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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K/A
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AMENDMENT NO. 1
TO
FORM 10-K FILED ON SEPTEMBER 27, 1994
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(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED JUNE 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
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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<TABLE>
<S> <C>
DELAWARE 33-0072502
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
</TABLE>
9900 TALBERT AVENUE, FOUNTAIN VALLEY, CA 92708
(ADDRESS, INCLUDING ZIP CODE, OF PRINCIPAL EXECUTIVE OFFICES)
(714) 963-7233
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
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The sole purpose of this amendment is to insert the headings on the
membership chart which appears on page 3. These headings were inadvertently
omitted during the electronic transmission of the Registrant's Form 10-K filed
September 27, 1994.
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PART I
ITEM 1. BUSINESS
(A) GENERAL DESCRIPTION OF BUSINESS
Through its direct and indirect subsidiaries, FHP International
Corporation, a Delaware corporation (the "Company"), delivers managed health
care services and sells indemnity health, group life and workers' compensation
insurance. The Company's oldest and largest subsidiary, FHP, Inc., a California
corporation ("FHP"), is a federally qualified multistate licensed health
maintenance organization ("HMO"), which has been operating managed health care
programs since 1961. Unless the context otherwise requires, the term "Company"
as used in this Form 10-K Annual Report refers to FHP International Corporation
and its direct and indirect subsidiaries, including FHP and TakeCare, Inc. and
its subsidiaries ("TakeCare").
The Company provides a broad range of managed health care services to
approximately 1,712,000 HMO members, comprised of commercial and governmental
employees and Medicare beneficiaries, in California, Colorado, Arizona, Utah,
Illinois, Ohio, New Mexico, Nevada and Guam. These managed health care services
include ambulatory and outpatient physician care, hospital care, pharmacy,
dental care, eye care, home health nursing, skilled nursing, physical therapy,
psychological counseling and health education.
The Company also offers group life and health insurance products through
its insurance subsidiaries. At June 30, 1994, the Company provided group term
life insurance coverage for approximately 63,000 individuals and group health
and accident indemnity insurance coverage for approximately 48,000 individuals.
In its 24 Hour Managed Care ProgramSM the Company offers in a single package
workers' compensation coverage, HMO plans and group indemnity medical, dental
and life insurance benefit plans through several of its subsidiaries. The
Company also offers third party administration and utilization review services
and several PPO networks.
In October 1993, FHP acquired all of the issued and outstanding stock of
Aetna Health Plans of Colorado, Inc., an IPA model HMO with approximately 4,700
members, for an aggregate purchase price, subject to adjustment, of $3.5
million. Upon consummation of the acquisition, Aetna Health Plans of Colorado,
Inc. was renamed FHP of Colorado, Inc. In May 1994, FHP of Texas, Inc. became
licensed as an HMO in the State of Texas and expects to begin providing
healthcare to HMO members in the Houston, Texas area effective October 1, 1994.
On June 17, 1994, the Company consummated the acquisition of TakeCare by
merging TakeCare with and into a wholly-owned subsidiary of the Company.
TakeCare, through its direct and indirect subsidiaries, is a managed health care
company that provides comprehensive health care services to approximately
786,000 HMO members as of June 30, 1994, in California, Colorado, Illinois and
Ohio. In September 1993, TakeCare acquired Comprecare, Inc. ("Comprecare"), a
178,000-member HMO in Colorado, making TakeCare the largest HMO in Colorado.
In connection with the acquisition of TakeCare, the Company entered into a
Credit Agreement, dated as of March 24, 1994 (the "Credit Agreement"), among the
Company, the lenders named therein and Chemical Bank, as Administrative Agent.
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.
At June 30, 1994, the Company had approximately 14,000 full and part-time
employees. The Company's primary business activities consist of two business
segments: HMO services and group life, health and accident and workers'
compensation insurance. Information concerning revenue, operating profit or loss
and identifiable assets of the Company's two business segments is set forth in
the financial statements and relative notes included in Part II of this Form
10-K.
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(B) HMO DELIVERY MODELS
The Company operates primarily through two different HMO delivery models.
The Company delivers health care services through independent practice
association and group model HMOs in which the Company contracts with individual
medical and dental providers, provider networks and multi-specialty medical
groups to provide healthcare in facilities not operated by the Company. The term
"IPA" used hereafter in this Form 10-K Annual Report refers to both of these
contractual HMO models. Each IPA model centers around one or more contract
hospitals where IPA physicians maintain practice privileges. The Company's
members receive health care through the offices of more than 41,000 independent
contract providers and more than 500 contract hospitals.
