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 March 31, 1994
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 33,158,269 shares of common stock, par value $0.05 per
share, outstanding at May 10, 1994.
The Exhibit Index Appears on Page 19<PAGE>
PART 1 - FINANCIAL INFORMATION
Item 1. Financial Statements
FHP INTERNATIONAL CORPORATION
CONSOLIDATED BALANCE SHEETS
(unaudited)
ASSETS
(amounts in thousands, March 31, June 30,
except share data) 1994 1993
__________ ________
Cash and cash equivalents $ 194,884 $ 2,700
Short-term investments 172,733 174,057
Accounts receivable (net of
allowance for doubtful
accounts of $11,792 and $7,147
at March 31, 1994 and
June 30, 1993, respectively) 70,761 56,288
Inventories 12,566 11,658
Other current assets 30,312 22,167
________ _______
Total current assets 481,256 266,870
________ _______
Property and equipment 506,811 455,915
Less accumulated depreciation
and amortization 138,154 109,607
________ _______
Property and equipment, net 368,657 346,308
________ _______
Long-term investments 78,629 38,723
Restricted investments 75,418 67,025
Other assets (Note 7) 34,535 26,758
________ _______
Total assets $1,038,495 $745,684
========== ========
__________
See accompanying notes to consolidated financial statements.
<PAGE>
FHP INTERNATIONAL CORPORATION
CONSOLIDATED BALANCE SHEETS
(unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY
(amounts in thousands, March 31, June 30,
except share data) 1994 1993
___________ ________
Current portion of long-term
obligations $ 150 $ 2,474
Accounts payable 35,411 39,935
Medical claims payable 170,968 149,060
Accrued salaries and employee
benefits 79,030 69,940
Deferred premiums 146,017 17,678
Other current liabilities 16,839 16,817
________ ________
Total current liabilities 448,415 295,904
Long-term obligations 103,025 20,802
Other liabilities 81,958 64,556
________ ________
Total liabilities 633,398 381,262
________ ________
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;
33,152,619 and 32,836,079 shares
issued at March 31, 1994 and
June 30, 1993, respectively 1,658 1,642
Paid-in capital 224,722 222,375
Retained earnings 178,717 140,405
________ ________
Total stockholders' equity 405,097 364,422
________ _______
Total liabilities and
stockholders' equity $1,038,495 $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) March 31,
________________________________
1994 1993
________ ________
Revenue $622,461 $535,775
________ ________
Expenses:
Primary health care 494,484 422,521
Other health care 23,803 22,255
General, administrative and
marketing 79,818 71,951
________ ________
Total expenses 598,105 516,727
________ ________
Operating income 24,356 19,048
Interest income, net (Note 5) 3,342 3,848
________ ________
Income before income taxes 27,698 22,896
Provision for income taxes 10,885 8,448
________ ________
Net income $ 16,813 $ 14,448
======== ========
Earnings per share (Note 2) $ 0.50 $ 0.43
====== ======
Weighted average number of common
shares and common share
equivalents 33,840 33,384
====== ======
__________
See accompanying notes to consolidated financial statements.
FHP INTERNATIONAL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(unaudited)
For The
(amounts in thousands, Nine Months Ended
except per share data) March 31,
________________________________
1994 1993
__________ __________
Revenue $1,789,947 $1,444,451
__________ __________
Expenses:
Primary health care 1,428,703 1,153,712
Other health care 69,634 63,762
General, administrative and
marketing 240,086 195,403
__________ __________
Total expenses 1,738,423 1,412,877
__________ __________
Operating income 51,524 31,574
Interest income, net (Note 5) 10,673 11,148
__________ __________
Income before income taxes 62,197 42,722
Provision for income taxes 23,885 15,679
__________ __________
Net income $ 38,312 $ 27,043
========== ==========
Earnings per share (Note 2) $ 1.14 $ 0.82
====== ======
Weighted average number of common
shares and common share
equivalents 33,659 33,159
====== ======
__________
See accompanying notes to consolidated financial statements.
FHP INTERNATIONAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
For The
Nine Months Ended
(amounts in thousands) March 31,
____________________________
1994 1993
________ ________
Operating Activities
Net income $ 38,312 $ 27,043
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation and amortization 32,494 21,886
Loss on disposal of equipment 1,420 1,189
Amortization of restricted stock awards 220
Deferred income taxes (1,042) (111)
Effect on cash of changes in
operating assets and liabilities,
net of effects of purchase of Colorado
health maintenance organization (HMO)(1994)
(Note 7) and Great States Financial
Corporation (1993):
Accounts receivable, net (14,332) (5,296)
Inventories (908) (1,792)
Other current assets (8,336) (3,209)
Other assets (4,934) (11,692)
Accounts payable (4,877) 3,385
Medical claims payable 20,137 15,773
Accrued salaries and employee
benefits 9,090 (711)
Deferred premiums 128,189 4,224
Other liabilities 17,397 5,309
_______ ________
Net cash provided by operating
activities 212,610 56,218
_______ ________
Investing Activities
Decrease (increase) in short-term
investments 5,153 (5,164)
Purchases of property and equipment (56,278) (61,196)
Increase in long-term and
restricted investments (48,144) (25,502)
Purchase of Colorado HMO
(net of cash acquired) (3,419)
Purchase of Great States Financial
Corporation, net of cash acquired (21,706)
Payments received on notes receivable
from Employee Stock Ownership Trust 4,150
_______ ________
Net cash used in investing activities (102,688) (109,418)
_______ ________
FHP INTERNATIONAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
(unaudited)
For The
Nine Months Ended
(amounts in thousands) March 31,
____________________________
1994 1993
_________ ________
Financing Activities
Issuance of common stock $ 16 $ 19
Proceeds from issuance of Senior Notes 100,000
Payments on long-term obligations (20,101) (1,953)
Proceeds from exercise of stock options 2,347 1,971
________ ________
Net cash provided by financing
activities 82,262 37
________ ________
Increase (decrease) in cash and cash
equivalents 192,184 (53,163)
Cash and cash equivalents at beginning
of period 2,700 73,560
________ ________
Cash and cash equivalents at end of period $194,884 $ 20,397
======== ========
Supplemental cash flow information:
Interest payments (net of portion
capitalized) $ 4,292 $ 1,678
Income tax payments (net of refunds) $ 25,566 $ 17,851
Note: Certain amounts previously classified as property, plant and equipment
of $3,039 were reclassified to other assets during the nine months ended March
31, 1994.
__________
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 nine
months ended March 31, 1994 and 1993 are included in these consolidated
financial statements.
NOTE 2. Earnings Per Share
Earnings per share for the three and nine months ended March 31,
1994 and 1993 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 $588,000
were capitalized during the three months ended March 31, 1994 and 1993,
respectively. Interest costs of $596,000 and $2,009,000 were capitalized
during the nine months ended March 31, 1994 and 1993 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 a 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. Proposed Acquisition
On March 4, 1994, the Company and TakeCare, Inc. ("TakeCare")
jointly announced the execution of a definitive merger agreement.
TakeCare is a health maintenance organization serving approximately
788,000 commercial members in California, Colorado, Illinois and Ohio.
The definitive merger agreement calls for aggregate consideration of more
than $1 billion or approximately $80 per share of TakeCare common stock.
The merger is subject to the approval of the shareholders of both
the Company and TakeCare. Shareholder meetings are scheduled for both
companies on June 10, 1994. The merger is also subject to the approval of
regulatory agencies in California, Colorado, Arizona, Illinois and Ohio.
