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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(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, 1995
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)
DELAWARE 33-0072502
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
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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SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
COMMON STOCK PAR VALUE $.05 PER SHARE
SERIES A CUMULATIVE CONVERTIBLE PREFERRED STOCK PAR VALUE $.05 PER SHARE
SERIES B ADJUSTABLE RATE CUMULATIVE PREFERRED STOCK PAR VALUE $.05 PER SHARE
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
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INDICATE BY CHECK MARK IF DISCLOSURE OF DELINQUENT FILERS PURSUANT TO ITEM
405 OF REGULATION S-K IS NOT CONTAINED HEREIN, AND WILL NOT BE CONTAINED, TO
THE BEST OF REGISTRANT'S KNOWLEDGE, IN DEFINITIVE PROXY OR INFORMATION
STATEMENTS INCORPORATED BY REFERENCE IN PART III OF THIS FORM 10-K OR ANY
AMENDMENT TO THIS FORM 10-K. [_]
THE AGGREGATE MARKET VALUE OF THE VOTING STOCK HELD BY NON-AFFILIATES OF THE
REGISTRANT AT SEPTEMBER 15, 1995 WAS $887,649,172.
THE REGISTRANT HAD 40,262,018 SHARES OF COMMON STOCK, PAR VALUE $.05 PER
SHARE, OUTSTANDING AT SEPTEMBER 15, 1995.
DOCUMENTS INCORPORATED BY REFERENCE
PORTIONS OF THE REGISTRANT'S PROXY STATEMENT FOR THE ANNUAL MEETING OF
STOCKHOLDERS TO BE HELD ON NOVEMBER 16, 1995, ARE INCORPORATED BY REFERENCE
INTO PART III OF THIS REPORT.
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TABLE OF CONTENTS
PART I
<TABLE>
<CAPTION>
ITEM PAGE
---- ----
<C> <S> <C>
1. Business........................................................... 1
2. Properties......................................................... 8
3. Legal Proceedings.................................................. 8
4. Submission of Matters to a Vote of Security Holders................ 8
Executive Officers of the Registrant............................... 9
PART II
Market for Registrant's Common Equity and Related Stockholder Mat-
5. ters............................................................... 11
6. Selected Financial Data............................................ 11
Management's Discussion and Analysis of Financial Condition and Re-
7. sults of Operations................................................ 11
8. Financial Statements and Supplementary Data........................ 12
Changes in and Disagreements with Accountants on Accounting and Fi-
9. nancial Disclosure................................................. 12
PART III
10. Directors and Executive Officers of the Registrant................. 12
11. Executive Compensation............................................. 12
12. Security Ownership of Certain Beneficial Owners and Management..... 12
13. Certain Relationships and Related Transactions..................... 12
PART IV
14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K... 12
Signatures......................................................... 13
</TABLE>
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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 subsidiary, FHP, Inc., a California corporation ("FHP"),
is a federally qualified multi-state 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.
At June 30, 1995, the Company provided a broad range of managed health care
services to more than 1,779,000 HMO members, comprised of commercial and
governmental employees and Medicare beneficiaries, in 11 states 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 term life and health insurance products
through its insurance subsidiaries. At June 30, 1995, the Company provided
group term life insurance coverage for more than 75,000 insureds and group
health and accident indemnity insurance coverage for more than 55,000
insureds. 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.
As a result of its June, 1994, acquisition of TakeCare, Inc. ("TakeCare"),
the Company owned three separately licensed HMOs in both Colorado and
California. On December 31, 1994, the three separately licensed Colorado HMO
subsidiaries were merged with each other and the sole surviving Colorado HMO
subsidiary, Comprecare Health Care Services, Inc., changed its name to FHP of
Colorado, Inc. On March 31, 1995, the three separately licensed California HMO
subsidiaries merged with each other and the sole surviving California HMO
subsidiary is FHP.
Restructuring of Staff Model Operations
At June 30, 1995, the Company provided staff model HMO services to over
350,000 enrollees in 58 medical centers and dental centers located in southern
California, Arizona, Utah, New Mexico, Nevada and Guam. On June 27, 1995, the
Company announced that its Board of Directors had approved a plan to
restructure its staff model HMO operations by creating a physician practice
management company (the "PPMC"). Subject to the receipt of requisite
regulatory approvals, the PPMC will become the owner and manager of most of
the Company's 58 medical and dental centers and will employ all the personnel
in those centers, with the exception of the physicians, dentists and certain
other licensed professionals. The physicians, dentists and other professionals
will become employees of several newly formed professional corporations
("PCs") and the PCs will enter into long-term management agreements with the
PPMC. Under the management agreements, the PPMC will provide the facilities,
equipment and support personnel to enable the physicians and dentists to
continue their practices with no interruption in service to patients. It is
the intention of the Company that the PPMC and PCs will become fully
operational on or around January 1, 1996, and that the PCs will continue to
provide health care to the Company's HMO members. The PPMC and the PCs also
will seek to do business with non-affiliated HMOs and other payors and will
provide fee-for-service health care to patients.
Together, the PPMC and PCs will include all the Company's current staff
model operations in California, Utah, Arizona, New Mexico and Nevada. In
connection with the restructuring, the Company also announced its intention to
sell the Company's two acute care hospitals and to sublease or otherwise
dispose of the Company's two skilled nursing facilities.
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As a part of the restructuring, the Company has reduced the number of its
employees by approximately 700 positions. At September 1, 1995, the Company
had approximately 13,000 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 related notes included in Part II of this Form 10-K.
(B) 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 health care in facilities not operated by the
Company. The term "IPA" used hereafter in this Form 10-K Annual Report refers
to both of these contract 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 approximately
51,000 independent contract providers and approximately 600 contract
hospitals.
As described above, the Company is undergoing a restructuring of its staff
model operation which will result in the redeployment of those operations
through the PPMC and PCs. Currently, 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, 1995, the Company employed approximately 800 primary care physicians and
physician specialists, 200 dentists and 5,000 other health care professionals.
Company-operated facilities currently include 58 medical and dental centers
ranging in size from approximately 2,000 to 95,000 square feet, three acute
care hospitals and two sub-acute skilled nursing facilities. With the transfer
of these assets and personnel to the PPMC and the PCs, the Company will cease
to operate as a staff model. The Company's former staff model HMO members will
continue to receive health care services from the PPMC and PCs.
(C) HMO MEMBERSHIP
Commercial Members. As used herein, the term commercial members means all
HMO members except Senior Plan/SM/ 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 indemnity 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 comprised approximately 79% of the
Company's total membership at June 30, 1995.
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 ("HCFA") of the United States Department
of Health and Human Services ("DHHS"). 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 21% of the Company's total membership at
June 30, 1995, but accounted for approximately 47% of the Company's total
revenue for the fiscal year. The Company receives substantially more revenue
for each Senior Plan member than it receives for each commercial member.
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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 with 30 days notice. Medicare beneficiaries also can
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 monthly premium.
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, 1995:
<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.............. 94,000 587,000 681,000 55,000 158,000 213,000 149,000 745,000 894,000 50
Colorado................ 0 284,000 284,000 0 30,000 30,000 0 314,000 314,000 18
Utah.................... 168,000 0 168,000 11,000 0 11,000 179,000 0 179,000 10
Arizona................. 0 89,000 89,000 0 85,000 85,000 0 174,000 174,000 10
Illinois (3)............ 0 48,000 48,000 0 0 0 0 48,000 48,000 3
Nevada.................. 0 28,000 28,000 0 19,000 19,000 0 47,000 47,000 3
Ohio (4)................ 0 42,000 42,000 0 0 0 0 42,000 42,000 2
New Mexico.............. 0 23,000 23,000 0 17,000 17,000 0 40,000 40,000 2
Guam.................... 31,000 7,000 38,000 0 0 0 31,000 7,000 38,000 2
Texas................... 0 3,000 3,000 0 0 0 0 3,000 3,000 --
------- --------- --------- ------ ------- ------- ------- --------- --------- ---
Total.................. 293,000 1,111,000 1,404,000 66,000 309,000 375,000 359,000 1,420,000 1,779,000 100
======= ========= ========= ====== ======= ======= ======= ========= ========= ===
</TABLE>
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(1) Includes government employees and Medicaid recipients.
(2) Includes mixed model membership in Arizona, New Mexico, Nevada and
portions of southern California, where members may choose to receive care
in an IPA or staff model setting.
(3) Includes approximately 6,000 members located in northwest Indiana.
(4) Includes approximately 1,000 members located in southeast Indiana and
approximately 16,000 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, 1995, the Company provided group term life
insurance coverage for approximately 75,000 individuals and group health and
accident indemnity coverage (including its preferred provider organization)
for approximately 55,000 individuals.
24 Hour Managed Care Program. The Company operates a 24 Hour Managed Care
Program, which provides HMO and preferred provider organization/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. As of June 30, 1995, the 24 Hour Managed
Care Program provided services to approximately 189 employer groups for
approximately 24,000 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
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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.
An example of such regulations is the Knox-Keene Health Care Service Plan Act
of 1975, as amended (the "Knox-Keene Act"), under which the Company's
California HMO is licensed. The Knox-Keene Act mandates that the Company's
California HMO satisfy California regulatory authorities that it has fiscally
sound operations, adequate provision for the risk of insolvency, and working
procedures for the prompt payment or denial of claims for payment by health
care providers. In addition, the Knox-Keene Act empowers California regulatory
authorities to limit the administrative expense of the Company's California HMO
to 15% of total revenue. Nearly all of the Company's HMOs outside of California
are subject to state regulation similar to the Knox-Keene Act.
California law requires all HMOs and health insurers that offer health care
benefit plans to "small groups" in California (employers with 5 to 50
employees) to offer such benefit plans to any small group seeking coverage, and
to renew the health coverage of any small group that purchases coverage from
the HMO or insurer and desires to renew it, regardless of the health status of
the individuals in the group. This legislation also limits the amount by which
the premium rates charged to a specific small group by an HMO or insurer can
vary from the average community rate charged by such HMO or insurer to other
small groups in California. The law also places various other requirements on
HMOs and insurers participating in the California small group market, including
a requirement to file premium rate information with the state and various
restrictions on the terms under which health care coverage can be provided to
small groups.
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 also may unilaterally terminate
the Company's Medicare contracts if the Company fails to continue to meet
compliance and eligibility standards. While the federal government may
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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.
Section 9313(c) of the Omnibus Budget Reconciliation Act of 1986 ("OBRA '86")
prohibits HMOs with Medicare risk contracts from knowingly making incentive
payments to a physician as an inducement to reduce or limit services to
Medicare beneficiaries. Sections 4204(a) and 4731 of OBRA '90 repealed the
prohibition on all such physician incentive plans, and enacted requirements for
regulating these plans. Under these sections, an HMO must: (1) not operate a
physician incentive plan that directly or indirectly makes specific payments to
a physician or physician group as an inducement to limit or reduce medically
necessary services to a specific individual enrolled with the organization; (2)
disclose to HCFA their incentive plan arrangements in such detail as to allow
HCFA to determine compliance of the arrangements with the DHHS regulations; and
(3) provide certain protections to physicians and enrollees where a physician
incentive plan places a physician or physician group at "substantial financial
risk" for services not provided directly by them.
The Company's Medicare contracts subject it to numerous other federal
regulations governing the Medicare program, including the so-called "Medicare
and Medicaid anti-kickback statute." The Medicare and Medicaid anti-kickback
statute (Section 1128B of the Social Security Act, as amended) provides both
civil and criminal penalties for individuals or entities that knowingly and
willfully offer, pay, solicit or receive remuneration in return for referrals
of business reimbursed under Medicare or Medicaid. Civil penalties include
exclusion from participation in the Medicare or Medicaid programs. In 1991,
DHHS promulgated a "safe harbor" regulation that defined certain payment
practices between providers of Medicare or Medicaid covered services and
entities or individuals in a position to refer patients or business to these
providers, which would not constitute violations of the statute. On November 5,
1992, DHHS promulgated interim final regulations establishing two new safe
harbors and amending one existing safe harbor to provide protection from
criminal prosecution and civil sanctions for certain payment practices engaged
in by health care plans, including HMOs. This new regulation provides that
certain incentives offered to HMO enrollees, such as a reduction or waiver of
Medicare coinsurance or deductible amounts paid by the HMO; the waiver of Part
A deductible and coinsurance amounts pursuant to an agreement between a
hospital and a Medicare insurer; and price reductions or discounts offered to
HMOs by contracting health care providers as part of agreements by those
providers to furnish Medicare covered services will be deemed not to violate
the anti-kickback statute. The Company believes that its payment practices
either come within one or more of the safe harbors promulgated in 1991 and
1992, or are not in violation of the anti-kickback statute in any event.
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 ("FEHBP") for federal employees, 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.
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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 provided by the Company, the OPM auditors will issue a final report;
the OPM Audit Resolution Division will 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 position or results of
operations or cash flows of the Company. In addition, the Company's management
currently does not believe that the audit will have a material effect on future
relations with OPM.
HCFA has notified the Company and other risk-based contractors that HCFA
believes it has erroneously made overpayments over the last three years for
health care services provided to dually eligible Medicaid/Medicare
("Medi/Medi") beneficiaries. HCFA began to recoup the alleged overpayments on a
quarterly basis from the Company beginning April 1, 1995. The aggregate
withholds by HCFA are expected to be approximately $23.5 million. The Company
is contesting HCFA's legal authority to recoup such sums as well as the amount
of the purported Medi/Medi overpayments. Most of the Company's capitation
contracts permit the Company to retroactively reduce payments to providers to
reflect changes in payments from HCFA. The Company's contracted providers have
been notified that the Company will be recouping overpayments from them as a
result of HCFA's recoupments from the Company.
The Company has established reserves based on its best estimate of the
amounts it will be unable to recoup from contracted providers. Management
currently believes that after consideration of established reserves and the
amounts of overpayments which are currently expected to be borne by the
contracted providers, amounts ultimately to be recouped by HCFA will not have a
material adverse effect on the consolidated financial position or results of
operations or cash flows of the Company.
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 a material adverse effect on its consolidated financial position or
results of operations or cash flows.
(F) HEALTH CARE REFORM
There have been diverse legislative and regulatory initiatives at both the
federal and state levels to address, among other aspects of the nation's health
care system, the continuing increases in health care costs and the lack of
health care coverage for a significant segment of the population. Several bills
have been introduced in Congress to reform the nation's health care system.
These bills include elements such as guaranteed issuance and renewability of
health insurance; subsidies for individuals who are uninsured or underinsured;
mandates on employers to provide health coverage for their employees; medical
savings accounts; mandatory or voluntary regional health alliances or
purchasing cooperatives; minimum or standardized health benefit packages;
limitations on premiums; medical liability reforms; amendment of the antitrust
laws to benefit providers; mandatory or optional single-payer systems for all
or part of the
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population; and changes in federal tax, Medicare and Medicaid laws and the
Employee Retirement Income Security Act of 1974. To varying degrees, many of
the bills contemplate the involvement of state governments in the regulation
and implementation of federal health care reform legislation.
Various states are considering forms of single-payer systems, restructuring
of Medicaid programs and "any willing provider" legislation that could require
managed care companies to contract with any medical provider who agrees to the
terms of the company's standard provider contract and payment schedule. All or
any of these potential forms of legislation could adversely affect the
Company's business.
The Company is unable to predict how existing federal or state laws and
regulations may be changed or interpreted, what additional laws or regulations
affecting its businesses may be enacted or proposed, when and which of the
proposed laws will be adopted or what effect the new laws and regulations will
have on its businesses. However, certain of the proposals, if adopted, could
have a material adverse effect on the Company's business, while others, if
adopted, could potentially benefit the Company's business. Although the effects
of these activities cannot yet be determined, the Company remains committed to
participate in the debate over health care reform and in the restructuring of
the health care system.
(G) 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. ("Kaiser"), which served approximately 4.7 million members in
California at January 1, 1995. In addition to Kaiser, there are at least two
other HMOs with more members than the Company in California at January 1, 1995.
At June 30, 1995, the Company served approximately 894,000 HMO members in
California.
At June 30, 1995, the Company served approximately 314,000 and 179,000 HMO
members in 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, 1995, the Company served approximately 174,000, 47,000 and 40,000
HMO members in Arizona, Nevada and New Mexico, respectively. The Company
believes that its largest competitors in Arizona are Intergroup Prepaid Health
Services of Arizona and CIGNA Healthplan of Arizona-Phoenix, that its largest
competitor in Nevada is Health Plan of Nevada and that its largest competitor
in New Mexico is Lovelace Healthplan, Inc.
At June 30, 1995, the Company served approximately 48,000 and 42,000 HMO
members in Illinois and Ohio, respectively. The Company believes its largest
competitor in Illinois is United HealthCare of Illinois, Inc. and that its
largest competitor in Ohio is ChoiceCare. At June 30, 1995, the Company served
approximately 38,000 HMO members in Guam. The Company believes its largest
competitor in Guam is Guam Memorial Health Plan. At June 30, 1995, the Company
served approximately 3,000 members in Texas. The Company believes that Sanus
Health Plan, Inc. is its largest competitor in Texas. The Company also believes
that Blue Cross and Blue Shield carriers serve a substantial portion of the
total health care markets in its service areas.
All membership data for other HMOs is obtained from "The InterStudy
Competitive Edge, 1995 Volume 5.2, Number 1," published by InterStudy Center
for Managed Care Research, a research organization.
7
<PAGE>
ITEM 2. PROPERTIES
The Company currently operates medical and dental centers ranging in size
from approximately 2,000 to 95,000 square feet.
The Company currently operates (i) 26 medical and dental centers in southern
California, of which 10 are owned and 16 are leased; (ii) 7 medical and dental
centers in Utah, of which 6 are owned and 1 is leased; (iii) 14 medical centers
in Arizona, of which 4 are owned and 10 are leased; (iv) 3 owned and 2 leased
medical centers in New Mexico; (v) 2 medical centers in Nevada, of which one is
owned and one is leased; and (vi) 1 owned and 3 leased medical centers in Guam
and a neighboring island. The Company also leases two 99-bed sub-acute skilled
nursing facilities, owns a hospital licensed for 239 beds and manages another
hospital licensed for 150 beds in southern California. The Company also owns a
hospital currently licensed for 117 beds in Salt Lake City, Utah. As described
in Item 1, the Company has announced its intention to sell the Company's two
acute care hospitals and to sublease or otherwise dispose of its two sub-acute
skilled nursing facilities.
The Company owns a 40,000 square foot administrative office building in
southern California and a 58,000 square foot administrative office building in
Utah. The Company also leases administrative offices in more than one dozen
states and a public affairs office in California.
On June 30, 1995, the Company owned buildings totaling approximately 1.6
million square feet in size, all but one of which was free of outstanding
encumbrances. The Company has a single medical center in southern California
which is subject to an encumbrance of approximately $2.5 million. During the
fiscal year ended June 30, 1995, the Company leased approximately 2.1 million
square feet of buildings subject to annual lease obligations of approximately
$27.4 million. In addition, the Company owns nonproductive acreage in
California, Utah, Arizona, New Mexico, Nevada and Guam most of which it is
planning to sell.
ITEM 3. LEGAL PROCEEDINGS
During the ordinary course of business, the Company has become a party to
pending and threatened legal actions and proceedings, a significant number of
which involve claims of medical malpractice. Management of the Company is of
the opinion, taking into account its insurance coverage and reserves that have
been established, that the outcome of currently known legal actions and
proceedings will not, singly or in the aggregate, have a material effect on the
consolidated financial position or results of operations or cash flows of the
Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders, through the
solicitation of proxies or otherwise, during the three months ended June 30,
1995.
8
<PAGE>
EXECUTIVE OFFICERS OF THE REGISTRANT
Set forth below are the names of the executive officers of the Company as of
September 15, 1995. The executive officers of the Company are chosen annually
to serve until the first meeting of the Board of Directors following the next
annual meeting of stockholders and until their successors are elected and have
qualified, or until death, resignation or removal, whichever is sooner.
Westcott W. Price III, age 56, has been Vice Chairman of the Board of
Directors of the Company since 1986, and has been a Director of the Company
since 1984. Mr. Price was a Vice President of the Company from 1987 to 1989 and
was elected President in 1989. Mr. Price joined FHP in 1981, first serving as
Senior Vice President and later as Executive Vice President, and was elected
President in 1987. Mr. Price became Chief Executive Officer of the Company in
1990.
Gloria Austin, age 41, joined FHP in 1978 and served in several executive
capacities in FHP's Utah and California regional operations, including
Associate Vice President, Utah Region Administration and Regional Vice
President, Los Angeles. In February 1995, Ms. Austin became the Company's
Senior Vice President, Health Care Delivery. In July 1995, Ms. Austin was
appointed Senior Vice President, California of the Company's PPMC Division.
Valerie A. Fletcher, age 48, joined FHP in 1989 as Associate Vice President,
Finance. In 1992, Ms. Fletcher was appointed Corporate Vice President,
Accounting of FHP and in 1993 was elected Controller of the Company. In 1994,
Ms. Fletcher became Vice President, Accounting of the Company.
Nick Franklin, age 52, joined FHP in 1990 and served as Vice President,
Government Affairs before being appointed Senior Vice President, Public Affairs
in 1993. In 1994, Mr. Franklin became Senior Vice President, Public Affairs of
the Company.
John F. Fritz, age 51, joined FHP in 1991 and served as Vice President and
Chief Actuary of FHP and FHP Life Insurance Company before becoming President
of FHP Life Insurance Company and a Senior Vice President of the Company in
1994. From 1976 to 1991, Mr. Fritz was a Vice President and Principal of
Tillinghast, a Towers Perrin Co., in Irvine, California.
Gary E. Goldstein, M.D., age 45, joined FHP in 1982 from private practice and
has held the positions of Regional Medical Director, Corporate Medical
Director, and California Regional Vice President. He was appointed Corporate
Vice President of Medical Affairs in 1990 and in 1992, a Senior Vice President
of FHP. In 1994, Dr. Goldstein was appointed Senior Vice President, Medical
Affairs of the Company. In July 1995, Dr. Goldstein was appointed Senior Vice
President and Chief Medical Officer of the Company's PPMC Division.
Burke F. Gumbiner, age 44, has been a Director of the Company since 1984 and
was a Vice President from 1986 to November 1989, when he was appointed Senior
Vice President. He joined FHP in 1977 and served in several executive
capacities before being appointed a Senior Vice President in 1986. In 1994,
Burke Gumbiner was appointed Senior Vice President and Chief Operating Officer,
Insurance and Support Services of the Company. In August 1995, Mr. Gumbiner was
appointed President of the Company's Insurance Division.