In its staff model, the Company delivers health care services through an
employed staff of primary health care physicians, physician specialists,
dentists, nurses and other health care providers. These providers deliver health
care to members in Company-operated facilities rather than in the offices of
private doctors and dentists. At June 30, 1994, the Company employed
approximately 800 primary care physicians and physician specialists, 200
dentists and 6,000 other health care professionals. Company-operated facilities
include 59 medical and dental care centers ranging in size from approximately
2,000 to 96,000 square feet, three acute care hospitals and two sub-acute
skilled nursing facilities.
In a number of the Company's service areas, members receive health care in
mixed models where members have a choice of seeing either independent
contracting physicians in their offices or staff physicians employed at
Company-operated medical centers. This mixed model combines elements of both the
Company's staff and IPA models. The Company also offers its members IPA models
in certain areas previously served only by its staff model operations.
(C) HMO MEMBERSHIP
Commercial Members. As used herein, the term commercial members means all
HMO members except Senior PlanSM members. The Company acquires most of its
commercial members by contracting with employers that offer health benefits to
their employees. These employers generally offer a selection of insurance and
managed health care plans, pay for all or part of the monthly costs thereof and
make payroll deductions for any costs payable by the employee. Supplemental
benefits such as dental and eye care are often included as part of employer
health benefit plans. During a designated open enrollment period, employees may
select their desired health care coverage. Monthly premiums are negotiated
between the Company and the employers, and are typically fixed for a one-year
period. Commercial members, including TakeCare membership, comprised
approximately 80% of the Company's total membership at June 30, 1994.
Senior Plan Members. The Company also delivers managed health care services
to Medicare beneficiaries under its Senior Plan pursuant to contracts with the
Health Care Financing Administration of the United States Department of Health
and Human Services ("HCFA"). These contracts entitle the Company to a fixed fee
per member premium, and are subject to adjustment annually based on certain
demographic information relating to the Medicare population, and the cost of
providing health care in a particular geographic area. Senior Plan membership
comprised approximately 35% of the Company's total membership (excluding
TakeCare membership) at June 30, 1994, but accounted for approximately 65% of
the Company's total revenue for the fiscal year. Including TakeCare membership,
Senior Plan membership comprised 20% of the Company's total membership at June
30, 1994. The Company receives substantially more revenue for each Senior Plan
member than it receives for each commercial member.
In addition to physician care, hospitalization and other benefits covered
by Medicare, Senior Plan benefits also include prescription drugs, routine
physical exams, hearing tests, immunizations, eye examinations, counseling and
health education services. Senior Plan members are enrolled on an individual
basis and may disenroll at any time. Medicare beneficiaries can also choose to
enroll in the Senior Plan PlusSM program which offers more comprehensive medical
and dental benefits. Seniors who enroll in this plan pay a small monthly
premium.
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The Company anticipates further growth opportunities for its Senior Plan,
based in part on demographic trends that show that the senior population is
growing faster than any other segment of the nation's population. The Company is
currently one of the largest providers of health care services to Medicare
beneficiaries in the United States.
The following table shows an approximate breakdown of the Company's HMO
membership at June 30, 1994:
<TABLE>
<CAPTION>
COMMERCIAL(1) SENIOR PLAN TOTAL
-------------------------------- --------------------------- --------------------------------------
STAFF IPA (2) TOTAL STAFF IPA (2) TOTAL STAFF IPA (2) TOTAL %
-------- ---------- ---------- ------- ------- -------- -------- ---------- ---------- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
California (3)............. 90,000 583,000 673,000 50,000 155,000 205,000 140,000 738,000 878,000 51
Colorado (4)............... 0 284,000 284,000 0 19,000 19,000 0 303,000 303,000 18
Arizona.................... 0 88,000 88,000 0 83,000 83,000 0 171,000 171,000 10
Utah....................... 160,000 0 160,000 10,000 0 10,000 170,000 0 170,000 10
Illinois (5)............... 0 43,000 43,000 0 0 0 0 43,000 43,000 3
Ohio (6)................... 0 40,000 40,000 0 0 0 0 40,000 40,000 2
Guam....................... 33,000 5,000 38,000 0 0 0 33,000 5,000 38,000 2
New Mexico................. 0 20,000 20,000 0 17,000 17,000 0 37,000 37,000 2
Nevada..................... 0 18,000 18,000 0 14,000 14,000 0 32,000 32,000 2
------- --------- --------- ------ ------- ------- ------- --------- --------- ---
Total.................. 283,000 1,081,000 1,364,000 60,000 288,000 348,000 343,000 1,369,000 1,712,000 100
======= ========= ========= ====== ======= ======= ======= ========= ========= ===
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(1) Includes government employees and Medicaid recipients.
(2) Includes mixed model membership in Arizona, New Mexico and portions of
Southern California, where members may choose to receive care in an IPA or
staff model setting.
