-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, EMJya2B5rdCmdvJvWAKt78QeI8pLE3MkNaVsGMqVAjGB32JB5CQvKTwUzpaOjs/n sMEG0r//OCtcFQrRllAXnw== 0000793499-96-000005.txt : 19960216 0000793499-96-000005.hdr.sgml : 19960216 ACCESSION NUMBER: 0000793499-96-000005 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19951231 FILED AS OF DATE: 19960213 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: FHP INTERNATIONAL CORP CENTRAL INDEX KEY: 0000793499 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-OFFICES & CLINICS OF DOCTORS OF MEDICINE [8011] IRS NUMBER: 330072502 STATE OF INCORPORATION: DE FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-14796 FILM NUMBER: 96516612 BUSINESS ADDRESS: STREET 1: 9900 TALBERT AVE CITY: FOUNTAIN VALLEY STATE: CA ZIP: 92708 BUSINESS PHONE: 7149637233 FORMER COMPANY: FORMER CONFORMED NAME: FHP CORP DATE OF NAME CHANGE: 19870201 10-Q 1 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 December 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 40,476,738 shares of common stock, par value $0.05 per share, outstanding at February 7, 1996. The Exhibit Index Appears on Page 17 PART 1 - FINANCIAL INFORMATION Item 1. Financial Statements FHP INTERNATIONAL CORPORATION CONSOLIDATED BALANCE SHEETS (unaudited) ASSETS (amounts in thousands, December 31, June 30, except share data) 1995 1995 _____________ ___________ Cash and cash equivalents $ 351,283 $ 299,144 Short-term investments 144,993 157,220 Accounts receivable 149,499 141,840 Prepaid expenses and other current assets 127,307 44,091 Deferred income taxes 31,984 31,984 ___________ ___________ Total current assets 805,066 674,279 Property and equipment, net 233,248 229,765 Assets held for sale (Note 5) 78,804 138,164 Long-term investments 54,137 71,492 Restricted investments 97,528 105,482 Goodwill and other intangibles, net 1,043,601 1,059,507 Other assets, net 37,806 37,127 ___________ ___________ Total assets $2,350,190 $2,315,816 =========== =========== __________ See accompanying notes to consolidated financial statements. FHP INTERNATIONAL CORPORATION CONSOLIDATED BALANCE SHEETS (unaudited) LIABILITIES AND STOCKHOLDERS' EQUITY (amounts in thousands, December 31, June 30, except share data) 1995 1995 _____________ ___________ Current portion of long-term obligations $ 30,095 $ 30,168 Accounts payable 66,449 64,762 Medical claims payable 370,197 341,222 Accrued salaries and employee benefits 78,624 77,716 Unearned premiums 209,661 207,961 Restructuring reserve (Note 5) 11,323 15,038 Income taxes payable and other current liabilities 42,120 15,791 ____________ ___________ Total current liabilities 808,469 752,658 Long-term obligations 290,299 337,817 Other liabilities 93,096 85,200 ____________ ___________ Total liabilities 1,191,864 1,175,675 ____________ ___________ Commitments and contingencies (Note 4) Stockholders' equity: Series A Convertible and Series B Preferred Stock, $0.05 par value; 40,000,000 shares authorized (Note 3) 1,052 1,056 Common Stock, $0.05 par value; 100,000,000 shares authorized; issued and outstanding 40,415,849 and 40,220,941 shares at December 31, 1995 and June 30, 1995, respectively 2,021 2,011 Paid-in capital 929,693 927,882 Unrealized holding gains (losses) on available-for-sale investments, net of tax effect of $(266) at December 31, 1995 and $1,232 at June 30, 1995 289 (1,446) Retained earnings 225,271 210,638 ____________ ____________ Total stockholders' equity 1,158,326 1,140,141 ____________ ____________ Total liabilities and stockholders' equity $2,350,190 $2,315,816 ============ ============ __________ See accompanying notes to consolidated financial statements. FHP INTERNATIONAL CORPORATION CONSOLIDATED STATEMENTS OF INCOME (unaudited) For The (amounts in thousands, Three Months Ended except per share data) December 31, 1995 1994 ___________ ___________ Revenues $1,015,746 $ 954,407 ___________ ___________ Expenses: Primary health care 831,071 759,987 Other health care 29,865 29,681 General, administrative and marketing 127,751 126,079 Provision for restructuring 3,900 ___________ ___________ Total expenses 992,587 915,747 ___________ ___________ Operating income 23,159 38,660 Interest income 9,163 7,263 Interest expense (5,963) (6,429) ___________ ___________ Income before income taxes 26,359 39,494 Provision for income taxes 12,438 18,167 ___________ ___________ Net income 13,921 21,327 Preferred Stock dividends 6,608 6,630 ___________ ___________ Net income attributable to Common Stock $ 7,313 $ 14,697 =========== =========== Primary earnings per share attributable to Common Stock (Note 2) $ 0.18 $ 0.36 =========== =========== Weighted average number of common shares and common share equivalents 41,289 41,234 =========== =========== __________ See accompanying notes to consolidated financial statements. FHP INTERNATIONAL CORPORATION CONSOLIDATED STATEMENTS OF INCOME (unaudited) For The (amounts in thousands, Six Months Ended except per share data) December 31, 1995 1994 ___________ ___________ Revenues $2,020,379 $1,908,747 ___________ ___________ Expenses: Primary health care 1,650,042 1,522,995 Other health care 60,710 55,704 General, administrative and marketing 252,877 254,152 Provision for restructuring 9,659 ___________ ___________ Total expenses 1,973,288 1,832,851 ___________ ___________ Operating income 47,091 75,896 Interest income 18,299 14,535 Interest expense (12,387) (12,566) ___________ ___________ Income before income taxes 53,003 77,865 Provision for income taxes 25,155 35,818 ___________ ___________ Net income 27,848 42,047 Preferred Stock dividends 13,215 12,135 ___________ ___________ Net income attributable to Common Stock $ 14,633 $ 29,912 =========== =========== Primary earnings per share attributable to Common Stock (Note 2) $ 0.36 $ 0.73 =========== =========== Weighted average number of common shares and common share equivalents 41,146 41,044 =========== =========== Fully diluted earnings per share (Note 2) - $ 0.72 =========== =========== Fully diluted weighted average number of common shares and common share equivalents - 58,005 =========== =========== __________ See accompanying notes to consolidated financial statements. FHP INTERNATIONAL CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited) For The Six Months Ended (amounts in thousands) December 31, 1995 1994 ___________ ___________ Operating Activities Net income $27,848 $ 42,047 Adjustments to reconcile net income to net cash provided by operating activities: Provision for restructuring 9,659 Depreciation and amortization 36,714 41,048 Increase in allowance for doubtful accounts 1,782 2,589 Loss on disposal of equipment 48 1,648 Deferred income taxes (522) Effect on cash of changes in operating assets and liabilities: Accounts receivable (9,441) (25,895) Prepaid expenses and other current assets 3,784 (6,854) Other assets (2,621) (476) Accounts payable 1,687 279 Medical claims payable 28,975 31,596 Accrued salaries and employee benefits 908 1,807 Deferred premiums 1,700 145,933 Other liabilities (5,668) (38,728) ___________ ___________ Net cash provided by operating activities 95,375 194,472 ___________ ___________ Investing Activities Purchases of available-for-sale investments (112,706) (236,197) Proceeds from sales/maturities of available-for-sale investments 154,216 247,984 Loss on sale of available-for-sale investments 258 476 Gain on sale of available-for-sale investments (999) (200) Purchases of property and equipment (28,747) (26,745) Proceeds from sales of assets held for sale 1,228 ___________ ___________ Net cash provided by (used in) investing activities 13,250 (14,682) ___________ ___________ FHP INTERNATIONAL CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS(continued) (unaudited) For The Six Months Ended (amounts in thousands) December 31, 1995 1994 ___________ ___________ Financing Activities Payments on long-term obligations (45,088) (75) Exercise of stock options 3,797 4,577 Cash dividends paid to preferred shareholders (13,215) (12,952) Redemption of Series B Preferred Stock (1,980) ___________ ___________ Net cash used in financing activities (56,486) (8,450) ___________ ___________ Increase in cash and cash equivalents 52,139 171,340 Cash and cash equivalents at beginning of period 299,144 60,571 ___________ ___________ Cash and cash equivalents at end of period $351,283 $231,911 =========== =========== Supplemental cash flow information: Interest payments $ 10,603 $ 11,191 Income tax payments (net of refunds) $ 27,072 $ 43,240 __________ 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. 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, 1995. In the opinion of management, all adjustments necessary to fairly present the financial position and the results of operations for the six months ended December 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 six months ended December 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 six months ended December 31, 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 quarter for dilutive common stock options. NOTE 3. Preferred Stock The issued and outstanding, and aggregate liquidation preference of the Company's two series of preferred stock are as follows: December 31, 1995 June 30, 1995 -------------------- ---------------------------- Series B Series A Series A Adjustable Cumulative Cumulative Rate Convertible Convertible Cumulative ------------- -------------------------- Issued and outstanding 21,040,307 21,040,307 79,218 Aggregate liquidation preference $526,032,000 $526,027,000 $1,999,000 The Company redeemed all of its outstanding Series B Preferred Stock at Stated Value in December 1995. NOTE 4. Commitments and Contingencies 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 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 5. 