R. Judd Jessup, age 47, joined the Company in 1994 as President of its Health
Plans Division. In July 1995, Mr. Jessup was appointed President of the
Company's HMO Division. Mr. Jessup was TakeCare Health Plan, Inc.'s Executive
Director from June 1987 to January 1990 and was its President from January 1990
to March 1995. He served as President of TakeCare, Inc. from 1991 until June of
1994 when it was acquired by the Company.
9
<PAGE>
Jeffrey H. Margolis, age 32, joined the Company in 1994 as Vice President,
Information Services and Chief Information Officer. From 1993 to 1994, Mr.
Margolis was Vice President and Chief Information Officer of TakeCare, Inc.
From 1989 to 1991, Mr. Margolis was Director of Information Services of
Comprecare, Inc. and from 1991 to 1993 he was Vice President and Chief
Information Officer of Comprecare, Inc. In June 1995, Mr. Margolis was
appointed a Senior Vice President of the Company.
Jack D. Massimino, age 46, first joined FHP in 1975 and served in several
executive capacities, including Utah Regional General Manager, before leaving
FHP in 1979 to join a health care consulting firm. He later served as
President, CEO and a Director of Texas Health Plans from 1987 to 1988. In 1988,
he returned to FHP as Vice President of Corporate Development and in 1990 was
appointed a Senior Vice President of FHP. From 1994 to 1995 he served as the
Company's Executive Vice President and Chief Operating Officer. In July 1995,
Mr. Massimino was appointed President of the Company's PPMC Division.
Michael A. Montevideo, age 41, joined FHP in 1985, became Treasurer of the
Company and FHP in 1989 and was appointed an Associate Vice President of FHP in
1990 and a Vice President of FHP in 1993. In 1994, Mr. Montevideo became a Vice
President of the Company.
Kenneth S. Ord, age 49, joined the Company in 1994 as Senior Vice President
and Chief Financial Officer. From 1982 to 1994, he was employed by Kelly
Services, Inc. in Troy, Michigan most recently as Vice President of Finance,
Controller and Treasurer.
Eric D. Sipf, age 46, joined the Company in 1994 as Senior Vice President of
Health Plans of the Company's Eastern Division. From 1985 to 1993, he was
President and Chief Executive Officer of Comprecare, Inc. and from 1993 to 1994
was President of Comprecare Health Care Services, Inc. and TakeCare of
Colorado, Inc.
Michael J. Weinstock, age 54, has been General Counsel and Secretary of the
Company and FHP since 1987. He became a Vice President of the Company and FHP
in 1989 and a Senior Vice President of the Company and FHP in 1993.
10
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
(A) MARKET INFORMATION
The Company's Common Stock is traded over-the-counter on the National
Association of Securities Dealers Automated Quotation ("NASDAQ") National
Market System under the symbol "FHPC." The following table sets forth the range
of high and low closing bid prices per share for the fiscal periods indicated,
as reported on the NASDAQ National Market System. Quotations represent prices
between dealers and do not reflect retail markups, mark-downs or commissions
and may not necessarily represent actual transactions.
<TABLE>
<CAPTION>
PRICE RANGE OF
COMMON STOCK
---------------
HIGH LOW
------- -------
<S> <C> <C>
YEAR ENDED JUNE 30, 1995:
First Quarter............................................. 30 1/2 21 3/4
Second Quarter............................................ 29 25 1/4
Third Quarter............................................. 29 1/2 24 1/4
Fourth Quarter............................................ 29 1/2 19 3/4
YEAR ENDED JUNE 30, 1994:
First Quarter............................................. 29 1/2 18 1/4
Second Quarter............................................ 26 3/4 19 1/4
Third Quarter............................................. 29 24
Fourth Quarter............................................ 25 1/4 20 3/4
</TABLE>
As of September 15, 1995, the reported closing bid price per share was
$23.00.
(B) HOLDERS
The approximate number of holders of record of the Company's Common Stock as
of August 31, 1995 was 730. This number did not include individual participants
in security position listings. Based on available information, the Company
believes there are several thousand beneficial holders of its Common Stock.
(C) DIVIDENDS
The Company has retained its fiscal year 1995 earnings for use in its
business and anticipates, for the foreseeable future, that no cash dividends
will be paid on its Common Stock. The Company's Amended Credit Agreement
restricts the payment of cash dividends on the Company's Common Stock.
ITEM 6.SELECTED FINANCIAL DATA
Information with respect to this item is located at page 14 herein.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Information with respect to this item is located at pages 15 through 19
herein.
11
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The following documents are filed as part of this Form 10-K Annual Report:
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Index to Financial Statements............................................. 20
Consolidated Balance Sheets, June 30, 1995 and 1994....................... 21
Consolidated Statements of Income for the years ended June 30, 1995, 1994
and 1993................................................................. 22
Consolidated Statements of Stockholders' Equity for the years ended June
30, 1995, 1994 and 1993.................................................. 23
Consolidated Statements of Cash Flows for the years ended June 30, 1995,
1994 and 1993............................................................ 25
Notes to Consolidated Financial Statements................................ 26
Independent Auditors' Report.............................................. 42
</TABLE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
There have been no changes in the Company's independent auditors or
disagreements with such auditors on accounting principles or practices or
financial statement disclosures.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information with respect to Directors of the Company is incorporated by
reference from the Company's 1995 Proxy Statement. Certain information relating
to Executive Officers of the Company appears on pages 9 through 10 herein.
ITEM 11. EXECUTIVE COMPENSATION
Information with respect to this item is incorporated by reference from the
Company's 1995 Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information with respect to this item is incorporated by reference from the
Company's 1995 Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information with respect to this item is incorporated by reference from the
Company's 1995 Proxy Statement.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
The following documents are filed as part of this Form 10-K Annual Report:
(a) Exhibits:
See the Exhibit Index on pages 43 through 45 herein.
(b) Financial Statement Schedules:
None.
(c) Reports on Form 8-K:
None filed during the three months ended June 30, 1995.
12
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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
By /s/ Westcott W. Price III
------------------------------
Westcott W. Price III,
Chief Executive Officer and
President
Date: September 27, 1995
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the date indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ Jack R. Anderson Director and Chairman September 27, 1995
____________________________________ of the Board
Jack R. Anderson
/s/ Westcott W. Price III Director, President, Chief September 27, 1995
____________________________________ Executive Officer (Principal
Westcott W. Price III Executive Officer), and
Vice Chairman of the Board
/s/ Burke F. Gumbiner Senior Vice President September 27, 1995
____________________________________ and Director
Burke F. Gumbiner
/s/ Joseph F. Prevratil Director September 27, 1995
____________________________________
Joseph F. Prevratil
/s/ Warner Heineman Director September 27, 1995
____________________________________
Warner Heineman
/s/ Richard M. Burdge, Sr. Director September 27, 1995
____________________________________
Richard M. Burdge, Sr.
/s/ Robert C. Maxson Director September 27, 1995
____________________________________
Robert C. Maxson
/s/ Robert W. Jamplis Director September 27, 1995
____________________________________
Robert W. Jamplis
/s/ Kenneth S. Ord Senior Vice President and September 27, 1995
____________________________________ Chief Financial Officer
Kenneth S. Ord (Principal Financial
Officer)
/s/ Valerie A. Fletcher Controller (Principal September 27, 1995
____________________________________ Accounting Officer)
Valerie A. Fletcher
</TABLE>
13
<PAGE>
FHP INTERNATIONAL CORPORATION
SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
----------------------------------------------------------
1995 1994 1993 1992 1991
---------- ---------- ---------- ---------- ----------
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT
DATA(A):
Revenue................. $3,909,380 $2,472,958 $2,005,854 $1,586,086 $1,296,843
Expenses:
Primary health care.... 3,121,529 1,963,112 1,595,231 1,243,020 989,706
Other health care...... 116,960 94,577 85,913 81,680 69,021
General, administrative
and marketing......... 521,702 332,249 269,645 231,916 188,333
Provision for
restructuring......... 75,110
---------- ---------- ---------- ---------- ----------
3,835,301 2,389,938 1,950,789 1,556,616 1,247,060
---------- ---------- ---------- ---------- ----------
Operating income........ 74,079 83,020 55,065 29,470 49,783
Interest income......... 32,079 20,365 14,919 22,211 19,664
Interest expense........ (25,972) (6,565) (211) (189) (3,771)
---------- ---------- ---------- ---------- ----------
Income before income
taxes.................. 80,186 96,820 69,773 51,492 65,676
Provision for income
taxes.................. 42,894 37,510 25,607 18,602 25,614
---------- ---------- ---------- ---------- ----------
Net income.............. 37,292 59,310 44,166 32,890 40,062
Preferred Stock
dividends.............. 25,337 1,032
---------- ---------- ---------- ---------- ----------
Net income attributable
to Common Stock........ $ 11,955 $ 58,278 $ 44,166 $ 32,890 $ 40,062
========== ========== ========== ========== ==========
Earnings per share(b)... $0.29 $1.71 $1.33 $1.00 $1.37
===== ===== ===== ===== =====
<CAPTION>
JUNE 30,
----------------------------------------------------------
1995 1994 1993 1992 1991
---------- ---------- ---------- ---------- ----------
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA(A):
Total assets............ $2,315,816 $2,169,269 $ 745,684 $ 615,659 $ 528,808
Long-term obligations... 337,817 377,986 20,802 23,279 29,826
Stockholders' equity.... 1,140,141 1,113,136 364,422 311,381 269,761
</TABLE>
- --------
(a) The Company acquired all of the outstanding common stock of TakeCare on
June 17, 1994, as explained in Note 12 of the Notes to Consolidated
Financial Statements. The Consolidated Financial Statements include the
operations of TakeCare beginning June 17, 1994.
(b) Earnings per share were computed as explained in Note 11 of the Notes to
Consolidated Financial Statements.
14
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
BUSINESS RESTRUCTURING
In June, 1995, FHP International Corporation ("FHP" or the "Company")
announced an internal restructuring (the "Restructuring Plan") of its
operations. The Restructuring Plan was formulated in response to the intensely
competitive environment in the HMO industry and continued declining membership
in its Company-operated medical facilities. The Restructuring Plan consists of
the sale of the Company's owned and operated hospitals, certain nonproductive
real estate and other assets; a reduction in the Company's work force; and the
creation of three distinct business segments: 1) a physician practice
management company ("PPMC"); 2) the contract model health maintenance
organization ("HMO"); and3) the Company's group life, health and accident and
workers' compensation insurance and related products (collectively, the
"Insurance Group").
The Restructuring Plan provides for sale of the Company's two acute care
hospitals located in Fountain Valley, California and Salt Lake City, Utah (with
a combined total of 356 licensed beds), sublease of two sub-acute facilities,
disposal of certain nonproductive real estate and other assets, discontinuance
of the Company's consulting product line and a reduction of the Company's work
force. Accordingly, the Company recorded a pretax charge against earnings in
the fourth quarter of $75.1 million. The charge primarily includes the write-
down to the estimated net realizable value of the hospitals and other assets
held for sale and costs associated with a reduction in work force of
approximately 500 employees which took place in June, 1995. The Company further
reduced its work force by approximately 200 employees in the first quarter of
fiscal year 1996. Further reductions in the work force are likely. The costs of
fiscal year 1996 work force reductions, together with costs associated with
establishing the PPMC, will result in an additional provision for restructuring
in fiscal year 1996 of up to $10 million. All asset sales that are part of the
Restructuring Plan are expected to be completed by June 30, 1996. Net proceeds
available from the sale of assets will be used to reduce indebtedness and for
other corporate purposes.
The Restructuring Plan includes the creation of the PPMC, as a new subsidiary
of the Company and the transfer of the Company's medical centers and related
assets (located in California, Arizona, Utah, Nevada, and New Mexico) into the
PPMC. Approximately 7,000 of the Company's employees, including health care
professionals, will become employees of the PPMC or of several newly created
professional corporations (the "PCs"). The PCs will enter into long-term
practice management agreements with the PPMC, thereby enabling the PCs and PPMC
to do business with other payors and HMOs, as well as with the Company's HMO.
The PCs and PPMC are expected to be operational by January 1, 1996, subject to
obtaining all necessary regulatory approvals.
The Company's HMO will be responsible for all the Company's HMO membership.
The HMO will contract with the PCs to provide health care services for
approximately 20% of the Company's HMO members who are already receiving health
care in the Company's medical centers. The Company's contractual arrangements
between the HMO and PCs will be financially similar to existing contracts
between the HMO and other contract health care providers.
The Company will continue to operate its Insurance Group. The Insurance Group
accounted for 3.7% of the Company's revenue and incurred an operating loss in
fiscal year 1995. The products offered by the Insurance Group enable the
Company to offer a full complement of health care products to employer groups.
TAKECARE ACQUISITION
The Company acquired TakeCare, Inc. and its subsidiaries ("TakeCare") on June
17, 1994. The Company acquired all of the outstanding stock of TakeCare, for
approximately $1,054.4 million. The acquisition was paid for by the issuance of
approximately 21 million shares of Series A Cumulative Convertible Preferred
Stock, 6.3 million shares of Common Stock, 79.2 thousand shares of Series B
Adjustable Rate Cumulative Preferred Stock and approximately $360 million of
cash.
15
<PAGE>
REVENUE AND MEMBERSHIP
The Company generates approximately 96% of its revenue from premiums received
for health care services provided to the HMO members of its wholly-owned
subsidiaries. The Company experienced significant revenue growth during the
three-year period ended June 30, 1995, primarily due to the acquisition of
TakeCare in June, 1994, and to growth in its HMO membership. Total revenue for
the year endedJune 30, 1995, was $3,909.4 million, increasing 58.1% over
revenue of $2,473.0 million for the previous year. The Company's year-over-year
revenue growth was primarily due to the TakeCare acquisition. During fiscal
year 1995, revenue growth was slowed by modest enrollment growth and intense
pricing competition.
Total HMO membership grew 17.0%, 104.3%, and 3.9% in the three years ended
June 30, 1993, 1994, and 1995, respectively. Membership growth in fiscal year
1994 was primarily due to the acquisition of TakeCare on June 17, 1994.
Excluding TakeCare membership, total HMO membership growth in fiscal year 1994
was 10.5%. During fiscal year 1995, the Company experienced slower membership
growth than in prior years, due primarily to intense competition in all its key
markets. Membership growth in fiscal year 1995 resulted from contiguous
expansion of HMO operations into new market areas, together with growth in
existing markets. The Company's membership in fiscal year 1995 grew primarily
in the Company's contract model plans. As FHP and TakeCare merged their
California operations, the Company lost approximately 14,000 former TakeCare
plan members in fiscal year 1995. Also, membership in Company-operated medical
centers continued to decline. Continued slow membership growth may adversely
impact the Company's operating results in fiscal year 1996.
Commercial HMO membership grew 15.4%, 152.6%, and 2.9% for the years ended
June 30, 1993, 1994, and 1995, respectively. Commercial HMO membership growth
in fiscal year 1994 was primarily due to the acquisition of TakeCare. Excluding
TakeCare commercial membership, commercial HMO membership growth in fiscal year
1994 was 10.7%. Senior membership grew 20.2%, 16.8%, and 7.8% for the fiscal
years ended June 30, 1993, 1994, and 1995, respectively. Excluding TakeCare
senior membership, senior HMO membership growth in fiscal year 1994 was 10.1%.
During fiscal year 1995, regulatory approvals necessary for senior membership
expansion in northern California were delayed, causing lower than expected
senior growth. Regulatory approvals were completed in the fourth quarter of
fiscal year 1995.
The Company generates approximately 51% of its HMO revenue from sales to the
commercial market. The Company's ability to increase its commercial membership
and commercial premium rates during the fiscal years ended June 30, 1994 and
1995, was adversely impacted by intense competition in all the Company's major
markets, particularly in California. In addition, certain large employer groups
and other purchasers of health care services continue to demand minimal
increases or reductions in premium rates. Downward pressure on premium rates is
expected to continue into fiscal year 1996 in all of the Company's major
service areas. A substantial portion of the Company's HMO commercial premium
rate increases becomes effective in January of each year.
Almost all of the Company's senior HMO revenue is generated from premiums
paid to the Company by the Health Care Financing Administration ("HCFA"). The
Company receives senior premium rate increases from HCFA on January 1 of each
year. For calendar year 1995, the Company received an average 5.8% rate
increase. Revenue per senior member is substantially higher than revenue per
commercial plan member because senior members use substantially more health
care services. In September of each year, HCFA announces the annual Medicare
rate increases that will become effective on January 1 of the subsequent year.
These rate increases vary geographically and become the basis for determining
the amounts that HCFA will pay to the Company. Based upon the September, 1995,
announcement, the Company currently estimates that it will receive an average
3.5% senior premium rate increase on January 1, 1996.
For the year ended June 30, 1995, the Company generated approximately 3.7% of
its revenue from the sale of indemnity health, group life and workers'
compensation insurance, and related lines of business. This compares to 4.4%
for the previous fiscal year. In fiscal year 1994, the Company increased its
investment in
16
<PAGE>
the Insurance Group by approximately $25.0 million. During fiscal year 1995,
the Company was faced with rate deregulation for workers' compensation
insurance in California resulting in substantial rate decreases and loss of
business in the state. Also, the Company's indemnity health subsidiaries have
been facing an increasingly competitive market. The Company does not anticipate
that its Insurance Group will represent a material portion of revenues or
profits in fiscal year 1996.
COST OF HEALTH CARE
A significant factor affecting the Company's profitability is its ability to
manage and control its health care costs. Since the Company receives fixed
monthly premiums, an unusually high number of catastrophic claims (such as
organ transplants and costly premature births) may cause substantial additional
health care costs. Periodically, the Company's results of operations may be
affected by such costs. Management believes that the Company's cost control
measures, which include risk-sharing arrangements with its contract medical
providers along with administrative and medical review of its health care
delivery services, help to mitigate the effects of rising health care costs.
During the last three years, certain Company-operated medical centers in
California have experienced high operating costs relative to declining
enrollment. The economic recession has resulted in permanent job losses in
certain industries in southern California whose employees were traditionally
enrolled in Company-operated medical centers. Also, the competitive environment
and the proliferation of managed care health plan choices have contributed
further to a decline in membership in Company-operated medical centers. This
has created excess capacity and therefore, higher health care costs as a
percentage of revenue.
The following table sets forth the percentage relationships of various income
statement items to revenue for the periods indicated:
<TABLE>
<CAPTION>
YEARS ENDED JUNE
30,
-------------------
1995 1994 1993
----- ----- -----
<S> <C> <C> <C>
Revenue.............................................. 100.0% 100.0% 100.0%
Health care costs.................................... 82.8 83.2 83.8
General, administrative, and marketing expenses...... 13.3 13.4 13.4
Restructuring charge................................. 1.9
Operating income..................................... 1.9 3.4 2.8
Interest income, net................................. 0.2 0.5 0.7
Income before income taxes........................... 2.1 3.9 3.5
Net income........................................... 1.0 2.4 2.2
</TABLE>
Fiscal Year 1995 Compared to Fiscal Year 1994
Revenue increased 58.1% to $3,909.4 million for fiscal year 1995 from
$2,473.0 million for fiscal year 1994, primarily due to the acquisition of
TakeCare.
Health care costs increased 57.4% to $3,238.5 million for fiscal year 1995
from $2,057.7 million for fiscal year 1994, primarily due to the TakeCare
acquisition. Health care costs decreased to 82.8% of revenue in 1995 from 83.2%
in 1994, primarily due to the lower average cost of health care in the former
TakeCare health plans. Notwithstanding the year-over-year improvement, the
Company's cost of health care was adversely impacted by excess capacity in
Company-operated medical centers.
General, administrative, and marketing ("G&A") expenses increased 57.0% to
$521.7 million for fiscal year 1995 from $332.2 million for fiscal year 1994,
primarily as a result of the acquisition of TakeCare. G&A expenses as a
percentage of revenue were 13.3% in fiscal year 1995, down slightly from 13.4%
in fiscal year 1994. Fiscal year 1995 G&A expenses included approximately $26.7
million of goodwill amortization arising from the TakeCare transaction on June
17, 1994. In fiscal year 1994, goodwill amortization relating to the TakeCare
transaction was approximately $1.0 million.
17
<PAGE>
Net interest income was $6.1 million for fiscal year 1995 as compared to
$13.8 million for the previous year. Net interest income declined year-over-
year, primarily because of additional interest expense due to an increase in
debt related to the acquisition of TakeCare.
Fiscal Year 1994 Compared to Fiscal Year 1993
Revenue increased 23.3% to $2,473.0 million for fiscal year 1994 from
$2,005.9 million for fiscal year 1993. Approximately 67.3% of revenue was
generated by contract model membership, and approximately 28.3% of revenue was
generated by membership in Company-operated medical centers during fiscal year
1994. Approximately 4.4% of the Company's revenue was generated by the
Insurance Group.
Health care costs increased 22.4% to $2,057.7 million for fiscal year 1994
from $1,681.1 million for fiscal year 1993, primarily due to membership growth
during the period. Health care costs decreased to 83.2% of revenue in 1994 from
83.8% in 1993, primarily due to improvement in the Company's health
administration and health operations costs. In addition, pharmacy costs in
Arizona, as well as optometry costs in California and Nevada, were
significantly reduced. The Company experienced certain health care cost
increases during the year. In Utah, the Company opened its own acute care
hospital in August, 1993. The hospital did not reach break-even occupancy by
the end of the fiscal year. California and Nevada experienced higher physician
services costs as a percent of revenue in fiscal year 1994 than in fiscal year
1993.
G&A expenses increased 23.2% to $332.2 million for fiscal year 1994 from
$269.6 million for the fiscal year 1993, primarily as a result of growth in the
Company's operations. G&A expenses as a percentage of revenue were 13.4% in
fiscal year 1994, unchanged from 13.4% in fiscal year 1993. Cost control
measures included hiring freezes, reductions in the Company's work force, and
administrative reorganizations.
Net interest income was $13.8 million for fiscal year 1994 as compared to
$14.7 million for the previous year. The decrease in net interest income was
primarily the result of interest expense on $100 million of 7% Senior Notes due
2003 (the "Notes") issued in September, 1993, and a decrease in capitalized
interest of approximately $2 million, due to the completion of several major
construction projects including the Company's Utah hospital. The decreases were
partially offset by higher average invested cash balances during the period.
LIQUIDITY AND CAPITAL RESOURCES
The Company's consolidated cash, cash equivalents, and short-term investments
increased by $209.6 million to $456.4 million at June 30, 1995, from $246.8
million at June 30, 1994. The increase includes the early receipt in June,
1995, of approximately $152.0 million of premiums from HCFA due on July 1,
1995, for medical services to be provided to senior members in July, 1995.
Other major sources of cash during the fiscal year ended June 30, 1995,
included cash generated from operations (net of the early receipt of HCFA
premiums) of $135.0 million and net transfers of $37.4 million from long-term
investments. Uses of cash during fiscal year 1995 included $72.1 million for
capital expenditures, $26.3 million for Preferred Stock dividends, and $35.2
million net reductions in borrowings.
