FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
_______________________
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 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
a Delaware Corporation
I.R.S. Employer Identification No. 33-0072502
9900 Talbert Avenue, Fountain Valley, CA 92708-8000
(Address of principal executive offices) (Zip Code)
(714) 963-7233
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements
for the past 90 days.
Yes X No ___.
The registrant had 40,210,885 shares of common stock, par value
$0.05 per share, outstanding at May 10, 1995.
The Exhibit Index Appears on Page 18
<PAGE>
PART 1 - FINANCIAL INFORMATION
Item 1. Financial Statements
FHP INTERNATIONAL CORPORATION
CONSOLIDATED BALANCE SHEETS
(unaudited)
ASSETS
(amounts in thousands, March 31, June 30,
except share data) 1995 1994
_____________ ___________
Cash and cash equivalents $ 247,000 $ 60,571
Short-term investments (Note 3) 172,600 186,212
Accounts receivable, net 143,814 112,092
Deferred income taxes 29,500 30,360
Prepaid expenses and other
current assets 60,269 56,708
__________ __________
Total current assets 653,183 445,943
Property and equipment, net 404,699 403,754
Long-term investments (Note 3) 71,401 122,782
Restricted investments (Note 3) 97,409 97,879
Excess purchase price over net assets
acquired, net 1,048,788 1,073,839
Other assets, net 28,305 25,072
__________ __________
Total assets $ 2,303,785 $2,169,269
========== ==========
__________
See accompanying notes to consolidated financial statements.<PAGE>
FHP INTERNATIONAL CORPORATION
CONSOLIDATED BALANCE SHEETS
(unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY
(amounts in thousands, March 31, June 30,
except share data) 1995 1994
______________ ____________
Current portion of long-term
obligations $ 30,162 $ 25,154
Accounts payable 54,798 94,725
Medical claims payable 331,762 283,612
Accrued salaries and employee
benefits 60,989 84,371
Unearned premiums 179,818 32,738
Income taxes payable and other
current liabilities 25,884 67,203
___________ __________
Total current liabilities 683,413 587,803
Long-term obligations 362,862 377,986
Other liabilities 84,653 90,344
___________ __________
Total liabilities 1,130,928 1,056,133
___________ __________
Commitments and contingencies
(Note 5)
Stockholders' equity:
Series A Convertible and Series B
preferred stock, $0.05 par value;
40,000,000 shares authorized (Note 4) 1,053 1,053
Common stock, $0.05 par value;
100,000,000 shares authorized;
40,114,350 and 39,503,675 shares
issued and outstanding at March 31,
1995 and June 30, 1994, respectively 2,006 1,976
Paid-in capital 922,379 915,816
Unrealized holding loss on available-
for-sale securities, net of tax
effect of $1,748 at
March 31, 1995 and $2,617 at
June 30, 1994 (Note 3) (2,991) (4,392)
Retained earnings 250,410 198,683
___________ __________
Total stockholders' equity 1,172,857 1,113,136
___________ __________
Total liabilities and
stockholders' equity $ 2,303,785 $2,169,269
=========== ==========
__________
See accompanying notes to consolidated financial statements.
<PAGE>
FHP INTERNATIONAL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(unaudited)
For The
(amounts in thousands, Three Months Ended
except per share data) March 31,
1995 1994
__________ ________
Revenues $1,001,062 $622,461
__________ ________
Expenses:
Primary health care 791,100 494,484
Other health care 31,683 23,803
General, administrative and
marketing 127,319 79,818
________ ________
Total expenses 950,102 598,105
________ ________
Operating income 50,960 24,356
Interest income 7,939 5,146
Interest expense (6,286) (1,804)
________ ________
Income before income taxes 52,613 27,698
Provision for income taxes 24,202 10,885
________ ________
Net income 28,411 16,813
Preferred stock dividends 6,596
________ ________
Net income attributable to
common stock $ 21,815 $ 16,813
======== ========
Primary earnings per share
attributable to common stock (Note 2) $ 0.53 $ 0.50
======== ========
Weighted average number of common
shares and common share equivalents 41,210 33,840
======== ========
Fully diluted earnings per share
(Note 2) $ 0.49 $ 0.50
======== ========
Fully diluted weighted average number
of common shares and common share
equivalents 58,447 33,840
======== ========
__________
See accompanying notes to consolidated financial statements.
