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 September 30, 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 39,773,980 shares of common stock, par value
$0.05 per share, outstanding at November 9, 1994.
The Exhibit Index Appears on Page 15
<PAGE>
PART 1 - FINANCIAL INFORMATION
Item 1. Financial Statements
FHP INTERNATIONAL CORPORATION
CONSOLIDATED BALANCE SHEETS
(unaudited)
ASSETS
(amounts in thousands, September 30, June 30,
except share data) 1994 1994
_____________ _________
Cash and cash equivalents $ 241,950 $ 60,571
Short-term investments (Note 3) 214,698 186,212
Accounts receivable, net 111,167 112,092
Deferred income taxes 31,441 30,360
Prepaid expenses and other
current assets 52,573 56,708
__________ __________
Total current assets 651,829 445,943
Property and equipment, net 405,285 403,754
Long-term investments (Note 3) 77,785 122,782
Restricted investments (Note 3) 97,870 97,879
Excess purchase price over net assets
acquired, net 1,067,206 1,073,839
Other assets, net 26,146 25,072
__________ __________
Total assets $2,326,121 $2,169,269
========== ==========
__________
See accompanying notes to consolidated financial statements.
<PAGE>
FHP INTERNATIONAL CORPORATION
CONSOLIDATED BALANCE SHEETS
(unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY
(amounts in thousands, September 30, June 30,
except share data) 1994 1994
_____________ __________
Current portion of long-term
obligations $ 50,158 $ 25,154
Accounts payable 76,304 94,725
Medical claims payable 304,699 283,612
Accrued salaries and employee
benefits 80,014 84,371
Deferred premiums 169,989 32,738
Income taxes payable and other
current liabilities 67,116 67,203
_________ _________
Total current liabilities 748,280 587,803
Long-term obligations 352,945 377,986
Other liabilities 92,305 90,344
_________ _________
Total liabilities 1,193,530 1,056,133
_________ _________
Commitments and contingencies
(Note 5)
Stockholders' equity:
Series A Convertible and Series B
preferred stock, $0.05 par value;
40,000,000 shares authorized (Note 4) 1,053 1,053
Common stock, $0.05 par value;
100,000,000 shares authorized;
39,767,380 and 39,503,675 shares
issued and outstanding at September 30,
1994 and June 30, 1994, respectively 1,988 1,976
Paid-in capital 918,845 915,816
Unrealized holding loss on available-
for-sale securities, net of tax
effect of $2,552 at
September 30, 1994 and $2,617 at
June 30, 1994 (Note 3) (3,193) (4,392)
Retained earnings 213,898 198,683
__________ __________
Total stockholders' equity 1,132,591 1,113,136
__________ __________
Total liabilities and
stockholders' equity $2,326,121 $2,169,269
========== ==========
__________
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) September 30,
1994 1993
________ ________
Revenues $954,340 $576,379
________ ________
Expenses:
Primary health care 763,008 461,870
Other health care 26,023 23,052
General, administrative and
marketing 128,073 77,973
________ ________
Total expenses 917,104 562,895
________ ________
Operating income 37,236 13,484
Interest income 7,271 4,324
Interest expense (6,136) (200)
________ ________
Income before income taxes 38,371 17,608
Provision for income taxes 17,651 6,362
________ ________
Net income 20,720 11,246
Preferred stock dividends 5,505
________ ________
Net income attributable to
common stock $ 15,215 $ 11,246
======== ========
Primary earnings per share
attributable to common stock (Note 2) $ 0.37 $ 0.33
======== ========
Weighted average number of common
shares and common share equivalents 40,852 33,587
======== ========
Fully diluted earnings per share
(Note 2) $ 0.36 $ 0.33
======== ========
Fully diluted weighted average number
of common shares and common share
equivalents 58,196 33,587
======== ========
__________
See accompanying notes to consolidated financial statements.