If all requisite government agency and shareholder approvals are received
in time, the merger is expected to close late in the fourth quarter of
fiscal 1994.
<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Three Months Ended March 31, 1994 Compared to
the Three Months Ended March 31, 1993
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 March 31, 1994 totaled $622.5 million,
increasing 16.2% over revenue of $535.8 million for the same period in the
previous fiscal year.
Approximately 4.4% of the Company's revenue for the three months
ended March 31, 1994 was derived from its subsidiaries' indemnity health
and life insurance and workers' compensation insurance products. This
compares to 4.2% for the same period during the previous fiscal year.
Commercial HMO revenue growth for the three months ended March 31,
1993 was generated by membership increases and premium rate increases.
Commercial per member per month revenue on average increased approximately
3.0% over the same period during the prior fiscal year, and is expected to
average approximately the same over the remainder of calendar 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.
<PAGE>
Senior Plan revenue growth for the three months ended March 31, 1994
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. The Company received an average 2.0% rate increase
effective January 1, 1994 compared to 11.6% for the previous year. The
Company believes the impact of this increase has largely been offset by
its cost sharing arrangements with contract providers. Contract providers
serve over 80% of Senior Plan members.
HMO Membership
The Company experienced a 10.5% growth in total HMO membership to
906,000 members at March 31, 1994 from 820,000 members at March 31, 1993.
Senior Plan membership increased by 12.8% to 325,000 from 288,000,
primarily in the Company's IPA and mixed model operations in California,
Arizona and Nevada. Commercial plan membership increased by 9.2% to
581,000 from 532,000, primarily in the Company's IPA and mixed model
operations in California and Nevada, in the staff model in Utah and due to
the addition of approximately 6,000 members enrolled in the recently
acquired Colorado HMO. Total staff model membership grew 2.1% to 346,000
at March 31, 1994 from 339,000 at March 31, 1993. Total IPA and mixed
model membership grew 16.4% to 560,000 at March 31, 1994 from 481,000 at
March 31, 1993.
During the last four 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. The Company also experienced a slight decrease in
California Senior Plan staff model enrollment compared to the third
quarter of fiscal 1993. In Arizona, commercial enrollment growth slowed
to approximately 5.7% over the year ended March 31, 1994, due primarily to
aggressive pricing by major competitors. The Company's Senior Plan growth
in Arizona has been constrained by a HCFA rule that Senior Plan membership
may not exceed commercial membership. At March 31, 1994, commercial
membership exceeded Senior Plan membership in Arizona by approximately
2,100 members.
Cost of Health Care
Health care costs increased 16.5% to $518.3 million for the three
months ended March 31, 1994 from $444.8 million for the three months ended
March 31, 1993. Health care costs increased as a percent of revenue to
83.3% in the current period from 83.0% in the same period of the last
fiscal year. The increase as a percent of revenue reflected lower premium
rate increases in the Medicare risk and commercial businesses. In
addition, higher hospital costs in the Company's Utah, Arizona and Nevada
regions as well as higher contract physician costs in all regions except
the California IPA operations contributed to this increase. The higher
hospital costs in the Utah region are expected to continue during the
fourth quarter as the region transitions from utilization of contract
hospitals to the FHP owned hospital opened in August 1993. The increases
noted were offset partially by cost decreases as a percentage of revenue
in health care operations and ancillary health care services. 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
remained the same as the prior fiscal year period.
The January 1994 earthquake in Southern California did not
significantly impact the Company's consolidated financial position.
Although there was temporary loss of contract provider and hospital
capacity and an increase in emergency room usage in Los Angeles County and
an overall slowdown in the enrollment process during January, the
Company's cost of health care in Southern California (staff and IPA
combined) improved as a percentage of revenue compared to the prior year
period.
General, Administrative and Marketing Costs
General, administrative and marketing ("G & A") expenses increased
10.9% to $79.8 million for the third quarter of fiscal 1994 from $72.0
million for the third quarter of fiscal 1993. The increase resulted
primarily from growth in the Company's operations, increased advertising
expenses, 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 March 31, 1994 decreased as a percentage of revenue to
12.8% from 13.4% for the same period in the prior fiscal year in part
reflecting the benefit of the Company's second quarter of fiscal 1994
reduction in force which slowed the growth of G & A expenses.
<PAGE>
Nine Months Ended March 31, 1994
Compared to the Nine Months Ended March 31, 1993
Revenue
Revenue for the nine months ended March 31, 1994 totaled $1,789.9
million, increasing 23.9% over revenue of $1,444.5 million for the same
period in the previous year. Approximately 4.5% of the revenue for the
nine months ended March 31, 1994, was related to the Company's indemnity
health and life insurance and workers' compensation insurance products.
Cost of Health Care
Health care costs increased 23.1% to $1,498.3 million for the nine
months ended March 31, 1994, from $1,217.5 million for the comparable nine
months ended March 31, 1993. Health care costs during the nine month
period decreased to 83.7% of total revenue from 84.3% of total revenue in
the same period last year primarily as a result of lower health care
operations costs offset by an increase in contract physician 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, its 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 primarily due
to the continuing transition from contract hospitals to the FHP owned
hospital opened in August 1993.
<PAGE>
General, Administrative and Marketing Costs
G & A expenses increased 22.9% to $240.1 million from $195.4 million
in the previous year, due to continuing expansion of the Company's
operations. G & A expenses were 13.4% of total revenue for the nine
months ended March 31, 1994 versus 13.5% of total revenue for the
comparable period in the previous year. The decrease resulted primarily
from a reduction in sales expenditures as a percentage of revenue and the
Company's second quarter of fiscal 1994 reduction in force.
Interest Income
Net interest income was $10.7 million for the nine months ended
March 31, 1994 as compared to $11.1 million for the same period in the
previous year. Net interest income decreased primarily as the result of
the interest expense of the $100 million of 7% senior 10-year notes (the
"Notes") issued in September 1993 offset by higher average invested cash
balances during the period. Also, capitalized interest decreased
approximately $1.4 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 $190.8 million to $367.6 million at March 31, 1994 from
$176.8 million at June 30, 1993. This increase reflects the receipt in
March 1994 of $131.0 million in premiums from HCFA due on April 1, 1994
for medical services to be provided to Senior Plan members in April 1994.
Other major sources of cash during the nine months ended March 31, 1994,
included cash generated from operations of $81.6 million (net of the early
receipt of the HCFA premium of $131.0 million) and net proceeds from the
Notes in September 1993. Major uses of cash during the period included
$56.3 million for capital expenditures and $48.1 million in transfers to
long-term and restricted investments.
The net proceeds from the sale of the Notes were used to repay, in
full, certain outstanding indebtedness of approximately $21 million. The
Company has used $25 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.
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 the remaining quarter of fiscal 1994.
In March 1994, the Company entered into a $350 million Credit
Agreement with several banks in connection with the TakeCare merger. The
Company intends to fund the cash portion of the merger with $100 million
of internally generated funds and by drawings under the Credit Agreement.
The Credit Agreement provides for a $250 million five-year term loan
facility and a $100 million five-year revolving credit facility. The
Credit Agreement contains financial and other covenants, including
limitations on indebtedness, liens, dividends, sale and lease-back
transactions and certain other transactions.
Effects of Regulatory Changes and Inflation
Effective January 1, 1994, the Company received 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.
<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.
None.
Item 5. Other Information.