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 subsidiary physician practice management company, Talbert Medical Management Corporation ("TMMC"). TMMC became operational January 1, 1996. The Board of Directors also decided to sell the Company's Fountain Valley, California hospital campus and its Salt Lake City, Utah hospital campus and other nonproductive real estate. The Company has sold its Fountain Valley, California hospital campus for gross proceeds of $87 million. The gross proceeds were deposited in escrow and will be released to the Company upon the purchaser obtaining certain operating licenses, which are expected to be obtained before the end of the current fiscal year. The receivable created by this escrow has been included in prepaid expenses and other current assets in the Consolidated Balance Sheet, as of December 31, 1995. During six months ended December 31, 1995, the Company recorded a pretax restructuring charge of approximately $9.7 million ($6.0 million, net of tax) in the accompanying Consolidated Statements of Income. Included in this charge are the costs of employee separations (approximately $4.7 million), and certain other costs associated with the Company's restructuring of its operations (approximately $5.0 million). Affected employees were notified prior to December 31, 1995. 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 December 31, 1995, and June 30, 1995, and are expected to be disposed of by the end of fiscal year 1996. 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 or other disposition of the Company's owned and operated hospitals and other in- patient facilities; 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, Talbert Medical Management Corporation ("TMMC"); 2) the contract model health maintenance organization ("HMO"); and 3) the Company's group life, health and accident and workers' compensation insurance and related products (collectively, the "Insurance Group"). Costs associated with restructuring, including administrative facility closure costs and employee separation costs, resulted in pretax charges against earnings of approximately $75.1 million in the fourth quarter of fiscal year 1995, and $5.8 million and $3.9 million in the first and second quarters of fiscal year 1996, respectively. Net proceeds available from the sales of assets will be used for various corporate purposes including the reduction of indebtedness. The Company has made the following progress with regard to the Restructuring Plan: * Disposition of Assets The Company has sold its Fountain Valley, California, hospital campus for gross proceeds of $87 million. Proceeds will be released from escrow upon the purchaser obtaining certain operating licenses, which are expected to be obtained before the end of fiscal year 1996. The transaction was recorded in the second quarter of fiscal year 1996 and had no material affect on operating results for the second quarter. The campus includes primary and specialty care medical clinics and other buildings. The transaction included the lease of the primary and specialty care clinics by TMMC. In January, 1996, the Company signed a non- binding letter of intent for the sale of the Company's acute care hospital and surrounding campus located in Salt Lake City, Utah. Also, the Company has reached agreements to transfer the operations of its two other in-patient facilities to other operators during the second half of fiscal year 1996. The Company expects to complete sales of other assets and certain vacant land by the end of fiscal year 1996. * Work Force Reductions The Company reduced its work force by approximately 250 employees in the three month period ended December 31, 1995. This reduction was in addition to reductions of approximately 750 employees between June and September, 1995. In addition, the approximately 700 employees of the Company's Fountain Valley hospital became employees of the Purchaser effective with the transaction. * TMMC The Restructuring Plan included the creation of TMMC, operational January 1, 1996, as a new subsidiary of the Company, together with the creation of several new professional corporations (the "PCs"). Approximately 4,100 of the Company's employees, including health care professionals, became employees of TMMC or of the PCs on January 1, 1996. At the same time: 1) TMMC leased or subleased all of the Company's medical centers and related assets located in