In order to fund a major portion of the cash required for the TakeCare
acquisition, the Company entered into a $350 million Credit Agreement (the
"Credit Agreement") in March, 1994. The Credit Agreement originally provided
for a $250 million five-year Term Loan facility (the "Term Loan") and a $100
million five-year Revolving Credit facility (the "Revolving Credit Loan"). The
Credit Agreement was amended in March, 1995, and currently provides a $200
million Revolving Credit Loan and a $150 million Term Loan. The Term Loan and
Revolving Credit Loan carry interest rates currently ranging from 6.1% to 6.9%
based on LIBOR rate borrowings. The Term Loan is repayable at the rate of $15
million every six months, commencing on September 29, 1995. The final payment
is due March 31, 2000. The Credit Agreement contains financial and other
covenants, including limitations on indebtedness, liens, dividends, sale and
lease-back transactions, and certain other transactions.
18
<PAGE>
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
significantly dependent upon the receipt of funds by 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; and (b) 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. These fiscal standards may, from time to
time, impact the amount of funds paid by one or more of the Regulated
Subsidiaries to the Company.
The Company believes the payments referred to above by the Regulated
Subsidiaries, together with other financing sources, including the Credit
Agreement, should be sufficient to enable the Company to meet its payment
obligations (totaling approximately $80 million annually) under the Notes, the
Credit Agreement and the Company's Preferred Stock. The Company believes that
cash flow from operations, the Credit Agreement and existing cash balances will
be sufficient to continue to fund operations and capital expenditures for the
foreseeable future. Also, sales of real property under the Restructuring Plan
are expected to generate net cash to the Company in fiscal year 1996 which is
intended to be used to reduce indebtedness and for other corporate purposes.
Effects of Regulatory Changes and Inflation
Recently, the Company has been informed by HCFA that effective January 1,
1996, it will receive an annual premium rate increase of approximately 3.5% for
its Senior Plan members. Over calendar years 1994 and 1995, annual Senior Plan
premium increases granted by HCFA were approximately 2.0% and 5.8%,
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.
The Company has been experiencing significant downward pressures on
commercial HMO membership growth and premium rates due to competition and
measures by large employer groups and other purchasers of health care services
attempting to hold their costs down. The Company may not be able to obtain
premium rate increases and may see some premium rate reductions in its
commercial HMO business in the short term. Also 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. There
can be no assurance that these trends will be reversed in the short term.
19
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
REFERENCE
---------
<S> <C>
Consolidated Balance Sheets, June 30, 1995 and 1994.................. 21
Consolidated Statements of Income for the years ended June 30, 1995,
1994, and 1993...................................................... 22
Consolidated Statements of Stockholders' Equity for the years ended
June 30, 1995, 1994,
and 1993............................................................ 23
Consolidated Statements of Cash Flows for the years ended June 30,
1995, 1994, and 1993................................................ 25
Notes to Consolidated Financial Statements........................... 26
Independent Auditors' Report......................................... 42
</TABLE>
20
<PAGE>
FHP INTERNATIONAL CORPORATION
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
JUNE 30,
------------------------
1995 1994
----------- -----------
(AMOUNTS IN THOUSANDS,
EXCEPT SHARE DATA)
<S> <C> <C>
Cash and cash equivalents (Note 1)................... $ 299,144 $ 60,571
Short-term investments (Notes 1 and 6)............... 157,220 186,212
Accounts receivable (net of allowance for doubtful
accounts of $23,617 and $13,448 at June 30, 1995 and
1994, respectively)................................. 141,840 112,092
Prepaid expenses and other current assets............ 44,091 56,708
Deferred income taxes (Notes 1 and 5)................ 31,984 30,360
----------- -----------
Total current assets............................. 674,279 445,943
Property and equipment, net (Notes 1, 2, and 4)...... 229,765 403,754
Assets held for sale (Notes 1, 2, and 13)............ 138,164 3,450
Long-term investments (Notes 1 and 6)................ 71,492 122,782
Restricted investments (Notes 1 and 6)............... 105,482 97,879
Goodwill and other intangibles, net (Notes 1 and 12). 1,059,507 1,082,701
Other assets (Notes 1 and 7)......................... 37,127 12,760
----------- -----------
Total assets..................................... $ 2,315,816 $ 2,169,269
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current portion of long-term obligations (Notes 4 and
6).................................................. $ 30,168 $ 25,154
Accounts payable..................................... 64,762 94,725
Medical claims payable (Note 1)...................... 341,222 283,612
Accrued salaries and employee benefits (Note 7)...... 77,716 84,371
Unearned premiums (Note 1)........................... 207,961 32,738
Restructuring reserve (Note 13)...................... 15,038
Income taxes payable and other current liabilities
(Notes 1, 3, 5, and 13)............................. 15,791 67,203
----------- -----------
Total current liabilities........................ 752,658 587,803
Long-term obligations (Notes 4 and 6)................ 337,817 377,986
Other liabilities (Notes 3, 5, and 7)................ 85,200 90,344
----------- -----------
Total liabilities................................ 1,175,675 1,056,133
----------- -----------
Commitments and contingencies (Note 8)
Stockholders' equity:
Series A Convertible and Series B Preferred Stock,
$0.05 par value; 40,000,000 shares authorized;
issued and outstanding 21,040,307 and 21,031,733
(Series A) and 79,218 and 32,850 (Series B) shares
at June 30, 1995 and 1994, respectively; aggregate
liquidation preference $526,027
and $526,825 (Series A) and $1,999 and $821
(Series B) at June 30, 1995 and 1994, respectively
(Notes 1, 7, 10, and 12).......................... 1,056 1,053
Common Stock, $0.05 par value; 100,000,000 shares
authorized; issued and outstanding 40,220,941 and
39,503,675 shares at June 30, 1995 and 1994,
respectively (Notes 1, 7, 10, and 12)............. 2,011 1,976
Paid-in capital.................................... 927,882 915,816
Unrealized holding gains (losses) on available-for-
sale investments, net of tax
effect of $1,232 (1995) and $2,617 (1994) (Note
6)................................................ (1,446) (4,392)
Retained earnings.................................. 210,638 198,683
----------- -----------
Total stockholders' equity....................... 1,140,141 1,113,136
----------- -----------
Total liabilities and stockholders' equity....... $ 2,315,816 $ 2,169,269
=========== ===========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
21
<PAGE>
FHP INTERNATIONAL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
----------------------------------
1995 1994 1993
---------- ---------- ----------
(AMOUNTS IN THOUSANDS,
EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
Revenue (Note 1)........................... $3,909,380 $2,472,958 $2,005,854
Expenses (Note 1):
Primary health care:
Medical services........................ 1,553,955 923,560 744,912
Hospital services....................... 1,227,392 839,980 681,543
Dental, optometry, pharmacy, and other
primary health care services........... 340,182 199,572 168,776
Other health care........................ 116,960 94,577 85,913
General, administrative, and marketing... 521,702 332,249 269,645
Provision for restructuring (Note 13).... 75,110
---------- ---------- ----------
3,835,301 2,389,938 1,950,789
---------- ---------- ----------
Operating income....................... 74,079 83,020 55,065
Interest income............................ 32,079 20,365 14,919
Interest expense (Notes 1 and 4)........... (25,972) (6,565) (211)
---------- ---------- ----------
Income before income taxes................. 80,186 96,820 69,773
Provision for income taxes (Notes 1 and 5). 42,894 37,510 25,607
---------- ---------- ----------
Net income............................. 37,292 59,310 44,166
Preferred Stock dividends (Note 10)........ 25,337 1,032
---------- ---------- ----------
Net income attributable to Common Stock.... $ 11,955 $ 58,278 $ 44,166
========== ========== ==========
Earnings per share attributable to Common $0.29 $1.71 $1.33
Stock (Note 11)........................... ===== ===== =====
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
22
<PAGE>
FHP INTERNATIONAL CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
NUMBER OF NUMBER OF
PREFERRED COMMON PREFERRED COMMON PAID-IN
SHARES SHARES STOCK STOCK CAPITAL
--------- --------- --------- ------ --------
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
BALANCE AT JULY 1, 1992.......... -- 32,388 $ -- $1,620 $217,672
Amortization of restricted stock
awards (Note 7)................. 220
Reduction of notes receivable
from Employee Stock Ownership
Plan (Note 9)...................
Stock options exercised (Note 7). 448 22 2,452
Income tax benefit from exercise
of stock options................ 2,031
Net income.......................
------ ------ ------ ------ --------
BALANCE AT JUNE 30, 1993......... -- 32,836 -- 1,642 222,375
Stock options exercised (Note 7). 356 18 2,697
Income tax benefit from exercise
of stock options................ 3,229
Issuance of Series A Convertible
Preferred Stock
(Note 12)....................... 21,032 1,052 524,741
Issuance of Series B Preferred
Stock (Note 12)................. 33 1 820
Issuance of Common Stock (Note
12)............................. 6,312 316 161,954
Dividends on Series A Convertible
and Series B
Preferred Stock (Note 10).......
Unrealized holding gains (loss-
es), net of taxes
(Note 6)........................
Net income.......................
------ ------ ------ ------ --------
BALANCE AT JUNE 30, 1994......... 21,065 39,504 1,053 1,976 915,816
Stock options exercised (Note 7). 640 31 6,321
Income tax benefit from exercise
of stock options................ 2,530
Issuance of Series A Convertible
Preferred Stock
(Note 12)....................... 9 213
Issuance of Series B Preferred
Stock (Note 12)................. 46 3 1,156
Issuance of Common Stock (Note
12)............................. 77 4 1,846
Dividends on Series A Convertible
and Series B
Preferred Stock (Note 10).......
Unrealized holding gains (loss-
es), net of taxes
(Note 6)........................
Net income.......................
------ ------ ------ ------ --------
BALANCE AT JUNE 30, 1995......... 21,120 40,221 $1,056 $2,011 $927,882
====== ====== ====== ====== ========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
23
<PAGE>
FHP INTERNATIONAL CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (CONTINUED)
<TABLE>
<CAPTION>
NOTES
RECEIVABLE UNREALIZED TOTAL
RETAINED FROM HOLDING GAINS STOCKHOLDERS'
EARNINGS ESOP (LOSSES) EQUITY
-------- ---------- ------------- -------------
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C>
BALANCE AT JULY 1, 1992....... $ 96,239 $(4,150) $ -- $ 311,381
Amortization of restricted
stock awards (Note 7)........ 220
Reduction of notes receivable
from Employee Stock
Ownership Plan (Note 9)...... 4,150 4,150
Stock options exercised (Note
7)........................... 2,474
Income tax benefit from
exercise of stock options.... 2,031
Net income.................... 44,166 44,166
-------- ------- ------- ----------
BALANCE AT JUNE 30, 1993...... 140,405 -- -- 364,422
Stock options exercised (Note
7)........................... 2,715
Income tax benefit from
exercise of stock options.... 3,229
Issuance of Series A
Convertible Preferred Stock
(Note 12).................... 525,793
Issuance of Series B Preferred
Stock (Note 12).............. 821
Issuance of Common Stock (Note
12).......................... 162,270
Dividends on Series A
Convertible and Series B
Preferred Stock (Note 10).... (1,032) (1,032)
Unrealized holding gains
(losses), net of taxes
(Note 6)..................... (4,392) (4,392)
Net income.................... 59,310 59,310
-------- ------- ------- ----------
BALANCE AT JUNE 30, 1994...... 198,683 -- (4,392) 1,113,136
Stock options exercised (Note
7)........................... 6,352
Income tax benefit from
exercise of stock options.... 2,530
Issuance of Series A
Convertible Preferred Stock
(Note 12).................... 213
Issuance of Series B Preferred
Stock (Note 12).............. 1,159
Issuance of Common Stock (Note
12).......................... 1,850
Dividends on Series A
Convertible and Series B
Preferred Stock (Note 10).... (25,337) (25,337)
Unrealized holding gains
(losses), net of taxes
(Note 6)..................... 2,946 2,946
Net income.................... 37,292 37,292
-------- ------- ------- ----------
BALANCE AT JUNE 30, 1995...... $210,638 $ -- $(1,446) $1,140,141
======== ======= ======= ==========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
24
<PAGE>
FHP INTERNATIONAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
-------------------------------
1995 1994 1993
-------- ---------- ---------
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C>
Operating Activities:
Net income................................... $ 37,292 $ 59,310 $ 44,166
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for restructuring................. 75,110
Depreciation and amortization............... 80,065 45,271 29,912
Increase in allowance for doubtful accounts. 10,169 6,301 4,837
Loss on disposal of equipment............... 4,757 4,954 2,300
Amortization of restricted stock awards..... 220
Deferred income taxes....................... (25,118) 2,630 (1,192)
Effect on cash of changes in operating
assets and liabilities, net of effects from
acquisitions in 1994 and 1993:
Accounts receivable....................... (39,917) (30,051) (9,226)
Prepaid expenses and other current assets. 12,596 (18,099) (2,052)
Other assets.............................. (4,279) 47 (10,901)
Accounts payable.......................... (29,963) 8,060 12,089
Medical claims payable.................... 57,610 12,138 11,124
Accrued salaries and employee benefits.... (6,655) 7,931 6,372
Unearned premiums......................... 175,223 (2,815) 923
Other liabilities......................... (59,907) 6,292 9,166
-------- ---------- ---------
Net cash provided by operating activities..... 286,983 101,969 97,738
-------- ---------- ---------
Investing Activities:
Purchases of available-for-sale investments.. (519,090) (66,133)
Proceeds from sales/maturities of available-
for-sale investments........................ 600,487 1,167
Gain on sale of available-for-sale
investments................................. (5,232)
Loss on sale of available-for-sale
investments................................. 880
Purchase of TakeCare, Inc., net of cash
acquired.................................... (341,602)
Purchase of Colorado HMO, net of cash
acquired.................................... (755) (3,419)
Purchase of Great States Financial
Corporation, net of cash acquired........... (21,706)
Purchases of property and equipment.......... (72,096) (86,052) (87,403)
Payments received from Employee Stock
Ownership Plan notes receivable............. 4,150
-------- ---------- ---------
Net cash provided by (used in) investing
activities................................... 4,194 (429,906) (171,092)
-------- ---------- ---------
Financing Activities:
Proceeds from issuance of long-term
obligations................................. 15,000 400,000
Payments on long-term obligations............ (50,155) (20,136) (2,011)
Exercise of stock options including tax
benefit..................................... 8,882 5,944 4,505
Cash dividends paid to preferred
shareholders................................ (26,331)
-------- ---------- ---------
Net cash (used in) provided by financing
activities................................... (52,604) 385,808 2,494
-------- ---------- ---------
Net increase (decrease) in cash and cash
equivalents.................................. 238,573 57,871 (70,860)
Cash and cash equivalents at beginning of
year......................................... 60,571 2,700 73,560
-------- ---------- ---------
Cash and cash equivalents at end of year...... $299,144 $ 60,571 $ 2,700
======== ========== =========
Supplemental cash flow information:
Interest payments (net of portion
capitalized)................................ $ 25,526 $ 4,695 $ 571
Income tax payments (net of refunds)......... $ 73,751 $ 34,583 $ 25,552
Supplemental schedule of noncash investing and
financing activities:
The Company purchased all of the outstanding
common stock of TakeCare, Inc. in exchange
for Common Stock, Preferred Stock, and cash
as follows:
Total TakeCare acquisition cost............ $1,137,642
Cash acquired.............................. (60,402)
Liabilities accrued........................ (46,754)
Common and Preferred Stock issued.......... (688,884)
----------
Net cash paid.............................. $ 341,602
==========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
25
<PAGE>
FHP INTERNATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1--ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Organization
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") in exchange for cash, Common Stock, and Preferred Stock. The
acquisition was accounted for as a purchase business combination, and
consequently, all balances and results of operations of TakeCare since the date
of acquisition have been included in the accompanying financial statements
(Note 12).
Most of the Company's subsidiaries are federally qualified, licensed health
maintenance organizations ("HMO") which provide comprehensive health care to
their members for a fixed monthly fee per member. In the course of providing
health care services to commercial and governmental employees, the Company
extends credit to various federal government agencies and hospitals,
independent physician groups, and to other health care providers and
intermediaries located in California, Colorado, Arizona, Utah, Guam, New
Mexico, Texas, Illinois, Nevada, Ohio, Indiana, and Kentucky.
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of
the Company and its subsidiaries. All significant intercompany accounts and
transactions have been eliminated.
Regulatory Requirements
The Company's regulated subsidiaries must comply with certain minimum capital
or tangible net equity requirements in each of the states in which they
operate. As of June 30, 1995, all of the Company's regulated subsidiaries were
in compliance with these requirements.
Revenue Recognition and Health Care Costs
Medicare risk contracts with the Health Care Financing Administration
("HCFA") provided 45%, 63%, and 65% of revenue in fiscal years 1995, 1994, and
1993, respectively. The Company's HMOs are paid a prospectively determined per
capita monthly payment for each Medicare beneficiary enrolled in the HMOs. This
capitated payment is the projected actuarial equivalence of 95% of the amount
Medicare would have paid for the Medicare beneficiaries if they had received
services from a fee for service Medicare provider or supplier. The HMOs must
absorb any difference between the Medicare prepaid amounts and the actual costs
the HMOs incur for providing services and are therefore at risk.
Premiums from enrolled groups for prepaid health care are recognized as
revenue in the month in which the enrollees are entitled to care. Unearned
premiums represent cash received from employer groups and HCFA in advance of
the applicable period of coverage. Health care costs are recorded in the period
when services are provided to enrolled members, including estimates for
contracted medical specialists and hospital costs which have been incurred as
of the balance sheet date but not yet reported. The estimates for accrued
health care costs are based on historical studies of claims paid. The methods
for making such estimates and for establishing the resulting reserves are
continually reviewed and updated, and any adjustments resulting therefrom are
reflected in current operations. While the ultimate amount of claims and the
related expenses paid are dependent on future developments, management is of
the opinion that the liability for medical claims payable is adequate to cover
such medical claims and expenses.
26
<PAGE>
FHP INTERNATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Advertising Costs
The Company recognizes advertising costs in accordance with the American
Institute of Certified Public Accountants' Statement of Position 93-7,
"Reporting on Advertising Costs."
Advertising expense was $37,018,000, $23,800,000, and $17,018,000 for the
fiscal years ended June 30, 1995, 1994, and 1993, respectively.
Cash Equivalents
The Company considers all highly-liquid investments with a maturity of three
months or less when purchased to be cash equivalents. The carrying value of
cash and cash equivalents approximates fair value based on their short-term
maturity.
Short-term, Long-term, and Restricted Investments
Effective June 30, 1994, the Company adopted Statement of Financial
Accounting Standards No. 115 ("SFAS 115"), "Accounting for Certain Investments
in Debt and Equity Securities." The Company has classified all of its
investment portfolio as "available-for-sale." In accordance with SFAS 115,
investments classified as available-for-sale are carried at fair value, and
unrealized gains or losses (net of applicable income taxes) are reported in a
separate caption of stockholders' equity.
Short-term, long-term, and restricted investments consist of U.S. Treasury
securities, certificates of deposit, and other marketable debt securities.
Long-term investments have maturities in excess of one year. Restricted
investments primarily include investments placed on deposit with various state
regulatory agencies to comply with regulatory requirements.
Income Taxes
The Company utilizes the asset and liability method of accounting for income
taxes. Under this method, 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. Deferred tax
assets and liabilities are established for temporary differences between the
financial reporting basis and tax basis of the Company's assets and liabilities
at tax rates expected to be in effect when such assets or liabilities are
realized or settled.
Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets
to be Disposed of
In March, 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 121 ("SFAS 121"), "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of."
As permitted by SFAS 121, the Company elected to adopt the statement as of June
30, 1995. In accordance with SFAS 121, long-lived assets to be held will be
reviewed for events or changes in circumstances which would indicate that the
carrying value may not be recoverable. Assets held for sale are accounted for
at the lower of carrying amount or fair value, less costs to sell, since
management has committed to a plan to dispose of the assets. The adoption of
SFAS 121 had no effect on the consolidated financial statements for fiscal year
1995. In accordance with SFAS 121, prior period financial statements have not
been restated.
27
<PAGE>
FHP INTERNATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Property and Equipment
Property and equipment are recorded at cost. Depreciation and amortization
are provided principally by the straight-line method over the estimated useful
lives of the respective classes of assets as follows: buildings, 20 to 40
years; leasehold improvements, lesser of the useful lives (three to ten years)
or the lease term; and equipment and fixtures, three to ten years. Property and
equipment also includes capitalized interest expense of approximately $471,000,
$596,000, and $2,597,000 in fiscal years 1995, 1994, and 1993, respectively,
associated with the Company's major construction projects.
Goodwill and Other Intangibles
Goodwill arose primarily from the purchase of TakeCare (Note 12).
Amortization is provided on a straight-line basis over periods not exceeding 40
years. In addition to goodwill, other intangible assets resulting from business
acquisitions consist of the economic value of purchased membership, customer
contracts, and covenants not-to-compete. Intangibles are amortized on a
straight-line basis over their estimated useful lives ranging from 3 to 30
years. The Company periodically evaluates whether events and circumstances have
occurred which may affect the estimated useful life or the recoverability of
the remaining balance of its intangibles. At June 30, 1995, the Company's
management believed that no material impairment of goodwill or other intangible
assets existed. Amortization charged to continuing operations amounted to
$31,506,000, $5,284,000, and $1,163,000 for fiscal years 1995, 1994, and 1993,
respectively. Accumulated amortization was $34,738,000, $6,685,000, and
$1,401,000 for the fiscal years ended June 30, 1995, 1994, and 1993,
respectively.
Other Assets
The principal components of other assets are as follows:
<TABLE>
<CAPTION>
JUNE 30,
-----------------------
1995 1994
----------- -----------
(AMOUNTS IN THOUSANDS)
<S> <C> <C>
Deferred income taxes (Note 5)...................... $ 21,007 $ --
Cash surrender value of life insurance polices (Note
7)................................................. 6,902 3,747
Deposits............................................ 3,608 2,998
Notes receivable.................................... 2,999 2,604
Other............................................... 2,611 3,411
----------- -----------
Total other assets.................................. $ 37,127 $ 12,760
=========== ===========
</TABLE>
Reclassifications
Certain prior year amounts have been reclassified to conform to the 1995
financial statement presentation.