On March 3, 1994, the Company, its wholly-owned subsidiary, FHP Sub,
Inc. ("FHP Sub") and TakeCare executed an Agreement and Plan of Merger
(the "Merger Agreement"), pursuant to which (i) TakeCare will be merged with
and into FHP Sub (the "Merger"); (ii) the name of FHP Sub will be changed to
TakeCare, Inc.; and (iii) each outstanding share of common stock
of TakeCare will be converted into the right to receive merger
consideration composed of a combination of the Company's common stock, its
Series A cumulative convertible preferred stock (the "Convertible Merger
Preferred Stock") and either cash or the Company's Series B adjustable
rate cumulative preferred stock (the "Non-Convertible Merger Preferred
Stock").
Pursuant to the Merger Agreement and to facilitate the payment of
the cash portion of the merger consideration contemplated thereunder, the
Company entered into a Credit Agreement, dated as of March 24, 1994 (the
"Credit Agreement") among the Company, the lenders named therein (the
"Lenders") and Chemical Bank, as Administrative Agent ("Chemical"). The
Company will not borrow under the Credit Agreement until the Merger
becomes effective (the "Effective Time").
The Credit Agreement provides for a $250 million five-year term loan
facility and a $100 million five-year revolving credit facility. Term
loans may be borrowed from the Effective Time to December 31, 1994. The
aggregate amount of the term loans outstanding on December 31, 1994 will
be amortized in equal semi-annual installments, which amortization will be
at the rate of $50 million a year if the aggregate amount of term loans
outstanding on such date is $250 million. Revolving loans may be made at
any time up to the fifth anniversary of the Effective Time, on which date
all revolving loans, term loans and other amounts owed under the Credit
Agreement must be paid in full.
At the Company's election, revolving loans and terms loans may bear
interest at a rate determined by reference to Chemical's Alternate Base
Rate (as described below) or the Eurodollar Rate (as described below),
plus, in the case of loans based on the Eurodollar Rate, an incremental
per annum charge that varies based on the rating of the Company's
unsecured, long-term debt. Such rating is presently BBB- from Standard &
Poor's Corporation and Baa3 from Moody's Investor Service, Inc. Based on
the present rating, the incremental per annum charge would be 0.375% for
revolving loans and 0.600% for term loans. Chemical's Alternate Base Rate
is equal to or greater than Chemical's prime rate. The Eurodollar Rate is
based on the average of rates at which certain Lenders are offered dollar
deposits in applicable interbank Eurodollar markets. Additionally, the
Company may request that the Lenders submit interest rate bids for
revolving loans. These bids will be based on either the LIBOR rate or a
fixed rate, at the Company's election. It is anticipated that the bids
received will result in lower interest rates than the interest rates at
which all lenders are contractually obligated to lend.
Additionally, the Company is required to pay each Lender a facility
fee and a commitment fee, both of which vary based on the Company's
unsecured, long-term debt rating. The Company is also obligated to pay
certain amounts to Chemical for its services in syndicating the credit
facilities and for its services as administrative agent.
The Credit Agreement contains financial and other covenants,
including limitations on indebtedness, liens, dividends, sale and lease-
back transactions and certain other transactions. Dividends are permitted
to be paid on the Convertible Merger Preferred Stock and the Non-
Convertible Merger Preferred Stock, and redemptions are permitted to be
made in respect of the Non-Convertible Merger Preferred Stock, in each
case so long as no event of default exists under the Credit Agreement at
the time of such payment or redemption, or occurs as a result of such
payment or redemption. In addition, so long as no event of default exists
under the Credit Agreement at the time of such payment or redemption, or
occurs as a result of such payment or redemption, the Company may pay
dividends on, or may redeem, the Company's Common Stock and the Company's
Preferred Stock if the total cash amount of all such dividends and
redemptions in any fiscal quarter does not exceed (i) 50% of the
consolidated net income of the Company and its consolidated subsidiaries
for the period of four consecutive fiscal quarters immediately preceding
such fiscal quarter less (ii) the cash amount of all dividends paid and
redemptions made by the Company (including dividends and redemption
described in the immediately preceding sentence) during such four
consecutive fiscal quarters in respect of the Company's Common Stock and
the Company's Preferred Stock. Additionally, the Credit Agreement
requires that the Company repay the loans thereunder with the net proceeds
of asset sales, if any, in excess of $75 million per year. The Credit
Agreement contains representations and warranties, events of defaults and
conditions to lending considered by the Company to be typical for
financing mergers of companies with credit standings comparable to those
of the Company and TakeCare.
Additional information relating to the proposed acquisition of
TakeCare is set forth in Note 8 of Notes to Consolidated Financial
Statements in Part I of this report and incorporated herein by this
reference.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits. See Index to Exhibits at page 19 of this
report.
(b) Reports on Form 8-K. A current report on Form 8-K was
filed on April 5, 1994 describing the amendment and
restatement of the Company's Rights Agreement.
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: May 13, 1994 By: /s/ KENNETH S. ORD
__________________________________
Kenneth S. Ord, Senior Vice
President and Chief (Principal)
Financial 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.
*10.1Credit Agreement dated as of March 24, 1994, among the Company, the
Lenders named therein and Chemical Bank as Administrative Agent (Exhibit
10.1 to Form 8-A filed May 9, 1994).
10.2 Form of Employment Agreement dated as of March 12, 1994 by and between
the Company and 11 key executives.
11.1 Statement Re: Computation of Earnings Per Share.
_______________________
* Document has previously been filed with the Commission and is incorporated
by reference and made a part hereof.
Exhibit 10.2
EMPLOYMENT AGREEMENT
AGREEMENT by and between FHP International Corpora-
tion, a Delaware corporation (the "Company") and
(the "Executive"), dated as of the 12th day of March,
1994.
The Board of Directors of the Company (the
"Board"), has determined that it is in the best interests of
the Company and its shareholders to assure that the Company
will have the continued dedication of the Executive,
notwithstanding the possibility, threat or occurrence of a
Change of Control (as defined below) of the Company. The
Board believes it is imperative to diminish the inevitable
distraction of the Executive by virtue of the personal
uncertainties and risks created by a pending or threatened
Change of Control and to encourage the Executive's full
attention and dedication to the Company currently and in the
event of any threatened or pending Change of Control, and to
provide the Executive with compensation and benefits
arrangements upon a Change of Control which ensure that the
compensation and benefits expectations of the Executive will
be satisfied and which are competitive with those of other
corporations. Therefore, in order to accomplish these
objectives, the Board has caused the Company to enter into
this Agreement.
NOW, THEREFORE, IT IS HEREBY AGREED AS FOLLOWS:
1. Certain Definitions. (a) The "Effective Date"
shall mean the first date during the Change of Control
Period (as defined in Section 1(b)) on which a Change of
Control (as defined in Section 2) occurs. Anything in this
Agreement to the contrary notwithstanding, if a Change of
Control occurs and if the Executive's employment with the
Company is terminated prior to the date on which the Change
of Control occurs, and if it is reasonably demonstrated by
the Executive that such termination of employment (i) was at
the request of a third party who has taken steps reasonably
calculated to effect a Change of Control or (ii) otherwise
arose in connection with or anticipation of a Change of
Control, then for all purposes of this Agreement the
"Effective Date" shall mean the date immediately prior to
the date of such termination of employment.
