093,075 $ 980,352
Income before income taxes .. 76,947 55,991
Net income .................. 43,651 31,236
Earnings per share .......... $ 3.29 $ 2.54
8. Subsequent event
On March 3, 1994, the Company entered into an agreement and
plan of merger with FHP International Corporation (FHP) under
which FHP agreed to acquire all the outstanding common stock of
the Company. FHP agreed to exchange 1.6 shares of its convert-
ible preferred stock, $28 in cash, and approximately .45 shares
of its common stock, subject to adjustment, for each outstanding
share of the Company's common stock. In the event that the
average closing market price of FHP's common stock near the close
of the transaction is between $25.00 and $29.00, the terms of the
FHP preferred stock will be adjusted so that each 1.6 shares of
it will have an estimated market value of $40.00, and the number
of shares of FHP common stock will be adjusted so that the common
stock provided will have a market value of $12.00, providing for
an aggregate value of $80 per share of the Company's common
stock. In the event that the average closing market price of FHP
common stock near the close of the transaction is more than $29
or less than $25, the aggregate value of the consideration will
be more or less than $80 per share of the Company's common stock.
The merger is contingent upon customary closing conditions,
including approval by the stockholders of both the Company and
FHP, regulatory approvals, and FHP obtaining financing.
9. Litigation - (unaudited)
In 1993, an action was brought against LNASC and Lincoln
National Health Plan (LNHP) alleging numerous complaints. On July 20,
1994, after a six-day jury trial, the jury returned a verdict finding
LNASC and LNHP liable for approximately $26,800,000 which includes
$25,000,000 of punitive damages. On August 3, 1994, the defendants
filed a motion for judgments notwithstanding the verdict, new trial
and in the alternative, remittitur of the punitive damages award.
The Court has tentatively set September 14, 1994 as the date for the
hearing on the post-trial motions. The management of the Company
believes that its liability, if any, would be all or partially covered by
insurance claims and contract claims. The Company will vigorously
contest the verdict and believes the eventual outcome will
not have a material adverse impact on the financial position of the
Company.
<PAGE>
Item 7(b). Pro Forma Financial Information.
Pro forma financial information that would be required
pursuant to Article 11 of Regulation S-X.
<PAGE>
FHP INTERNATIONAL CORPORATION AND SUBSIDIARIES
HISTORICAL AND PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
March 31, 1994 (Unaudited)
Assets
Pro Forma
Acquisition
Adjustments
FHP TakeCare Increase
(Amounts in thousands) Historical Historical (Decrease)
__________ __________ __________
Cash and cash equivalents $194,884 $91,896 ($100,000)
Short-term investments 172,733 69,864
Accounts receivable 70,761 30,579
Other current assets 42,878 36,383
________ ________ ________
Total current assets 481,256 228,722 (100,000)
Property and equipment, net 368,657 16,720
Excess purchase price over
net assets acquired 3,992 236,773 778,412
less accumulated amortization (286) (13,726) 13,726
________ _________ ________
Excess purchase price over
net assets acquired, net 3,706 223,047 792,138
Long-term investments 78,629 49,159
Restricted investments 75,418
Other assets, net 30,829 2,458 (858)
________ ________ ________
Total assets $1,038,495 $520,106 $691,280
========== ======== ========
Liabilities and Stockholders' Equity
Current portion of long-term
obligations $150 $15,000 $35,000
Accounts payable 35,411 49,736
Medical claims payable 170,968 129,378
Accrued salaries and
employee benefits 79,030 6,501
Deferred premiums 146,017 18,623
Income taxes payable and
other current liabilities 16,839 5,617 10,500
________ ________ ________
Total current liabilities 448,415 224,855 45,500
Long-term obligations 103,025 22,500 239,590
Other liabilities 81,958 7,517
________ ________ ________
Total liabilities 633,398 254,872 285,090
________ ________ ________
Stockholders' equity:
Series A Cumulative Convertible
Preferred Stock 516,480
Common Stock 1,658 1,291 (981)
Paid-in capital 224,722 157,084 (2,450)
Retained earnings 178,717 106,859 (106,859)
________ ________ _________
Total stockholders'
equity 405,097 265,234 406,190
________ ________ ________
Total liabilities and