(3) Includes 406,000 TakeCare commercial IPA members and 1,000 TakeCare Senior
Plan IPA members.
(4) Includes 277,000 TakeCare commercial IPA members and 19,000 TakeCare Senior
Plan IPA members.
(5) Represents TakeCare members and includes 1,000 members located in Northwest
Indiana.
(6) Represents TakeCare members and includes 15,000 members located in Northern
Kentucky.
(D) INSURANCE OPERATIONS
The Company also offers group health and life insurance products through
its insurance subsidiaries. At June 30, 1994, the Company provided group term
life insurance coverage for approximately 63,000 individuals and group health
and accident indemnity coverage for approximately 48,000 individuals.
24 Hour Managed Care Program. The Company operates a 24 Hour Managed Care
Program, which provides HMO and preferred provider organization
("PPO")/indemnity medical coverage and workers' compensation coverage in one
coordinated managed care system. Through this program, both occupational and
nonoccupational injuries and illnesses are covered by products offered in a
single package and administered on a coordinated basis in a managed care system.
As of June 30, 1994, the 24 Hour Managed Care Program provided services to
approximately 125 employer groups for approximately 16,000 insured employees.
(E) GOVERNMENT REGULATION
Most of the Company's HMO subsidiaries are qualified under the federal
Health Maintenance Organization Act of 1973, as amended (the "HMO Act"). In
addition, each of the states in which the Company does business has enacted
statutes regulating or affecting the HMO subsidiaries. As a result, the Company
is subject to extensive regulation regarding the scope of benefits provided to
HMO members and the terms of group benefit agreements, the Company's financial
condition, including minimum tangible net equity, quality assurance and
utilization review procedures, enrollment requirements, manner of structuring
member premiums, member grievance procedures, provider contracts, marketing and
advertising. Changes in governmental regulations could adversely affect the
operations, profitability and business prospects of the HMO subsidiaries.
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Certain minimum tangible net equity and other financial viability
requirements are imposed on the Company's HMO and insurance subsidiaries by
regulatory authorities in each state in which these subsidiaries operate and
restrict the Company's ability to transfer cash and short-term investments from
such subsidiaries to the Company. While the Company currently believes its
regulated subsidiaries are in compliance with these minimum tangible net equity
and other financial viability requirements, a change in these requirements or an
adverse determination by one or more regulatory authorities could have a
material adverse effect on the Company's ability to make timely payments on
preferred stock dividend obligations and principal and interest obligations
under its Credit Agreement and its 7% Senior Notes due 2003. In order to obtain
approvals for HMO and insurance company expansions into additional states, the
regulated subsidiaries are required to meet certain minimum capital, surplus and
deposit requirements which may require the Company to make additional capital
contributions to such subsidiaries.
The Company's Senior Plan services are provided under contracts with, and
are subject to regulation by, HCFA and certain state agencies. HCFA requires
that an HMO be federally qualified in order to be eligible for Medicare
fixed-fee-per-member contracts. Under the Company's Medicare contracts and HCFA
regulations, if the premiums received for Medicare-covered health care services
provided to Senior Plan members are more than the premiums received for the same
health care services provided to non-Senior Plan members, then the Company must
provide its Senior Plan members with additional benefits beyond those required
by Medicare or reduce any of the premiums, deductibles or co-payments that it
may charge. The Company's Senior Plan is not permitted to account for more than
one-half of the Company's total HMO members in each of the Company's geographic
markets as those markets are defined by HCFA. HCFA has the right to audit HMOs
operating under Medicare contracts to determine the quality of care being
rendered and the degree of compliance with HCFA's contracts and regulations.
The Company's Medicare contracts are renewed annually unless the Company or
HCFA elects to terminate the contracts. HCFA may also unilaterally terminate the
Company's Medicare contracts if the Company fails to continue to meet compliance
and eligibility standards. While the federal government may implement changes in
the Medicare risk-based program, the Company believes that the HMO will continue
to be an important factor in the federal government's overall efforts to control
medical costs. However, the loss of Medicare contracts or termination or
modification of the HCFA risk-based Medicare program could have a material
adverse effect on the revenue, profitability and business prospects of the
Company. The services reimbursed by Medicare and Medicaid are subject to various
requirements and restrictions imposed by contract law and regulation.
Non-compliance with government regulations could subject the Company to adverse
action by the government. To maintain compliance, the Company will take such
action, or modify its practices, as it deems necessary.
The HMO and insurance subsidiaries of the Company must file periodic
reports with, and their operations are subject to periodic examination by,
federal and state licensing authorities. To remain licensed and accredited, it
is necessary for the Company's HMO and insurance subsidiaries to comply with
various fiscal standards imposed by regulatory authorities and to make changes
from time to time in their services, procedures, structure and marketing
methods. Such changes may be required as a result of amendment to, or other
significant modification of, federal and state laws and regulations controlling
the subsidiaries' operations.