<PAGE>
FHP INTERNATIONAL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(unaudited)
For The
(amounts in thousands, Nine Months Ended
except per share data) March 31,
1995 1994
__________ __________
Revenues $2,909,809 $1,789,947
__________ __________
Expenses:
Primary health care 2,314,095 1,428,703
Other health care 87,387 69,634
General, administrative and
marketing 381,471 240,086
__________ __________
Total expenses 2,782,953 1,738,423
__________ __________
Operating income 126,856 51,524
Interest income 22,474 14,558
Interest expense (18,852) (3,885)
__________ __________
Income before income taxes 130,478 62,197
Provision for income taxes 60,020 23,885
__________ __________
Net income 70,458 38,312
Preferred stock dividends 18,731
__________ __________
Net income attributable to
common stock $ 51,727 $ 38,312
========== ==========
Primary earnings per share
attributable to common stock (Note 2) $ 1.26 $ 1.14
========== ==========
Weighted average number of common
shares and common share equivalents 41,099 33,659
========== ==========
Fully diluted earnings per share
(Note 2) $ 1.21 $ 1.14
========== ==========
Fully diluted weighted average number
of common shares and common share
equivalents 58,364 33,659
========== ==========
__________
See accompanying notes to consolidated financial statements.
<PAGE>
FHP INTERNATIONAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
For The
Nine Months Ended
(amounts in thousands) March 31,
1995 1994
________ ________
Operating Activities
Net income $ 70,458 $ 38,312
Adjustments to reconcile
net income to net cash
provided by operating activities:
Depreciation and amortization 61,894 32,494
Increase in allowance for doubtful
accounts 11,661 4,645
Loss on disposal of equipment 1,893 1,420
Loss on sale of available-for-sale
securities 140
Deferred income taxes (3,532) (1,042)
Effect on cash of changes
in operating assets and
liabilities, net of effects
of purchase of Colorado health
maintenance organization
(HMO - 1994):
Accounts receivable (43,383) (18,977)
Other assets (8,255) (14,178)
Accounts payable (39,927) (4,877)
Medical claims payable 48,150 20,137
Accrued salaries and
employee benefits (23,382) 9,090
Unearned premiums 147,080 128,189
Other liabilities (38,292) 17,397
________ ________
Net cash provided by operating
activities 184,505 212,610
________ ________
Investing Activities
Purchases of available-for-sale
securities (Note 3) (375,444) (42,991)
Proceeds from sales/maturities
of available-for-sale securities
(Note 3) 443,072
Purchases of property and
equipment (40,992) (56,278)
Purchase of Colorado HMO
(net of cash acquired) (755) (3,419)
________ ________
Net cash provided by (used in)
investing activities 25,881 (102,688)
________ ________
<PAGE>
FHP INTERNATIONAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS(continued)
(unaudited)
For The
Nine Months Ended
(amounts in thousands) March 31,
1995 1994
________ ________
Financing Activities
Proceeds from issuance of
long-term debt 15,000 100,000
Payments on long-term
obligations (25,116) (20,101)
Exercise of stock options 5,872 2,363
Cash dividends paid to preferred
shareholders (19,713)
________ ________
Net cash (used in) provided by
financing activities (23,957) 82,262
________ ________
Increase in cash and
cash equivalents 186,429 192,184
Cash and cash equivalents at
beginning of period 60,571 2,700
________ ________
Cash and cash equivalents at end
of period $247,000 $194,884
======== ========
Supplemental cash flow information:
Interest payments (net of portion
capitalized) $ 19,547 $ 4,292
Income tax payments (net of
refunds) $ 63,869 $ 25,566
__________
See accompanying notes to consolidated financial statements.