stockholders' equity $1,038,495 $520,106 $691,280
========== ======== ========
Assets (cont'd)
Pro Forma
Note Condensed
(Amounts in thousands) Reference Consolidated
_________ ____________
Cash and cash equivalents 2 $186,780
Short-term investments 242,597
Accounts receivable 101,340
Other current assets 79,261
__________
Total current assets 609,978
Property and equipment, net 385,377
Excess purchase price over
net assets acquired 1,019,177
less accumulated amortization (286)
__________
Excess purchase price over
net assets acquired, net 3 1,018,891
__________
Long-term investments 127,788
Restricted investments 75,418
Other assets, net 11 32,429
__________
Total assets $2,249,881
==========
Liabilities and Stockholders' Equity (cont'd)
Current portion of long-term
obligations 4 $50,150
Accounts payable 85,147
Medical claims payable 300,346
Accrued salaries and
employee benefits 85,531
Deferred premiums 164,640
Income taxes payable and
other current liabilities 11 32,956
__________
Total current liabilities 718,770
__________
Long-term obligations 4 365,115
Other liabilities 89,475
__________
Total liabilities 1,173,360
__________
Stockholders' equity:
Series A Cumulative Convertible
Preferred Stock 5 516,480
Common Stock 5 1,968
Paid-in capital 5 379,356
Retained earnings 5 178,717
__________
Total stockholders'
equity 1,076,521
__________
Total liabilities and
stockholders' equity $2,249,881
==========
See accompanying notes to historical and pro forma unaudited condensed
consolidated financial statements.
<PAGE>
FHP INTERNATIONAL CORPORATION AND SUBSIDIARIES
HISTORICAL AND PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF INCOME
Nine Months Ended March 31, 1994 (Unaudited)
Comprecare
Historical Pro Forma
(Amounts in Two Months Ended Adjustments
thousands, FHP TakeCare August 31, Increase Note
except earnings Historical Historical 1993 (Decrease)
Reference
per share) __________ __________ __________ __________
_________
Revenue $1,789,947 $817,649 $47,971 $ -
Expenses:
Cost of
health care 1,498,337 661,420 36,745
General, admin-
istrative and
marketing 240,086 101,730 5,084 (830) 6
__________ __________ _______ ________
Total expenses 1,738,423 763,150 41,829 (830)
__________ __________ _______ ________
Operating income 51,524 54,499 6,142 830
Interest income 14,552 4,846 202
Interest expense 3,879 2,065 259 (241) 8
__________ __________ _______ ________
Income before
provision for
income taxes 62,197 57,280 6,085 1,071
Provision for
income taxes 23,885 24,781 2,215 118 10
__________ __________ _______ ________
Net income 38,312 32,499 3,870 953
Preferred Stock
dividend
__________ __________ _______ ________
Net income
attributable
to Common Stock $38,312 $32,499 $3,870 $953
========== ========== ======= ========
Earnings
per share
attributable to
Common Stock $1.14 $2.52
========== ==========
Weighted average
shares of Common
Stock and common
stock equivalents
outstanding 33,659 12,891
========== ==========
FHP INTERNATIONAL CORPORATION AND SUBSIDIARIES
HISTORICAL AND PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF INCOME
Nine Months Ended March 31, 1994 (Unaudited) (continued)
Pro Forma
(Amounts in Pro Forma Adjustments Pro Forma
thousands, TakeCare Increase Note Condensed
except earnings Consolidated (Decrease) Reference
Consolidated
per share) ____________ ___________ _________
____________
Revenue $865,620 $ -
$2,655,567
Expenses:
Cost of
health care 698,165
2,196,502
General, admin-
istrative and
marketing 105,984 13,797 6
359,867
________ __________
__________
Total expenses 804,149 13,797
2,556,369
________ __________
__________
Operating income 61,471 (13,797)
99,198
Interest income 5,048 (3,338) 7
16,262
Interest expense 2,083 10,206 8
16,168
________ __________
__________
Income before
provision for
income taxes 64,436 (27,341)
99,292
Provision for
income taxes 27,114 (2,346) 10
48,653
________ __________
__________
Net income 37,322 (24,995)
50,639
Preferred Stock
dividend 19,368 9
19,368
________ _________
__________
Net income
attributable
to Common Stock $37,322 ($44,363)
$31,271
======== =========
==========
Earnings
per share
attributable to
Common Stock ($6.88) 9
$0.78
=========
==========
Weighted average
shares of Common
Stock and common
stock equivalents
outstanding 6,446 9
40,105
=========
==========
See accompanying notes to historical and pro forma unaudited condensed
consolidated financial statements.