FHP INTERNATIONAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
For The
Three Months Ended
(amounts in thousands) September 30,
1994 1993
________ ________
Operating Activities
Net income $20,720 $11,246
Adjustments to reconcile
net income to net cash
provided by operating activities:
Depreciation and amortization 20,090 9,369
Increase in allowance for
doubtful accounts 1,002 1,210
Loss on disposal of equipment 893 964
Loss on sale of available-for-sale
securities 175
Deferred income taxes (939) (1,043)
Effect on cash of changes
in operating assets and
liabilities:
Accounts receivable (77) (1,796)
Prepaid expenses and other
current assets 4,135 (3,068)
Other assets (2,106) (1,012)
Accounts payable (18,421) (10,627)
Medical claims payable 21,087 4,258
Accrued salaries and
employee benefits (4,357) 10,453
Deferred premiums 137,251 (3,734)
Other liabilities 2,744 12,182
________ ________
Net cash provided by operating
activities 182,197 28,402
________ ________
Investing Activities
Purchases of available-for-sale
securities (Note 3) (57,983) (14,306)
Proceeds from sales/maturities
of available-for-sale securities
(Note 3) 75,527
Purchases of property and
equipment (14,849) (20,637)
________ ________
Net cash provided by (used in) investing
activities 2,695 (34,943)
________ ________
<PAGE>
FHP INTERNATIONAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS(continued)
(unaudited)
For The
Three Months Ended
(amounts in thousands) September 30,
1994 1993
________ ________
Financing Activities
Proceeds from issuance of
long-term debt 100,000
Payments on long-term
obligations (37) (20,030)
Exercise of stock options 2,828 144
Cash dividends paid to preferred
shareholders (6,304)
________ ________
Net cash (used in) provided by
financing activities (3,513) 80,114
________ ________
Increase in cash and
cash equivalents 181,379 73,573
Cash and cash equivalents at
beginning of period 60,571 2,700
________ ________
Cash and cash equivalents at end
of period $241,950 $ 76,273
======== ========
Supplemental cash flow information:
Interest payments (net of portion
capitalized) $ 6,122 $ 487
Income tax payments (net of
refunds) $ 38 $ 1,266
__________
See accompanying notes to consolidated financial statements.
<PAGE>
FHP INTERNATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
NOTE 1. Organization and Accounting Policies
FHP International Corporation (the "Company"), through its direct
and indirect subsidiaries, delivers managed health care services and
sells indemnity medical, group life, and workers' compensation
insurance.
On June 17, 1994, the Company completed its acquisition of
TakeCare, Inc. ("TakeCare"). The results of operations of TakeCare are
included in the accompanying financial statements for the three months
ended September 30, 1994.
Interim periods are viewed as an integral part of the annual period
of 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, 1994. In the opinion of management, all adjustments
necessary to fairly present the financial position and the results of
operations for the three months ended September 30, 1994 and 1993 are
included in these consolidated financial statements.
NOTE 2. Earnings Per Share
Primary earnings per share attributable to common stock for the
three months ended September 30, 1994 and 1993 are computed by dividing
net income after preferred stock dividends by the weighted average
number of common shares and dilutive common stock options (using average
market price), which are considered common share equivalents,
outstanding during the periods.
Fully diluted earnings per share for the three months ended
September 30, 1994, and 1993 assume the conversion of the Series A
Cumulative Convertible preferred stock, the elimination of
the related preferred stock dividend requirement and market price as of
the end of the quarter for dilutive common stock options.
NOTE 3. Consolidated Statements of Cash Flows
The Company adopted Statement of Financial Accounting Standards No.
115 ("SFAS 115"), "Accounting for Certain Investments in Debt and Equity
Securities," as of June 30, 1994. The amounts shown in the Company's
consolidated statements of cash flows for purchases of and proceeds from
sales/maturities of available-for-sale securities for the three months
ended September 30, 1994, are reflected separately as required by SFAS
115. The purchases and sales/maturities for the three months ended
September 30, 1993, are shown net as SFAS 115 does not require
retroactive adoption, and the determination of such information for the
prior period was not practical. An unrealized holding gain of $1,199
was recognized for the three months ended September 30, 1994.