FHP INTERNATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
NOTE 1. Organization and Accounting Policies
FHP International Corporation (the "Company"), through its direct
and indirect subsidiaries, delivers managed health care services and
sells indemnity medical, group life, and workers' compensation
insurance.
On June 17, 1994, the Company completed its acquisition of
TakeCare, Inc. ("TakeCare"). The results of operations of TakeCare are
included in the accompanying financial statements for the nine months
ended March 31, 1995.
Interim periods are viewed as an integral part of the annual period
of the Company. Accordingly, the results for the interim periods
reported are based on the accounting principles and practices followed
by the Company as presented in its Annual Report on Form 10-K for the
year ended June 30, 1994. In the opinion of management, all adjustments
necessary to fairly present the financial position and the results of
operations for the nine months ended March 31, 1995 and 1994 are
included in these consolidated financial statements.
NOTE 2. Earnings Per Share
Primary earnings per share attributable to common stock for the
nine months ended March 31, 1995 and 1994 are computed by dividing net
income after preferred stock dividends by the weighted average number of
common shares and dilutive common stock options (using average market
price), which are considered common share equivalents, outstanding
during the periods.
Fully diluted earnings per share for the nine months ended March
31, 1995 and 1994 assume the conversion of the Series A Cumulative
Convertible preferred stock, the elimination of the related preferred
stock dividend requirement and market price as of the end of the period
for dilutive common stock options.
NOTE 3. Investments
The Company adopted Statement of Financial Accounting Standards No.
115 ("SFAS 115"), "Accounting for Certain Investments in Debt and Equity
Securities," as of June 30, 1994. The amounts shown in the Company's
consolidated statements of cash flows for purchases of and proceeds from
sales/maturities of available-for-sale securities for the nine months
ended March 31, 1995, are reflected separately as required by SFAS 115.
The purchases and sales/maturities for the nine months ended March 31,
1994, are shown net as SFAS 115 does not require retroactive adoption,
and the determination of such information for the prior period was not
practical. For the nine months ended March 31, 1995, SFAS 115 had no
effect on net income but decreased short-term, long-term and restricted
investments by $4,739,000 representing net unrealized losses, and
decreased stockholders' equity by $2,991,000 (net unrealized losses less
deferred income taxes of $1,748,000).
NOTE 4. Preferred Stock
The issued and outstanding, and aggregate liquidation preference of
the Company's two series of preferred stocks are as follows:
March 31, 1995 June 30, 1994
----------------------- -----------------------
Series B Series B
Series A Adjustable Series A Adjustable
Cumulative Rate Cumulative Rate
Convertible Cumulative Convertible Cumulative
----------- ---------- ------------ ----------
Issued and outstanding 21,031,733 61,757 21,031,733 32,850
Aggregate liquidation
preference $525,817,000 $1,545,000 $526,825,000 $821,000
Additional shares of Series B preferred stock were issued during
the nine months ended March 31, 1995 to holders of TakeCare common stock
that redeemed their TakeCare shares subsequent to June 30, 1994. The
acquisition agreement provided for the conversion of each share of
TakeCare common stock into the right to receive, without interest, .48
of a share of the Company's common stock, 1.6 shares of Series A
Preferred Stock and either 1.096 shares of Series B Preferred Stock or,
at the election of the holder of such share, cash equal to $27.40 per
share of TakeCare common stock.
NOTE 5. Commitments, Contingencies, and Other Matters
The Health Care Financing Administration ("HCFA") has notified the
Company and other risk-based contractors that HCFA believes that 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 results of operations
and liquidity of the Company.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Three Months Ended March 31, 1995 Compared to
the Three Months Ended March 31, 1994
Revenue
The Company generates approximately 96% of its revenue from
premiums received for health care services provided to the health
maintenance organization ("HMO") members of its wholly-owned
subsidiaries. Total revenue for the three-month period ended March 31,
1995, was $1,001.1 million increasing 60.8% over revenue of $622.5
million for the same period in the previous year. The significant
revenue growth was primarily due to the acquisition of TakeCare, Inc.