(b) The "Change of Control Period" shall mean the
period commencing on the date hereof and ending on the third
anniversary of the date hereof; provided, however, that com-
mencing on the date one year after the date hereof, and on
each annual anniversary of such date (such date and each an-
nual anniversary thereof shall be hereinafter referred to as
the "Renewal Date"), unless previously terminated, the
Change of Control Period shall be automatically extended so
as to terminate three years from such Renewal Date, unless
at least 60 days prior to the Renewal Date the Company shall
give notice to the Executive that the Change of Control
Period shall not be so extended.
2. Change of Control. For the purpose of this
Agreement, a "Change of Control" shall mean:
(a) The acquisition by any individual, entity or
group (within the meaning of Section 13(d)(3) or 14(d)(2) of
the Securities Exchange Act of 1934, as amended (the "Ex-
change Act")) (a "Person") of beneficial ownership (within
the meaning of Rule 13d-3 promulgated under the Exchange
Act) of 20% or more of either (i) the then outstanding
shares of common stock of the Company (the "Outstanding
Company Common Stock") or (ii) the combined voting power of
the then outstanding voting securities of the Company
entitled to vote generally in the election of directors (the
"Outstanding Company Voting Securities"); provided, however,
that for purposes of this subsection (a), the following
acquisitions shall not constitute a Change of Control: (i)
any acquisition directly from the Company, (ii) any
acquisition by the Company, (iii) any acquisition by any
employee benefit plan (or related trust) sponsored or
maintained by the Company or any corporation controlled by
the Company or (iv) any acquisition by any corporation
pursuant to a transaction which complies with clauses (i),
(ii) and (iii) of subsection (c) of this Section 2; or
(b) Individuals who, as of the date hereof,
constitute the Board (the "Incumbent Board") cease for any
reason to constitute at least a majority of the Board;
provided, however, that any individual becoming a director
subsequent to the date hereof whose election, or nomination
for election by the Company's shareholders, was approved by
a vote of at least a majority of the directors then
comprising the Incumbent Board shall be considered as though
such individual were a member of the Incumbent Board, but
excluding, for this purpose, any such individual whose
initial assumption of office occurs as a result of an actual
or threatened election contest with respect to the election
or removal of directors or other actual or threatened
solicitation of proxies or consents by or on behalf of a
Person other than the Board; or
(c) Consummation of a reorganization, merger or
consolidation or sale or other disposition of all or
substantially all of the assets of the Company (a "Business
Combination"), in each case, unless, following such Business
Combination, (i) all or substantially all of the individuals
and entities who were the beneficial owners, respectively,
of the Outstanding Company Common Stock and Outstanding
Company Voting Securities immediately prior to such Business
Combination beneficially own, directly or indirectly, more
than 70% of, respectively, the then outstanding shares of
common stock and the combined voting power of the then
outstanding voting securities entitled to vote generally in
the election of directors, as the case may be, of the
corporation resulting from such Business Combination
(including, without limitation, a corporation which as a
result of such transaction owns the Company or all or sub-
stantially all of the Company's assets either directly or
through one or more subsidiaries) in substantially the same
proportions as their ownership, immediately prior to such
Business Combination of the Outstanding Company Common Stock
and Outstanding Company Voting Securities, as the case may
be, (ii) no Person (excluding any employee benefit plan (or
related trust) of the Company or such corporation resulting
from such Business Combination) beneficially owns, directly
or indirectly, 20% or more of, respectively, the then out-
standing shares of common stock of the corporation resulting
from such Business Combination or the combined voting power
of the then outstanding voting securities of such
corporation except to the extent that such ownership existed
prior to the Business Combination and (iii) at least a
majority of the members of the board of directors of the
corporation resulting from such Business Combination were
members of the Incumbent Board at the time of the execution
of the initial agreement, or of the action of the Board,
providing for such Business Combination; or
(d) Approval by the shareholders of the Company of
a complete liquidation or dissolution of the Company.
3. Employment Period. The Company hereby agrees
to continue the Executive in its employ, and the Executive
hereby agrees to remain in the employ of the Company subject
to the terms and conditions of this Agreement, for the
period commencing on the Effective Date and ending on the
third anniversary of such date (the "Employment Period").
4. Terms of Employment. (a) Position and Duties.
(i) During the Employment Period, (A) the Executive's posi-
tion (including status, offices, titles and reporting re-
quirements), authority, duties and responsibilities shall be
at least commensurate in all material respects with the most
significant of those held, exercised and assigned at any
time during the 120-day period immediately preceding the Ef-
fective Date and (B) the Executive's services shall be
performed at the location where the Executive was employed
immediately preceding the Effective Date or any office or
location less than 35 miles from such location.
(ii) During the Employment Period, and
excluding any periods of vacation and sick leave to which
the Executive is entitled, the Executive agrees to devote
reasonable attention and time during normal business hours
to the business and affairs of the Company and, to the
extent necessary to discharge the responsibilities assigned
to the Executive hereunder, to use the Executive's
reasonable best efforts to perform faithfully and
efficiently such responsibilities. During the Employment
Period it shall not be a violation of this Agreement for the
Executive to (A) serve on corporate, civic or charitable
boards or committees, (B) deliver lectures, fulfill speaking
engagements or teach at educational institutions and (C)
manage personal investments, so long as such activities do
not significantly interfere with the performance of the
Executive's responsibilities as an employee of the Company
in accordance with this Agreement. It is expressly
understood and agreed that to the extent that any such
activities have been conducted by the Executive prior to the
Effective Date, the continued conduct of such activities (or
the conduct of activities similar in nature and scope
thereto) subsequent to the Effective Date shall not
thereafter be deemed to interfere with the performance of
the Executive's responsibilities to the Company.
(b) Compensation. (i) Base Salary. During the
Employment Period, the Executive shall receive an annual
base salary ("Annual Base Salary"), which shall be paid at a
monthly rate, at least equal to twelve times the highest
monthly base salary paid or payable, including any base sal-
ary which has been earned but deferred, to the Executive by
the Company and its affiliated companies in respect of the
twelve-month period immediately preceding the month in which
the Effective Date occurs. During the Employment Period,
the Annual Base Salary shall be reviewed no more than 12
months after the last salary increase awarded to the
Executive prior to the Effective Date and thereafter at
least annually. Any increase in Annual Base Salary shall
not serve to limit or reduce any other obligation to the
Executive under this Agreement. Annual Base Salary shall
not be reduced after any such increase and the term Annual
Base Salary as utilized in this Agreement shall refer to An-
nual Base Salary as so increased. As used in this
Agreement, the term "affiliated companies" shall include any
company controlled by, controlling or under common control
with the Company.
(ii) Annual Bonus. In addition to Annual
Base Salary, the Executive shall be awarded, for each fiscal
year ending during the Employment Period, an annual bonus
(the "Annual Bonus") in cash at least equal to the
Executive's highest bonus under the Company's Management
Incentive Plan, or any comparable bonus under any
predecessor or successor plan, for the last three full
fiscal years prior to the Effective Date (annualized in the
event that the Executive was not employed by the Company for
the whole of such fiscal year) (the "Recent Annual Bonus").
Each such Annual Bonus shall be paid no later than the end
of the third month of the fiscal year next following the
fiscal year for which the Annual Bonus is awarded, unless
the Executive shall elect to defer the receipt of such
Annual Bonus.