<PAGE>
FHP INTERNATIONAL CORPORATION AND SUBSIDIARIES
HISTORICAL AND PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF INCOME
Year Ended June 30, 1993 (Unaudited)
Pro Forma
(Amounts in Adjustments
thousands, FHP TakeCare Comprecare Increase Note
except earnings Historical Historical Historical (Decrease)
Reference
per share) __________ __________ __________ __________
_________
Revenue $2,005,854 $789,654 $254,547 $ -
Expenses:
Cost of
health care 1,681,144 644,237 215,219 (2,612) 11
General, admin-
istrative and
marketing 269,645 92,869 30,859 (5,330) 6
__________ __________ _______ ________
Total expenses 1,950,789 737,106 246,078 (7,942)
__________ __________ _______ ________
Operating income 55,065 52,548 8,469 7,942
Interest income 14,919 5,399 819
Interest expense 211 3,939 1,407 (1,309) 8
__________ __________ _______ ________
Income before
provision for
income taxes 69,773 54,008 7,881 9,251
Provision for
income taxes 25,607 23,207 2,808 1,921 10
__________ __________ _______ ________
Net income 44,166 30,801 5,073 7,330
Preferred Stock
dividend
__________ __________ _______ ________
Net income
attributable
to Common Stock $44,166 $30,801 $5,073 $7,330
========== ========== ======= ========
Earnings
per share
attributable to
Common Stock $1.33 $2.80
========== ==========
Weighted average
shares of Common
Stock and common
stock equivalents
outstanding 33,270 10,982
========== ==========
FHP INTERNATIONAL CORPORATION AND SUBSIDIARIES
HISTORICAL AND PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF INCOME
Year Ended June 30, 1993 (Unaudited) (continued)
Pro Forma
(Amounts in Pro Forma Adjustments Pro Forma
thousands, TakeCare Increase Note Condensed
except earnings Consolidated (Decrease) Reference
Consolidated
per share) ____________ ___________ _________
____________
Revenue $1,044,201 $ -
$3,050,055
Expenses:
Cost of
health care 856,844
2,537,988
General, admin-
istrative and
marketing 118,398 20,985 6
409,028
________ __________
__________
Total expenses 975,242 20,985
2,947,016
________ __________
__________
Operating income 68,959 (20,985)
103,039
Interest income 6,218 (4,670) 7
16,467
Interest expense 4,037 12,422 8
16,670
________ __________
__________
Income before
provision for
income taxes 71,140 (38,077)
102,836
Provision for
income taxes 27,936 (3,153) 10
50,390
________ __________
__________
Net income 43,204 (34,924)
52,446
Preferred Stock
dividend 25,824 9
25,824
________ _________
__________
Net income
attributable
to Common Stock $43,204 ($60,748) $26,622
======== ========= ==========
Earnings
per share
attributable to
Common Stock ($9.42) 9 $0.67
========= ==========
Weighted average
shares of Common
Stock and common
stock equivalents
outstanding 6,446 9 39,716
========= ==========
See accompanying notes to historical and pro forma unaudited condensed
consolidated financial statements.
<PAGE>
FHP INTERNATIONAL CORPORATION
NOTES TO HISTORICAL AND PRO FORMA UNAUDITED
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, except per share data)
1. General
The historical and pro forma unaudited condensed consolidated
balance sheet of FHP International Corporation ("FHP" or "the
Company") reflects the Merger as though it occurred on March 31, 1994.
The historical and pro forma unaudited condensed consolidated
statements of income of the Company reflect the Merger and the
September 1993 acquisition of Comprecare, Inc. by TakeCare, Inc.