("TakeCare") and its HMO subsidiaries (the "TakeCare HMOs") on June 17,
1994, and the subsequent inclusion of TakeCare's revenue in the
Company's consolidated statement of income.
The Company generates approximately 50% of its HMO revenue from
sales to the commercial market. Commercial HMO revenue growth for the
three-month period ended March 31, 1995, when compared with the previous
quarter, was favorably impacted by HMO membership gains but unfavorably
impacted by competitive HMO premium rate pressures. The Company's
ability to increase commercial HMO premium rates continues to be
adversely impacted by increasing competition among existing HMOs and
other health care providers and insurers in the Company's service
areas, particularly California. In addition, certain large employer
groups and other purchasers of healthcare services continue to demand
minimal premium rate increases or reductions in premium rates. Downward
pressure on premium rates is expected to continue in all of the
Company's service areas, particularly California for the remainder of
fiscal year 1995.
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 usually receives senior premium rate increases
from HCFA on January 1 of each year. The Company received an average
5.8% senior premium rate increase from HCFA effective January 1, 1995.
Most of the Company's HMO revenue increase for the three-month period
ended March 31, 1995, was due to the HCFA rate increase. Revenue per
senior member is substantially higher than revenue per commercial member
because senior members use substantially more health care services.
The Company generates approximately 4% of its revenue from the sale
of indemnity health, group life and workers' compensation insurance
products and related lines of business. The California open rating law
for worker's compensation insurance which took effect January 1, 1995,
has resulted in price competition that has substantially reduced the
Company's workers' compensation revenue when compared to the same period
in the prior fiscal year. Workers' compensation revenue for the three-
month period ended March 31, 1995, declined 22.6% from comparable
revenue for the same period in the prior fiscal year.
<PAGE>
HMO Membership
Total HMO membership grew 878,000 or 96.9% to approximately
1,784,000 at March 31, 1995, from approximately 906,000 at March 31
1994. The significant membership growth was primarily due to the
addition of approximately 786,000 members as a result of the acquisition
of TakeCare in June, 1994. Almost all TakeCare members acquired were
commercial members. Prior to the acquisition of TakeCare, approximately
65% of the Company's HMO membership were commercial members and 35% were
senior members. At March 31, 1995, the Company's commercial membership
represented approximately 79% of total membership while senior
membership represented approximately 21%.
Total commercial membership grew by 833,000 or 143.4% to
approximately 1,414,000 at March 31, 1995, from approximately 581,000 at
March 31, 1994, primarily due to the inclusion of approximately 766,000
members as a result of the acquisition of TakeCare in June, 1994. Total
commercial membership increased by approximately 39,000 members during
the third quarter of fiscal year 1995, primarily due to a significant
number of employers conducting open enrollment for employee health care
benefits that become effective on January 1 of each year.
The Company continues to experience strong competitive pressures,
particularly in the Southern California commercial market. These
competitive pressures are a combination of demand by employers for lower
rates and the large number of HMOs competing in the marketplace. Commercial
rate pressures have been increasing throughout the current fiscal year
and the Company does not anticipate any improvement over the next
several months.
Senior members receive health care services from the Company under
the Company's risk and cost contracts with HCFA for the provision of
health care services to Medicare-eligible senior citizens. Senior
membership (including approximately 20,000 senior members resulting from
the acquisition of TakeCare) grew by 45,000 or 13.8% to approximately
370,000 at March 31, 1995, from approximately 325,000 at March 31, 1994.
Intense competition in Southern California and Arizona resulting in
a broader choice of provider networks has slowed the Company's rate of
senior member enrollment in these markets. Also, delays in entering the
senior market in Northern California have unfavorably impacted senior
membership growth in that market. The Company has recently obtained
approval from HCFA to begin marketing to seniors in Houston, Texas.
Also, the Company has filed applications with HCFA to market to seniors
in Ohio and Illinois. The Company expects to begin marketing in these
two states in the second half of fiscal year 1996.