(iii) Incentive, Savings and Retirement
Plans. During the Employment Period, the Executive shall be
entitled to participate in all incentive, savings and
retirement plans, practices, policies and programs
applicable generally to other peer executives of the Company
and its affiliated companies, but in no event shall such
plans, practices, policies and programs provide the
Executive with incentive opportunities (measured with
respect to both regular and special incentive opportunities,
to the extent, if any, that such distinction is applicable),
savings opportunities and retirement benefit opportunities,
in each case, less favorable, in the aggregate, than the
most favorable of those provided by the Company and its af-
filiated companies for the Executive under such plans,
practices, policies and programs as in effect at any time
during the 120-day period immediately preceding the
Effective Date or if more favorable to the Executive, those
provided generally at any time after the Effective Date to
other peer executives of the Company and its affiliated
companies.
(iv) Welfare Benefit Plans. During the Em-
ployment Period, the Executive and/or the Executive's fam-
ily, as the case may be, shall be eligible for participation
in and shall receive all benefits under welfare benefit
plans, practices, policies and programs provided by the
Company and its affiliated companies (including, without
limitation, medical, prescription, dental, disability,
salary continuance, employee life, group life, accidental
death and travel accident insurance plans and programs) to
the extent applicable generally to other peer executives of
the Company and its affiliated companies, but in no event
shall such plans, practices, policies and programs provide
the Executive with benefits which are less favorable, in the
aggregate, than the most favorable of such plans, practices,
policies and programs in effect for the Executive at any
time during the 120-day period immediately preceding the
Effective Date or, if more favorable to the Executive, those
provided generally at any time after the Effective Date to
other peer executives of the Company and its affiliated
companies.
(v) Expenses. During the Employment Period,
the Executive shall be entitled to receive prompt reimburse-
ment for all reasonable expenses incurred by the Executive
in accordance with the most favorable policies, practices
and procedures of the Company and its affiliated companies
in effect for the Executive at any time during the 120-day
period immediately preceding the Effective Date or, if more
favorable to the Executive, as in effect generally at any
time thereafter with respect to other peer executives of the
Company and its affiliated companies.
(vi) Fringe Benefits. During the Employment
Period, the Executive shall be entitled to fringe benefits,
including, without limitation, tax and financial planning
services, payment of club dues, and, if applicable, use of
an automobile and payment of related expenses, in accordance
with the most favorable plans, practices, programs and poli-
cies of the Company and its affiliated companies in effect
for the Executive at any time during the 120-day period im-
mediately preceding the Effective Date or, if more favorable
to the Executive, as in effect generally at any time
thereafter with respect to other peer executives of the
Company and its affiliated companies.
(vii) Office and Support Staff. During the
Employment Period, the Executive shall be entitled to an of-
fice or offices of a size and with furnishings and other ap-
pointments, and to exclusive personal secretarial and other
assistance, at least equal to the most favorable of the
foregoing provided to the Executive by the Company and its
affiliated companies at any time during the 120-day period
immediately preceding the Effective Date or, if more favor-
able to the Executive, as provided generally at any time
thereafter with respect to other peer executives of the
Company and its affiliated companies.
(viii) Vacation. During the Employment Pe-
riod, the Executive shall be entitled to paid vacation in ac-
cordance with the most favorable plans, policies, programs
and practices of the Company and its affiliated companies as
in effect for the Executive at any time during the 120-day
period immediately preceding the Effective Date or, if more
favorable to the Executive, as in effect generally at any
time thereafter with respect to other peer executives of the
Company and its affiliated companies.
5. Termination of Employment. (a) Death or Dis-
ability. The Executive's employment shall terminate auto-
matically upon the Executive's death during the Employment
Period. If the Company determines in good faith that the
Disability of the Executive has occurred during the Employ-
ment Period (pursuant to the definition of Disability set
forth below), it may give to the Executive written notice in
accordance with Section 12(b) of this Agreement of its
intention to terminate the Executive's employment. In such
event, the Executive's employment with the Company shall
terminate effective on the 30th day after receipt of such
notice by the Executive (the "Disability Effective Date"),
provided that, within the 30 days after such receipt, the
Executive shall not have returned to full-time performance
of the Executive's duties. For purposes of this Agreement,
"Disability" shall mean the absence of the Executive from
the Executive's duties with the Company on a full-time basis
for 180 consecutive business days as a result of incapacity
due to mental or physical illness which is determined to be
total and permanent by a physician selected by the Company
or its insurers and acceptable to the Executive or the
Executive's legal representative.
(b) Cause. The Company may terminate the Execu-
tive's employment during the Employment Period for Cause.
For purposes of this Agreement, "Cause" shall mean:
(i) the willful and continued failure of the Ex-
ecutive to perform substantially the Executive's duties
with the Company or one of its affiliates (other than
any such failure resulting from incapacity due to
physical or mental illness), after a written demand for
substantial performance is delivered to the Executive by
the Board or the Chief Executive Officer of the Company
which specifically identifies the manner in which the
Board or Chief Executive Officer believes that the
Executive has not substantially performed the
Executive's duties, or
(ii) the willful engaging by the Executive in il-
legal conduct or gross misconduct which is materially
and demonstrably injurious to the Company.
For purposes of this provision, no act or failure to act, on
the part of the Executive, shall be considered "willful" un-
less it is done, or omitted to be done, by the Executive in
bad faith or without reasonable belief that the Executive's
action or omission was in the best interests of the Company.
Any act, or failure to act, based upon authority given pur-
suant to a resolution duly adopted by the Board or upon the
instructions of the Chief Executive Officer or a senior of-
ficer of the Company or based upon the advice of counsel for
the Company shall be conclusively presumed to be done, or
omitted to be done, by the Executive in good faith and in
the best interests of the Company. The cessation of
employment of the Executive shall not be deemed to be for
Cause unless and until there shall have been delivered to
the Executive a copy of a resolution duly adopted by the
affirmative vote of not less than three-quarters of the
entire membership of the Board at a meeting of the Board
called and held for such purpose (after reasonable notice is
provided to the Executive and the Executive is given an
opportunity, together with counsel, to be heard before the
Board), finding that, in the good faith opinion of the
Board, the Executive is guilty of the conduct described in
subparagraph (i) or (ii) above, and specifying the
particulars thereof in detail.
(c) Good Reason. The Executive's employment may
be terminated by the Executive for Good Reason. For
purposes of this Agreement, "Good Reason" shall mean:
(i) the assignment to the Executive of any duties
inconsistent in any respect with the Executive's
position (including status, offices, titles and
reporting requirements), authority, duties or
responsibilities as contemplated by Section 4(a) of this
Agreement, or any other action by the Company which
results in a diminution in such position, authority,
duties or responsibilities, excluding for this purpose
an isolated, insubstantial and inadvertent action not
taken in bad faith and which is remedied by the Company
promptly after receipt of notice thereof given by the
Executive;
(ii) any failure by the Company to comply with
any of the provisions of Section 4(b) of this Agreement,
other than an isolated, insubstantial and inadvertent
failure not occurring in bad faith and which is remedied
by the Company promptly after receipt of notice thereof
given by the Executive;
(iii) the Company's requiring the Executive to be
based at any office or location other than as provided
in Section 4(a)(i)(B) hereof or the Company's requiring
the Executive to travel on Company business to a
substantially greater extent than required immediately
prior to the Effective Date;
(iv) any purported termination by the Company of
the Executive's employment otherwise than as expressly
permitted by this Agreement; or
(v) any failure by the Company to comply with and
satisfy Section 11(c) of this Agreement.
For purposes of this Section 5(c), any good faith determina-
tion of "Good Reason" made by the Executive shall be conclu-
sive. Anything in this Agreement to the contrary notwith-
standing, a termination by the Executive for any reason dur-
ing the 30-day period immediately following the first an-
niversary of the Effective Date shall be deemed to be a ter-
mination for Good Reason for all purposes of this Agreement.