California, Arizona, Utah and Nevada; and 2) the Company's HMO contracted with the PCs to provide health care services to approximately 20% of the Company's HMO members who were already receiving health care in the medical centers. The contractual arrangements between the Company's HMO and the PCs are financially similar to existing contracts between the HMO and other contract health care providers. Also, the PCs entered into long-term practice management agreements with TMMC, thereby enabling the PCs and TMMC to do business with other payors and HMOs, as well as with the Company's HMO. These third party arrangements will allow TMMC to utilize excess capacity in the medical centers. Three Months Ended December 31, 1995 Compared to the Three Months Ended December 31, 1994 Revenue and Membership The Company generates substantially all of its revenue from premiums received for health care services provided to the HMO members of its wholly-owned subsidiaries. Total revenue for the three-month period ended December 31, 1995, was $1,016 million increasing 6.5% over revenue of $954 million for the same period in the previous year. The Company's commercial and senior enrollment each generate approximately half of the Company's HMO revenue. The Company's ability to increase its commercial HMO premium rates during the last two fiscal years and the first two fiscal quarters of fiscal year 1996 were 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 in 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. Total HMO membership grew 5.1% to approximately 1,825,000 at December 31, 1995, from approximately 1,737,000 at December 31, 1994. During fiscal year 1995, the Company experienced slower membership growth than in prior years, due primarily to intense competition in all its key markets. The membership growth rate of 5.1% shows an improvement over the Company's membership growth rate of 3.9% for the prior fiscal year; however, growth is slower than the Company experienced in earlier years, and is slower than the HMO industry in general. From December 31, 1994, to December 31, 1995, total commercial membership increased by 64,000 or 4.7% from approximately 1,375,000 to approximately 1,439,000. The Company's ability to increase its commercial membership during the last two fiscal years and the first and second quarters of fiscal year 1996 has been adversely impacted by intense competition in all the Company's major markets, particularly in California. Senior membership grew by 24,000 or 6.6% to approximately 386,000 at December 31, 1995, from approximately 362,000 at December 31, 1994. Almost all of the Company's senior HMO revenue is generated from premiums paid to the Company by the Health Care Financing Administration ("HCFA"). Revenue per senior member is substantially higher than revenue per commercial member because senior members use substantially more health care services. 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. For calendar year 1995, the Company received an average 5.8% rate increase. For calendar year 1996, the Company will receive an average 5.1% rate increase. Cost of Health Care Health care costs increased 9.0% to $861 million for the three months ended December 31, 1995, from $790 million for the three months ended December 31, 1994, due to operational growth and cost increases. Health care costs increased as a percentage of revenue by 2.1 percentage points, to 84.8% from 82.7% for the same three month period in the prior fiscal year. The increase as a percent of revenue resulted primarily from lower commercial premium rates and higher health care costs in almost all states in which the Company operates. General, Administrative and Marketing Costs General, administrative and marketing ("G & A") expenses increased by $2 million or 1.3% to $128 million for the three month period ended December 31, 1995, from $126 million for the three month period ended December 31, 1994. The small increase is the result of higher sales and marketing costs, offset by cost savings from workforce reductions and other cost controls. Further reductions in the Company's work force may take place in the second half of fiscal year 1996. G & A expenses for the three month period ended December 31, 1995, decreased as a percentage of revenue to 12.6% from 13.2% for the same period in the prior fiscal year. Interest Income Net interest income was $3 million for the three month period ended December 31, 1995, as compared to $1 million for the three month period ended December 31, 1994. Net interest income increased year- over-year primarily because of growth in the Company's investment portfolio and lower debt. Six Months Ended December 31, 1995 Compared to the Six Months Ended December 