("TakeCare") as though both transactions occurred on July 1, 1992.
The Merger will be accounted for as a purchase transaction.
No effect has been given in the historical and pro forma
unaudited condensed consolidated statements of income for operating
and synergistic benefits that may be realized through the combination
of the entities, including any increased enrollment of Medicare
eligible persons in geographic areas principally served by TakeCare
(Northern California, Colorado, Illinois, and Ohio). Certain minor
reclassifications have been made to the TakeCare historical financial
statements to conform them to FHP's presentation.
TakeCare has agreed with FHP that if the expenses of TakeCare
incurred in connection with the Merger, including financial advisory
fees, accounting, legal and consulting fees, and costs in connection
with any litigation relating to the Merger, exceed $3 million, such
excess (the "Excess Expenses") will reduce pro rata the amount of cash
or shares of Series B Adjustable Rate Cumulative Preferred Stock to be
issued in the Merger upon conversion of each share of TakeCare Common
Stock. For purposes of these pro forma financial statements, the
Excess Expenses are assumed to be $8.0 million, resulting in a
reduction of the cash consideration to $27.38 from $28.00 or of the
Series B Preferred Stock from 1.12 shares to approximately 1.10 shares
for each share of TakeCare Common Stock.
Under the terms of the Merger Agreement, each outstanding share
of TakeCare common stock (estimated to be 12,912 shares for purposes
of these historical and pro forma unaudited condensed consolidated
financial statements (pro forma financial statements)) will be
converted into the right to receive, without interest, the following
consideration (valued at an aggregate of $80.00 per share less the
estimated impact of the Excess Expenses of approximately $0.62 per
share for purposes of these pro forma financial statements):
(1) 1.6 shares of Series A Cumulative Convertible Preferred
Stock (Series A Preferred Stock); plus
(2) 1.12 shares of Series B Adjustable Rate Cumulative Preferred
Stock (Series B Preferred Stock), or at the specific election of the
holder, cash of $28.00 per share of TakeCare Common Stock; plus
(3) .48 of a share of FHP Common Stock, as provided in the
Merger Agreement since FHP's stock traded at less than an average of
$25 per share for 20 consecutive trading days ending on the third
trading day prior to the effective date of the Merger.
Holders of Series A Preferred Stock with stated value of $25 will
be entitled to receive cumulative cash dividends of 5.0% per annum.
Dividends will be payable quarterly in arrears when and if declared by
FHP's Board of Directors. On or after the fourth anniversary of the
Merger, FHP may, at its option, redeem all or part of the outstanding
shares of Series A Preferred Stock, at fixed redemption prices per
share plus an amount equal to any accrued and unpaid dividends. Each
share of Series A Preferred Stock will be convertible at the option of
the holder into FHP Common Stock at any time commencing six months
after the Closing. The conversion price for the Series A Preferred
Stock is $31.00 per share.
Holders of Series B Preferred Stock with stated value of $25 will
be entitled to receive cumulative cash dividends of not less than 5.0%
per annum or greater than 11.0% per annum. The actual dividend rate
will be determined quarterly based upon prevailing market rates as
provided in the Merger Agreement. Dividends will be payable quarterly
in arrears when and if declared by FHP's Board of Directors.
Beginning nine months after June 17, 1994, FHP may, at its option,
redeem all or part of the outstanding shares of Series B Preferred
Stock, at $25.00 per share plus an amount equal to accrued and unpaid
dividends.
2. Cash and Cash Equivalents
Pro forma adjustments to cash and cash equivalents consist of the
following:
Proceeds of long-term borrowings
(net of financing costs of $1,600) $310,490
Cash consideration paid in the Merger (353,531)
Repayment of TakeCare long-term
obligations, including current portion (37,500)
Payment of estimated costs of the Merger (11,459)
Payment of Excess Expenses of
TakeCare (see Note 1) (8,000)
_________
($100,000)
=========
The pro forma financial statements assume that the holders of
TakeCare Common Stock will elect to receive cash of $27.38 per share
as Merger Consideration in lieu of the Series B Preferred Stock. (See
Note 9 for summary pro forma financial information assuming holders of
TakeCare Common Stock elect to receive approximately 1.10 shares of
Series B Preferred Stock as Merger Consideration.)