(d) Notice of Termination. Any termination by the
Company for Cause, or by the Executive for Good Reason,
shall be communicated by Notice of Termination to the other
party hereto given in accordance with Section 12(b) of this
Agreement. For purposes of this Agreement, a "Notice of
Termination" means a written notice which (i) indicates the
specific termination provision in this Agreement relied
upon, (ii) to the extent applicable, sets forth in
reasonable detail the facts and circumstances claimed to
provide a basis for termination of the Executive's
employment under the provision so indicated and (iii) if the
Date of Termination (as defined below) is other than the
date of receipt of such notice, specifies the termination
date (which date shall be not more than thirty days after
the giving of such notice). The failure by the Executive or
the Company to set forth in the Notice of Termination any
fact or circumstance which contributes to a showing of Good
Reason or Cause shall not waive any right of the Executive
or the Company, respectively, hereunder or preclude the
Executive or the Company, respectively, from asserting such
fact or circumstance in enforcing the Executive's or the
Company's rights hereunder.
(e) Date of Termination. "Date of Termination"
means (i) if the Executive's employment is terminated by the
Company for Cause, or by the Executive for Good Reason, the
date of receipt of the Notice of Termination or any later
date specified therein, as the case may be, (ii) if the
Executive's employment is terminated by the Company other
than for Cause or Disability, the Date of Termination shall
be the date on which the Company notifies the Executive of
such termination and (iii) if the Executive's employment is
terminated by reason of death or Disability, the Date of
Termination shall be the date of death of the Executive or
the Disability Effective Date, as the case may be.
6. Obligations of the Company upon Termination.
(a) Good Reason; Other Than for Cause, Death or Disability.
If, during the Employment Period, the Company shall
terminate the Executive's employment other than for Cause or
Disability or the Executive shall terminate employment for
Good Reason:
(i) the Company shall pay to the Executive in a
lump sum in cash within 30 days after the Date of Termi-
nation the aggregate of the following amounts:
A. the sum of (1) the Executive's Annual Base
Salary through the Date of Termination to the
extent not theretofore paid, (2) the product of (x)
the higher of (I) the Recent Annual Bonus and (II)
the Annual Bonus paid or payable, including any
bonus or portion thereof which has been earned but
deferred (and annualized for any fiscal year
consisting of less than twelve full months or
during which the Executive was employed for less
than twelve full months), for the most recently
completed fiscal year during the Employment Period,
if any (such higher amount being referred to as the
"Highest Annual Bonus") and (y) a fraction, the
numerator of which is the number of days in the
current fiscal year through the Date of
Termination, and the denominator of which is 365
and (3) any compensation previously deferred by the
Executive (together with any accrued interest or
earnings thereon) and any accrued vacation pay, in
each case to the extent not theretofore paid (the
sum of the amounts described in clauses (1), (2),
and (3) shall be hereinafter referred to as the
"Accrued Obligations"); and
B. the amount equal to the product of (1)
three and (2) the sum of (x) the Executive's Annual
Base Salary and (y) the Highest Annual Bonus; and
C. an amount equal to the excess of (a) the
actuarial equivalent of the benefit under the
Company's qualified defined benefit retirement plan
(the "Retirement Plan") (utilizing actuarial
assumptions no less favorable to the Executive than
those in effect under the Company's Retirement Plan
immediately prior to the Effective Date), and any
excess or supplemental retirement plan in which the
Executive participates (together, the "SERP") which
the Executive would receive if the Executive's em-
ployment continued for three years after the Date
of Termination assuming for this purpose that all
accrued benefits are fully vested, and, assuming
that the Executive's compensation in each of the
three years is that required by Section 4(b)(i) and
Section 4(b)(ii), over (b) the actuarial equivalent
of the Executive's actual benefit (paid or
payable), if any, under the Retirement Plan and the
SERP as of the Date of Termination;
(ii) for three years after the Executive's Date of
Termination, or such longer period as may be provided by
the terms of the appropriate plan, program, practice or
policy, the Company shall continue benefits to the
Executive and/or the Executive's family at least equal
to those which would have been provided to them in
accordance with the plans, programs, practices and
policies described in Section 4(b)(iv) of this Agreement
if the Executive's employment had not been terminated
or, if more favorable to the Executive, as in effect
generally at any time thereafter with respect to other
peer executives of the Company and its affiliated
companies and their families, provided, however, that if
the Executive becomes reemployed with another employer
and is eligible to receive medical or other welfare
benefits under another employer provided plan, the
medical and other welfare benefits described herein
shall be secondary to those provided under such other
plan during such applicable period of eligibility. For
purposes of determining eligibility (but not the time of
commencement of benefits) of the Executive for retiree
benefits pursuant to such plans, practices, programs and
policies, the Executive shall be considered to have
remained employed until three years after the Date of
Termination and to have retired on the last day of such
period;
(iii) the Company shall, at its sole expense as in-
curred, provide the Executive with outplacement services
the scope and provider of which shall be selected by the
Executive in his sole discretion; and
(iv) to the extent not theretofore paid or pro-
vided, the Company shall timely pay or provide to the
Executive any other amounts or benefits required to be
paid or provided or which the Executive is eligible to
receive under any plan, program, policy or practice or
contract or agreement of the Company and its affiliated
companies (such other amounts and benefits shall be
hereinafter referred to as the "Other Benefits").
(b) Death. If the Executive's employment is
terminated by reason of the Executive's death during the
Employment Period, this Agreement shall terminate without
further obligations to the Executive's legal representatives
under this Agreement, other than for payment of Accrued
Obligations and the timely payment or provision of Other
Benefits. Accrued Obligations shall be paid to the
Executive's estate or beneficiary, as applicable, in a lump
sum in cash within 30 days of the Date of Termination. With
respect to the provision of Other Benefits, the term Other
Benefits as utilized in this Section 6(b) shall include,
without limitation, and the Executive's estate and/or
beneficiaries shall be entitled to receive, benefits at
least equal to the most favorable benefits provided by the
Company and affiliated companies to the estates and
beneficiaries of peer executives of the Company and such af-
filiated companies under such plans, programs, practices and
policies relating to death benefits, if any, as in effect
with respect to other peer executives and their
beneficiaries at any time during the 120-day period
immediately preceding the Effective Date or, if more favor-
able to the Executive's estate and/or the Executive's
beneficiaries, as in effect on the date of the Executive's
death with respect to other peer executives of the Company
and its affiliated companies and their beneficiaries.
(c) Disability. If the Executive's employment is
terminated by reason of the Executive's Disability during
the Employment Period, this Agreement shall terminate
without further obligations to the Executive, other than for
payment of Accrued Obligations and the timely payment or
provision of Other Benefits. Accrued Obligations shall be
paid to the Executive in a lump sum in cash within 30 days
of the Date of Termination. With respect to the provision
of Other Benefits, the term Other Benefits as utilized in
this Section 6(c) shall include, and the Executive shall be
entitled after the Disability Effective Date to receive,
disability and other benefits at least equal to the most
favorable of those generally provided by the Company and its
affiliated companies to disabled executives and/or their
families in accordance with such plans, programs, practices
and policies relating to disability, if any, as in effect
generally with respect to other peer executives and their
families at any time during the 120-day period immediately
preceding the Effective Date or, if more favorable to the
Executive and/or the Executive's family, as in effect at any
time thereafter generally with respect to other peer
executives of the Company and its affiliated companies and
their families.