NOTE 4. Preferred Stock
The issued and outstanding, and aggregate liquidation preference of
the Company's two series of preferred stocks are as follows:
September 30, 1994 June 30, 1994
----------------------- -----------------------
Series B Series B
Series A Adjustable Series A Adjustable
Cumulative Rate Cumulative Rate
Convertible Cumulative Convertible Cumulative
----------- ---------- ------------ ----------
Issued and outstanding 21,031,733 39,209 21,031,733 32,850
Aggregate liquidation
preference $526,023,000 $983,000 $526,825,000 $821,000
NOTE 5. 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.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Three Months Ended September 30, 1994 Compared to
the Three Months Ended September 30, 1993
Revenue
The Company generates substantially all of its revenue from
premiums received for health care services provided to the HMO members
of its wholly-owned subsidiaries. Revenue for the three-month period
ended September 30, 1994, totaled $954.3 million, increasing 65.6% over
revenue of $576.4 million for the same period in the previous fiscal
year. The Company experienced significant revenue growth during the
three-month period ended September 30, 1994, primarily due to the
Company's acquisition of TakeCare, Inc. and its HMO subsidiaries
("TakeCare") on June 17, 1994, and the inclusion of TakeCare's results
of operations for the current three-month period ended September 30,
1994.
Commercial HMO revenue growth for the three-month period ended
September 30, 1994, was generated by membership increases and premium
rate increases. 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 attempts to mitigate this impact by
restructuring HMO benefits, and offering additional managed care
products and services, such as dental and optical services. A
substantial portion of the Company's commercial premium rate increases
becomes effective in January of each year.
Senior HMO revenue growth for the three-month period ended
September 30, 1994, was generated primarily by membership increases from
increased penetration in existing markets and expansion into new market
areas. Almost all of the Company's senior HMO revenue is generated from
premiums paid to the Company by the Health Care Financing Administration
("HCFA"). Revenue per senior member is substantially higher than
revenue per commercial member because senior members use substantially
more health care services.
The Company receives senior premium rate increases from HCFA on
January 1 of each year. In September, 1994, HCFA announced the Medicare
rate increases that will become effective January 1, 1995. These rate
increases become the basis for determining the amounts that HCFA will
pay to the Company. Based upon this announcement, the Company currently
estimates that it will receive an average 5.0% senior premium rate
increase. The Company received an average 2.0% rate increase effective
January 1, 1994, compared to an average 11.6% rate increase effective
January 1, 1993.
HMO Membership
Total HMO membership grew 102.5% to approximately 1,723,000 at
September 30, 1994, from approximately 851,000 at September 30, 1993,
primarily due to the inclusion of TakeCare members. (The Company
acquired approximately 786,000 TakeCare members as of June 30, 1994).
From September 30, 1993, to September 30, 1994, total commercial
membership increased from approximately 541,000 to approximately
1,368,000 primarily due to the inclusion of approximately 764,000
TakeCare commercial members. Membership growth also resulted from
expansion of HMO operations into new market areas and increased
penetration in existing markets. Most of this growth has occurred in
the Company's IPA plans. Excluding TakeCare commercial membership, the
Company's commercial membership grew by 63,000 or 11.6% from
approximately 541,000 at September 30, 1993, to approximately 604,000 at
September 30, 1994.
Senior membership (including that resulting from the acquisition
of TakeCare), grew by 45,000 or 14.5% to approximately 355,000 at
September 30, 1994, from approximately 310,000 at September 30, 1993.
Excluding TakeCare senior membership, senior membership grew year-over-
year by 21,000 or 6.8% from approximately 310,000 at September 30, 1993,
to approximately 331,000 at September 30, 1994.
The Company continues to experience declining membership in certain
staff model medical centers in Los Angeles and Orange Counties in
Southern California. The decline has been greater among commercial
members than senior members, and management believes that this has been
caused primarily by increased competition, the economic recession and
substantial employment reductions in several industry sectors. The
TakeCare acquisition and substantial IPA expansion in recent years have
significantly contributed to IPA HMO membership increasing to
approximately 80% of the Company's total HMO membership. Prior to the
TakeCare acquisition, IPA HMO members comprised approximately 63% of the
Company's total membership.