The TakeCare acquisition and substantial expansion of the number of
contract providers in recent years have significantly contributed to an
increase in the percentage of the Company's HMO members receiving health
care from contract providers. Immediately prior to the TakeCare
acquisition, HMO members receiving health care from contract providers
comprised approximately 63% of the Company's total membership. At March 31,
1995, approximately 80% of the Company's members received their health care
from contract providers. Most commercial growth continues to occur in the
Company's contract model plans.
During the last several fiscal quarters, the Company has
experienced declining membership in certain staff model medical centers
in Southern California. The decline has been among both commercial and
senior members. Management believes the decline is due to an increase
in the number of health care choices available and subsequent migration
of members to contract model plans, including the Company's contract
model operations, and to permanent employment reductions by certain
employers that traditionally have been staff-model users.
In light of the foregoing, management believes that both commercial
and senior enrollment will continue to approximate current annual growth
rates for the balance of the fiscal year.
Cost of Health Care
Health care costs increased by $304.5 million or 58.7% to $822.8
million for the three-month period ended March 31, 1995, from $518.3
million for the three-month period ended March 31, 1994, primarily due
to the inclusion of the TakeCare HMOs. Health care costs decreased as
a percent of revenue to 82.2% in the current period from 83.3% in the
same period of the last fiscal year. The decrease as a percent of
revenue resulted primarily from a lower cost of health care in the
TakeCare HMOs.
The Company continues to experience high costs relative to revenues
in certain staff model operations in Southern California. Management
believes that operating margins will continue to be adversely impacted
by its Southern California staff model operations. The Company has
implemented several cost control strategies in its Southern California
staff model; however, these strategies have not yet reduced costs
sufficiently to offset the loss of membership and resulting revenue
decline in the staff model. The strategies include: facility closures
and consolidations; re-negotiation of specialty-provider contracts at
more favorable rates; and optimizing physician/patient ratios.
The Company continues to experience competitive pricing pressures
in all its key markets. To help mitigate against health care margin
erosion (resulting from competitive pricing pressures) in the Company's
Southern California and Colorado HMOs, the Company has negotiated
reductions in certain capitated provider contract rates effective
January 1, 1995. The Company is in the process of negotiating rate
reductions in its other contract provider arrangements, as those
contracts renew throughout the year.
In light of the foregoing, at this time the Company does not
anticipate an improvement in operating trends between the third and the
fourth quarters.
General, Administrative and Marketing Costs
General, administrative and marketing ("G & A") expenses increased
by $47.5 million or 59.5% to $127.3 million for the three-month period
ended March 31, 1995, from $79.8 million for the three-month period
ended March 31, 1994. The increase resulted primarily from the
acquisition of TakeCare. G & A expenses for the three-month period
ended March 31, 1995, decreased slightly as a percentage of revenue to
12.7% from 12.8% for the same period in the prior fiscal year. G & A
costs in each quarter of fiscal year 1995 include approximately $6.7
million of intangible amortization arising from the acquisition of
TakeCare. The Company continues to review additional cost savings and
control opportunities.
Nine Months Ended March 31, 1995
Compared to the Nine Months Ended March 31, 1994
Revenue
Revenue for the nine-month period ended March 31, 1995, totaled
$2,909.8 million, increasing $1,119.9 million or 62.6% over revenue of
$1,789.9 million for the same period in the previous fiscal year,
primarily due to the acquisition of TakeCare. Revenue growth is being
impacted by strong competitive pressures in all of the Company's key
markets, particularly Southern California, and downward pressures on HMO
premium rates from large employer groups and other purchasers of health
care services. Partially offsetting downward commercial rate pressures,
the Company received an average 5.8% senior premium rate increase from
HCFA effective January 1, 1995. The Company's revenue from its workers'
compensation product for the nine-month period ended March 31, 1995
declined approximately 13.2% from the comparable period in the prior
fiscal year.