28
<PAGE>
FHP INTERNATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2--PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
<TABLE>
<CAPTION>
JUNE 30,
-----------------------
1995 1994
----------- -----------
(AMOUNTS IN THOUSANDS)
<S> <C> <C>
Land................................................. $ 26,002 $ 68,420
Buildings............................................ 60,231 165,439
Leasehold improvements............................... 42,779 47,849
Equipment and fixtures............................... 224,517 237,640
Construction in progress............................. 17,653 30,767
----------- -----------
371,182 550,115
Less accumulated depreciation and amortization....... 141,417 146,361
----------- -----------
Total property and equipment, net.................... $ 229,765 $ 403,754
=========== ===========
</TABLE>
In June, 1995, the Company's Board of Directors authorized the sale of the
Company's two acute care hospitals and other nonproductive real estate (Note
13). Property and equipment with an estimated net realizable value of
$136,477,000 have been reclassified to assets held for sale in the Consolidated
Balance Sheets as of June 30, 1995.
Total depreciation and amortization expense related to property and equipment
was $48,559,000, $39,987,000, and $28,749,000 for fiscal years 1995, 1994, and
1993, respectively.
NOTE 3--OTHER LIABILITIES
From January, 1984, through March, 1986, the Company maintained commercial
insurance on a claims occurrence basis with nominal deductibles. Since April,
1986, the Company has maintained commercial insurance on a claims made basis.
The Company currently carries $50,000,000 of professional liability insurance
with annual deductibles of $2,000,000 per occurrence and $12,000,000 in the
aggregate.
An estimate of the Company's liability for professional liability claims,
including deductibles, was actuarially computed on a present value basis using
a discount rate of 7%, and amounted to approximately $35,525,000 and
$31,400,000 at June 30, 1995 and 1994, respectively. Such amounts are allocated
between other current liabilities and other liabilities based on estimates of
the amounts of claims which will be paid during the subsequent fiscal year
(Note 8).
Other liabilities also include approximately $30,001,000 and $40,785,000 of
reserves for losses and loss adjustment expenses at June 30, 1995 and 1994,
respectively, associated with the Company's insurance operations. These
reserves are estimates based on actuarial computations and industry standards
for the eventual costs of claims incurred but not settled, less reinsurance
recoverable from other companies.
As claims are settled, as amounts required to settle become known, and as
anticipated claims are actuarially revised, the professional liability and loss
reserve expenses and liabilities are adjusted accordingly.
29
<PAGE>
FHP INTERNATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 4--LONG-TERM OBLIGATIONS
Long-term obligations consist of the following:
<TABLE>
<CAPTION>
JUNE 30,
-----------------------
1995 1994
----------- -----------
(AMOUNTS IN THOUSANDS)
<S> <C> <C>
Term loan under bank credit agreement, due in semi-an-
nual installments of $15,000 plus interest, at float-
ing rates averaging 6.5%............................. $ 150,000 $ 250,000
Revolving loan under bank credit agreement, interest
payable at various intervals no less frequent than
quarterly, at floating rates averaging 6.5%.......... 115,000 50,000
7% Senior Notes due September, 2003, interest payable
semi-annually........................................ 100,000 100,000
Real estate mortgages payable, due monthly through
2010, interest at fixed rates averaging 9.9%, collat-
eralized by certain land and buildings............... 2,547 2,617
Other................................................. 438 523
----------- -----------
Total............................................. 367,985 403,140
Less current portion................................ 30,168 25,154
----------- -----------
Total long-term obligations......................... $ 337,817 $ 377,986
=========== ===========
</TABLE>
Scheduled maturities of long-term obligations are as follows:
<TABLE>
<CAPTION>
(AMOUNTS IN
YEARS ENDING JUNE 30: THOUSANDS)
--------------------- -----------
<S> <C>
1996.......................................................... $ 30,168
1997.......................................................... 30,185
1998.......................................................... 30,204
1999.......................................................... 30,224
2000.......................................................... 145,136
Later years................................................... 102,068
--------
Total scheduled maturities.................................... $367,985
========
</TABLE>
In March, 1994, in connection with the acquisition of TakeCare (Note 12), the
Company entered into a $350 million credit agreement with a group of banks
which provided for a $250 million term loan facility and a $100 million
revolving credit facility (the "Credit Agreement"). The Credit Agreement was
amended in March, 1995, and currently provides a $200 million revolving credit
facility and a $150 million term loan facility. The amended Credit Agreement
expires March 31, 2000. Prime rate, LIBOR based, and competitive bid (revolving
credit facility only) interest rate options are available for borrowings under
the Credit Agreement. In addition, a facility fee of 0.125% is payable,
regardless of usage, on the $200 million revolving credit facility portion of
the Credit Agreement.
The Credit Agreement contains financial and other covenants. The Company was
in compliance with these covenants as of June 30, 1995.
30
<PAGE>
FHP INTERNATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 5--INCOME TAXES
The components of the provision for income taxes are summarized as follows:
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
-------------------------
1995 1994 1993
-------- ------- -------
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C>
Current:
Federal............................................ $ 53,965 $27,806 $21,143
State.............................................. 12,590 5,999 4,494
Guam............................................... 1,457 1,075 1,162
-------- ------- -------
Total current provision.............................. 68,012 34,880 26,799
-------- ------- -------
Deferred:
Federal............................................ (20,964) 2,201 (1,033)
State.............................................. (4,154) 429 (159)
-------- ------- -------
Total deferred (benefit) provision................... (25,118) 2,630 (1,192)
-------- ------- -------
Total provision for income taxes..................... $ 42,894 $37,510 $25,607
======== ======= =======
</TABLE>
The deferred (benefit) provision for income taxes results from reporting the
following items in different periods for financial statement and income tax
purposes:
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
-------------------------
1995 1994 1993
-------- ------ -------
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C>
Restructuring costs................................. $(30,270) $ -- $ --
Tax depreciation and amortization in excess of book
depreciation....................................... 3,160 2,494 2,048
Stockholder litigation.............................. 1,785
Self-insurance and other non-deductible reserves.... 2,936 175 (1,702)
Deferred premiums and other revenue................. 116 296 (1,677)
Discounted loss reserves............................ (10) (728) (1,186)
Vacation and other deferred compensation............ (746) (183) (1,151)
Pre-operating costs................................. 516 1,005
Deferred acquisition costs.......................... 15 546
Policy holder dividends............................. (175) 631
Bad debt expense.................................... (562) (340) (541)
Other, net.......................................... 418 (777) 227
-------- ------ -------
Total deferred (benefit) provision.................. $(25,118) $2,630 $(1,192)
======== ====== =======
</TABLE>
The provision for income taxes differs from the amount of tax determined by
applying the Federal statutory rate to pretax income. The components of this
difference are summarized as follows:
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
--------------------------------------------------
1995 1994 1993
---------------- ---------------- ----------------
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
------- ------- ------- ------- ------- -------
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Taxes on income at Federal
statutory tax rate......... $28,065 35% $33,887 35% $23,722 34%
State income taxes, net of
Federal tax benefit........ 5,484 6 4,178 4 2,862 4
Goodwill amortization....... 8,573 11
Tax exempt interest......... (116) (444) (473)
Other, net.................. 888 1 (111) (504) (1)
------- --- ------- --- ------- ---
Total provision for income
taxes...................... $42,894 53% $37,510 39% $25,607 37%
======= === ======= === ======= ===
</TABLE>
31
<PAGE>
FHP INTERNATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The tax effects of significant items comprising the Company's net deferred
tax assets are as follows:
<TABLE>
<CAPTION>
JUNE 30,
------------------------
1995 1994
----------- -----------
(AMOUNTS IN THOUSANDS)
<S> <C> <C>
Deferred tax assets:
Restructuring costs............................. $ 30,270 $ --
Reserves not currently deductible............... 37,974 43,248
Vacation and other deferred compensation........ 6,125 5,396
Other........................................... 660
State income taxes.............................. (99) 3,258
----------- -----------
Total deferred tax assets..................... 74,930 51,902
Valuation allowance...........................
----------- -----------
Total deferred tax assets..................... 74,930 51,902
----------- -----------
Deferred tax liabilities:
Difference between book and tax bases of
property....................................... (21,939) (22,441)
Other........................................... (514)
----------- -----------
Total deferred tax liabilities................ (21,939) (22,955)
----------- -----------
Net deferred tax assets....................... $ 52,991 $ 28,947
=========== ===========
</TABLE>
There was no change in the valuation allowance during the years ended June
30, 1995 and 1994.
NOTE 6--INVESTMENTS AND FAIR VALUE OF OTHER FINANCIAL INSTRUMENTS
Gross unrealized gains and losses and a comparison of amortized cost and
estimated fair value are presented in the table below:
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED ESTIMATED
COST GAINS LOSSES FAIR VALUE
--------- ---------- ---------- ----------
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C>
JUNE 30, 1995:
Classified as short-term:
U.S. Government and its agencies. $117,913 $ 382 $ (619) $117,676
Corporate obligations............ 22,503 (175) 22,328
Municipal obligations............ 11,605 25 (20) 11,610
Other............................ 5,649 12 (55) 5,606
-------- ------ ------- --------
Total short-term............... 157,670 419 (869) 157,220
-------- ------ ------- --------
Classified as long-term:
U.S. Government and its agencies. 49,329 438 (1,493) 48,274
Corporate obligations............ 15,257 74 (114) 15,217
Other............................ 8,072 4 (75) 8,001
-------- ------ ------- --------
Total long-term................ 72,658 516 (1,682) 71,492
-------- ------ ------- --------
Classified as restricted
investments:
U.S. Government and its agencies. 103,454 645 (1,722) 102,377
Certificates of deposit.......... 2,575 9 2,584
Money market funds............... 515 6 521
-------- ------ ------- --------
Total restricted............... 106,544 660 (1,722) 105,482
-------- ------ ------- --------
Total........................ $336,872 $1,595 $(4,273) $334,194
======== ====== ======= ========
</TABLE>
32
<PAGE>
FHP INTERNATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED ESTIMATED
COST GAINS LOSSES FAIR VALUE
--------- ---------- ---------- ----------
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C>
JUNE 30, 1994:
Classified as short-term:
U.S. Government and its agencies. $125,309 $ 31 $ (1,816) $123,524
Corporate obligations............ 45,466 2 (841) 44,627
Other............................ 18,251 6 (196) 18,061
-------- ------ -------- --------
Total short-term............... 189,026 39 (2,853) 186,212
-------- ------ -------- --------
Classified as long-term:
U.S. Government and its agencies. 96,098 12 (3,530) 92,580
Corporate obligations............ 16,697 10 (591) 16,116
Municipal obligations............ 4,479 (45) 4,434
Other............................ 6,710 3,270 (328) 9,652
-------- ------ -------- --------
Total long-term................ 123,984 3,292 (4,494) 122,782
-------- ------ -------- --------
Classified as restricted invest-
ments:
U.S. Government and its agencies. 92,818 36 (3,030) 89,824
Certificates of deposit.......... 3,150 3,150
Money market funds............... 4,904 1 4,905
-------- ------ -------- --------
Total restricted............... 100,872 37 (3,030) 97,879
-------- ------ -------- --------
Total........................ $413,882 $3,368 $(10,377) $406,873
======== ====== ======== ========
</TABLE>
Realized gains or (losses) on available-for-sale investments are calculated
on the specific identification method and were $5,232,000 and ($880,000),
respectively, in fiscal year 1995.
The contractual maturities of short-term, long-term, and restricted
investments at June 30, 1995, were as follows:
<TABLE>
<CAPTION>
AMORTIZED ESTIMATED
COST FAIR VALUE
----------- -----------
(AMOUNTS IN THOUSANDS)
<S> <C> <C>
Due within one year............................... $ 157,963 $ 157,671
Due after one year, but within five years......... 109,939 109,362
Due after five years, but within ten years........ 48,171 46,902
Due after ten years............................... 20,799 20,259
----------- -----------
Total contractual maturities...................... $ 336,872 $ 334,194
=========== ===========
</TABLE>
The Company also determined that investments, classified as short-term, are
available for use in current operations and, accordingly, classified such
investments as current assets without regard to the investments' contractual
maturity dates.
The fair value of short-term, long-term, and restricted investments is
estimated based on quoted market prices. The fair value of the Company's long-
term obligations are estimated to be equivalent to its carrying value.
33
<PAGE>
FHP INTERNATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 7--EMPLOYEE BENEFITS
The Company has a defined contribution pension plan ("Pension Plan") and an
Employee Stock Ownership Plan ("ESOP") covering substantially all employees.
Under the provisions of these plans, the Company contributed into trusts for
the benefit of employees an amount equal to 12% of eligible annual
compensation, as defined, of all plan participants. Effective January 1, 1995,
the contribution rate was reduced to 8% of eligible annual compensation, as
defined. Participants do not vest until they have completed five years of
service with the Company. Nonvested contributions, which are forfeited upon an
employee's termination, are treated as a reduction in the amount of the
Company's contribution. The combined contribution expenses for the Pension Plan
and ESOP were $32,844,000, $35,020,000, and $32,970,000 for fiscal years 1995,
1994, and 1993, respectively.
Under an Executive Incentive Plan (the "Plan"), the Company is authorized to
grant restricted stock awards, incentive stock options, nonqualified stock
options, and bonus awards to directors, officers, key employees, consultants,
and other agents. Under the terms of the Plan, the exercise price of the stock
options must be equal to the fair market value of the Company's Common Stock at
the date of grant. All stock options granted by the Company through June 30,
1995, were nonqualified.
Beginning July 1, 1992, the first of a series of four annual stock option
grants were made to certain executives under the Plan. These grants are
intended to provide a strong linkage between long-term incentives and the
Company's financial performance. Accelerated vesting of each of these stock
options is tied directly to growth in the Company's earnings per share ("EPS").
Total stock options for 300,000, 435,000, and 1,085,000 shares were granted
under this plan on July 1, 1994, 1993, and 1992, respectively. Each year's
stock option grant allows the optionee up to six consecutive annual
opportunities for accelerated vesting of portions of the employee's stock
options only if the Company's EPS exceeds both: (1) EPS for the previous fiscal
year and (2) average EPS for the two previous fiscal years. The terms of
accelerated vesting for 25% of the stock options granted on July 1, 1992, and
10% of the stock options granted on July 1, 1993, have been met. The terms of
accelerated vesting for stock options granted July 1, 1994, have not been met.
If a stock option in the series does not become subject to accelerated vesting
by the sixth anniversary of its grant, the stock option automatically becomes
vested on the seventh anniversary of its grant. The Company may periodically
issue stock options under similar terms and conditions as those above.
In addition to the options described above, the Company has granted other
options. All options granted are included in the following summary of stock
option activity for fiscal years 1995, 1994, and 1993:
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
----------------------------------------
1995 1994 1993
------------ ------------ ------------
<S> <C> <C> <C>
Outstanding at beginning of year..... 4,641,000 2,386,000 1,457,000
Granted............................ 812,000 2,830,000 1,492,000
Cancelled.......................... (817,000) (219,000) (115,000)
Exercised.......................... (640,000) (356,000) (448,000)
------------ ------------ ------------
Outstanding at end of year........... 3,996,000 4,641,000 2,386,000
============ ============ ============
Exercisable at end of year........... 824,000 390,000 366,000
============ ============ ============
Price range of options outstanding at
end of year......................... $1.16-$29.25 $1.16-$28.25 $2.73-$27.63
Price range of options exercised..... $1.16-$27.63 $2.73-$27.63 $2.73-$24.00
</TABLE>
At June 30, 1995, 1,179,000 shares remained available under the Plan for
future grants of stock awards and stock options. Outstanding stock options at
June 30, 1995, expire at the earlier of the date the stock option holder ceases
to be an employee or a director, or ten years after the date of grant, based on
the date of grant of the original stock options.
34
<PAGE>
FHP INTERNATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The Company established a deferred compensation plan in July, 1991, for
certain of its executives and physicians which is designed to provide
supplemental retirement income benefits by enabling the participants to defer
receipt of up to 50% of their gross annual salaries and 100% of their gross
annual bonuses. Amounts deferred by employees are included in other liabilities
and these deferred amounts are deemed to be invested in one or more mutual
funds selected by the participants. The Company pays premiums on individual
life insurance policies whose policy benefits are equal to the deferred
amounts. Account balances, including earnings from investments, are distributed
to a participant upon two years' advance request or upon a participant's
termination of employment, death, or disability. Such distributions are
substantially offset by any values in the cash surrender value of the life
insurance policies provided by the Company which are included in other assets.
In fiscal year 1995, the Company's Board of Directors and shareholders
approved the Employee Stock Purchase Plan, effective January 1, 1995. The plan
provides employees of the Company with an opportunity to purchase the Company's
Common Stock once annually with after tax income set aside through payroll
deductions. Eligible employees may defer up to a specified amount from annual
compensation to purchase shares of the Company's Common Stock at 85% of the
market price on the last day of each annual offering period. No shares were
purchased in fiscal year 1995, as the first purchase date is December 18, 1995.
On November 1, 1989, 187,000 shares of Common Stock were issued as restricted
stock awards at a purchase price of $0.02 per share. Compensation expense was
determined based on the excess of the estimated market value of the stock over
the purchase price on the date of the grant and was recognized ratably over the
vesting period which ended on October 31, 1992.
NOTE 8--COMMITMENTS AND CONTINGENCIES
Operating Leases
The Company leases certain buildings and equipment under operating leases.
Future minimum rental payments required under operating leases that have
initial or remaining noncancellable lease terms in excess of one year as of
June 30, 1995, are as follows:
<TABLE>
<CAPTION>
(AMOUNTS IN
YEARS ENDING JUNE 30: THOUSANDS)
--------------------- -----------
<S> <C>
1996............................................................. $ 31,965
1997............................................................. 27,650
1998............................................................. 17,666
1999............................................................. 12,988
2000............................................................. 9,146
Later years...................................................... 25,217
--------
Total minimum payments required................................ $124,632
========
</TABLE>
Total rental expense on operating leases aggregated $34,956,000, $28,663,000,
and $23,579,000 for fiscal years 1995, 1994, and 1993, respectively.
OPM Audit
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 ("FEHBP") for federal employees, annuitants,
and their dependents. OPM is the Company's largest commercial customer. These
contracts with OPM and applicable government regulations establish premium
rating requirements
35
<PAGE>
FHP INTERNATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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
the additional information and comments provided by the Company, the OPM
auditors will issue a final report; the OPM Audit Resolution Division will 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 position or results of
operations or cash flows of the Company. In addition, the Company's management
currently does not believe that the audit will have a material effect on future
relations with OPM.
Litigation
During the ordinary course of business, the Company and its subsidiaries have
become a party to pending and threatened legal actions and proceedings, a
significant number of which involve alleged claims of medical malpractice.
Management of the Company is of the opinion, taking into account its insurance
coverage and reserves that have been established, that the outcome of the
currently known legal actions and proceedings will not, singly or in the
aggregate, have a material effect on the consolidated financial position or
results of operations or cash flows of the Company and its subsidiaries.
NOTE 9--NOTES RECEIVABLE FROM EMPLOYEE STOCK OWNERSHIP PLAN
During fiscal year 1993, the ESOP repaid to the Company amounts previously
loaned of $4,150,000. The loans were made to enable the ESOP to purchase the
Company's Common Stock on a periodic basis and were repaid from periodic
contributions to the ESOP received from the Company (Note 7).
The Company currently makes quarterly contributions (pursuant to the annual
contribution described in Note 7) to the ESOP to fund quarterly purchases by
the ESOP on the open market. For fiscal years 1995, 1994, and 1993, the Company
contributed $9,315,000, $9,140,000, and $6,870,000, respectively for this
purpose.
NOTE 10--STOCKHOLDERS' EQUITY
In June, 1994, the Company amended its Certificate of Incorporation to
increase the authorized number of shares of Common Stock from 70,000,000 to
100,000,000 and the authorized number of shares of Preferred Stock from
5,000,000 to 40,000,000. As the Company issues Preferred Stock, it is
designated as either Series A Cumulative Convertible Preferred Stock ("Series A
Preferred Stock") or Series B Adjustable Rate Cumulative Preferred Stock
("Series B Preferred Stock"). The Company issued 6,311,781 shares of Common
Stock, 21,031,733 shares of Series A Preferred Stock, and 32,850 shares of
Series B Preferred Stock as merger consideration in the acquisition of TakeCare
as of June 17, 1994 (Note 12). An additional 3,876 shares of Common Stock,
8,574 shares of Series A Preferred Stock, and 46,368 shares of Series B
Preferred Stock were issued during fiscal year 1995 to TakeCare shareholders
for shares unpresented at the acquisition date.
36
<PAGE>
FHP INTERNATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Holders of the Series A Preferred Stock are entitled to receive cumulative
cash dividends of 5.0% per annum. Dividends are payable quarterly in arrears
when and if declared by the Company's Board of Directors. Dividends declared
during fiscal year 1995 were $26,230,000. On or after the fourth anniversary of
the acquisition, the Company may, at its option, redeem all or part of the
outstanding shares of Series A Preferred Stock, at fixed redemption prices per
share plus an amount equal to any accrued and unpaid dividends. Each share of
Series A Preferred Stock may be convertible at the option of the holder into
the Company's Common Stock at any time commencing six months after the
acquisition date. The conversion price for the Series A Preferred Stock is $31
per share.
Holders of Series B Preferred Stock are entitled to receive cumulative cash
dividends of not less than 5.0% per annum or greater than 11.0% per annum. The
actual dividend rate is determined quarterly based upon prevailing market
interest rates. During fiscal year 1995, the dividend rate ranged from 6.245%
to 7.454%. Dividends are payable quarterly in arrears when and if declared by
the Company's Board of Directors. Dividends declared during fiscal year 1995
were $139,000. The Company may, at its option, redeem all or part of the
outstanding shares of Series B Preferred Stock at $25 per share plus an amount
equal to accrued and unpaid dividends.
In June, 1990, the Board of Directors of the Company declared a dividend of
one common share purchase right (a "Right") for each outstanding share of
common stock to the holders of record on June 29, 1990, and authorized and
directed the issuance of one Right with respect to each share of common stock
that shall become outstanding prior to the occurrence of certain terminating
events. Each Right entitles the registered holder to purchase from the Company
one-fourth of a share of common stock at a price which varies based on the
market price of a share of the Company's stock ($23.00 at June 30, 1995),
subject to adjustment (the "Purchase Price"). Upon the occurrence of certain
events associated with an unsolicited takeover attempt of the Company, the
Rights will become exercisable and will cease to automatically trade with the
common stock. Thereafter, upon the occurrence of certain further triggering
events, each Right will become exercisable, at an adjusted Purchase Price (the
"Adjusted Purchase Price") equal to four times the Purchase Price immediately
prior to such adjustment, for that number of shares of common stock having a
market value of two times such Adjusted Purchase Price. The Rights have certain
anti-takeover effects that will cause substantial dilution to a person or group
that attempts to acquire the Company in a manner which causes the Rights to
become exercisable. The terms of the Rights may be amended by the Board of
Directors of the Company without the consent of the holders of the Rights. At
June 30, 1995, there was one Right outstanding for each share of common stock
outstanding and a sufficient number of authorized but unissued shares of common
stock available for issuance upon (i) the exercise of the Rights, (ii) the
issuance of common stock (and associated Rights) in connection with the future
exercise of outstanding stock options, and (iii) the issuance of common stock
(and associated Rights) in connection with the future conversion of the Series
A Preferred Stock.