31, 1994 Revenue and Membership Revenue for the six month period ended December 31, 1995, totaled $2,020 million, increasing 5.8% over revenue of $1,909 million for the same period in the previous fiscal year. Membership and revenue growth have both been constrained by intense competition in all the Company's major markets and by downward pressure on commercial premium rate increases Cost of Health Care Health care costs increased 8.4% to $1,711 million for the six- month period ended December 31, 1995, from $1,579 million for the comparable six-month period ended December 31, 1994. Health care costs during the six-month period ended December 31, 1995, increased to 84.7% of total revenue from 82.7% of total revenue for the same period last year. Cost of health care has been increasing relative to revenues as competitive pressures have slowed the growth of the Company's revenues; also, the Company has been experiencing higher health care costs in almost all its major markets. General, Administrative and Marketing Costs G & A expenses decreased 0.5% to $253 million for the six-month period ended December 31, 1995, from $254 million for the same period in the previous year, primarily due to cost reductions resulting from the Company's Restructuring Plan. G & A expenses were 12.5% of total revenue for the six-month period ended December 31, 1995, versus 13.3% of total revenue for the comparable period in the previous year. Interest Income Net interest income was $6 million for the six-month period ended December 31, 1995, compared to $2 million for the same period in the previous fiscal year. Net interest income increased $4 million year- over-year primarily as the result of growth in the Company's investment portfolio and lower debt. Liquidity and Capital Resources The Company's consolidated cash, cash equivalents and short-term investments increased by $40 million to $496 million at December 31, 1995, from $456 million at June 30, 1995. The total reflects the receipt in December, 1995, of approximately $167 million of premiums from HCFA due on January 1, 1996, for medical services to be provided to senior members in January, 1996. (The Company's June 30, 1995 cash balances were similarly affected.) Other major sources of cash during the six month period ended December 31, 1995, included cash generated from operations (net of the early receipt of HCFA premiums) of $80 million, and net transfers of $7 million from long-term and restricted investments. Major uses of cash during the period included $29 million for capital expenditures, $13 million for preferred stock dividends, and $45 million of debt repayment. Also, the Company redeemed all of its outstanding Series B Preferred Stock for approximately $2 million. The Company entered into a $350 million Credit Agreement in March, 1994. The Credit Agreement, as amended, provides for 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 6.3% based on LIBOR rate borrowings. The Term Loan is repayable at the rate of $15 million every six months. The first repayment was made 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. The Company's ability to make a payment on, or repayment of, its obligations under the Notes, the Credit Agreement, and the 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 (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 $75 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. As stated above, gross proceeds of $87 million from the sale of the Company's Fountain Valley hospital campus were deposited into escrow. These proceeds, together with interest earned, should be available to the Company before the end of fiscal year 1996. Cash generated from this and other real property sales under the Restructuring Plan will be used for various corporate purposes including the reduction of indebtedness. Effects of Regulatory Changes and Inflation Effective January 1, 1996, the Company received an average premium rate increase from HCFA of approximately 5.1% for its senior HMO members. Over calendar years 1994 and 1995, annual senior premium increases from HCFA were approximately 2.0% and 5.8%, respectively. 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 commercial employers attempting to hold their costs down. 