Cost of Health Care
Health care costs increased by $903.2 million or 60.3% to $2,401.5
million for the nine-month period ended March 31, 1995, from $1,498.3
million for the comparable nine-month period ended March 31, 1994,
primarily due to the inclusion of TakeCare. Health care costs during
the nine-month period ended March 31, 1995, decreased to 82.5% of total
revenue from 83.7% of total revenue for the same period last year. The
decrease as a percent of revenue resulted primarily from a lower cost
of health care in the TakeCare HMOs, partially offset by a higher cost
of health care in the Company's staff model operations.
General, Administrative and Marketing Costs
G & A expenses increased $141.4 million or 58.9% to $381.5 million
for the nine-month period ended March 31, 1995, from $240.1 million for
the same period in the previous year, primarily due to the TakeCare
acquisition. G & A expenses were 13.1% of total revenue for the nine-
month period ended March 31, 1995 versus 13.4% of total revenue for the
comparable period in the previous year. Excluding intangible
amortization of approximately $20.1 million arising from the acquisition
of TakeCare, G & A for the nine-month period ended March 31, 1995, was
12.4% of revenue, reflecting savings achieved when certain duplicative
sales and administrative departments were merged and facilities closed,
and from ongoing cost controls. The Company continues to identify
administrative cost savings opportunities.
Interest Income
Net interest income was $3.6 million for the nine-month period
ended March 31, 1995, compared to $10.7 million for the same period in
the previous fiscal year. Net interest income declined $7.1 million
year-over-year primarily as the result of additional interest expense
due to an increase in debt related to the acquisition of TakeCare.
Liquidity and Capital Resources
The Company's consolidated cash, cash equivalents and short-term
investments increased by $172.8 million to $419.6 million at March 31,
1995, from $246.8 million at June 30, 1994. The increase reflects the
early receipt in March, 1995, of approximately $147.1 million of
premiums from HCFA due on April 1, 1995, for medical services to be
provided to senior members in April, 1995. Other major sources of cash
during the nine-month period ended March 31, 1995, included cash
generated from operations (net of the early receipt of HCFA premiums) of
$37.4 million, and net transfers of $45.5 million from long-term
investments. Major uses of cash during the period included $41.0
million for capital expenditures, $19.7 million for preferred stock
dividends and net reductions in borrowings of $10.1 million.
The Company amended certain terms of its $350 million Credit
Agreement (the "Credit Agreement") in March, 1995. Pursuant to the
amended terms of the Credit Agreement, the amount of loans available
under the Revolving Credit Facility was increased from $100 million to
$200 million ("Revolving loans") and the amount of loans under the Term
Loan Facility was reduced from $250 million to $150 million ("Term
loans"). The final maturity of both the Revolving loans and Term loans
was extended to March 31, 2000. In addition, certain pricing provisions
with respect to the borrowing rates and commitment fees payable by the
Company under the Credit Agreement were reduced. As of March 31, 1995,
Term loans amounted to $150 million and Revolving loans amounted to $140
million. Term loans are repayable at the rate of $15 million
semiannually commencing September 29, 1995.
The Company has incurred principal, interest and dividend
obligations arising from (i) the issuance of $100 million of 7% Senior
Notes (the "Notes"); (ii) borrowings under the Credit Agreement; and
(iii) the issuance of preferred stock. The Company's ability to make a
payment against 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; (b) the
repayment of certain intercompany debt owed by one of the subsidiaries
to the Company; and (c) cash dividends by the subsidiaries to the
Company. Nearly all of the subsidiaries are subject to HMO regulations
or insurance regulations and may be subject to substantial supervision
by one or more HMO regulators and insurance regulators (the "Regulated
Subsidiaries"). Each of the Regulated Subsidiaries must meet or exceed
various fiscal standards imposed by HMO regulations or insurance
regulations or by HMO regulators or insurance regulators. These fiscal
standards may, from time to time, impact the ability of one or more of
the Regulated Subsidiaries to pay funds to the Company.
The Company believes the payments referred to above by the
subsidiaries, together with other financing sources including the Credit
Agreement, should be sufficient to enable the Company to meet its
payment obligations under the Notes, the Credit Agreement and the
Company's preferred stock (totalling approximately $80 million
annually). 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.