NOTE 11--EARNINGS PER SHARE ATTRIBUTABLE TO COMMON STOCK
Earnings per share for fiscal years 1995, 1994, and 1993, were computed by
dividing net income attributable to Common Stock by 41,057,000, 34,051,000, and
33,270,000 shares, respectively, which represent the weighted average number of
outstanding common shares and common share equivalents during the respective
periods. Common share equivalents include the effect of dilutive stock options
calculated using the treasury stock method.
Primary and fully diluted earnings per share are the same for each year
presented.
37
<PAGE>
FHP INTERNATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 12--ACQUISITIONS
The Company acquired all of the outstanding common stock of TakeCare on June
17, 1994, in a transaction treated as a purchase for accounting purposes. The
consolidated financial statements include the operations of TakeCare beginning
June 17, 1994. The purchase price was approximately $1,054.4 million, net of
acquisition costs.
The following table summarizes the unaudited pro forma consolidated results
of operations of the Company as though the acquisition of TakeCare had occurred
on July 1, 1992. The unaudited pro forma consolidated results of operations
shown below do not necessarily represent what the consolidated results of
operations of the Company would have been if the acquisition had actually
occurred on July 1, 1992, nor do they represent a forecast of the consolidated
results of operations of the Company for any future period.
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
-----------------------
1994 1993
----------- -----------
(AMOUNTS IN THOUSANDS,
EXCEPT PER SHARE DATA)
<S> <C> <C>
Revenue................................................ $ 3,596,000 $ 3,050,000
Income before income taxes............................. 139,848 101,652
Net income attributable to common stock................ 44,986 25,507
Earnings per share attributable to common stock........ $1.12 $0.64
</TABLE>
In January, 1995, the Company acquired a third party administrator located in
Nevada for approximately $1.9 million. The acquisition, which has been
accounted for as a purchase, was consummated through the issuance of
approximately 73,000 shares of the Company's Common Stock. As a result of the
purchase, the Company recorded goodwill of approximately $1.4 million.
In October, 1993, the Company acquired an approximately 4,700 member HMO
located in Denver, Colorado, for approximately $3.5 million. The Company also
obtained a covenant not-to-compete for which it paid $0.5 million (Note 1). The
acquisition, which has been accounted for as a purchase, was financed through
cash generated from operations of the Company. During fiscal year 1995, under a
contract clause tied to retained membership on the first anniversary of the
transaction, the Company made an additional payment of approximately $0.8
million. As a result of the purchase, the Company recorded goodwill of
approximately $1.8 million.
In March, 1993, the Company acquired an insurance carrier and its
subsidiaries for approximately $21.7 million, net of cash acquired. Through its
subsidiaries, it offers workers' compensation insurance in California and
Arizona and provides various claims administration services. 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 goodwill of approximately $2.5 million. The Company also obtained a
covenant not-to-compete for which it paid $4.0 million (Note 1).
NOTE 13--RESTRUCTURING CHARGE
In June, 1995, the Company's Board of Directors approved a restructuring plan
involving the discontinuance of services and programs that do not meet the
Company's strategic and economic return objectives, a reduction in workforce,
and the creation of a physician practice management company ("PPMC"), which
will be operated as a subsidiary of the Company. The PPMC will encompass all of
FHP's Company-operated medical facilities in California, Utah, Arizona, New
Mexico, and Nevada. In addition, the Board of Directors decided to sell the
Company's two acute care hospitals and other nonproductive real
38
<PAGE>
FHP INTERNATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
estate. The formation of the PPMC, anticipated for January 1, 1996, will entail
added operating costs during the first six months of fiscal 1996. These costs
include duplicate employees during the transition period, separation expenses
for displaced employees, and the cost of developing new computer systems to
handle fee for service business and other HMO and preferred provider
organization customers. The restructuring plan was announced to the affected
employees prior to the Company's fiscal year end.
Accordingly, the Company recorded a pretax restructuring charge of $75.1
million ($46.6 million, net of tax) in the accompanying Consolidated Statements
of Income for the fiscal year ended June 30, 1995. Included in this charge are
the expected costs of employee separations ($6.8 million), asset write-downs to
estimated net realizable values ($58.9 million), and certain other costs
associated with the Company's restructuring of its operations ($9.4 million).
Assets identified as those to be sold as part of the restructuring have been
reclassified as assets held for sale in the accompanying Consolidated Balance
Sheets as of June 30, 1995, and are expected to be disposed of by the end of
fiscal year 1996 (Notes 1 and 2).
The restructuring charge is based on the Company's estimate and will continue
to be refined until the restructuring plan is complete.
NOTE 14--INFORMATION REGARDING THE COMPANY'S OPERATIONS IN DIFFERENT SEGMENTS
The Company offers a full range of products to achieve its strategic goal of
becoming a sole source provider of health care services. These products can be
classified into two principal segments of business: HMO and insurance services.
The HMO offers a full range of related products to consumers and employers in
the direct delivery of managed health care services, either through contracted
health care providers or through Company-operated medical centers.
Complementing the operations of the HMO are the products offered by the
insurance segment. These products include traditional indemnity health and life
insurance, workers' compensation, and third party administration of self-
insured employer programs. Often, the products offered by the HMO and insurance
segments are sold to the same account; that is, an employer is able to offer a
"dual choice" to employees of enrollment in either the HMO or the indemnity
product provided through group health insurance coverage.
39
<PAGE>
FHP INTERNATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Information regarding the two segments is summarized below:
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
----------------------------------
1995 1994 1993
---------- ---------- ----------
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C>
Revenue:
HMO....................................... $3,762,993 $2,363,832 $1,926,832
Insurance................................. 146,387 109,126 79,022
---------- ---------- ----------
Total revenue............................... $3,909,380 $2,472,958 $2,005,854
========== ========== ==========
Pretax income (loss):
HMO....................................... $ 256,333 $ 160,202 $ 134,162
Insurance................................. (8,416) 9,913 448
Corporate................................. (173,838) (87,095) (79,545)
Interest income, net...................... 6,107 13,800 14,708
---------- ---------- ----------
Total pretax income......................... $ 80,186 $ 96,820 $ 69,773
========== ========== ==========
Assets:
HMO....................................... $1,816,320 $1,896,081 $ 341,895
Insurance................................. 181,909 167,092 143,075
Corporate................................. 317,587 106,096 260,714
---------- ---------- ----------
Total assets................................ $2,315,816 $2,169,269 $ 745,684
========== ========== ==========
Depreciation and amortization:
HMO....................................... $ 67,276 $ 35,284 $ 23,526
Insurance................................. 1,348 1,399 270
Corporate................................. 11,441 8,588 6,116
---------- ---------- ----------
Total depreciation and amortization......... $ 80,065 $ 45,271 $ 29,912
========== ========== ==========
Capital expenditures:
HMO....................................... $ 35,376 $ 72,509 $ 75,509
Insurance................................. 1,684 3,287 1,399
Corporate................................. 35,036 10,256 10,495
---------- ---------- ----------
Total capital expenditures.................. $ 72,096 $ 86,052 $ 87,403
========== ========== ==========
</TABLE>
40
<PAGE>
FHP INTERNATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 15--UNAUDITED QUARTERLY INFORMATION
<TABLE>
<CAPTION>
QUARTERS ENDED
--------------------------------------------------
SEPTEMBER 30 DECEMBER 31 MARCH 31 JUNE 30
------------- ------------ ------------ ----------
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Year ended June 30, 1995:
Revenue.................. $ 954,340 $ 954,407 $ 1,001,062 $ 999,571
Operating income (loss).. 37,236 38,660 50,960 (52,777)
Income (loss) before
income taxes............ 38,371 39,494 52,613 (50,292)
Net income (loss)(a)..... 20,720 21,327 28,411 (33,166)
Primary earnings (loss)
per share attributable
to
Common Stock............ $0.37 $0.36 $0.53 $(0.97)
Fully diluted earnings
per share(b)............ $0.36 $0.49
Year ended June 30, 1994:
Revenue.................. $ 576,379 $ 591,107 $ 622,461 $ 683,011
Operating income......... 13,484 13,684 24,356 31,496
Income before income
taxes................... 17,608 16,891 27,698 34,623
Net income(c)............ 11,246 10,253 16,813 20,998
Earnings per share
attributable to Common
Stock................... $0.33 $0.31 $0.50 $0.57
</TABLE>
- --------
(a) The net loss for the fourth quarter ended June 30, 1995, included an
unfavorable net adjustment due to a restructuring charge of approximately
$46.6 million, net of tax, relating primarily to the costs of employee
separations, asset write-downs to estimated net realizable values, and
certain other costs associated with the restructuring of the Company's
operations (Note 13).
(b) Fully diluted earnings per share is not presented if it is anti-dilutive.
(c) Net income for the fourth quarter ended June 30, 1994, included TakeCare's
operations from the date of acquisition (June 17, 1994) and other favorable
net adjustments of approximately $838,000, resulting primarily from changes
of estimates with respect to certain fiscal year 1994 compensation and
benefit related accruals and reserves for professional liability claims.
Management's estimates were based on the most recent information available,
including events and changes in circumstances which occurred during the
period.
41
<PAGE>
INDEPENDENT AUDITORS' REPORT
FHP International Corporation:
We have audited the accompanying consolidated balance sheets of FHP
International Corporation and its subsidiaries as of June 30, 1995 and 1994,
and the related consolidated statements of income, stockholders' equity, and
cash flows for each of the three years in the period ended June 30, 1995. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of FHP International Corporation and
its subsidiaries at June 30, 1995 and 1994, and the results of their operations
and their cash flows for each of the three years in the period ended June 30,
1995, in conformity with generally accepted accounting principles.
Deloitte & Touche LLP
Costa Mesa, California
September 7, 1995
42
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION PAGE
------- ------------------------------------------------------- ------------
<C> <S> <C>
*3.1 Restated Certificate of Incorporation of FHP *
International Corporation (Exhibit 3.1 to Form S-4 No.
33-53431).
*3.2 Amendment to Restated Certificate of Incorporation of *
FHP International Corporation (Exhibit 3.2 to Form S-4
No. 33-53431).
*3.3 Certificate of Designation for Series A Cumulative *
Convertible Preferred Stock of FHP International
Corporation. (Exhibit 3.3 to Form 8-K, filed with the
Commission on July 1, 1994.)
*3.4 Certificate of Designation for Series B Adjustable Rate *
Cumulative Preferred Stock of FHP International
Corporation. (Exhibit 3.4 to Form 8-K, filed with the
Commission on July 1, 1994.)
*3.5 Bylaws of FHP International Corporation as amended to *
date. (Exhibit 3.5 to Form 10-K for the Fiscal Year
Ended June 30, 1994).
*4.1 Specimen Common Stock Certificate (Exhibit 4.1 to Form *
S-3 Registration Statement No. 33-39984).
*4.2 Indenture dated as of September 22, 1993 between *
Registrant and The Chase Manhattan Bank, N.A. in regard
to $100,000,000 7% Senior Notes due 2003. (Exhibit 4.2
to Form 10-K for the Fiscal Year Ended June 30, 1993.)
*4.3 Credit Agreement dated as of March 24, 1994, among the *
Registrant, the Lenders named therein and Chemical Bank
as Administrative Agent (Exhibit 10.1 to Form 8-A filed
with the Commission on May 9, 1994).
4.4 First Amendment dated as of March 31, 1995, to Credit
Agreement dated as of March 24, 1994.
4.5 Second Amendment dated as of August 29, 1995, to Credit
Agreement dated as of March 24, 1994.
4.6 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 the total assets of Registrant.
*10.1 Health Insurance Benefits for the Aged and Disabled *
Contracts dated January 1, 1992 between FHP, Inc. and
the Secretary of Health and Human Services (Exhibit
10.2 to Form 10-K for the Fiscal Year Ended June 30,
1992).
*10.2 Group Health Benefits Contract dated January 1, 1986 *
between FHP, Inc. and the Federal Office of Personnel
Management (Exhibit 10.3 to Form S-1 Registration
Statement No. 33-5596).
*10.3 Lease between Plaza Land Corporation and FHP, Inc. *
dated December 29, 1977, as amended, concerning the
lease of FHP's Plaza Medical Center in Long Beach,
California (Exhibit 10.4 to Form S-1 Registration
Statement No. 33-5596).
*10.4 Fourth Addendum to Lease between Plaza Land Corporation *
and FHP, Inc. dated December 4, 1987 concerning the
lease of FHP's Plaza Medical Center in Long Beach,
California (Exhibit 10.5 to Form 10-K for the Fiscal
Year Ended June 30, 1988).
</TABLE>
43
<PAGE>
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION PAGE
------- ------------------------------------------------------- ------------
<C> <S> <C>
*10.5 Medical Building Lease between Downtowners Associates, *
Ltd. and FHP, Inc. dated October 7, 1983, as amended,
concerning the lease of FHP's Hippodrome Senior Center
in Long Beach, California (Exhibit 10.5 to Form S-1
Registration Statement No. 33-5596).
*10.6 Amendment to Lease between Downtowners Associates, *
Limited and FHP, Inc. dated July 1, 1994 concerning the
lease of FHP's Hippodrome Senior Center in Long Beach,
California. (Exhibit 10.6 to Form 10-K for the Fiscal
Year Ended June 30, 1994).
*10.7 Employment Agreement dated December 12, 1984 between *
FHP, Inc. and Robert Gumbiner, M.D. (Exhibit 10.8 to
Form S-1 Registration Statement No. 33-5596).
*10.8 Amendment to Employment Agreement dated June 15, 1988 *
between FHP, Inc. and Robert Gumbiner, M.D. (Exhibit
10.9 to Form 10-K Annual Report for the Fiscal Year
Ended June 30, 1988).
*10.9 Supplement to Employment Agreement dated June 20, 1990 *
between FHP, Inc. and Robert Gumbiner, M.D. (Exhibit
10.10 to Form 10-K Annual Report for the Fiscal Year
Ended June 30, 1990).
*10.10 Amendment to Employment Agreement dated February 1, *
1992 between FHP, Inc. and Robert Gumbiner, M.D.
(Exhibit 10.11 to Form 10-K Annual Report for the
Fiscal Year Ended June 30, 1992).
*10.11 Employment Contract dated as of November 1, 1993, *
between the Registrant, FHP, Inc. and Mark B. Hacken
(Exhibit 10.1 to Form 10-Q for the Quarter Ended
December 31, 1993).
*10.12 Form of Employment Agreement dated as of March 12, 1994 *
by and between the Registrant and certain key
executives (Exhibit 10.2 to Form 10-Q for the Quarter
Ended March 31, 1994).
*10.13 FHP International Corporation Executive Incentive Plan, *
as amended November 19, 1992. (Exhibit 10.11 to Form
10-K for the Fiscal Year Ended June 30, 1993.)
*10.14 FHP Money Purchase Pension Plan, as amended and *
restated June 7, 1993. (Exhibit 10.12 to Form 10-K for
the Fiscal Year Ended June 30, 1993.)
*10.15 FHP International Corporation Employee Stock Ownership *
Plan, as amended and restated June 7, 1993. (Exhibit
10.13 to Form 10-K for the Fiscal Year Ended June 30,
1993.)
*10.16 FHP, Inc. Deferred Compensation Plan for Executives and *
Physicians, dated June 28, 1991. (Exhibit 10.14 to Form
10-K for the Fiscal Year Ended June 30, 1993.)
*10.17 FHP International Corporation/TakeCare, Inc. Stock *
Option Plan (successor to the TakeCare, Inc. Amended
and Restated 1990 Stock Option Plan and the TakeCare,
Inc. 1993 Stock Option Plan) (Exhibit 4 to Form S-8
Registration Statement No. 33-54313).
*10.18 TakeCare Savings and Retirement Plan and Trust *
Agreement (1992 Restatement) (Exhibit 4.1 to Form S-8
Registration Statement No. 33-55545).
*10.19 Amendment No. 1 to the TakeCare Savings and Retirement *
Plan and Trust Agreement (1992 Restatement) (Exhibit
4.2 to Form S-8 Registration No. 33-55545).
*10.20 Amendment No. 2 to the TakeCare Savings and Retirement *
Plan and Trust Agreement (Exhibit 4.3 to Form S-8
Registration Statement No. 33-55545).
</TABLE>
44
<PAGE>
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION PAGE
------- ------------------------------------------------------- ------------
<C> <S> <C>
*10.21 FHP International Corporation Employee Stock Purchase *
Plan (Exhibit 4.1 to Form S-8 Registration No. 33-
56651).
*10.22 Amended and Restated Rights Agreement evidencing rights *
to purchase Common Stock of Registrant (Exhibit 1 to
Form 8-A/A filed with the Commission on April 5, 1994).
10.23 Agreement of Settlement and General Release dated June
15, 1995, between FHP International Corporation, FHP,
Inc. and Mark B. Hacken.
10.24 Settlement Agreement and General Release dated July 26,
1995, between Ryan M. Trimble and FHP International
Corporation.
11.1 Computation of earnings per common share for the years
ended June 30, 1995, 1994 and 1993.
21.0 Subsidiaries of the Registrant.
23.1 Independent Auditors' Consent.
27.0 Financial Data Schedule.
</TABLE>
- --------
* Document has previously been filed with the Commission and is incorporated
by reference and made a part hereof.
The Registrant will furnish any of the foregoing exhibits upon the payment of
a reasonable fee based upon the Registrant's expenses in furnishing such
exhibit(s). Written inquiries should be addressed to FHP International
Corporation, Investor Relations Department, 9900 Talbert Avenue, Fountain
Valley, California 92708.
45
<PAGE>
EXHIBIT 4.4
FIRST AMENDMENT
FIRST AMENDMENT, dated as of March 31, 1995 (this "Amendment"), to the
---------
CREDIT AGREEMENT, dated as of March 24, 1994 (the "Credit Agreement"), among (i)
----------------
FHP INTERNATIONAL CORPORATION, a Delaware corporation (the "Borrower"), (ii) the
--------
Lenders parties thereto (individually, a "Lender", and collectively, the
------
"Lenders"), (iii) CHEMICAL BANK, a New York banking corporation, as agent for
- --------
the Lenders (in such capacity, the "Administrative Agent") and as CAF
--------------------
Loan Agent (in such capacity, the "CAF Loan Agent"), and (iv) CHEMICAL
--------------
SECURITIES INC., as arranger (in such capacity, the "Arranger").
--------
W I T N E S S E T H :
- - - - - - - - - -
WHEREAS, the Borrower has requested that the Lenders agree to amend
the Credit Agreement to, among other things, increase the aggregate Revolving
Credit Commitments thereunder to $200,000,000, decrease the aggregate Term Loan
Commitments thereunder to $150,000,000, extend the Revolving Credit Termination
Date, extend and amend the amortization schedule for the Term Loans (as each of
such terms is defined in the Credit Agreement) and change certain pricing
provisions thereof as set forth in this Amendment;
NOW THEREFORE, in consideration of the premises, the parties hereto
hereby agree as follows:
1. Defined Terms. Unless otherwise defined herein, terms defined in
-------------
the Credit Agreement are used herein as defined therein.
2. Amendments to Credit Agreement. (a) Subsection 1.1 of the Credit
------------------------------
Agreement is hereby amended by (i) deleting therefrom the definition of
"Applicable Margin" in its entirety and (ii) inserting the following new
definitions in the appropriate alphabetical order:
"'Applicable Facility Fee Rate': as defined in subsection 2.4(a)."
----------------------------
"'Applicable Margin': for any day (a) for each ABR Loan, 0% and (b)
-----------------
for each Revolving Credit Loan and Term Loan that is a Eurodollar Loan,
during each fiscal quarter of the Borrower, (i) prior to the First
Amendment Effective Date, the rate per annum determined in accordance with
the Credit Agreement as in effect prior to the First Amendment Effective
Date and (ii) from and after the First Amendment Effective Date, the rate
per annum set forth below for Term Loans or Revolving Credit Loans, as the
case may be, opposite the Pricing Ratio Level determined as of the end of
the immediately preceding fiscal quarter, as shown (in the absence of
manifest error) on the Pricing Ratio Certificate delivered for such
immediately preceding fiscal quarter:
1
<PAGE>
<TABLE>
<CAPTION>
APPLICABLE MARGINS
-------------------
<S> <C> <C>
Pricing Ratio Level Term Loans Revolving Credit Loans
- ------------------- ---------- ----------------------
Level I .300 of 1% .200 of 1%
Level II .325 of 1% .200 of 1%
Level III .375 of 1% .250 of 1%
Level IV .450 of 1% .275 of 1%
</TABLE>
; provided, however, that (a) if any interest payment is made during the
-------- -------
period between the first day of a fiscal quarter and the date which is the
earlier of (x) the last day of such fiscal quarter and (y) five days after
the date of delivery of the Pricing Ratio Certificate for the immediately
preceding fiscal quarter, such interest payment shall be tentatively
calculated on the basis of the Applicable Margins in effect for such
immediately preceding fiscal quarter until the Applicable Margins are
adjusted upon delivery of such Pricing Ratio Certificate and (b) in the
event that no Pricing Ratio Certificate has been delivered for a fiscal
quarter prior to the last day of the next succeeding fiscal quarter, the
Applicable Margins shall thereafter be tentatively calculated as those
applicable to Pricing Ratio Level IV until delivery of such Pricing Ratio
Certificate. Changes in the Applicable Margins in respect of any Loans
resulting from the operation of either of clauses (a) or (b) above for any
fiscal quarter shall be given effect through adjustments to the next
interest payments to be made in respect of Term Loans and Revolving Credit
Loans so as to give effect to such Applicable Margins for all affected Term
Loans and Revolving Credit Loans retroactively to the beginning of such
fiscal quarter.";
"'First Amendment Effective Date': the Effective Date, as defined in
------------------------------
Section 6 of the First Amendment, dated as of March 31, 1995, to this
Agreement.";
"'Pricing Ratio Certificate': a certificate, substantially in the
-------------------------
form of Exhibit K, delivered pursuant to subsection 5.2(e)."; and
"'Pricing Ratio Level': for purposes of the Pricing Ratio Certificate
-------------------
delivered following the end of a fiscal quarter of the Borrower, the ratio
of (i) Consolidated Total Debt as at the end of such fiscal quarter to (ii)
Consolidated Capital Funds as at the end of such fiscal quarter, as set
forth below:
<TABLE>
<CAPTION>
Level Pricing Ratio
----- -------------
<S> <C>
Level I < 10%
-
Level II > 10% < 20%
-
Level III > 20% < 30%
-
Level IV > 30%."