The TakeCare long-term obligations are being retired immediately
after the Closing as required by TakeCare's existing debt agreement
upon a change in control of TakeCare.
3. Excess of Purchase Price Over Net Assets Acquired
Pro forma adjustments to the excess of purchase price over net
assets acquired consist of the following:
Resulting from the Merger $1,015,185
Elimination of previously recorded excess
of purchase price over net assets acquired
of TakeCare (net of accumulated amortization
of $13,726) (223,047)
___________
$792,138
===========
Management has not completed an allocation of the purchase price
of TakeCare to the assets and liabilities that will be acquired.
However, management believes that the amounts reflected on TakeCare's
historical consolidated balance sheet as tangible assets and
liabilities approximate the fair market values of such assets and
liabilities and accordingly, such assets have not been adjusted in the
accompanying pro forma financial statements.
4. Long-term Obligations
Pro forma adjustments to long-term obligations consist of the
following:
Current Long-Term
Portion Portion Total
_______ _________ ________
Borrowings to finance the Merger $50,000 $262,090 $312,090
Repayment of TakeCare long-term
obligations (15,000) (22,500) (37,500)
________ _________ _________
$35,000 $239,590 $274,590
======== ========= =========
5. Stockholders' Equity
Pro forma adjustments to Series A Preferred Stock, FHP Common
Stock, paid-in capital and retained earnings consist of the following:
Total
Series A Common Paid-in Retained Stockholders'
Preferred Stock Stock Capital Earnings Equity
_______________ _____ _______ ________ ___________
Series A
Preferred Stock
issued $516,480 $ - $ - $ - $516,480
Common Stock issued 310 154,634 154,944
Elimination of
equity accounts of
TakeCare (1,291) (157,084) (106,859) (265,234)
_________ _______ ________ _________ ________
$516,480 ($981) ($2,450) ($106,859) $406,190
========= ======= ========= ========== =========
<PAGE>
6. General, Administrative and Marketing
Pro forma adjustments to general, administrative and marketing
expense, principally amortization, consist of the following:
TakeCare Consolidated
TakeCare Consolidated Pro Forma Pro Forma
Pro Forma Pro Forma Nine Nine
Year Year Months Months
Ended Ended Ended Ended
June 30, June 30, March 31, March 31,
1993 1993 1994 1994
_________ ____________ _________ ____________
Amortization of
excess purchase
price over net
assets acquired
resulting from the
Merger $ - $25,380 $ - $19,035
Elimination of
amortization of
excess of purchase
price over
net assets
acquired
previously
recorded by
TakeCare (4,395) (5,238)
Elimination of
amortization of
excess purchase
price over
net assets
acquired of
Comprecare (5,330) (830)
__________ _________ _________ __________
($5,330) $20,985 ($830) $13,797
========== ========= ========= ==========
The excess purchase price over net assets acquired resulting from the
Merger will be amortized on a straight-line basis over 40 years.
7. Interest Income
Pro forma adjustments to interest income consist of the following:
Pro Forma Consolidated
___________________________
Nine Months
Year Ended Ended
June 30, 1993 March 31, 1994
_____________ _______________
Elimination of interest income
(computed based on historical
rates of return on investment
of cash) used to finance a
portion of the purchase price
(4.67% for the year ended
June 30, 1993 and 4.45% for the
nine months ended March 31, 1994) $4,670 $3,338
============== ===============
8. Interest Expense
Pro forma adjustments to interest expense consist of the
following:
Pro Forma Pro Forma
Pro Forma Pro Forma TakeCare Consolidated
TakeCare Consolidated Nine Nine
Year Year Months Months
Ended Ended Ended Ended
June 30, June 30, March 31, March 31,
1993 1993 1994 1994
_________ ____________ _________ ____________
Interest expense on
long-term obliga-
tions to finance
the Merger $ - $16,041 $ - $12,031
Elimination of
interest expense
on retired long-
term obligations
of TakeCare (3,463) (1,866)
Amortization of
debt financing
costs resulting
from the long-
term borrowings
to finance the
Merger 320 240
Elimination of
deferred debt
financing costs of
TakeCare (476) (199)
Elimination of
interest expense on
long-term obliga-
tions retired as a
result of TakeCare's
acquisition of
Comprecare (1,309) (241)
____________ __________ ___________ _________
($1,309) $12,422 ($241) $10,206
============ ========== =========== =========
The interest rate on the long-term obligations incurred to
finance the Merger is a floating rate based on the principal lender's
prime rate in the London Interbank market plus 0.6% which, based upon
current rates, would be approximately 5.1%. Each 1/4% increase in
such floating rate would decrease annual pro forma consolidated net
income by $398 and pro forma consolidated earnings per share
attributable to Common Stock by $0.01 per annum.
