-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: keymaster@town.hall.org Originator-Key-Asymmetric: MFkwCgYEVQgBAQICAgADSwAwSAJBALeWW4xDV4i7+b6+UyPn5RtObb1cJ7VkACDq pKb9/DClgTKIm08lCfoilvi9Wl4SODbR1+1waHhiGmeZO8OdgLUCAwEAAQ== MIC-Info: RSA-MD5,RSA, jBQXeQ+VJESDXqRw4+xR+xyZgr/oD9MGj22/oXmZllmBDMIL1GcPgoW5Jx1w2/+s cjc7BvWoxXu6TSz2H+AJgg== 0000793499-94-000007.txt : 19940607 0000793499-94-000007.hdr.sgml : 19940607 ACCESSION NUMBER: 0000793499-94-000007 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19931231 FILED AS OF DATE: 19940214 DATE AS OF CHANGE: 19940214 FILER: COMPANY DATA: COMPANY CONFORMED NAME: FHP INTERNATIONAL CORP CENTRAL INDEX KEY: 0000793499 STANDARD INDUSTRIAL CLASSIFICATION: 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: 001-11329 FILM NUMBER: 94507911 BUSINESS ADDRESS: STREET 1: 9900 TALBERT AVE STREET 2: C/O FHP INTERNATIONAL CORP 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 10Q 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, 1993 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 32,121,482 shares of common stock, par value $0.05 per share, outstanding at February 10, 1994. 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) 1993 1993 _____________ __________ Cash and cash equivalents $ 173,269 $ 2,700 Short-term investments 187,474 174,057 Accounts receivable (net of allowance for doubtful accounts of $10,791 and $7,147 at December 31, 1993 and June 30, 1993, respectively) 62,135 56,288 Inventories 12,511 11,658 Other current assets (Note 4) 26,468 22,167 __________ ________ Total current assets 461,857 266,870 __________ ________ Property and equipment 486,460 455,915 Less accumulated depreciation and amortization 128,238 109,607 __________ ________ Property and equipment, net 358,222 346,308 __________ ________ Long-term investments 76,245 38,723 Restricted investments 75,153 67,025 Other assets (Notes 4 & 7) 35,419 26,758 __________ ________ Total assets $1,006,896 $745,684 ============ ======== __________ 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) 1993 1993 _____________ ________ Current portion of long-term obligations $ 147 $ 2,474 Accounts payable 29,617 39,935 Medical claims payable 168,384 149,060 Accrued salaries and employee benefits 84,640 69,940 Deferred premiums 143,633 17,678 Other current liabilities 17,267 16,817 __________ ________ Total current liabilities 443,688 295,904 Long-term obligations 103,064 20,802 Other liabilities 72,519 64,556 __________ ________ Total liabilities 619,271 381,262 __________ ________ Commitments and contingencies (Note 6) Stockholders' equity: Preferred stock, $0.05 par value; 5,000,000 shares authorized; none outstanding Common stock, $0.05 par value; 70,000,000 shares authorized; 33,109,582 and 32,836,079 shares issued at December 31, 1993 and June 30, 1993, respectively 1,655 1,642 Paid-in capital 224,066 222,375 Retained earnings 161,904 140,405 _________ _______ Total stockholders' equity 387,625 364,422 _________ _______ Total liabilities and stockholders' equity $1,006,896 $745,684 ========== ======== __________ 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, ________________________ 1993 1992 ________ ________ Revenue $591,107 $464,509 ________ ________ Expenses: Primary health care 472,349 373,368 Other health care 22,779 20,587 General, administrative and marketing 82,295 64,294 ________ ________ Total expenses 577,423 458,249 ________ ________ Operating income 13,684 6,260 Interest income, net (Note 5) 3,207 3,450 ________ ________ Income before income taxes 16,891 9,710 Provision for income taxes (Note 4) 6,638 3,559 ________ ________ Net income $ 10,253 $ 6,151 ======== ======== Earnings per share (Note 2) $ 0.31 $ 0.19 ====== ====== Weighted average number of common shares and common share equivalents 33,533 33,233 ====== ====== __________ 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, _______________________________ 1993 1992 __________ ________ Revenue $1,167,486 $908,676 __________ ________ Expenses: Primary health care 934,219 731,191 Other health care 45,831 41,507 General, administrative and marketing 160,268 123,452 __________ ________ Total expenses 1,140,318 896,150 __________ ________ Operating income 27,168 12,526 Interest income, net (Note 5) 7,331 7,300 __________ ________ Income before income taxes 34,499 19,826 Provision for income taxes (Note 4) 13,000 7,231 __________ _______ Net income $ 21,499 $ 12,595 ========== ======== Earnings per share (Note 2) $ 0.64 $ 0.38 ====== ====== Weighted average number of common shares and common share equivalents 33,515 33,059 ====== ====== __________ 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, ______________________ 1993 1992 ________ ________ Operating Activities Net income $ 21,499 $ 12,595 