</TABLE>
(b) Subsection 2.4(a) of the Credit Agreement is hereby amended to read
in its entirety as follows:
2
<PAGE>
"(a) The Borrower agrees to pay to the Administrative Agent for the
account of each Lender a facility fee for the period from and including the
first day of the Revolving Credit Commitment Period to but not including
the Revolving Credit Termination Date, computed at (i) prior to the First
Amendment Effective Date, the rate per annum determined in accordance with
the Credit Agreement as in effect prior to the First Amendment Effective
Date and (ii) from and after the First Amendment Effective Date, the rate
per annum (the "Applicable Facility Fee Rate") set forth below opposite the
----------------------------
Pricing Ratio Level determined as of the end of the immediately preceding
fiscal quarter, as shown (in the absence of manifest error) on the Pricing
Ratio Certificate delivered for such immediately preceding fiscal quarter,
on the average daily amount of the Revolving Credit Commitment of such
Lender during the period for which payment is made, payable quarterly in
arrears on the last day of each March, June, September and December and on
the Revolving Credit Termination Date or such earlier date on which the
Revolving Credit Commitments shall terminate as provided herein, commencing
on the first of such dates to occur after the First Amendment Effective
Date:
APPLICABLE FACILITY FEE RATE
----------------------------
<TABLE>
<CAPTION>
Pricing Ratio Level Applicable Facility Fee Rate
------------------- ----------------------------
<S> <C>
Level I .100 of 1%
Level II .125 of 1%
Level III .125 of 1%
Level IV .175 of 1%
</TABLE>
; provided, however, that in the event that no Pricing Ratio Certificate
-------- -------
has been delivered for a fiscal quarter prior to the last day of the next
succeeding fiscal quarter, the Applicable Facility Fee Rate for the
facility fee payment to be made on such date shall be tentatively
calculated as that applicable to Pricing Ratio Level IV until delivery of
such Pricing Ratio Certificate. Changes in the Applicable Facility Fee
Rate resulting from the operation of the foregoing proviso for any fiscal
quarter shall be given effect through adjustments to the next facility fee
payments to be made so as to give effect to such Applicable Facility Fee
Rate retroactively to the beginning of such fiscal quarter."
(c) Subsection 5.2 of the Credit Agreement is hereby amended by adding
a new paragraph (e) thereto as follows:
"(e) after the end of each fiscal quarter, a Pricing Ratio Certificate
signed by the chief financial officer or the treasurer of the Borrower,
showing the calculation of the Pricing Ratio Level on the last day of such
fiscal quarter."
(d) Subsection 5.2(c) of the Credit Agreement is hereby amended by
(i) deleting the word "five" and inserting in lieu thereof the word "ten" and
(ii) deleting the word "and" at the end thereof;
3
<PAGE>
(e) Subsection 5.2(d) of the Credit Agreement is hereby amended by
deleting the "." at the end of such subsection and inserting in lieu thereof the
following: "; and".
(f) The exhibits to the Credit Agreement are hereby amended by adding
a new Exhibit K thereto, which exhibit is attached hereto as Exhibit K.
(g) The definition of "Revolving Credit Termination Date" contained
in subsection 1.1 of the Credit Agreement is hereby amended by deleting the
words "Closing Date" contained therein and inserting in lieu thereof the words
"First Amendment Effective Date".
(h) The last sentence of subsection 2.1(c) of the Credit Agreement is
hereby amended by deleting clause (x) thereof in its entirety and inserting in
lieu thereof the following new clause (x):
"(x) be dated the First Amendment Effective Date,".
(i) Subsection 2.2(c) of the Credit Agreement is hereby amended by
deleting clauses (x) and (y) thereof in their entirety and inserting in lieu
thereof the following new clauses (x) and (y):
"(x) be dated the First Amendment Effective Date, (y) mature in 10
equal consecutive semi-annual installments, each of which shall be in an
amount equal to such Lender's Term Loan Commitment Percentage of
$15,000,000, commencing on the date which is six months after the First
Amendment Effective Date".
3. Amendment to Schedule I. Schedule I to the Credit Agreement is
-----------------------
hereby amended by deleting such Schedule I in its entirety and inserting in lieu
thereof Schedule I to this Amendment.
4. Confirmation; Adjustment of Commitments. (a) As of the
----------------------------------------
Effective Date (as hereinafter defined), each Lender hereby (i) confirms that it
appoints and authorizes the Administrative Agent to take such action as agent on
its behalf and to exercise such powers under the Credit Agreement and the other
Loan Documents as provided by the terms thereof and in accordance with Section 8
of the Credit Agreement and (ii) agrees that it will perform in accordance with
their terms all of the obligations which by the terms of the Credit Agreement
and the other Loan Documents are required to be performed by it as a Lender.
(b) As of the Effective Date, the Commitments of each of the Lenders
shall be as set forth on Schedule I hereto.
5. Loan Refunding. (a) Each Revolving Credit Loan and Term Loan
---------------
outstanding on the Effective Date prior to the effectiveness of this Amendment
shall be repaid on the Effective Date to the Administrative Agent for the
account of the Lender to which such Loan is owed, in each case in accordance
with the Credit Agreement as in effect prior to the effectiveness of this
Amendment. Notwithstanding any other provision of the Credit Agreement (but
subject in any event to satisfaction of the conditions set forth in subsection
4.2 of the Credit Agreement), on the Effective Date, immediately after the
repayment of Loans described in the foregoing sentence, each Lender shall (i)
make a Term Loan to the
4
<PAGE>
Borrower in an amount equal to its Term Loan Commitment as set forth in Schedule
I hereto and (ii) make a Revolving Credit Loan to the Borrower in the amount
requested by the Borrower in accordance with the Credit Agreement, as amended by
this Amendment.
(b) Each repayment pursuant to clause (a) above shall be accompanied
by payment in full to each Lender by the Borrower of (i) all accrued interest
owed to such Lender by the Borrower under the Credit Agreement and (ii) all
unpaid amounts, if any, required to be paid to such Lender by the Borrower
pursuant to the Credit Agreement (which, for purposes hereof, shall include
payment of all fees, including facility fees, accrued for the account of such
Lender pursuant to subsection 2.4 of the Credit Agreement before giving effect
to this Amendment).
(c) In order to permit the repayment and reborrowing described in
paragraph (a) above to be accomplished on the Effective Date, the Borrower shall
give timely notice to the Administrative Agent of the amounts and types of Loans
to be borrowed on the Effective Date in accordance with the provisions of the
Credit Agreement applicable to notices of borrowing.
(d) As of the Effective Date, each Lender that has no Commitments (as
reflected on Schedule I to this Amendment) shall cease to be a party to the
Credit Agreement; provided that such Lender shall continue to benefit from any
--------
provision of the Credit Agreement that is expressed to survive termination of
the Credit Agreement.
6. Effectiveness. The amendments provided for herein shall become
-------------
effective on March 31, 1995 (the "Effective Date"), provided that the following
-------------- --------
conditions precedent have been satisfied on or before such date:
(a) the Administrative Agent shall have received counterparts of this
Amendment, duly executed and delivered by all the parties listed on the
signature pages hereto;
(b) each Lender shall have received replacement Notes, in the forms
specified by the Credit Agreement, duly executed and delivered by the
Borrower;
(c) the Administrative Agent shall have received an opinion or
opinions of counsel to the Borrower, in form and substance satisfactory to
the Administrative Agent, covering such matters as the Administrative Agent
may reasonably request and, in any event, each such opinion shall expressly
state that it is being delivered pursuant to the request of the Borrower;
(d) the principal, interest, fees and other amounts required by
Section 5 hereof to be paid to the Administrative Agent, for the account of
each Lender, shall have been paid; and
(e) all corporate and other proceedings and all other documents and
legal matters in connection with the transactions contemplated by this
Amendment shall be satisfactory in form and substance to the Administrative
Agent and its counsel.
5
<PAGE>
7. Representations and Warranties. After giving effect to the
------------------------------
amendments contained herein, on the Effective Date, the Borrower hereby
confirms, reaffirms and restates in all material respects the representations
and warranties set forth in Section 3 of the Credit Agreement; provided that
--------
each reference in such Section 3 to "this Agreement" shall be deemed to be a
reference both to this Amendment and to the Credit Agreement as amended by this
Amendment; and provided, further, that to the extent such representations and
-----------------
warranties specifically relate to an earlier date, such representations and
warranties shall have been true and correct in all material respects on and as
of such earlier date.
8. Continuing Effect; No Other Amendments. Except as expressly
--------------------------------------
amended or waived hereby, all of the terms and provisions of the Credit
Agreement are and shall remain in full force and effect. The amendments
contained herein shall not constitute an amendment or waiver of any other
provision of the Credit Agreement or for any purpose except as expressly set
forth herein.
9. Counterparts. This Amendment may be executed by one or more of
------------
the parties to this Amendment on any number of separate counterparts, and all of
said counterparts taken together shall be deemed to constitute one and the same
instrument. This Amendment may be delivered by facsimile transmission of the
relevant signature pages hereof.
10. GOVERNING LAW. THIS AMENDMENT SHALL BE GOVERNED BY, AND
-------------
CONSTRUED AND INTERPRETED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK.
6
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to
be executed and delivered by their respective duly authorized officers as of the
date first above written.
FHP INTERNATIONAL CORPORATION
By:/s/ Kenneth S. Ord
----------------------------------
Title: Chief Financial Officer
CHEMICAL BANK,
as Administrative Agent, as CAF Loan Agent and
as a Lender
By:/s/ Peter C. Eckstein
-----------------------------------
Title: Vice President
THE TOKAI BANK, LTD., LOS ANGELES
AGENCY
By:/s/ Masahiko Saito
-----------------------------------
Title: Assistant General Manager
THE SUMITOMO BANK, LIMITED, LOS
ANGELES BRANCH
By:/s/ Hiroshi Amano
-----------------------------------
Title: General Manager
THE SANWA BANK LIMITED, ACTING
THROUGH THE LOS ANGELES BRANCH
By:/s/ Mike Abdelaaty
-----------------------------------
Title: Vice President and Manager
7
<PAGE>
THE INDUSTRIAL BANK OF JAPAN, LIMITED,
LOS ANGELES AGENCY
By:/s/ Toshinari Iyoda
-----------------------------------
Title: Sr. Vice President and Sr. Manager
BANK OF HAWAII
By:/s/ Marcy E. Fleming
----------------------------------
Title: Vice President
CITICORP USA, INC.
By:/s/ Barbara A. Cohen
-----------------------------------
Title: Vice President
THE BANK OF NEW YORK
By:/s/ Rebecca Kyman Levine
-----------------------------------
Title: Assistant Vice President
BANK OF AMERICA NATIONAL TRUST AND
SAVINGS ASSOCIATION
By:/s/ Wyatt R. Ritchie
-----------------------------------
Title: Vice President
FIRST INTERSTATE BANK OF CALIFORNIA
(FICAL)
By:/s/ William J. Baird Judy A. Maahs
-----------------------------------------
Title: Vice President Asst. Vice President
8
<PAGE>
FIRST UNION NATIONAL BANK OF NORTH
CAROLINA
By:/s/ Tess O. Whelpley
-----------------------------------
Title: Vice President
PNC BANK, NATIONAL ASSOCIATION
By:/s/ Anthony Trunzo
-----------------------------------
Title: Vice President
THE LONG-TERM CREDIT BANK OF
JAPAN, LTD.
By:/s/ Yutaka Kamisawa
-----------------------------------
Title: Deputy General Manager
THE SUMITOMO TRUST & BANKING
CO., LTD., NEW YORK BRANCH
By:/s/ Suraj P. Bhatia
-----------------------------------
Title: Senior Vice President and Manager
BANKERS TRUST COMPANY
By:/s/ Robert R. Telesca
-----------------------------------
Title: Assistant Vice President
NATIONSBANK OF TEXAS, N.A.
By:/s/ Brad W. DeSpain
-----------------------------------
Title: Vice President
9
<PAGE>
KREDIETBANK N.V.
By:/s/ Dianne M. Grimmig
-----------------------------------
Title: Vice President
By:/s/ Robert Snauffer
-----------------------------------
Title: Vice President
THE DAI-ICHI KANGYO BANK, LTD.
LOS ANGELES AGENCY
By:/s/ Tomohiro Nozaki
-----------------------------------
Title: Senior Vice President and Joint
General Manager
10
<PAGE>
SCHEDULE I
----------
LENDERS AND COMMITMENTS
CHEMICAL BANK
Revolving Credit Commitment: $15,428,571.43
Term Loan Commitment: $11,571,428.57
Revolving Credit Commitment Percentage: 7.7142857%
Term Loan Commitment Percentage: 7.7142857%
Address for Notices:
270 Park Avenue
New York, New York 10017
Attention: Peter Eckstein
Telephone: (212) 270-3090
Telecopy: (212) 972-0009
FIRST INTERSTATE BANK OF CALIFORNIA (FICAL)
Revolving Credit Commitment: $13,714,285.71
Term Loan Commitment: $10,285,714.29
Revolving Credit Commitment Percentage: 6.8571429%
Term Loan Commitment Percentage: 6.8571429%
Address for Notices:
U.S. Banking Division
707 Wilshire Boulevard, W16-13
Los Angeles, California 90017
Attention: William Baird
Telephone: (213) 614-5540
Telecopy: (213) 614-2569
11
<PAGE>
THE LONG-TERM CREDIT BANK OF JAPAN, LTD.
Revolving Credit Commitment: $12,571,428.57
Term Loan Commitment: $9,428,571.43
Revolving Credit Commitment Percentage: 6.2857143%
Term Loan Commitment Percentage: 6.2857143%
Address for Notices:
444 South Flower Street, Suite 3700
Los Angeles, California 90071-2938
Attention: Takaomi Tomioka
Telephone: (213) 689-6355
Telecopy: (213) 622-6908
BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION
Revolving Credit Commitment: $12,571,428.57
Term Loan Commitment: $9,428,571.43
Revolving Credit Commitment Percentage: 6.2857143%
Term Loan Commitment Percentage: 6.2857143%
Address for Notices:
555 South Flower Street
Los Angeles, California 90071
Attention: James Emslie
Telephone: (213) 228-2669
Telecopy: (213) 228-2756
12
<PAGE>
THE BANK OF NEW YORK
Revolving Credit Commitment: $12,571,428.57
Term Loan Commitment: $9,428,571.43
Revolving Credit Commitment Percentage: 6.2857143%
Term Loan Commitment Percentage: 6.2857143%
Address for Notices:
10990 Wilshire Blvd., Suite 1700
Los Angeles, California 90024
Attention: Rebecca Kyman-Levine
Telephone: (310) 996-8659
Telecopy: (310) 996-8667
CITICORP USA, INC.
Revolving Credit Commitment: $12,571,428.57
Term Loan Commitment: $9,428,571.43
Revolving Credit Commitment Percentage: 6.2857143%
Term Loan Commitment Percentage: 6.2857143%
Address for Notices:
2001 Ross Avenue, Suite 1400
Dallas, Texas 75201
Attention: Margaret Au Brown
Telephone: (214) 953-3839
Telecopy: (214) 953-3888
13
<PAGE>
FIRST UNION NATIONAL BANK OF NORTH CAROLINA
Revolving Credit Commitment: $12,571,428.57
Term Loan Commitment: $9,428,571.43
Revolving Credit Commitment Percentage: 6.2857143%
Term Loan Commitment Percentage: 6.2857143%
Address for Notices:
301 South College Street
Charlotte, North Carolina 28288
Attention: Greg Park
Telephone: (704) 374-7109
Telecopy: (704) 383-9144
THE SUMITOMO TRUST & BANKING CO., LTD., NEW YORK BRANCH
Revolving Credit Commitment: $12,571,428.57
Term Loan Commitment: $9,428,571.43
Revolving Credit Commitment Percentage: 6.2857143%
Term Loan Commitment Percentage: 6.2857143%
Address for Notices:
527 Madison Avenue
New York, New York 10022
Attention: Robin Schribner
Telephone: (212) 326-0781
Telecopy: (212) 418-4848
14
<PAGE>
BANKERS TRUST COMPANY
Revolving Credit Commitment: $12,571,428.57
Term Loan Commitment: $9,428,571.43
Revolving Credit Commitment Percentage: 6.2857143%
Term Loan Commitment Percentage: 6.2857143%
Address for Notices:
One Bankers Trust Plaza
Mail Stop 2141
New York, New York 10006
Attention: Michelle Zorn
Telephone: (212) 250-6514
Telecopy: (212) 250-6029
and copies to:
300 South Grand Avenue
Los Angeles, California 90071
Attention: Kate Cook
Telephone: (213) 620-8248
Telecopy: (213) 620-8484
NATIONSBANK OF TEXAS, N.A.
Revolving Credit Commitment: $12,571,428.57
Term Loan Commitment: $9,428,571.43
Revolving Credit Commitment Percentage: 6.2857143%
Term Loan Commitment Percentage: 6.2857143%
Address for Notices:
444 South Flower Street, Suite 1500
Los Angeles, California 90071
Attention: Pam Randell-Levy
Telephone: (213) 624-5807
Telecopy: (213) 624-5815
15
<PAGE>
PNC BANK, NATIONAL ASSOCIATION
Revolving Credit Commitment: $10,285,714.29
Term Loan Commitment: $7,714,285.71
Revolving Credit Commitment Percentage: 5.1428571%
Term Loan Commitment Percentage: 5.1428571%
Address for Notices:
55 South Lake Avenue, Suite 650
Pasadena, California 91101
Attention: Anthony Trunzo
Telephone: (818) 568-9423
Telecopy: (818) 568-0653
THE INDUSTRIAL BANK OF JAPAN, LIMITED, LOS ANGELES AGENCY
Revolving Credit Commitment: $10,285,714.29
Term Loan Commitment: $7,714,285.71
Revolving Credit Commitment Percentage: 5.1428571%
Term Loan Commitment Percentage: 5.1428571%
Address for Notices:
350 South Grand Avenue, Suite 1500
Los Angeles, California 90071
Attention: Lauri Roth-Schnadig
Telephone: (213) 893-6444
Telecopy: (213) 488-9840
16
<PAGE>
THE SUMITOMO BANK, LIMITED, LOS ANGELES BRANCH
Revolving Credit Commitment: $10,285,714.29
Term Loan Commitment: $7,714,285.71
Revolving Credit Commitment Percentage: 5.1428571%
Term Loan Commitment Percentage: 5.1428571%
Address for Notices:
777 South Figueroa Street, 26th Floor
Los Angeles, California 90017
Attention: Al Galluzzo
Telephone: (213) 955-0855
Telecopy: (213) 623-6832
THE DAI-ICHI KANGYO BANK, LTD. - LOS ANGELES AGENCY
Revolving Credit Commitment: $8,000,000.00
Term Loan Commitment: $6,000,000.00
Revolving Credit Commitment Percentage: 4.0000000%
Term Loan Commitment Percentage: 4.0000000%
Address for Notices:
555 W. Fifth Street, 5th floor
Los Angeles, California 90013
Attention: James Karnowski
Telephone: (213) 243-4761
Telecopy: (213) 624-5258
17
<PAGE>
KREDIETBANK N.V.
Revolving Credit Commitment: $8,000,000.00
Term Loan Commitment: $6,000,000.00
Revolving Credit Commitment Percentage: 4.0000000%
Term Loan Commitment Percentage: 4.0000000%
Address for Notices:
125 West 55th Street, 10th Floor
New York, New York 10019
Attention: Dianne Grimmig
Telephone: (212) 541-0700
Telecopy: (212) 956-5580
THE SANWA BANK LIMITED, ACTING THROUGH THE LOS ANGELES BRANCH
Revolving Credit Commitment: $8,000,000.00
Term Loan Commitment: $6,000,000.00
Revolving Credit Commitment Percentage: 4.0000000%
Term Loan Commitment Percentage: 4.0000000%
Address for Notices:
601 S. Figueroa Street, 5th floor
Los Angeles, California 90017
Attention: Mike Abdelaaty
Telephone: (213) 896-7421
Telecopy: (213) 896-7475
18
<PAGE>
THE TOKAI BANK, LTD., LOS ANGELES AGENCY
Revolving Credit Commitment: $8,000,000.00
Term Loan Commitment: $6,000,000.00
Revolving Credit Commitment Percentage: 4.0000000%
Term Loan Commitment Percentage: 4.0000000%
Address for Notices:
534 West Sixth Street
Los Angeles, California 90014
Attention: Toshihiro Horimoto
Telephone: (213) 892-2861
Telecopy: (213) 892-2818
BANK OF HAWAII
Revolving Credit Commitment: $7,428,571.43
Term Loan Commitment: $5,571,428.57
Revolving Credit Commitment Percentage: 3.7142857%
Term Loan Commitment Percentage: 3.7142857%
Address for Notices:
130 Merchant Street, 20th floor
Honolulu, Hawaii 96813
Attention: Marci Fleming
Telephone: (808) 537-8471
Telecopy: (808) 537-8301
19
<PAGE>
EXHIBIT K
---------
FORM OF
PRICING RATIO CERTIFICATE
Pursuant to subsection 5.2(e) of the Credit Agreement, dated as of
March 24, 1994, as amended, among FHP International Corporation, the several
banks and other financial institutions from time to time parties thereto as
Lenders, Chemical Bank, as Administrative Agent and as CAF Loan Agent, and
Chemical Securities Inc., as Arranger, the undersigned hereby certifies that the
Pricing Ratio Level in respect of the fiscal quarter most recently ended is
calculated as follows:
(Fiscal quarter ended __________________)
Consolidated Total Debt $ _______________
Consolidated Capital Funds _______________
Pricing = Consolidated Total Debt $ =
--------------------------- -------------- -----------
Ratio Consolidated Capital Funds $
IN WITNESS WHEREOF, the undersigned has executed this Certificate as
of the date set forth below.
Dated: ________________
FHP INTERNATIONAL CORPORATION
By: ___________________________________________
Title:
20
<PAGE>
EXHIBIT 4.5
SECOND AMENDMENT
SECOND AMENDMENT, dated as of August 29, 1995 (this "Amendment"), to the
---------
CREDIT AGREEMENT, dated as of March 24, 1994 (as amended, supplemented or
otherwise modified from time to time, the "Credit Agreement"), among (i) FHP
----------------
INTERNATIONAL CORPORATION, a Delaware corporation (the "Borrower") (ii) the
--------
Lenders parties thereto (individually, a "Lender", and collectively, the
------
"Lenders"), (iii) CHEMICAL BANK, a New York banking corporation, as agent for
- --------
the Lenders (in such capacity, the "Administrative Agent") and as CAF Loan Agent
--------------------
(in such capacity, the "CAF Loan Agent"), and (iv) CHEMICAL SECURITIES INC., as
--------------
arranger (in such capacity, the "Arranger").