Cost of Health Care
Health care costs increased 62.7% to $789.0 million for the three
months ended September 30, 1994, from $484.9 million for the three
months ended September 30, 1993 primarily due to the inclusion of the
TakeCare HMOs. Health care costs decreased as a percent of revenue to
82.7% in the current period from 84.1% in the same period of the last
fiscal year. The decrease as a percent of revenue resulted from a lower
cost of healthcare in the TakeCare HMOs (80.4%) together with reduced
healthcare costs in ongoing FHP HMOs to 83.8% of revenue. This 0.3
percentage point improvement resulted primarily from lower hospital and
pharmacy costs.
<PAGE>
General, Administrative and Marketing Costs
General, administrative and marketing ("G & A") expenses increased
64.2% to $128.1 million for the first quarter of fiscal 1995 from $78.0
million for the first quarter of fiscal 1994. The increase resulted
primarily from the acquisition of TakeCare. G & A expenses for the
three- month period ended September 30, 1994, decreased as a percentage
of revenue to 13.4% from 13.5% for the same period in the prior fiscal
year. Excluding intangible amortization substantially arising from the
acquisition of TakeCare, G & A for the three-month period ended
September 30, 1994, was 12.7% of revenue, reflecting savings achieved as
former FHP and TakeCare sales and administrative departments are merged
and duplicate facilities closed.
Liquidity and Capital Resources
The Company's consolidated cash, cash equivalents and short-term
investments increased by $209.8 million to $456.6 million at September
30, 1994, from $246.8 million at June 30, 1994. This increase reflects
the receipt in September 1994 of approximately $139 million of premiums
from HCFA due on October 1, 1994, for medical services to be provided to
senior members in October 1994. Other major sources of cash during the
three months ended September 30, 1994, included cash generated from
operations (net of the early receipt of HCFA premiums) of $43.2 million
and transfers of $45 million from long-term investments. Major uses of
cash during the period included $14.8 million for capital expenditures
and $6.3 million for preferred stock dividends.
The Company has incurred principal, interest and dividend
obligations arising from (i) the issuance of $100 million of 7% Senior
Notes in September 1993 (the "Notes"), (ii) borrowings under a $350
million Credit Agreement (the "Credit Agreement) beginning in June 1994,
and (iii) the issuance of preferred stock beginning in June 1994. The
Company's ability to make a payment on or repayment of its obligations
under the Notes, the Credit Agreement and dividends on its preferred
stock is dependent in part on the payment of funds to the Company from
the Company's direct and indirect subsidiaries. These subsidiary
payments represent: (a) fees for management services rendered by the
Company to the subsidiaries; (b) the repayment of certain intercompany
debt owed by one of the subsidiaries to the Company; and (c) cash
dividends by the subsidiaries to the Company. Nearly all of the
subsidiaries are subject to HMO regulations or insurance regulations and
may be subject to substantial supervision by one or more HMO regulators
and insurance regulators (the "Regulated Subsidiaries"). Each of the
Regulated Subsidiaries must meet or exceed various fiscal standards
imposed by HMO regulations or insurance regulations or by HMO regulators
or insurance regulators, which fiscal standards may, from time to time,
impact the amount of funds paid by one or more of the Regulated
Subsidiaries to the Company as referred to above.
<PAGE>
The Company believes the payments referred to above by the
subsidiaries together with other financing sources including the Credit
Agreement should be sufficient to enable the Company to meet its payment
obligations under the Notes, the Credit Agreement and the Company's
preferred stock (approximately $100 million annually). The Company
believes that cash flow from operations and existing cash balances will
be sufficient to continue to fund operations and capital expenditures in
fiscal year 1995.