(d) Cause; Other than for Good Reason. If the
Executive's employment shall be terminated for Cause during
the Employment Period, this Agreement shall terminate
without further obligations to the Executive other than the
obligation to pay to the Executive (x) his Annual Base
Salary through the Date of Termination, (y) the amount of
any compensation previously deferred by the Executive, and
(z) Other Benefits, in each case to the extent theretofore
unpaid. If the Executive voluntarily terminates employment
during the Employment Period, excluding a termination for
Good Reason, this Agreement shall terminate without further
obligations to the Executive, other than for Accrued Obliga-
tions and the timely payment or provision of Other Benefits.
In such case, all Accrued Obligations shall be paid to the
Executive in a lump sum in cash within 30 days of the Date
of Termination.
7. Non-exclusivity of Rights. Nothing in this
Agreement shall prevent or limit the Executive's continuing
or future participation in any plan, program, policy or
practice provided by the Company or any of its affiliated
companies and for which the Executive may qualify, nor,
subject to Section 12(f), shall anything herein limit or
otherwise affect such rights as the Executive may have under
any contract or agreement with the Company or any of its af-
filiated companies. Amounts which are vested benefits or
which the Executive is otherwise entitled to receive under
any plan, policy, practice or program of or any contract or
agreement with the Company or any of its affiliated
companies at or subsequent to the Date of Termination shall
be payable in accordance with such plan, policy, practice or
program or contract or agreement except as explicitly
modified by this Agreement.
8. Full Settlement. The Company's obligation to
make the payments provided for in this Agreement and other-
wise to perform its obligations hereunder shall not be af-
fected by any set-off, counterclaim, recoupment, defense or
other claim, right or action which the Company may have
against the Executive or others. In no event shall the Ex-
ecutive be obligated to seek other employment or take any
other action by way of mitigation of the amounts payable to
the Executive under any of the provisions of this Agreement
and such amounts shall not be reduced whether or not the Ex-
ecutive obtains other employment. The Company agrees to pay
as incurred, to the full extent permitted by law, all legal
fees and expenses which the Executive may reasonably incur
as a result of any contest (regardless of the outcome
thereof) by the Company, the Executive or others of the
validity or enforceability of, or liability under, any
provision of this Agreement or any guarantee of performance
thereof (including as a result of any contest by the Execu-
tive about the amount of any payment pursuant to this Agree-
ment), plus in each case interest on any delayed payment at
the applicable Federal rate provided for in Section
7872(f)(2)(A) of the Internal Revenue Code of 1986, as
amended (the "Code").
9. Certain Additional Payments by the Company.
(a) Anything in this Agreement to the contrary
notwithstanding but subject to the provisions of this
Section 9(a), in the event it shall be determined that any
payment or distribution by the Company to or for the benefit
of the Executive (whether paid or payable or distributed or
distributable pursuant to the terms of this Agreement or
otherwise, but determined without regard to any additional
payments required under this Section 9) (a "Payment") would
be subject to the excise tax imposed by Section 4999 of the
Code or any interest or penalties are incurred by the Execu-
tive with respect to such excise tax (such excise tax,
together with any such interest and penalties, are herein-
after collectively referred to as the "Excise Tax"), then
the Executive shall be entitled to receive an additional
payment (a "Gross-Up Payment") in an amount such that after
payment by the Executive of all taxes (including any
interest or penalties imposed with respect to such taxes),
including, without limitation, any income taxes (and any
interest and penalties imposed with respect thereto) and
Excise Tax imposed upon the Gross-Up Payment, the Executive
retains an amount of the Gross-Up Payment equal to the
Excise Tax imposed upon the Payments. Notwithstanding the
foregoing provisions of this Section 9(a), if it shall be
determined that the Executive is entitled to a Gross-Up
Payment, but that the Executive, after taking into account
the Payments and the Gross-Up Payment, would not receive a
net after-tax benefit of at least $50,000 (taking into
account both income taxes and any Excise Tax) as compared to
the net after-tax proceeds to the Executive resulting from
an elimination of the Gross-Up Payment and a reduction of
the Payments, in the aggregate, to an amount (the "Reduced
Amount") such that the receipt of Payments would not give
rise to any Excise Tax, then no Gross-Up Payment shall be
made to the Executive and the Payments, in the aggregate,
shall be reduced to the Reduced Amount.
(b) Subject to the provisions of Section 9(c), all
determinations required to be made under this Section 9, in-
cluding whether and when a Gross-Up Payment is required and
the amount of such Gross-Up Payment and the assumptions to
be utilized in arriving at such determination, shall be made
by Deloitte & Touche or such other certified public ac-
counting firm as may be designated by the Executive (the
"Accounting Firm") which shall provide detailed supporting
calculations both to the Company and the Executive within 15
business days of the receipt of notice from the Executive
that there has been a Payment, or such earlier time as is
requested by the Company. In the event that the Accounting
Firm is serving as accountant or auditor for the individual,
entity or group effecting the Change of Control, the
Executive shall appoint another nationally recognized ac-
counting firm to make the determinations required hereunder
(which accounting firm shall then be referred to as the Ac-
counting Firm hereunder). All fees and expenses of the Ac-
counting Firm shall be borne solely by the Company. Any
Gross-Up Payment, as determined pursuant to this Section 9,
shall be paid by the Company to the Executive within five
days of the receipt of the Accounting Firm's determination.
Any determination by the Accounting Firm shall be binding
upon the Company and the Executive. As a result of the
uncertainty in the application of Section 4999 of the Code
at the time of the initial determination by the Accounting
Firm hereunder, it is possible that Gross-Up Payments which
will not have been made by the Company should have been made
("Underpayment"), consistent with the calculations required
to be made hereunder. In the event that the Company
exhausts its remedies pursuant to Section 9(c) and the
Executive thereafter is required to make a payment of any
Excise Tax, the Accounting Firm shall determine the amount
of the Underpayment that has occurred and any such
Underpayment shall be promptly paid by the Company to or for
the benefit of the Executive.
(c) The Executive shall notify the Company in
writing of any claim by the Internal Revenue Service that,
if successful, would require the payment by the Company of
the Gross-Up Payment. Such notification shall be given as
soon as practicable but no later than ten business days
after the Executive is informed in writing of such claim and
shall apprise the Company of the nature of such claim and
the date on which such claim is requested to be paid. The
Executive shall not pay such claim prior to the expiration
of the 30-day period following the date on which it gives
such notice to the Company (or such shorter period ending on
the date that any payment of taxes with respect to such
claim is due). If the Company notifies the Executive in
writing prior to the expiration of such period that it
desires to contest such claim, the Executive shall:
(i) give the Company any information reasonably
requested by the Company relating to such claim,
(ii) take such action in connection with contesting
such claim as the Company shall reasonably request in
writing from time to time, including, without
limitation, accepting legal representation with respect
to such claim by an attorney reasonably selected by the
Company,
(iii) cooperate with the Company in good faith in
order effectively to contest such claim, and
(iv) permit the Company to participate in any pro-
ceedings relating to such claim;
provided, however, that the Company shall bear and pay di-
rectly all costs and expenses (including additional interest
and penalties) incurred in connection with such contest and
shall indemnify and hold the Executive harmless, on an
after-tax basis, for any Excise Tax or income tax (including
interest and penalties with respect thereto) imposed as a
result of such representation and payment of costs and ex-
penses. Without limitation on the foregoing provisions of
this Section 9(c), the Company shall control all proceedings
taken in connection with such contest and, at its sole op-
tion, may pursue or forgo any and all administrative
appeals, proceedings, hearings and conferences with the
taxing authority in respect of such claim and may, at its
sole option, either direct the Executive to pay the tax
claimed and sue for a refund or contest the claim in any
permissible manner, and the Executive agrees to prosecute
such contest to a determination before any administrative
tribunal, in a court of initial jurisdiction and in one or
more appellate courts, as the Company shall determine;
provided, however, that if the Company directs the Executive
to pay such claim and sue for a refund, the Company shall
advance the amount of such payment to the Executive, on an
interest-free basis and shall indemnify and hold the Execu-
tive harmless, on an after-tax basis, from any Excise Tax or
income tax (including interest or penalties with respect
thereto) imposed with respect to such advance or with
respect to any imputed income with respect to such advance;
and further provided that any extension of the statute of
limitations relating to payment of taxes for the taxable
year of the Executive with respect to which such contested
amount is claimed to be due is limited solely to such
contested amount. Furthermore, the Company's control of the
contest shall be limited to issues with respect to which a
Gross-Up Payment would be payable hereunder and the
Executive shall be entitled to settle or contest, as the
case may be, any other issue raised by the Internal Revenue
Service or any other taxing authority.