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 21,104 14,379 Loss on disposal of equipment 1,285 427 Amortization of restricted stock awards 220 Deferred income taxes (1,948) (111) Effect on cash of changes in operating assets and liabilities, net of effects of purchase of Colorado health maintenance organization (HMO) (Note 7): Accounts receivable, net (5,706) (1,585) Inventories (853) (1,429) Other current assets (4,492) (959) Other assets (3,814) (17,237) Accounts payable (10,671) (1,766) Medical claims payable 17,553 3,040 Accrued salaries and employee benefits 14,700 2,834 Deferred premiums 125,805 112,938 Other liabilities 8,386 6,508 ________ ________ Net cash provided by operating activities 182,848 129,854 ________ ________ Investing Activities Increase in short-term investments (9,588) (706) Purchases of property and equipment (35,416) (44,361) Increase in long-term and restricted investments (45,495) (21,172) Purchase of Colorado HMO (net of cash acquired) (3,419) Payments received on notes receivable from Employee Stock Ownership Trust 4,150 ________ ________ Net cash used in investing activities (93,918) (62,089) ________ ________ FHP INTERNATIONAL CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (continued) (unaudited) For The Six Months Ended (amounts in thousands) December 31, ________________________ 1993 1992 _________ ________ Financing Activities Issuance of common stock $ 13 $ 15 Proceeds from issuance of Senior Notes 100,000 Payments on long-term obligations (20,065) (1,896) Exercise of stock options 1,691 1,559 ________ ________ Net cash provided by (used in) financing activities 81,639 (322) ________ ________ Increase in cash and cash equivalents 170,569 67,443 Cash and cash equivalents at beginning of period 2,700 73,560 ________ ________ Cash and cash equivalents at end of period $173,269 $141,003 ======== ======== Supplemental cash flow information: Interest payments (net of portion capitalized) $ 2,476 $ 1,147 Income tax payments (net of refunds) $ 17,803 $ 13,142 Note: Certain amounts previously classified as property, plant and equipment of $3,039,000 were reclassified to other assets during the six months ended December 31, 1993. __________ See accompanying notes to consolidated financial statements. FHP INTERNATIONAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) NOTE 1. Accounting Policies Interim periods are viewed as an integral part of the annual period of FHP International Corporation and subsidiaries (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, 1993. In the opinion of management, all adjustments necessary to fairly present the financial position and the results of operations for the three and six months ended December 31, 1993 and 1992 are included in these consolidated financial statements. NOTE 2. Earnings Per Share Earnings per share for the three and six months ended December 31, 1993 and 1992 are computed by dividing net income by the weighted average number of common shares and dilutive common stock options, which are considered common share equivalents, outstanding during the periods. NOTE 3. Reclassifications Certain prior period amounts have been reclassified to conform to the current period financial statement presentation. NOTE 4. Income Taxes The Company adopted Statement of Financial Accounting Standards (SFAS) No. 109, Accounting for Income Taxes, effective as of July 1, 1993. This Statement supersedes Accounting Principles Board (APB) Opinion No. 11, Accounting for Income Taxes. Under SFAS No. 109, 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. No cumulative effect of the accounting change was recorded because the amount of deferred tax assets and liabilities computed under the new method is not significantly different from the amount recorded under the former method using APB Opinion No. 11. FHP INTERNATIONAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (unaudited) NOTE 5. Capitalized Interest The Company capitalizes interest costs as part of the cost of constructing major facilities. Interest costs of $100,000 and $700,000 were capitalized during the three months ended December 31, 1993 and 1992, respectively. Interest costs of $496,000 and $1,421,000 were capitalized during the six months ended December 31, 1993 and 1992 respectively. NOTE 6. Commitments and Contingencies During the ordinary course of business, the Company and its subsidiaries have become party to pending and threatened legal actions and proceedings, a significant portion of which involve alleged claims of medical malpractice. Management is of the opinion that the outcome of such legal actions and proceedings will not have a material effect on the consolidated financial statements of the Company and its subsidiaries. NOTE 7. Acquisition In October 1993, the Company acquired an approximately 4,700-member health maintenance organization based in Denver, Colorado for approximately $3.5 million. 