--------
W I T N E S S E T H :
- - - - - - - - - -
WHEREAS, in connection with a restructuring of its business operations, the
Borrower has requested that the Lenders agree to amend certain definitions
contained in subsection 1.1 of the Credit Agreement as set forth in this
Amendment:
NOW THEREFORE, in consideration of the premises and for other good and
valuable consideration the receipt and sufficiency of which is hereby
acknowledged, the parties hereto hereby agree as follows:
1. Defined Terms. Unless otherwise defined herein, terms defined in the
-------------
Credit Agreement are used herein as defined therein.
2. Amendments to Credit Agreement. Subsection 1.1 of the Credit
------------------------------
Agreement is hereby amended by (a) deleting therefrom the definition of
"Consolidated Adjusted Net Income" in its entirety and (b) inserting therein the
following new definitions in the appropriate alphabetical order:
"'Consolidated Adjusted Net Income': for any period, the
--------------------------------
Consolidated Net Income of the Borrower and its consolidated Subsidiaries
for such period, plus the amount of income taxes, interest expense, rental
expense, depreciation, amortization and Non-Cash Charges deducted from
earnings of the Borrower and its consolidated Subsidiaries for such period
in determining such Consolidated Net Income."; and
"'Non-Cash Charge': for any period, the amount deducted from
---------------
earnings of the Borrower and its consolidated Subsidiaries in determining
Consolidated Net Income for such period in respect of non-cash charges;
provided that such non-cash charges are not expected to result in cash
--------
expenditures in any subsequent period."
1
<PAGE>
3. Effectiveness. This Amendment shall become effective as of the date
-------------
hereof upon receipt by the Administrative Agent of counterparts hereof duly
executed by the Required Lenders.
4. Representations and Warranties. The Borrower hereby represents and
------------------------------
warrants that after giving effect to this Amendment, the representations and
warranties made by the Borrower in the Credit Agreement are true and correct in
all material respects on and as of the date hereof; provided that to the extent
--------
such representations and warranties specifically relate to an earlier date, such
representations and warranties shall have been true and correct in all material
respects on and as of such earlier date.
5. Continuing Effect; No Other Amendments. Except as expressly amended
--------------------------------------
hereby, all of the terms and provisions of the Credit Agreement are and shall
remain in full force and effect. The amendment contained herein shall not
constitute an amendment or waiver of any other provision of the Credit Agreement
or for any purpose except as expressly set forth herein.
6. Counterparts. This Amendment may be executed by one or more of the
------------
parties to this Amendment on any number of separate counterparts, and all of
said counterparts taken together shall be deemed to constitute one and the same
instrument. This Amendment may be delivered by facsimile transmission of the
relevant signature pages hereof.
7. GOVERNING LAW. THIS AMENDMENT SHALL BE GOVERNED BY, AND CONSTRUED
-------------
AND INTERPRETED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK.
2
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be
executed and delivered by their respective duly authorized officers as of the
date first above written.
FHP INTERNATIONAL CORPORATION
By: /s/ Michael A. Montevideo
-------------------------
Title: Vice President and Treasurer
CHEMICAL BANK,
as Administrative Agent, as CAF Loan Agent and as
a Lender
By: /s/ William J. Caggiano
-----------------------
Title: Managing Director
THE TOKAI BANK, LTD., LOS ANGELES AGENCY
By: /s/ Masahiko Saito
------------------
Title: Asst. General Manager
THE SUMITOMO BANK, LIMITED, LOS ANGELES BRANCH
By: /s/ Toshihide Orita
-------------------
Title: Joint General Manager
THE SANWA BANK LIMITED, ACTING THROUGH THE LOS
ANGELES BRANCH
By: /s/ Karen Coleman
-----------------
Title: Assistant Vice President
3
<PAGE>
THE INDUSTRIAL BANK OF JAPAN, LIMITED, LOS ANGELES
AGENCY
By: /s/ Toshinari Iyoda
-------------------
Title: Senior Vice President
BANK OF HAWAII
By: /s/ John Landgraf
-----------------
Title: Officer
CITICORP USA, INC.
By: /s/ Arezoo Jafari
-----------------
Title: Assistant Vice President
THE BANK OF NEW YORK
By: /s/ Rebecca K. Levine
---------------------
Title: Assistant Vice President
BANK OF AMERICA NATIONAL TRUST AND SAVINGS
ASSOCIATION
By: /s/ Wyatt R. Ritchie
--------------------
Title: Vice President
FIRST INTERSTATE BANK OF CALIFORNIA (FICAL)
By: /s/ William J. Baird
--------------------
Title: Senior Vice President
4
<PAGE>
FIRST UNION NATIONAL BANK OF NORTH CAROLINA
By: /s/ Ann M. Dodd
---------------
Title: Senior Vice President
PNC BANK, NATIONAL ASSOCIATION
By: /s/ Jeffrey White
-----------------
Title: Commercial Banking Officer
THE LONG-TERM CREDIT BANK OF JAPAN, LTD.
By: /s/ Yutaka Kamisawa
-------------------
Title: Deputy General Manager
THE SUMITOMO TRUST & BANKING CO., LTD., NEW YORK
BRANCH
By: /s/ Surai P. Bhatia
-------------------
Title: Senior Vice President
BANKERS TRUST COMPANY
By: /s/ Robert R. Telesca
---------------------
Title: Assistant Vice President
NATIONSBANK OF TEXAS, N.A.
By: /s/ Brad W. DeSpain
-------------------
Title: Vice President
5
<PAGE>
KREDIETBANK N.V.
By: /s/ Robert Snauffer
-------------------
Title: Vice President
THE DAI-ICHI KANGYO BANK, LTD. LOS ANGELES AGENCY
By: /s/ Tomohiro Nozaki
-------------------
Title: Senior Vice President & Joint
General Manager
6
<PAGE>
EXHIBIT 10.23
AGREEMENT OF SETTLEMENT AND GENERAL RELEASE
-------------------------------------------
1. PARTIES: The parties to this Agreement of Settlement and General
-------
Release ("Agreement") are FHP International Corporation, a Delaware corporation
("Parent"), FHP, Inc., a Delaware corporation ("Company") and Mark B. Hacken
("Hacken"). Parent and Company are collectively referred to herein as the
"Companies".
2. RECITALS: This Agreement is made with reference to the following
--------
facts:
2.1 Hacken has previously been employed by Company and Parent in the
position of President and Chief Executive Officer pursuant to an Employment
Agreement dated as of November 1, 1993 between Parent, Company and Hacken
("Employment Agreement"), and has previously served as a director of the Company
and the Parent and as such was granted options pursuant to the Parent's
Executive Incentive Plan and various agreements between the Parent and Hacken
(collectively, with the Employment Agreement, the "Prior Agreements").
2.2 Hacken was terminated without cause as President and Chief
Executive Officer of the Company and the Parent effective March 29, 1995, and
thereafter has served only as a director of the Parent.
2.3 Certain disputes and controversies have arisen between the
parties hereto with respect to Hacken's employment by the Companies, the
termination of such employment, the timing of such termination and its impact
on his role as a director. The Companies desire to avoid potential litigation
in connection with such termination and the expenses associated therewith and
the parties desire to avoid the negative publicity that would surround such a
litigated dispute.
2.4 It is the intention of the parties hereto to settle and dispose
of, fully and completely, all issues between the parties, including claims,
demands, or causes of action arising out of Hacken's employment with the
Companies or the termination thereof, claims, if any, for age discrimination
under the California Fair Employment and Housing Act and claims for damages for
pain and suffering and emotional distress, on the terms set forth herein.
1
<PAGE>
3. PAYMENTS AND AGREEMENTS FOR BENEFIT OF HACKEN:
---------------------------------------------
3.1 Parent agrees to pay to Hacken in a lump sum the full amount of
his salary due and to become due under his employment contract through October
31, 1995, plus any accrued vacation and sick pay to which he is or would have
been entitled pursuant to the Parent's existing policies had his employment
continued through October 31, 1995, in each case to the extent not previously
paid and subject to all applicable withholdings required by law.
3.2 Parent shall pay to Hacken the amount of $350,000.00. The
parties agree that the payment by Parent is in satisfaction of claims for
damages for physical injury, emotional distress and harm to personal reputation,
and are being treated as nontaxable damages.
3.3 Hacken shall receive all amounts currently accrued under Parent's
deferred compensation plan for non-employee directors, subject to all applicable
withholdings required by law.
3.4 Parent shall pay to Hacken the amount of $100,000.00 in
consideration of the release by Hacken of all claims he has under the Prior
Agreements regarding the vesting of 9,200 non-employee director stock options
granted in 1989-1993 and the impact of his termination as an officer of Company
and Parent on his ability to serve effectively as a director of the Parent.
3.5 All amounts payable pursuant to Sections 3.1 and 3.3 shall be set
forth on Exhibit A hereto. The amounts payable pursuant to Sections 3.2 and 3.4
hereof shall not be subject to withholding by the Parent. All amounts payable
pursuant to Sections 3.1, 3.2 and 3.4 shall be paid on the business day
following approval of this Agreement by the Parent's Board of Directors. All
amounts payable pursuant to Section 3.3 shall be paid in accordance with
Parent's normal corporate procedures. The parties agree that all payments to
Hacken will be made by wire transfer to an account designated by Hacken in
writing.
3.6 Parent shall reimburse legal fees and expenses up to $20,000
incurred in connection with the negotiation and consummation of this Agreement.
Such amount shall be paid to Hacken within five (5) business days of presentment
of statements or invoices evidencing such fees and expenses.
3.7 The options granted pursuant to paragraph 2.3 of the Employment
Agreement with respect to two hundred thousand (200,000) shares of common stock
of the Parent shall be fully vested and exercisable on the Effective Date (as
hereinafter defined). Except as modified in the immediately preceding sentence,
the options shall be subject to, governed by and entitled to the benefits of the
Employment Agreement and Parent's Executive Incentive Plan and shall expire
October 19, 1999. Vested options granted pursuant to the Prior Agreements in
1989-1993 with respect to 18,800 shares of common stock of the parent shall
remain exercisable in accordance with their terms. Hacken has been delivered
copies of the
2
<PAGE>
option agreements governing these vested options. Such option agreements are
dated the following dates and cover the following number of vested options:
September 28, 1989 (17,600 shares); October 1, 1991 (800 shares); and October 1,
1992 (400 shares). The shares issuable under all such options shall be issued
pursuant to, and entitled to the benefits of, any Form S-8 Registration
Statement previously filed by Parent with respect to the Parent's Executive
Incentive Plan so long as such Registration Statement remains effective.
3.8 Hacken has been delivered an executed copy of the Indemnification
Agreement dated March 6, 1987, and a Supplemental Indemnification Agreement
dated January 19, 1990, by and between himself and Parent prior to execution of
this Agreement, which agreements shall remain in effect in accordance with their
terms.
4. CONSIDERATION AND RELEASE: In consideration of the releases
-------------------------
contained herein, and for other good and valuable consideration, the receipt of
which is acknowledged, each party promises and agrees as follows:
4.1 Except as to the rights created or confirmed by this Agreement,
each party releases each other party and each of their affiliates, officers,
directors, employees, representatives, attorneys, investigators, servants and
agents from all claims, cause or causes of action, demands, damages or costs,
heretofore or hereafter arising out of, connected with or incidental to the
dealings between the parties hereto prior to the date hereof, including, without
limitation on the generality of the foregoing, any and all claims and demands
and cause or causes of action described herein or arising under any state or
federal law or regulation, including the Age Discrimination in Employment Act,
the Fair Employment and Housing Act and other laws prohibiting discrimination on
the basis of race, sex, age, disability or national origin. For purposes of
this paragraph 4.1, "affiliate" shall mean any person or entity that directly,
or indirectly through one or more intermediaries, controls, is controlled by, or
is under common control with Company or Parent.
4.2 The waiver and release set forth in paragraph 4.1 apply to claims
of which a party may not currently have knowledge, and each party specifically
waives the benefit of the provisions of Section 1542 of the Civil Code of the
State of California, which reads as follows:
"A general release does not extend to claims which the creditor
does not know or suspect to exist in his favor at the time of
executing the release, which if known by him must have materially
affected his settlement with the debtor."
4.3 Hacken will resign from his directorship of the Parent effective
as of the Effective Date (as hereinafter defined). Hacken has tendered a letter
of resignation in the form of that attached hereto as Exhibit B which, by its
terms, will become effective on the Effective Date provided this Agreement is
not revoked or
3
<PAGE>
terminated prior to such date. For the purpose of Hacken's option agreement
dated September 28, 1989, Hacken's resignation as a director is deemed to be for
the convenience of the Board of Directors of Parent.
5. SETTLEMENT: This Agreement affects the settlement of claims which
----------
are denied and contested and nothing contained herein shall be construed as an
admission by the Companies of any liability of any kind to Hacken. The
Companies deny any liability in connection with any claim and intend merely to
avoid litigation and buy their peace.
6. CONFIDENTIALITY: This Agreement and the settlement terms and amount
---------------
embodied herein are confidential and are intended to remain confidential
following execution.
6.1 Each party and its attorneys of record represent and agree that
they will keep the terms and amount of this Agreement or settlement completely
confidential, and that they will not hereafter disclose any information
concerning this Agreement or settlement to anyone other than a party's immediate
family (if applicable), attorney(s) or accountant(s).
6.2 Should any party choose to disclose the terms or amount of this
Agreement or settlement to any of the foregoing persons, such party represents
and agrees that such party will advise them that they will also be under an
obligation to keep the terms and amount of this Agreement or settlement
completely confidential.
6.3 Nothing in this section shall prohibit (a) Company or Parent or
their legal counsel or accountants from disclosing the facts, terms or amount of
this Agreement or settlement when required to do so by reason of the Securities
Act of 1933, as amended, the Securities Exchange Act of 1934, as amended, or
regulations under either, or (b) any party or their legal counsel or accountants
from disclosing the facts, terms or amount of this Agreement or settlement when
required to do so by any court or administrative agency (including state or
federal taxing authorities) or tribunal of appropriate jurisdiction.
6.4 It is the Companies' current intention to not issue a press
release with respect to the resignation of Mr. Hacken as a director of Parent or
with respect to any other terms of this Agreement. In the event that either the
Parent or Company determines that it is necessary or advisable to do so, the
Companies shall consult with Hacken with respect to the content of such press
release.
7. FURTHER ASSURANCES, REPRESENTATIONS AND WARRANTIES: Each of the
--------------------------------------------------
parties to this Agreement represents, warrants, and agrees as follows:
7.1 Each party has received independent legal advice from its
attorneys, with respect to the advisability of making the settlement provided
for herein, with respect to the advisability of executing this Agreement, and
with respect to the meaning of California Civil Code Section 1542.
4
<PAGE>
7.2 No party (nor any officer, agent, employee, representative, or
attorney of or for any party) has made any statement or representation to any
other party regarding any fact relied upon in entering into this Agreement, and
each party does not rely upon any statement, representation or promise of any
other party (or of any officer, agent, employee, representative, or attorney for
the other party), in executing this Agreement, or in making the settlement
provided for herein, except as expressly stated in this Agreement.
7.3 Each party to this Agreement has made such investigation of the
facts pertaining to this settlement and this Agreement and of all the matters
pertaining thereto as it deems necessary.
7.4 Each party or responsible officer thereof has read this Agreement
and understands the contents hereof. Each officer executing this Agreement on
behalf of a corporation is empowered to do so and thereby binds his corporation.
7.5 Each party has not heretofore assigned, transferred, or granted,
or purported to assign, transfer, or grant, any of the claims, demands, and
causes of action disposed of by this Agreement.
7.6 Each term of this Agreement is contractual and not merely a
recital.
7.7 The parties will execute all such further and additional
documents as shall be reasonable, convenient, necessary or desirable to carry
out the provisions of this Agreement.
8. TIME TO CONSIDER AGREEMENT; EFFECTIVE DATE: Hacken has consulted
------------------------------------------
with his attorney before signing this Agreement. Hacken understands that he is
entitled to a period of 21 days in which to consider whether to enter into this
Agreement. If Hacken does enter into this Agreement, he may revoke the
Agreement within seven days after his execution of the Agreement. In the event
Hacken timely exercises his right of revocation with respect to this Agreement,
no part of this Agreement shall be effective. If not revoked pursuant to this
Section 8, and conditioned upon payment of the amounts due under sections 3.1,
3.2 and 3.4 hereof, this Agreement shall be fully effective on the first
business day following approval of this Agreement by the Parent's Board of
Directors (the "Effective Date"). Notwithstanding the foregoing, in the event
the Parent's Board of Directors does not approve this Agreement at its June 15,
1995 board meeting, this Agreement shall be deemed terminated and no part of
this Agreement shall be effective. The parties hereto intend and agree that
this Agreement complies with the waiver requirements of the Older Workers
Benefit Protection Act (29 U.S.C. (S) 626(f)) and if this Agreement is ever
revoked pursuant to such act, any money paid to Hacken shall be immediately
returned.
5
<PAGE>
9. MISCELLANEOUS:
-------------
9.1 This Agreement shall be deemed to have been executed and
delivered within the State of California, and the rights and obligations of the
parties hereunder shall be construed and enforced in accordance with, and
governed by, the laws of the State of California.
9.2 This Agreement is the entire Agreement between the parties with
respect to the subject matter hereof and supersedes all prior and
contemporaneous oral and written agreements and discussions. This Agreement may
be amended only by an agreement in writing.
9.3 All notices, requests, demands and other communications
required or permitted to be given hereunder shall be in writing and shall be
deemed given (i) upon receipt, if given by personal delivery, (ii) upon
confirmation of delivery, if given by electronic facsimile, and (iii) upon the
third business day following mailing, if mailed by deposit in the United States
mail, with certification and postal charges prepaid, addressed:
If to Company or
Parent, to: FHP International Corporation
FHP, Inc.
9900 Talbert Avenue
Fountain Valley, California 92708
Fax: (714) 378-5049
Attention: Secretary
If to Hacken, to: Mark B. Hacken
13457 Cheltenham Drive
Sherman Oaks, California 91423
Fax: (818) 788-6327
Any party to be given notice in accordance with this Section 9.3 may designate
to the other party another address, telecopier number or person for receipt of
notices hereunder.
9.4 This Agreement is binding upon and shall inure to the benefit of
the parties hereto, their respective agents, employees, representatives,
officers, directors, division, assigns, heirs and successors in interest.
9.5 Each party has cooperated in the drafting and preparation of this
Agreement. Hence, in any construction to be made of this Agreement, the same
shall not be construed against any party.
9.6 This Agreement may be executed in counterparts, and when each
party has signed and delivered at least one such counterpart, each counterpart
shall be deemed an original, and, when taken together with other signed
counterparts,
6
<PAGE>
shall constitute one Agreement, which shall be binding upon and effective as to
all parties.
9.7 Each party agrees to report this settlement for federal and state
tax purposes in a manner consistent with the characterization in this Agreement.
If at some future date it should be claimed or determined that some portion or
all of the non-taxable settlement amount should be treated as taxable income, or
that any withholding should have been made prior to payment to Hacken, he agrees
to be solely liable for and pay all taxes, penalties, and assessments by reason
of the payment in the manner set forth above. Hacken also agrees to indemnify
and hold the Companies and their respective officers, directors and affiliates
harmless from any costs, penalties, and assessments to which any of them may be
subject by reason of the failure to withhold normal payroll taxes from such
payment.
9.8 Any dispute regarding or arising out of this Agreement or its
validity, or any act which allegedly has or would violate any provision of this
Agreement will be submitted to arbitration in Los Angeles County, California,
pursuant to then current employment/labor Rules of the American Arbitration
Association. The arbitration award will be binding and conclusive on Parent,
Company and Hacken and may be enforced in any court of competent jurisdiction.
9.9 The invalidity or unenforceability of any provision of this
Agreement shall not affect the validity or enforceability of any other
provision.
9.10 In the event of arbitration relating to this Agreement, the
prevailing party shall be entitled to costs and reasonable attorneys' fees.
9.11 This Agreement, consisting of eight (8) pages plus exhibits, is
made and entered into in Los Angeles, California.
/s/ Mark B. Hacken
----------------------------------
MARK B. HACKEN
Date June 8, 1995
------------------------------
"Company"
FHP, Inc.
By /s/ Westcott W. Price III
--------------------------------
Westcott W. Price III
Its President
-------------------------------
Date June 15, 1995
------------------------------
7
<PAGE>
"Parent"
FHP International Corporation
By /s/ Westcott W. Price III
--------------------------------
Westcott W. Price III
Its President
-------------------------------
Date June 15, 1995
------------------------------
APPROVED AS TO FORM:
SHEPPARD, MULLIN, RICHTER & HAMPTON
By /s/ Anthony Bishop
--------------------------------
Attorneys for FHP, INC. and
FHP INTERNATIONAL CORPORATION
Date June 15, 1995
------------------------------
LATHAM & WATKINS
By /s/ John McLoughlin
--------------------------------
Attorneys for MARK B. HACKEN
Date June 8, 1995
------------------------------
8
<PAGE>
EXHIBIT A
SCHEDULE OF PAYMENTS
<TABLE>
<CAPTION>
Gross Net
----------- -----------
<S> <C> <C> <C>
Section 3.1 Salary/1/: $195,484.72 $114,361.10
Accrued 73,357.01 47,351.95
Vacation/1/:
Accrued Sick 0.00 0.00
Pay/1/:
Section 3.3 Deferred 6,115.22 4,036.10
Compensation/2/:
</TABLE>
- ------------------------------------
/1/ For the period June 4, 1995 through October 31, 1995. Includes $1,328 in
the "net" column which represents a refund of deductions taken from
Hacken's compensation after his March 29, 1995 termination date.
/2/ Approximate amounts for the period ending June 30, 1995. The deferred
compensation payment will be paid in accordance with normal company
procedures after calculation of the actual amount due.
9
<PAGE>
EXHIBIT B
RESIGNATION
The undersigned, MARK B. HACKEN, does hereby resign as a Director of FHP
International Corporation, a Delaware corporation, and from the Board of
Directors of any Subsidiary of FHP International Corporation on which he may be
a director as of the date hereof, effective on the Effective Date of the
Agreement of Settlement and General Release between FHP International
Corporation, FHP, Inc. and the undersigned, which requires payment of the
amounts due under Sections 3.1, 3.2 and 3.4 thereof.