9. Earnings Per Share
Earnings per share is based on the weighted average shares of
outstanding Common Stock and common stock equivalents during the
respective periods. The pro forma financial statements assume the
holders of TakeCare common stock will elect to receive cash in lieu of
Series B Preferred Stock issued as of the effective date. The
inclusion of additional common shares assuming the conversion of the
Series A Preferred Stock would have been antidilutive for the year
ended June 30, 1993 and the nine months ended March 31, 1994 for both
the primary and fully diluted pro forma earnings per share
computations. Accounting rules governing the computation of earnings
per share require that dividends on cumulative preferred stock,
whether declared or not, be deducted in the earnings per share
computation.
The shares used in the computation of primary earnings per share
were as follows:
Pro Forma Consolidated
_________________________________
Year Ended Nine Months Ended
June 30, 1993 March 31, 1994
_____________ _________________
Common and common stock
equivalents prior to the Merger 33,270 33,659
Assumed Common and common stock
equivalents issued as part of
the Merger 6,446 6,446
______ ______
39,716 40,105
====== ======
Pro forma adjustments to dividends related to Series A Preferred Stock
consist of the following:
Pro Forma Consolidated
___________________________
Nine Months
Year Ended Ended
June 30, 1993 March 31, 1994
_____________ ______________
Cash dividends on Series A
Preferred Stock issued in the
Merger (dividend at 5%) $25,824 $19,368
======= =======
The pro forma financial statements have been prepared assuming
that all Series A Preferred Stock is outstanding for the year ended
June 30, 1993 and the nine months ended March 31, 1994.
As stated above, the pro forma financial statements assume the
holders of TakeCare Common Stock will elect to receive cash in lieu of
the Series B Preferred Stock. Accordingly, earnings per share has
been calculated assuming that no shares of Series B Preferred Stock
will be issued. If all holders of TakeCare Common Stock were to elect
to receive Series B Preferred Stock rather than cash, the principal
changes to the historical and pro forma unaudited condensed
consolidated statements of income would be as follows, assuming an
interest rate equal to 93% of the thirty-year average yield published
by the Federal Reserve Board as provided for in the Merger Agreement
(approximately 6.9% for this pro forma calculation - see Note 1 for
further explanation of range of possible dividends):
Pro Forma Consolidated
___________________________
Nine Months
Year Ended Ended
June 30, 1993 March 31, 1994
_____________ ______________
Operating income $103,039 $99,198
Interest income 18,477 17,699
Interest expense (309) (3,897)
Income taxes (59,392) (55,370)
_________ ________
Net income 61,815 57,630
Series A Preferred Stock dividend (25,824) (19,368)
Series B Preferred Stock dividend (24,264) (18,198)
_________ ________
Net income attributable to Common
Stock $11,727 $20,064
========= =======
Earnings per share attributable
to Common Stock $0.30 $0.50
========= ========
Weighted average number of shares 39,716 40,105
========= ========
<PAGE>
10. Income Taxes
Pro forma adjustment to the provision for income taxes consist of
the following:
Pro Forma Pro Forma
Pro Forma Pro Forma Take Care Consolidated
Take Care Consolidated Nine Months Nine Months
Year Ended Year Ended Ended Ended
June 30, June 30, March 31, March 31,
1993 1993 1994 1994
__________ ____________ ___________ ___________
Income tax effect
of:
Decrease in
interest income $ - ($2,288) $ - ($1,635)
Elimination of
TakeCare interest
expense and debt
financing costs 1,930 1,012
Increase in
interest expense
and debt financing
costs from Merger
financing (8,017) (6,013)
Elimination of
Comprecare interest
expense 641 118
Estimated increase
in effective
tax rate to 49% 5,222 4,290
Decrease in cost
of health care 1,280
__________ _____________ ___________ __________
$1,921 ($3,153) $118 ($2,346)
========== ============= =========== ==========
11. Other
Other pro forma adjustments include the restructuring of an
agreement with a physician group resulting in a reduction of pro forma
cost of health care ($2,612), recognition of deferred debt financing
costs ($1,600), elimination of deferred debt financing costs related
to debt of TakeCare retired in the Merger ($2,458) and accrual of
transaction expenses incurred by TakeCare ($3,000) and certain bonuses
that TakeCare may authorize.