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 costs in excess of net assets acquired of approximately $1,000,000. The Company also obtained a covenant not to compete for which it paid $500,000. NOTE 8. Subsequent Event On January 10, 1994, the Company announced it had reached an agreement in principle to acquire TakeCare, Inc. ("TakeCare"), a health maintenance organization serving over 755,000 commercial members in California, Colorado, Illinois and Ohio. The agreement in principle called for aggregate consideration of more than $800 million, or $62 per share of TakeCare common stock. Under the terms of the agreement in principle, TakeCare was required to negotiate exclusively with the Company through February 7, 1994. On February 8, 1994, TakeCare announced that it had not entered into a definitive merger agreement with the Company and that, as a result, the agreement in principle with the Company had terminated. TakeCare also announced that its Board of Directors had concluded that TakeCare should engage in discussions with other companies that have expressed an interest in acquiring TakeCare before the TakeCare Board of Directors reaches a decision as to the execution of any further agreement relating to the sale or merger of TakeCare. Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Three Months Ended December 31, 1993 Compared to the Three Months Ended December 31, 1992 Revenue Substantially all of the Company's revenue is generated by premiums received for health care services provided to its HMO members. Revenue for the three months ended December 31, 1993 totaled $591.1 million, increasing 27.3% over revenue of $464.5 million for the same period in the previous fiscal year. Approximately 4.0% of the Company's revenue for the three months ended December 31, 1993 was derived from its subsidiaries' indemnity health and life insurance and workers' compensation products. This compares to 3.4% for the same period during the previous fiscal year. This increase reflected the March 1993 acquisition of an insurance company specializing in providing workers' compensation coverage. Commercial HMO revenue growth for the three months ended December 31, 1993 was generated by membership increases and premium rate increases. Commercial per member per month revenue on average increased 3.0% over the prior year period, and is expected to average approximately the same over the balance of fiscal 1994. The Company's ability to increase commercial HMO premiums continues to be impacted by increasing competition among HMOs and insurers in the Company's service areas and by pressure from some large employers and other groups to minimize rate increases or even reduce existing rates. The Company expects to mitigate this impact by restructuring HMO benefits, and offering additional managed care products and services. Senior Plan revenue growth for the three months ended December 31, 1993 was generated by membership increases and rate increases on premiums paid to the Company by the Health Care Financing Administration ("HCFA") for its Senior Plan members (individuals eligible for benefits under the federal Medicare program). Revenue per Senior Plan member is substantially higher than revenue per commercial plan member because Senior Plan members use substantially more health care services. The Company receives Senior Plan premium rate increases on January 1 of each year. Effective January 1, 1993, the Company received an average 11.6% rate increase. Effective January 1, 1994, the Company will receive an average annual premium rate increase of approximately 2.0% for its Senior Plan members. In an effort to offset this low rate increase, the Company has modified Senior Plan benefits and introduced new premium plans for Senior Plan members. HMO Membership The Company experienced a 13.7% growth in total HMO membership to 877,000 members at December 31, 1993 from 771,000 members at December 31, 1992. Senior Plan membership increased by 16.4% to 319,000 from 274,000, primarily in the Company's IPA and mixed models in California, Arizona and Nevada. Commercial plan membership increased by 12.3% to 558,000 from 497,000, primarily in the Company's IPA and mixed models in California and Nevada and in the staff model in Utah. Total staff model membership grew 4.5% to 345,000 at December 31, 1993 from 330,000 at December 31, 1992. Total IPA and mixed model membership grew 20.6% to 532,000 at December 31, 1993 from 441,000 at December 31, 1992. In addition, in October 1993, the Company acquired an approximately 4,700- member HMO in Denver, Colorado. During the last three fiscal quarters, the Company has experienced declining