Effects of Regulatory Changes and Inflation
Recently, the Company has been informed by HCFA that effective
January 1, 1995, it will receive an annual premium rate increase of
approximately 5.0% for its Senior Plan members. Over calendar years
1993 and 1994, annual Senior Plan premium increases granted by HCFA were
approximately 11.6% and 2.0%, respectively. Periodically, the Company
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.
In recent years, health care costs have been rising at a rate
higher than that for consumer goods as a whole as a result of inflation,
new technology and medical advances. The Company believes, however,
that premium rate increases combined with its cost control measures and
financial risk-sharing arrangements with its contract medical providers
help to mitigate the effects of inflation on its operations. However,
there can be no assurance that the Company's efforts to reduce the
impact of the increasing cost of health care will be as successful in
the future as they have been in the past or that premium rate increases
will equal or exceed increased costs.
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
Information relating to certain litigation as set forth in
Note 5 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.
None.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits. See Index to Exhibits at page 15 of this
report.
(b) Reports on Form 8-K. Current reports on Form 8-K/A
were filed on August 29, 1994 and August 31, 1994, each
amending the current report on Form 8-K filed on June
17, 1994.
<PAGE>
Signatures
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
FHP INTERNATIONAL CORPORATION
Dated: November 10, 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.
11.1 Statement Re: Computation of Earnings Per Share.
27.1 Financial Data Schedule.
* Document has previously been filed with the Commission and is
incorporated by reference and made a part hereof.
EXHIBIT 11.
FHP INTERNATIONAL CORPORATION
STATEMENT RE: COMPUTATION OF EARNINGS PER SHARE
(unaudited)
For The
(amounts in thousands, Three Months Ended
except per share data) September 30,
1994 1993
_______ _______
Primary earnings per share
attributable to common stock:
Net income attributable to
common stock $15,215 $11,246
======= =======
Weighted average number of
common shares and common
share equivalents:
Common stock 39,553 32,859
Assumed exercise of options 1,299 728
_______ _______
Total shares 40,852 33,587
======= =======
Primary earnings per share
attributable to common stock $ 0.37 $ 0.33
======= =======
Fully diluted earnings per share:
Net income attributable to
common stock assuming
conversion of Series A
cumulative convertible
preferred stock $20,702 $11,246
======= =======
Weighted average number of
common shares and common
share equivalents:
Common stock 39,553 32,859
Assumed exercise of options 1,682 728
Assumed conversion of
Series A cumulative
convertible preferred stock 16,961
_______ _______
Total shares, assuming
full dilution 58,196 33,587
======= =======
Fully diluted earnings per share $ 0.36 $ 0.33
======= =======
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM (A) THE
CONSOLIDATED STATEMENTS OF INCOME, BALANCE SHEETS AND CASH FLOWS OF FHP
INTERNATIONAL CORPORATION AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
(B) SEPTEMBER 30, 1994 QUARTERLY REPORT ON FORM 10-Q.
</LEGEND>
<S> <C>
<PERIOD-TYPE> QTR-1
<FISCAL-YEAR-END> JUN-30-1995
<PERIOD-END> SEP-30-1994
<CASH> 241,950
<SECURITIES> 214,698
<RECEIVABLES> 125,617
<ALLOWANCES> 14,450
<INVENTORY> 14,200
<CURRENT-ASSETS> 651,829
<PP&E> 563,243
<DEPRECIATION> 157,958
<TOTAL-ASSETS> 2,326,121
<CURRENT-LIABILITIES> 748,280
<BONDS> 352,945
<COMMON> 395,059
0
526,827
<OTHER-SE> 210,705
<TOTAL-LIABILITY-AND-EQUITY> 2,326,121
<SALES> 954,340
<TOTAL-REVENUES> 954,340
<CGS> 917,104
<TOTAL-COSTS> 917,104
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 1,002
<INTEREST-EXPENSE> 6,136
<INCOME-PRETAX> 38,371
<INCOME-TAX> 17,651
<INCOME-CONTINUING> 20,720
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 20,720
<EPS-PRIMARY> .37
<EPS-DILUTED> .36
</TABLE>