(d) If, after the receipt by the Executive of an
amount advanced by the Company pursuant to Section 9(c), the
Executive becomes entitled to receive any refund with
respect to such claim, the Executive shall (subject to the
Company's complying with the requirements of Section 9(c))
promptly pay to the Company the amount of such refund
(together with any interest paid or credited thereon after
taxes applicable thereto). If, after the receipt by the
Executive of an amount advanced by the Company pursuant to
Section 9(c), a determination is made that the Executive
shall not be entitled to any refund with respect to such
claim and the Company does not notify the Executive in
writing of its intent to contest such denial of refund prior
to the expiration of 30 days after such determination, then
such advance shall be forgiven and shall not be required to
be repaid and the amount of such advance shall offset, to
the extent thereof, the amount of Gross-Up Payment required
to be paid.
10. Confidential Information. The Executive shall
hold in a fiduciary capacity for the benefit of the Company
all secret or confidential information, knowledge or data
relating to the Company or any of its affiliated companies,
and their respective businesses, which shall have been ob-
tained by the Executive during the Executive's employment by
the Company or any of its affiliated companies and which
shall not be or become public knowledge (other than by acts
by the Executive or representatives of the Executive in vio-
lation of this Agreement). After termination of the
Executive's employment with the Company, the Executive shall
not, without the prior written consent of the Company or as
may otherwise be required by law or legal process, communi-
cate or divulge any such information, knowledge or data to
anyone other than the Company and those designated by it.
In no event shall an asserted violation of the provisions of
this Section 10 constitute a basis for deferring or
withholding any amounts otherwise payable to the Executive
under this Agreement.
11. Successors. (a) This Agreement is personal
to the Executive and without the prior written consent of
the Company shall not be assignable by the Executive
otherwise than by will or the laws of descent and
distribution. This Agreement shall inure to the benefit of
and be enforceable by the Executive's legal representatives.
(b) This Agreement shall inure to the benefit of
and be binding upon the Company and its successors and as-
signs.
(c) The Company will require any successor
(whether direct or indirect, by purchase, merger,
consolidation or otherwise) to all or substantially all of
the business and/or assets of the Company to assume
expressly and agree to perform this Agreement in the same
manner and to the same extent that the Company would be
required to perform it if no such succession had taken
place. As used in this Agreement, "Company" shall mean the
Company as hereinbefore defined and any successor to its
business and/or assets as aforesaid which assumes and agrees
to perform this Agreement by operation of law, or otherwise.
12. Miscellaneous. (a) This Agreement shall be
governed by and construed in accordance with the laws of the
State of Delaware, without reference to principles of con-
flict of laws. The captions of this Agreement are not part
of the provisions hereof and shall have no force or effect.
This Agreement may not be amended or modified otherwise than
by a written agreement executed by the parties hereto or
their respective successors and legal representatives.
(b) All notices and other communications hereunder
shall be in writing and shall be given by hand delivery to
the other party or by registered or certified mail, return
receipt requested, postage prepaid, addressed as follows:
If to the Executive:
If to the Company:
FHP International Corporation
9900 Talbert Avenue
Fountain Valley, California 92708
Attention: General Counsel
or to such other address as either party shall have
furnished to the other in writing in accordance herewith.
Notice and communications shall be effective when actually
received by the addressee.
(c) The invalidity or unenforceability of any pro-
vision of this Agreement shall not affect the validity or
enforceability of any other provision of this Agreement.
(d) The Company may withhold from any amounts pay-
able under this Agreement such Federal, state, local or for-
eign taxes as shall be required to be withheld pursuant to
any applicable law or regulation.
(e) The Executive's or the Company's failure to
insist upon strict compliance with any provision of this
Agreement or the failure to assert any right the Executive
or the Company may have hereunder, including, without
limitation, the right of the Executive to terminate
employment for Good Reason pursuant to Section 5(c)(i)-(v)
of this Agreement, shall not be deemed to be a waiver of
such provision or right or any other provision or right of
this Agreement.
(f) The Executive and the Company acknowledge
that, except as may otherwise be provided under any other
written agreement between the Executive and the Company, the
employment of the Executive by the Company is "at will" and,
subject to Section 1(a) hereof, prior to the Effective Date,
the Executive's employment and/or this Agreement may be ter-
minated by either the Executive or the Company at any time
prior to the Effective Date, in which case the Executive
shall have no further rights under this Agreement.
(g) From and after the Effective Date, this Agree-
ment shall supersede any other agreement between the parties
with respect to the subject matter hereof entered into prior
to the date hereof.
<PAGE>
IN WITNESS WHEREOF, the Executive has hereunto set
the Executive's hand and, pursuant to the authorization from
its Board of Directors, the Company has caused these
presents to be executed in its name on its behalf, all as of
the day and year first above written.
FHP INTERNATIONAL CORPORATION
By
Westcott W. Price III
President and Chief
Executive Officer
A:\form
Exhibit 11.1
FHP INTERNATIONAL CORPORATION
STATEMENT RE: COMPUTATION OF EARNINGS PER SHARE
(unaudited)
For The For The
(amounts in thousands, Three Months Nine Months
except per share data) Ended March 31, Ended March 31,
1994 1993 1994 1993
------- ------- ------- -------
Primary earnings per share:
Net income $16,813 $14,448 $38,312 $27,043
======= ======= ======= =======
Weighted average number of
common shares and common
share equivalents:
Common stock 33,131 32,725 32,994 32,594
Assumed exercise of options 709 659 665 565
------- ------- ------- -------
Total shares 33,840 33,384 33,659 33,159
======= ======= ======= =======
Primary earnings per share $ 0.50 $ 0.43 $ 1.14 $ 0.82
======= ======= ======= =======
Fully diluted earnings per share:
Net income $16,813 $14,448 $38,312 $27,043
======= ======= ======= =======
Weighted average number of
common shares and common
share equivalents:
Common stock 33,131 32,725 32,994 32,594
Assumed exercise of options 709 764 665 761
------- ------- ------- -------
Total shares, assuming
full dilution 33,840 33,489 33,659 33,355
======= ======= ======= =======
Fully diluted earnings per share $ 0.50 $ 0.43 $ 1.14 $ 0.81
======= ======= ======= =======