membership in certain staff model medical centers in Southern California. The decline has been primarily among commercial members and management believes this has been caused by increased competition, the economic recession and substantial employment reductions in several industry sectors. In January 1994, effective in the third quarter of fiscal 1994, the Company signed a contract with the California Department of Health Services that will allow it to enroll up to a maximum of 10,000 Medi-Cal beneficiaries in Los Angeles County. The Medi-Cal members will be served by the Company's five staff model medical centers in Los Angeles County. Enrollment is expected to build slowly over calendar 1994. In Arizona, commercial enrollment growth slowed to approximately 3.8% over the year ended December 31, 1993, due primarily to aggressive pricing by major competitors and a maturing market. The Company's Senior Plan growth in Arizona has been constrained by a HCFA rule that senior membership may not exceed commercial membership. At December 31, 1993, Senior Plan membership in Arizona equalled commercial membership. Cost of Health Care Health care costs increased 25.7% to $495.1 million for the three months ended December 31, 1993 from $394.0 million for the three months ended December 31, 1992. Health care costs decreased as a percent of revenue to 83.8% in the current period from 84.8% in the same period last year. This decrease resulted primarily from lower hospital costs in the Company's California, Arizona, and New Mexico regions, as well as a decrease in pharmacy and health care operations costs as a percentage of revenue. Although the Company's California staff model operations continued to be unfavorably impacted by fixed operating and delivery system costs in certain medical centers, health care costs as a percentage of revenue improved over the prior year period. The Company's Utah operations incurred higher health care costs as a percentage of revenue mainly due to the opening of a new hospital in August 1993. General, Administrative and Marketing Costs General, administrative and marketing ("G & A") expenses increased 28.0% to $82.3 million for the second quarter of fiscal 1994 from $64.3 million for the second quarter of fiscal 1993. The increase resulted primarily from growth in the Company's operations, increased advertising expenses, costs associated with a small reduction in the Company's work force, and the inclusion of G & A costs for Great States Insurance Company ("GSIC") which was acquired in March 1993. G & A expenses for the three months ended December 31, 1993 increased slightly as a percentage of revenue to 13.9% from 13.8% for the same period in the prior year. Six Months Ended December 31, 1993 Compared to the Six Months Ended December 31, 1992 Revenue Revenue for the six months ended December 31, 1993 totaled $1,167.5 million, increasing 28.5% over revenue of $908.7 million for the same period in the previous year. Approximately 4.5% of the revenue for the six months ended December 31, 1993, was related to the Company's indemnity health insurance, workers' compensation and life insurance programs. Cost of Health Care Health care costs increased 26.8% to $980.1 million for the six months ended December 31, 1993, from $772.7 million for the comparable six months ended December 31, 1992. Health care costs during the six- month period decreased to 83.9% of total revenue from 85.0% of total revenue in the same period last year primarily as a result of lower hospital and health care operations costs. Although the Company's California staff model operations continued to be unfavorably impacted by fixed operating and delivery system costs in certain medical centers, health care costs as a percentage of revenue improved over the prior year period. The Company's Utah operations incurred higher health care costs as a percentage of revenue mainly due to the opening of a new hospital in August 1993. General, Administrative and Marketing Costs G & A expenses increased 29.8% to $160.3 million from $123.5 million in the previous year, due to continuing expansion of the Company's operations. G & A expenses were 13.7% of total revenue for the six months ended December 31, 1993 versus 13.6% of total revenue for the comparable period in the previous year. The increase resulted primarily from the inclusion of G & A costs for GSIC which was acquired in March 1993. Interest Income Net interest income was $7.3 million in the first half of fiscal 1994 versus $7.3 million in the first half of fiscal 1993. Net interest income remained constant primarily as the result of higher average invested cash balances during the period offset by the interest expense of the $100 million of 7% senior 10-year notes (the "Notes") issued in September 