<PAGE>
Item 7(c). Index of Exhibits.
2.1 Agreement and Plan of Merger, dated March 3, 1994
(incorporated by reference to Exhibit 2.1 of
Registrant's Registration Statement on Form S-4 (file
no. 33-53431) filed with the Commission on May 2,
1994).
2.2 Amendment No. 1 to Agreement and Plan of Merger, dated
April 29, 1994 (incorporated by reference to Exhibit
2.2 of Registrant's Registration Statement on Form S-4
(file no. 33-53431) filed with the Commission on May 2,
1994).
2.3 Amendment No. 2 to Agreement and Plan of Merger, dated
May 25, 1994 (incorporated by reference to Exhibit 2.1
of Registrant's Current Report on Form 8-K, filed with
the Commission on May 26, 1994).
3.1 Restated Certificate of Incorporation of Registrant
(incorporated by reference to Exhibit 3.1 of
Registrant's Registration Statement on Form S-4 (file
no. 33-53431) filed with the Commission on May 2,
1994).
3.2 Amendment to Restated Certificate of Incorporation of
Registrant (incorporated by reference to Exhibit 3.2
of Registrant's Registration Statement on Form S-4
(file no. 33-53431) filed with the Commission on May
2, 1994).
3.3 Certificate of Designation for Series A Cumulative
Convertible Preferred Stock of FHP (incorporated by
reference to Exhibit 3.3 of Registrant's Current
Report on Form 8-K, event date June 17, 1994).
3.4 Certificate of Designation for Series B Adjustable
Rate Cumulative Preferred Stock of FHP (incorporated
by reference to Exhibit 3.4 of Registrant's Current
Report on Form 8-K, event date June 17, 1994).
23.1 Consent of Ernst & Young LLP., Independent Auditors.
99.1 Press Release announcing consummation of the Merger,
dated June 17, 1994 (incorporated by reference to
Exhibit 99.1 of Registrant's Current Report on Form
8-K, event date June 17, 1994).
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange
Act of 1934, as amended, the Registrant has duly caused this
report to be signed on its behalf by the undersigned hereunto
duly authorized.
FHP INTERNATIONAL CORPORATION
By /s/ Kenneth S. Ord
Kenneth S. Ord
Senior Vice President and
Chief Financial Officer
Date: August 29, 1994
<PAGE>
EXHIBIT 23.1
Consent of Ernst & Young LLP, Independent Auditors
We consent to the incorporation by reference in Registration
Statements 33-11741, 33-11742, 33-14212, 33-14257, 33-30090, 33-30200,
33-36521, 33-37068 and 33-54313 on Form S-8 of FHP International
Corporation of our report dated February 23, 1994, except for Notes 8
and 9 as to which the date is March 3, 1994 and August 3, 1994,
respectively, with respect to the consolidated balance sheets of
TakeCare, Inc. as of December 31, 1993 and 1992 and the related
consolidated statements of operations, stockholders' equity, and cash
flows for each of the three years in the period ended December 31,
1993, included in this Current Report on Form 8-K/A, event date June
17, 1994, of FHP International Corporation relating to the acquisition
of TakeCare Inc.
/s/ Ernst & Young LLP
Walnut Creek, California
August 29, 1994