Effects of Regulatory Changes and Inflation
The Company usually receives a rate increase from HCFA on January 1
of each year. For 1995, the Company received an average premium rate
increase from HCFA of approximately 5.8% for its senior HMO members
compared with approximately 2.0% for the prior calendar year. 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 premium rates due to competition and counter-inflationary
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 the
Company's efforts to overcome the combined impact of unfavorable revenue
pressures and the increasing cost of health care will be successful in
the short term.
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
Information relating to certain litigation as set forth in
Note 5 of Notes to Consolidated Financial Statements in Part I of this
report is incorporated herein by this reference.
Item 2. Changes in Securities.
None.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Submission of Matters to a Vote of Security Holders.
None.
Item 5. Other Information.
None.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits. See Index to Exhibits at page 18 of this
report.
(b) Reports on Form 8-K. Current Report on Form 8-K filed on
February 27, 1995, disclosing the change in the fiscal
year end of the FHP International Corporation Employee
Stock Ownership Plan.
<PAGE>
Signatures
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
FHP INTERNATIONAL CORPORATION
Dated: May 12, 1995 By: /s/ Kenneth S. Ord
Senior Vice President and
Chief (Principal) Financial Officer
<PAGE>
INDEX TO EXHIBITS
Exhibit
Number
4.1 Registrant agrees to furnish to the Commission upon request a
copy of each instrument with respect to issues of long-term
debt of the Registrant, the authorized principal amount of
which does not exceed 10% of total assets of Registrant.
11.1 Statement Re: Computation of Earnings Per Share.
27.1 Financial Data Schedule.
EXHIBIT 11.1
FHP INTERNATIONAL CORPORATION
STATEMENT RE: COMPUTATION OF EARNINGS PER SHARE
(unaudited)
For The
(amounts in thousands, Three Months Ended
except per share data) March 31,
1995 1994
_______ _______
Primary earnings per share
attributable to common stock:
Net income attributable to
common stock $21,815 $16,813
======= =======
Weighted average number of
common shares and common
share equivalents:
Common stock 40,037 33,131
Assumed exercise of options 1,173 709
_______ _______
Total shares 41,210 33,840
======= =======
Primary earnings per share
attributable to common stock $ 0.53 $ 0.50
======= =======
Fully diluted earnings per share:
Net income attributable to
common stock assuming
conversion of Series A
cumulative convertible
preferred stock $28,382 $16,813
======= =======
Weighted average number of
common shares and common
share equivalents:
Common stock 40,037 33,131
Assumed exercise of options 1,449 709
Assumed conversion of
Series A cumulative
convertible preferred stock 16,961
_______ _______
Total shares, assuming
full dilution 58,447 33,840
======= =======
Fully diluted earnings per share $ 0.49 $ 0.50
======= =======
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS 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 MARCH 31, 1995
QUARTERLY REPORT ON FORM 10-Q.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> 06-30-1995
<PERIOD-END> 03-31-1995
<CASH> 247,000
<SECURITIES> 172,600
<RECEIVABLES> 168,923
<ALLOWANCES> 25,109
<INVENTORY> 14,592
<CURRENT-ASSETS> 653,183
<PP&E> 587,130
<DEPRECIATION> 182,431
<TOTAL-ASSETS> 2,303,785
<CURRENT-LIABILITIES> 683,413
<BONDS> 362,862
<COMMON> 398,103
0
527,335
<OTHER-SE> 247,419
<TOTAL-LIABILITY-AND-EQUITY> 2,303,785
<SALES> 2,909,809
<TOTAL-REVENUES> 2,909,809
<CGS> 2,782,953
<TOTAL-COSTS> 2,782,953
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 11,661
<INTEREST-EXPENSE> 18,852
<INCOME-PRETAX> 130,478
<INCOME-TAX> 60,020
<INCOME-CONTINUING> 70,458
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 70,458
<EPS-PRIMARY> 1.26
<EPS-DILUTED> 1.21
</TABLE>