Dated: , 1995
--------------------
----------------------------
Mark B. Hacken
10
<PAGE>
EXHIBIT 10.24
SETTLEMENT AGREEMENT AND GENERAL RELEASE
----------------------------------------
THIS SETTLEMENT AGREEMENT AND GENERAL RELEASE is made and entered into by
and between the undersigned employee (hereinafter referred to as "Employee") and
the Employee's corporate employer identified in Exhibit A on the signature page
of this Settlement Agreement and General Release (hereinafter referred to as the
"Company").
W I T N E S S E T H :
-------------------
WHEREAS, Employee is an employee of the Company;
AND WHEREAS, Employee will cease active services with the Company on the
separation date set forth in Exhibit A on the signature page of this Settlement
Agreement and General Release (the "Separation Date");
AND WHEREAS, Employee's employment relationship with the Company as defined
in this Agreement will terminate on the termination date set forth in Exhibit A
on the signature page of this Settlement Agreement and General Release (the
"Termination Date");
AND WHEREAS, Employee and the Company desire to settle fully and finally
all differences between them, including, but in no way limited to, any
differences that might arise out of Employee's employment with the Company, and
the termination thereof;
NOW THEREFORE, in consideration of the premises and mutual promises herein
contained, it is agreed as follows:
FIRST: This Settlement Agreement and General Release shall not in any way
-----
be construed as an admission by the Company that it has acted wrongfully with
respect to the Employee or any other person, or that the Employee has any rights
whatsoever against the Company, and the Company specifically disclaims any
liability to or wrongful acts against
Page 1 of 11
<PAGE>
Employee or any other person, on the part of itself, its corporate subsidiaries
or affiliates, its employees or its agents.
SECOND: Employee represents, understands and agrees that Employee's active
------
duties with the Company shall terminate on the Separation Date and Employee's
employment with the Company shall terminate on the Termination Date.
THIRD: Employee represents that Employee has not filed any complaints or
-----
charges or lawsuits against the Company or any of its affiliates with any
governmental agency or any court, and agrees that he/she does not intend to do
so at any time hereafter; provided, however, this shall not limit Employee from
filing a lawsuit for the sole purpose of enforcing Employee's rights under this
Settlement Agreement and General Release.
FOURTH: The Company agrees that once it receives a fully executed copy of
------
this Agreement from Employee, it will provide the following payments and
benefits to Employee, but only to the extent that Employee was entitled to and
enjoying such payments and benefits as of the Separation Date:
a) Bi-weekly salary continuation at Employee's current base rate of pay
through the Termination Date;
b) FHP Medical Coverage continuation through the Termination Date (at
Employee's current benefit level);
c) FHP Dental Coverage continuation through the Termination Date (at
Employee's current benefit level);
d) FHP Life Insurance Coverage continuation through the Termination Date
(at Employee's current benefit level);
Page 2 of 11
<PAGE>
e) Outplacement services consistent with the Company's outplacement
policy for a person of Employee's job classification and/or grade
level;
f) Continued eligibility to fully participate in the Company's Retirement
Plans through the Termination Date (at Employee's current benefit
level) in accordance with the terms of such Plans;
g) Payment effective the Separation Date of all accrued vacation, holiday
and personal leave days;
h) Continued eligibility to exercise any Stock Options in which the
Employee becomes vested through the Termination Date in accordance
with the exercise and vesting terms of Employee's Stock Option
Agreement(s), if any.
The Company reserves the right to deduct from any applicable sum those
amounts required by law. Any monies owed to the Company by Employee may be
deducted from the amounts payable pursuant to this paragraph. The Company shall
not continue any of Employee's existing benefit coverage except as provided for
in this paragraph. All accruals of vacation, holiday and personal leave days
shall end effective the Separation Date. The payments called for in this
paragraph shall be in lieu of and discharge any obligations of Company to
Employee for compensation, accrued vacation, accrued personal leave days,
accrued holidays, incentive compensation, car allowances or any other
expectations of remuneration or benefit on the part of the Employee. Except as
stated below, the payments and benefits called for in this paragraph shall cease
if and when Employee obtains future employment (whether such employment is
characterized as employment or as a consulting or other arrangement) prior to
the Termination Date. Employee shall immediately notify Company if such
employment is obtained, and if Employee does not obtain such employment,
Employee shall certify that fact to the Company quarterly in writing as a
condition to the continuation of benefits hereunder. Notwithstanding the
foregoing, with respect to salary continuation only, in the event Employee
obtains future employment prior to the Termination Date (whether such employment
is characterized as
Page 3 of 11
<PAGE>
employment or as a consulting or other arrangement), the Company's payment of
bi-weekly salary to Employee shall continue until the Termination Date, but
shall be reduced by fifty percent (50%).
FIFTH: Employee understands and agrees that effective the Separation
-----
Date Employee was and is no longer authorized to incur any expenses or
obligations or liabilities on behalf of the Company.
SIXTH: Employee understands and agrees that on the Separation Date
-----
Employee shall immediately turn over to the Company all files, memoranda,
records, credit cards and other documents or physical or personal property which
Employee received from the Company and which are the property of the Company.
SEVENTH: Employee understands and agrees that in the course of employment
-------
with the Company, Employee has acquired confidential information and trade
secrets concerning the Company's operations, its future plans and its methods of
doing business, including by way of example, but by no means limited to, highly
proprietary information about the Company's customers, product development,
research, technology, financial, marketing, pricing, costing, compensation and
other matters (hereinafter collectively "Trade Secrets"), all of which
information Employee understands and agrees would be extremely damaging to the
Company if disclosed to a competitor or made available to any other person or
corporation. As used herein, the term "Competitor" includes but is not limited
to any corporation, firm or business engaged in a business similar to that of
the Company or its parent, subsidiary or affiliated companies. Employee
understands and agrees that such information has been divulged to Employee in
confidence and Employee understands and agrees that Employee shall keep such
information secret and confidential and Employee further understands and agrees
that, at all times, Employee shall not knowingly disclose or communicate Trade
Secrets or other secret and confidential information to either a Competitor or
any other person or in any way make such information available to others, or
make use of such information on Employee's own behalf, or on behalf of any
Competitor. Employee further agrees that Employee shall not knowingly solicit
or participate
Page 4 of 11
<PAGE>
in or assist in any way, the solicitation of any other employees or customers of
the Company or of any of its subsidiary companies. In view of the nature of
Employee's employment and the information and Trade Secrets which Employee has
received during the course of Employee's employment, Employee likewise agrees
that the Company would be irreparably harmed by any violation, or threatened
violation of this Agreement and that, therefore, the Company shall be entitled
to an injunction prohibiting Employee from any violation or threatened violation
of this Agreement. The undertakings set forth in this paragraph shall survive
the termination of other arrangements contained in this Agreement.
EIGHTH: Employee agrees to cooperate with and assist the Company, upon
------
reasonable notice, in the defense of any litigation or governmental
investigation arising from events which occurred while Employee was employed by
the Company. Such cooperation and assistance shall include, but not be limited
to, Employee's full participation in locating, producing, collecting, analyzing
and preparing documents and other informational materials, in preparing for and
participating in depositions, hearings and trials, and in responding to document
production requests, interrogatories, and other discovery. If it becomes
necessary for employee to testify in any judicial or administrative proceedings,
the Company shall reimburse Employee for any reasonable travel expenses
(including transportation, food and lodging) which are incurred (or are to be
incurred) in connection with such testimony (including preparation therefor).
The Company shall not be required to pay Employee any additional consideration,
including but not limited to consulting or witness fees, in connection with any
cooperation, assistance or testimony required of or provided by Employee
pursuant to this Agreement.
NINTH: It is agreed that the benefits contained in this Settlement
-----
Agreement and General Release which flow to Employee from the Company are
subject to termination, reduction or cancellation as permitted by law in the
event that Employee takes any action or engages in any conduct deemed by the
Company to be in violation of this Agreement.
Page 5 of 11
<PAGE>
TENTH: The provisions of this Agreement are severable, and if any part of
-----
it is found to be unenforceable, the other paragraphs shall remain fully valid
and enforceable. This Agreement shall survive the termination of any
arrangements contained herein.
ELEVENTH: Employee represents and agrees that, except as otherwise
--------
specifically provided herein, Employee will keep the terms, amount and fact of
this Settlement Agreement and General Release completely confidential, and that
Employee shall not hereafter disclose any information concerning this Settlement
Agreement and General Release to anyone other than Employee's immediate family
members, legal counsel and financial and other advisors. Employee further
represents and agrees that Employee shall refrain from making any disparaging
remarks or comments about the Company and all those associated with the Company
which are intended to or which in fact do cause the Company or anyone associated
with the Company injury.
TWELFTH: EMPLOYEE REPRESENTS AND AGREES THAT HE/SHE FULLY UNDERSTANDS
-------
HIS/HER RIGHT TO DISCUSS ALL ASPECTS OF THIS SETTLEMENT AGREEMENT AND GENERAL
RELEASE WITH A PRIVATE ATTORNEY, THAT TO THE EXTENT, IF ANY, THAT EMPLOYEE
DESIRED, EMPLOYEE HAS AVAILED HIMSELF OR HERSELF OF THIS RIGHT, THAT EMPLOYEE
HAS CAREFULLY READ AND FULLY UNDERSTANDS ALL OF THE PROVISIONS OF THIS
SETTLEMENT AGREEMENT AND GENERAL RELEASE, AND THAT EMPLOYEE IS VOLUNTARILY
ENTERING INTO THIS SETTLEMENT AGREEMENT AND GENERAL RELEASE.
THIRTEENTH: As a material inducement to the Company to enter into this
----------
Agreement, Employee hereby irrevocably and unconditionally releases, acquits and
forever discharges the Company and each of the Company's owners, successors,
assigns, agents, directors, officers, employees, representatives, attorneys,
parents, divisions, subsidiaries and affiliates (and agents, directors,
officers, employees, representatives and attorneys of such parents, divisions,
subsidiaries and affiliates), and all persons acting by, through, under or in
concert with any of them (collectively "Releasees"), or any of them, of and from
any and all charges, complaints, claims,
Page 6 of 11
<PAGE>
liabilities, obligations, promises, agreements, controversies, damages, actions,
causes of action, suits, rights, demands, costs, losses, debts and expenses
(including attorneys' fees and costs actually incurred) of any nature
whatsoever, known or unknown, suspected or unsuspected, including, but not
limited to, rights arising out of alleged violations of any contracts, express
or implied, any covenant of good faith and fair dealing express or implied, or
any tort, or any legal restrictions on the Company's right to terminate
employees, or any federal, state or other governmental statute, regulation, or
ordinance ("Claim" or "Claims"), which Employee now has, owns or holds, or
claims to have, own or hold, or which Employee at any time heretofore had, owned
or held, or claimed to have, own or hold, or which Employee at any time
hereafter may have, own or hold, or claim to have, own or hold against each or
any of the Releasees.
FOURTEENTH: Employee further covenants that he/she does not intend to
----------
bring any complaint or charge against the Company before the Equal Employment
Opportunity Commission, or any other federal, state or local governmental agency
that enforces any civil rights law, including laws relating to discrimination in
employment. Should Employee file a complaint or charge against the Company
before such Commission, or any other federal, state or local governmental agency
that enforces any civil rights law, including laws relating to discrimination in
employment, then Employee expressly waives any right to recover any sum or
obtain any equitable relief in a suit brought by such Commission or agency on
Employee's behalf.
THIS IS A WAIVER OF CERTAIN STATUTORY RIGHTS. IT IS MADE KNOWINGLY AND
VOLUNTARILY BY THE EMPLOYEE.
FIFTEENTH: Employee further covenants that if Employee is 40 years of age
---------
or older, Employee does not intend to bring a charge against the Company under
the Federal Age Discrimination in Employment Act ("ADEA"), as amended by the
Older Workers Benefit Protection Act, and releases and waives any and all claims
Employee may have against the Company under the ADEA, as amended. Employee
acknowledges that Employee's promise is made in exchange for the consideration
paid by the Company to the Employee set out in this
Page 7 of 11
<PAGE>
Agreement and that such consideration is not an employment benefit to which
Employee is otherwise entitled. Should Employee file a charge against the
Company before the Equal Employment Opportunity Commission under the ADEA, as
amended, or file a charge before any other governmental agency that has the
jurisdiction to enforce said Act, then Employee expressly waives any right to
recover any sum or obtain any equitable relief in a suit brought by such
Commission or agency on Employee's behalf.
If the Employee is 40 years of age or older, Employee acknowledges that
Employee has been given twenty one (21) days to consider whether or not to sign
this Agreement including the foregoing release and waiver. Employee may revoke
this Agreement in its entirety at any time on or before the date which is seven
(7) days after the date of Employee's signature on this Agreement and Employee's
release or waiver with respect to the ADEA, as amended, will not be effective or
enforceable until such seven (7) day revocation period has expired. No payment
will be made under this Agreement until such seven (7) day period has elapsed
without revocation on the part of Employee. As stated above, Employee is
advised to consult with an attorney or any other advisor before he/she signs
this Agreement.
SIXTEENTH: Employee further covenants that if Employee is a qualified
---------
individual with a disability, as defined in the Americans With Disabilities Act
("ADA"), 42 U.S.C. (S) 12101, et. seq., Employee does not intend to bring a
-- ---
charge against the Company under the ADA and releases and waives any and all
claims Employee may have against the Company under the ADA. Employee
acknowledges that Employee's promise is made in exchange for the consideration
paid by the Company to the Employee set out in this Agreement and that such
consideration is not an employment benefit to which Employee is otherwise
entitled. Should Employee file a charge against the Company before the Equal
Employment Opportunity Commission under the ADA, or file such a charge before
any other governmental agency that has jurisdiction to enforce the ADA, then
Employee expressly waives any right to recover any sum or obtain any equitable
relief in a suit brought by such commission or agency on Employee's behalf.
Page 8 of 11
<PAGE>
If the Employee is a qualified individual with a disability, as defined in
the ADA, Employee acknowledges that Employee has been given twenty-one (21) days
to consider whether or not to sign this Agreement, including the foregoing
release and waiver. Employee may revoke this Agreement in its entirety at any
time on or before the date which is seven (7) days after the date of Employee's
signature on this Agreement and Employee's release or waiver with respect to the
ADA will not be effective or enforceable until such seven (7) day revocation
period has expired. No payment will be made under this Agreement until such
seven (7) day period has elapsed without revocation on the part of Employee. As
stated above, Employee is advised to consult with an attorney or any other
advisor before he/she signs this Agreement.
SEVENTEENTH: Employee expressly waives and relinquishes all rights and
-----------
benefits afforded by Section 1542 of the Civil Code of the State of California,
or similar statutes of any state having jurisdiction hereof, and does so
understanding and acknowledging the significance of such specific waiver of
Section 1542 or other statute. Section 1542 of the Civil Code of the State of
California states as follows:
"A GENERAL RELEASE DOES NOT EXTEND TO CLAIMS WHICH THE CREDITOR DOES NOT
KNOW OR SUSPECT TO EXIST IN HIS/HER FAVOR AT THE TIME OF EXECUTING THE
RELEASE, WHICH IF KNOWN BY HIM/HER MUST HAVE MATERIALLY AFFECTED HIS/HER
SETTLEMENT WITH THE DEBTOR."
Thus, notwithstanding the provisions of Section 1542 or any other similar
statute, and for the purpose of implementing a full and complete release and
discharge of the Releasees, Employee expressly acknowledges that this Settlement
Agreement and General Release is intended to include in its effect without
limitation, all Claims which Employee does not know or suspect to exist in
Employee's favor at the time of execution hereof, and that this Settlement
Agreement and General Release contemplates the extinguishment of any such Claim
or Claims.
Page 9 of 11
<PAGE>
EIGHTEENTH: In the event that legal action is required to enforce the
----------
terms of this Agreement, the prevailing party shall be entitled to recover its
costs along with reasonable attorneys fees.
NINETEENTH: Employee represents and acknowledges that in executing this
----------
Settlement Agreement and General Release, Employee does not rely and has not
relied upon any representation or statement not set forth herein made by any of
the Releasees or by any of the Releasees' agents, representatives, or attorneys
with regard to the subject matter, basis or effect of this Settlement Agreement
and General Release or otherwise.
TWENTIETH: Employee and the Company agree that any action brought by
---------
either the Employee or the Company in connection with the rights or obligations
arising out of this Agreement shall be instituted in a federal or state court of
competent jurisdiction with venue only in the county or federal district in
which the Employee was last employed by the Company. Either party to this
Agreement named as a defendant in an action brought in connection with this
Agreement in any other court outside of the above designated county or district
shall have the right to have the venue of said action changed to the above
designated county or district, or, if necessary, have the case dismissed,
requiring the other party to refile said action in an appropriate court in the
above designated county or federal district. Employee and Company hereby agree
to submit personally to the jurisdiction of a court of competent subject matter
jurisdiction located in the above designated state and county or federal
district. Employee and Company acknowledge that this Agreement is executed in
and that a material portion of the obligations to be performed hereunder are to
be performed in the above designated state and county or federal district.
TWENTY-FIRST: To the extent Employee has a Change of Control Employment
------------
Agreement dated March 12, 1994 with FHP International Corporation, that
agreement shall terminate as of the Separation Date and shall thereafter be
without force or effect.
Page 10 of 11
<PAGE>
This Settlement Agreement and General Release sets forth the entire
agreement between the parties hereto, and fully supersedes any and all prior
agreements or understandings between the parties hereto pertaining to the
subject matter hereof.
PLEASE READ CAREFULLY. THIS SETTLEMENT AGREEMENT AND GENERAL RELEASE
INCLUDES A RELEASE OF ALL KNOWN AND UNKNOWN CLAIMS.
Executed by Employee and the Company on the dates set forth below their
respective signatures.
"Company" "Employee"
By: /s/ Jim Wade /s/ Ryan M. Trimble
---------------------------- --------------------------------------
Title: V.P., Human Resources Date: July 14, 1995
-------------------------
Date: 7/26/95
-------------------------
EXHIBIT A
A. Separation Date: 6/30/95
----------------------
B. Termination Date: 12/31/96
----------------------
C. Employee's Corporate Employer: FHP International
----------------------
Page 11 of 11
<PAGE>
EXHIBIT 11.1
FHP INTERNATIONAL CORPORATION
COMPUTATION OF EARNINGS PER SHARE
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
----------------------------
1995 1994 1993
------- ------- -------
(AMOUNTS IN THOUSANDS,
EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
Primary earnings per share attributable to Common
Stock:
Net income attributable to Common Stock......... $11,955 $58,278 $44,166
======= ======= =======
Weighted average number of common shares and
common share equivalents:
Common Stock................................. 40,665 33,285 32,644
Assumed exercise of options.................. 392 766 626
------- ------- -------
Total shares............................... 41,057 34,051 33,270
======= ======= =======
Primary earnings per share attributable to
Common Stock.................................. $ 0.29 $ 1.71 $ 1.33
======= ======= =======
Fully diluted earnings per share:
Net income..................................... $37,292 $59,310 $44,166
======= ======= =======
Weighted average number of common shares and
common share equivalents:
Common Stock................................. 57,626 33,951 32,644
Assumed exercise of options.................. 392 766 943
------- ------- -------
Total shares, assuming full dilution....... 58,018 34,717 33,587
======= ======= =======
Fully diluted earnings per share................. $ 0.64(1) $ 1.71 $ 1.31
======= ======= =======
</TABLE>
- --------
(1) This computation is submitted in accordance with Regulation S-K, Item
601(b)(11), although it is contrary to paragraph 40 of Accounting
Principles Board Opinion No. 15 because it produces an anti-dilutive result
in fiscal year 1995.
<PAGE>
EXHIBIT 21.0
SUBSIDIARIES OF THE REGISTRANT
There is no parent of the Registrant. The following is a listing of the
active subsidiaries of the Registrant, or if indented, subsidiaries of the
subsidiary under which they are listed:
<TABLE>
<CAPTION>
JURISDICTION OF
INCORPORATION
---------------
<S> <C>
Great States Financial Corporation........................... Delaware
Great States Insurance Company............................. California
Great States Administrators, Inc........................... Delaware
TakeCare, Inc................................................ Delaware
TakeCare Administrative Services Corporation................ Indiana
TakeCare Life Insurance Company............................ Arizona
FHP of Colorado, Inc....................................... Colorado
FHP of Illinois, Inc....................................... Illinois
FHP of Ohio, Inc........................................... Ohio
FHP of Tennessee, Inc...................................... Tennessee
Peak Health Plan of Idaho, Inc............................. Idaho
TakeCare Insurance Company................................. Colorado
FHP, Inc................................................... California
FHP Life Insurance Company................................ California
FHP of Utah, Inc.......................................... Utah
FHP of New Mexico, Inc.................................... New Mexico
FHP of Texas, Inc......................................... Texas
Hippodrome Galleries Corporation.......................... California
Employees Choice Health Option............................ Utah
Health Maintenance Life, Inc.............................. Guam
FHP Reinsurance Limited................................... Bermuda
UltraLink, Inc............................................ California
FHP International Consulting Group, Inc...................... Delaware
</TABLE>
<PAGE>
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statements
33-30200, 33-14257, 33-30090, 33-36521, 33-54313, 33-55545 and 33-56651 on
Form S-8 of our report with respect to FHP International Corporation's financial
statements dated September 7, 1995 appearing in this Annual Report on Form 10-K
of FHP International Corporation for the year ended June 30, 1995.
/s/ Deloitte & Touche LLP
Costa Mesa, California
September 27, 1995
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED STATEMENTS OF INCOME, BALANCE SHEETS AND CASH FLOWS OF FHP
INTERNATIONAL CORPORATION AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
JUNE 30, 1995 ANNUAL REPORT ON FORM 10-K.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUN-30-1995
<PERIOD-START> JUL-01-1994
<PERIOD-END> JUN-30-1995
<CASH> 299,144
<SECURITIES> 157,220
<RECEIVABLES> 165,457
<ALLOWANCES> 23,617
<INVENTORY> 14,016
<CURRENT-ASSETS> 674,279
<PP&E> 371,182
<DEPRECIATION> 141,417
<TOTAL-ASSETS> 2,315,816
<CURRENT-LIABILITIES> 752,658
<BONDS> 337,817
<COMMON> 402,963
0
527,986
<OTHER-SE> 209,192
<TOTAL-LIABILITY-AND-EQUITY> 2,315,816
<SALES> 3,909,380
<TOTAL-REVENUES> 3,909,380
<CGS> 3,760,191
<TOTAL-COSTS> 3,760,191
<OTHER-EXPENSES> 75,110
<LOSS-PROVISION> 10,169
<INTEREST-EXPENSE> 25,972
<INCOME-PRETAX> 80,186
<INCOME-TAX> 42,894
<INCOME-CONTINUING> 37,292
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 37,292
<EPS-PRIMARY> 0.29
<EPS-DILUTED> 0.64
</TABLE>