The Company contracts with the United States Office of Personnel Management
("OPM") to provide or arrange managed health care services under the Federal
Employees Health Benefits Program for federal employees ("FEHBP"), annuitants
and their dependents. These contracts with OPM and applicable government
regulations establish premium rating requirements for the FEHBP. OPM conducts
periodic audits of its contractors to, among other things, verify that the
premiums established under the OPM contracts are established in compliance with
the community rating and other requirements under the FEHBP.
In May 1993, after conducting a periodic audit of the Company's FEHBP
contracts covering primarily the years 1988 through 1991, OPM sent a draft audit
report to the Company alleging certain defects in the Company's rating practices
under applicable regulatory and contractual requirements, and invited the
Company to comment. Following its evaluation of additional information and
comments which have been provided by the Company, the OPM auditors will issue a
final report; the OPM Audit Resolution Division will
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then be responsible for resolving the audit findings. As part of the resolution
process, the Audit Resolution Division may reconsider the findings of the
auditors and the information provided by the Company.
It is likely that the final audit report will recommend that OPM seek a
monetary recovery from the Company, and that such recommended recovery could be
a substantial amount. At this time, the Company's management and legal counsel
are unable to determine the amounts that may be required to be refunded to OPM
to resolve the audit findings. Management currently believes, however, that
after application of available offsets and consideration of established
reserves, amounts ultimately required to be refunded to OPM will not have a
material adverse effect on the consolidated financial condition of the Company.
In addition, management does not currently believe that the audit will have a
material effect on future relations with OPM.
The Company's insurance subsidiaries are regulated by the department of
insurance in each of the states in which they operate. These regulations relate
to, among other things, the terms, administration and marketing of the products
offered and the financial condition of these subsidiaries, and subject these
subsidiaries to periodic audits and continuing oversight. In addition, the
offering of certain new insurance products may require the approval of these
regulatory agencies.
The Company believes that it is in substantial compliance with all
governmental regulations affecting its business, the violation of which could
have material adverse effect on its operations or financial position.
(F) COMPETITION
The health care and insurance industries are highly competitive. The
Company believes that among the most significant competitive factors in the
market are the quality and location of the health care providers, the
comprehensiveness of coverage and the pricing of services. The Company has a
number of competitors, including commercial insurance carriers and other HMOs,
some of which have substantially larger memberships and are better capitalized
than the Company. In addition to insurance carriers and other HMOs, the Company
also competes with fee-for-service physicians, hospitals, and preferred provider
organizations which contract directly with employers, thus by-passing HMOs.
The Company's largest HMO competitor in California is Kaiser Foundation
Health Plan, Inc., which served approximately 4.6 million members in California
at January 1, 1994. In addition to Kaiser, there is at least one other HMO with
more members than the Company in California at January 1, 1994. At June 30,
1994, the Company served approximately 878,000 HMO members in California.
At June 30, 1994, the Company served approximately 303,000 and 170,000 HMO
members in the States of Colorado and Utah, respectively, more members than any
other HMO in these states. The Company believes that Kaiser is its largest
competitor in Colorado and that Intermountain Health Care is its largest
competitor in Utah. At June 30, 1994, the Company served approximately 171,000,
37,000 and 32,000 HMO members in Arizona, New Mexico and Nevada, respectively.
The Company believes that its largest competitors in Arizona are CIGNA
Healthplan of Arizona-Phoenix and Intergroup Prepaid Health Services of Arizona,
that its largest competitor in New Mexico is Lovelace Healthplan, Inc. and that
its largest competitor in Nevada is Health Plan of Nevada. The Company also
believes that Blue Cross/Blue Shield serves a substantial portion of the total
health care markets in California, Utah, Arizona, Nevada and New Mexico.
At June 30, 1994, the Company served approximately 43,000 and 40,000 HMO
members in Illinois and Ohio, respectively. The Company believes its largest
competitor in Illinois is Chicago HMO, Ltd., and that its largest competitor in
Ohio is ChoiceCare. At June 30, 1994, the Company served approximately 38,000
HMO members in Guam. The largest competitor of the Company in Guam served
approximately 40,000 members at January 1, 1994.
All membership data for other HMOs is obtained from "The InterStudy
Competitive Edge, 1994 Volume 3, Number 2," published by InterStudy Center for
Managed Care Research, a research organization.
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this amendment to be signed on its behalf by the
undersigned, thereunto duly authorized.
FHP INTERNATIONAL CORPORATION
By: /s/ ROBERT F. MURPHY
---------------------------------
Robert F. Murphy, Vice President
and Assistant Secretary
Dated: September 30, 1994
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