1993. Also, capitalized interest decreased approximately $1.0 million year-over-year, due to the completion of several major construction projects. Liquidity and Capital Resources The Company's cash, cash equivalents and short-term investments increased by $183.9 million to $360.7 million at December 31, 1993 from $176.8 million at June 30, 1993. This increase reflects the early receipt in December 1993 of $130.0 million in premiums from HCFA due on January 1, 1994 for medical services to be provided to Senior Plan members in January 1994. Other major sources of cash during the six months ended December 31, 1993, included cash generated from operations of $52.8 million (excluding the early receipt of the HCFA premiums of $130.0 million) and net proceeds from the "Notes" in September 1993. Major uses of cash during the period included $35.4 million for capital expenditures and $45.5 million in long-term and restricted investments. The Company generally receives premiums on a prepaid basis and therefore operates with relatively large cash balances. The Company believes that the cash flow generated by its operations, current cash balances and short-term investments will be sufficient to fund continuing operations during fiscal 1994. The net proceeds from the sale of the Notes was used to repay, in full, certain outstanding indebtedness of approximately $21 million. The Company has used $25.0 million of the remaining net proceeds to increase the net surplus of an indirect insurance subsidiary of the Company, with the balance available for general corporate purposes, including possible acquisitions. Effects of Regulatory Changes and Inflation Effective January 1, 1994, the Company will receive an average annual premium rate increase of approximately 2.0% for its Senior Plan members. Over calendar years 1992 and 1993, average annual Senior Plan premium increases granted by HCFA were approximately 5.0% and 11.6%, respectively. The Company periodically 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. Effects of Southern California Earthquake The Company is currently assessing the impact of the January, 1994, earthquake in Southern California. After the earthquake, the Company experienced an interruption in its rate of enrollment in the effected areas of Southern California. The Company also lost some contract provider and contract hospital capacity, and experienced some temporary increase in emergency room usage. One company-operated facility was temporarily affected. At this time, the Company does not have sufficient information to fully assess the effect of the earthquake on the Company's earnings for the year. However, management does not believe the effect of the earthquake will have a material adverse effect on the consolidated financial position of the Company. PART II - OTHER INFORMATION Item 1. Legal Proceedings. Information relating to certain litigation as set forth in Note 6 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 18, 1993. (b) Burke F. Gumbiner and Warner Heineman were elected as Directors to serve three-year terms ending in 1996. Other Directors whose terms of office continued after the meeting were Westcott W. Price III, Joseph F. Prevratil, Mark Hacken, Robert Gumbiner and Richard M. Rodnick. (c) The Stockholders elected Burke F. Gumbiner as a Director by vote of 22,897,884 for and 193,189 authority withheld. The Stockholders elected Warner Heineman as a Director by a vote of 22,859,096 for and 231,977 authority withheld. The Stockholders approved by a vote of 22,996,609 for, 48,255 against, 46,197 abstaining and 12 broker non-votes, the ratification of the appointment of Deloitte & Touche as independent auditors of the Company for the fiscal year ending June 30, 1994. Item 5. Other Information. Information relating to the possible acquisition of TakeCare, Inc. as set forth in Note 8 of Notes to Consolidated Financial Statements in Part I of this report is incorporated herein by this reference. 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 1994. 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 14, 1994 By: /s/ VALERIE A. FLETCHER ________________________________ Valerie A. Fletcher, Controller (Chief Accounting Officer) INDEX TO EXHIBITS Exhibit Number *4.1 Specimen Common Stock Certificate (Exhibit 4.1 to Form S-3 Registration Statement No. 33-39984). 4.2 Registrant agrees to furnish to the Commission upon request a copy of each instrument with respect to issues of long-term debt of the Registrant, the authorized principal amount of which does not exceed 10% of total assets of Registrant. 10.1 Employment Contract dated as of November 1, 1993, between the Company, FHP, Inc. and Mark B. Hacken. 11.1 Statement Re: Computation of Earnings Per Share. -----END PRIVACY-ENHANCED MESSAGE-----