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. The Company believes that internal cost control measures and financial risk- sharing arrangements with its contract medical providers will help to mitigate the effects of inflation on its operations. However, there can be no assurance that the Company's efforts to reduce the impact of the increasing cost of health care will be as successful in the future as they have been in the past, or that the Company will be able to obtain premium rate increases in the commercial sector in the short term. PART II - OTHER INFORMATION Item 1. Legal Proceedings. Information relating to certain litigation as set forth in Note 4 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. (a) The Annual Meeting of Stockholders was held on November 16, 1995. (b) Richard M. Burdge, Sr., Robert C. Maxson and Robert W. Jamplis were elected as Directors to serve three year terms ending in 1998. Other Directors whose terms of office continued after the meeting were Burke F. Gumbiner, Warner Heineman, Jack R. Anderson, Westcott W. Price III and Joseph F. Prevratil. (c) The Stockholders elected Richard M. Burdge, Sr. as a Director by vote of 26,662,427 for and 1,105,161 authority withheld. The Stockholders elected Robert C. Maxson as a Director by a vote of 26,695,250 for and 1,072,340 authority withheld. The Stockholders elected Robert W. Jamplis as a Director by a vote of 26,674,004 for and 1,093,584 authority withheld. (d) The Stockholders approved by a vote of 16,995,622 for, 8,445,855 against, 119,684 abstaining and 1,193,565 broker non-votes, the ratification and approval of amendments to the Company's Executive Incentive Plan. (e) The Stockholders approved by a vote of 27,569,862 for, 99,360 against and 98,365 abstaining the ratification of the appointment of Deloitte & Touche as independent auditors of the Company for the fiscal year ending June 30, 1996. Item 5. Other Information. None. Item 6. Exhibits and Reports on Form 8-K. (a) Exhibits. See Index to Exhibits at page 17 of this report. (b) Reports on Form 8-K. None filed during the second quarter of Fiscal 1996. 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: February 12, 1996 By: /s/ Kenneth S. Ord Senior Vice President and Chief (Principal) Financial Officer 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. EX-11 2 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) December 31, 1995 1994 ___________ ___________ Primary earnings per share attributable to Common Stock: Net income attributable to Common Stock $ 7,313 $14,697 =========== =========== Weighted average number of Common Shares and Common Share equivalents: Common Stock 40,324 39,878 Assumed exercise of options 965 1,356 ___________ ___________ Total shares 41,289 41,234 =========== =========== Primary earnings per share attributable to Common Stock $ 0.18 $ 0.36 =========== =========== Fully diluted earnings per share: Net income attributable to Common Stock assuming conversion of Series A cumulative convertible Preferred Stock $13,888 $21,300 =========== =========== Weighted average number of common shares and common share equivalents: Common Stock 40,324 39,878 Assumed exercise of options 1,242 1,356 Assumed conversion of Series A Cumulative Convertible Preferred Stock 16,968 16,961 ___________ ___________ Total shares, assuming full dilution 58,534 58,195 =========== =========== Fully diluted earnings per share $ 0.24(1) $ 0.37(1) =========== =========== (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. EXHIBIT 11.1 FHP INTERNATIONAL CORPORATION STATEMENT RE: COMPUTATION OF EARNINGS PER SHARE (unaudited) For The (amounts in thousands, Six Months Ended except per share data) December 31, 1995 1994 ___________ ___________ Primary earnings per share attributable to Common Stock: Net income attributable to Common Stock $14,633 $29,912 =========== =========== Weighted average number of common shares and common share equivalents: Common Stock 40,287 39,719 Assumed exercise of options 859 1,325 ___________ ___________ Total shares 41,146 41,044 =========== =========== Primary earnings per share attributable to Common Stock $ 0.36 $ 0.73 =========== =========== Fully diluted earnings per share: Net income attributable to Common Stock assuming conversion of Series A Cumulative Convertible Preferred Stock $27,785 $42,003 =========== =========== Weighted average number of common shares and common share equivalents: Common Stock 40,287 39,719 Assumed exercise of options 1,242 1,325 Assumed conversion of Series A Cumulative Convertible Preferred Stock 16,968 16,961 ___________ ___________ Total shares, assuming full dilution 58,497 58,005 =========== =========== Fully diluted earnings per share $ 0.48(1) $ 0.72 =========== =========== (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. EX-27 3
5 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 DECEMBER 31, 1995 QUARTERLY REPORT ON FORM 10-Q. 6-MOS JUN-30-1996 DEC-31-1995 351,283 144,993 173,855 24,356 12,767 805,066 387,478 154,230 2,350,190 808,469 290,299 406,760 0 526,006 225,560 2,350,190 2,020,379 2,020,379 1,963,629 1,963,629 9,659 1,782 12,387 53,003 25,155 27,848 0 0 0 27,848 0.36 0.48
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