-----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, L21M1gkYD3F91JEn9JJJhysJ5SGAeFKeq4811xVISoK1cAON2/AXL6dnLguhCa4n WRLLUy28lFc6s88KuZNoQw== 0000892569-94-000283.txt : 19940930 0000892569-94-000283.hdr.sgml : 19940930 ACCESSION NUMBER: 0000892569-94-000283 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 19940630 FILED AS OF DATE: 19940927 SROS: NASD 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-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-11329 FILM NUMBER: 94550490 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-K 1 FHP INTERNATIONAL CORP. - FORM 10-K ENDING 6/30/94 1 - - -------------------------------------------------------------------------------- - - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K ------------------------ (MARK ONE) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED JUNE 30, 1994 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM TO COMMISSION FILE NUMBER 0-14796 FHP INTERNATIONAL CORPORATION (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) ------------------------ DELAWARE 33-0072502 (STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
9900 TALBERT AVENUE, FOUNTAIN VALLEY, CA 92708 (ADDRESS, INCLUDING ZIP CODE, OF PRINCIPAL EXECUTIVE OFFICES) (714) 963-7233 (REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE) ------------------------ SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: NONE SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: COMMON STOCK PAR VALUE $.05 PER SHARE SERIES A CUMULATIVE CONVERTIBLE PREFERRED STOCK PAR VALUE $.05 PER SHARE SERIES B ADJUSTABLE RATE CUMULATIVE PREFERRED STOCK PAR VALUE $.05 PER SHARE Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES X NO --- --- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] The aggregate market value of the voting stock held by non-affiliates of the registrant at September 15, 1994 was $1,138,866,778. The Registrant had 39,360,276 shares of common stock, par value $.05 per share, outstanding at September 15, 1994. DOCUMENTS INCORPORATED BY REFERENCE Portions of the Registrant's Proxy Statement for the Annual Meeting of Stockholders to be held on November 17, 1994 are incorporated by reference into Part III of this report. - - -------------------------------------------------------------------------------- - - -------------------------------------------------------------------------------- 2 TABLE OF CONTENTS PART I
ITEM PAGE - - ---- ---- 1. Business.......................................................................... 1 2. Properties........................................................................ 6 3. Legal Proceedings................................................................. 6 4. Submission of Matters to a Vote of Security Holders............................... 6 Executive Officers of the Registrant.............................................. 6 PART II 5. Market for Registrant's Common Equity and Related Stockholder Matters............. 9 6. Selected Financial Data........................................................... 9 7. Management's Discussion and Analysis of Financial Condition and Results of Operations........................................................................ 9 8. Financial Statements and Supplementary Data....................................... 10 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure........................................................................ 10 PART III 10. Directors and Executive Officers of the Registrant................................ 10 11. Executive Compensation............................................................ 10 12. Security Ownership of Certain Beneficial Owners and Management.................... 10 13. Certain Relationships and Related Transactions.................................... 10 PART IV 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K................... 11 Signatures........................................................................ 12
3 PART I ITEM 1. BUSINESS (A) GENERAL DESCRIPTION OF BUSINESS Through its direct and indirect subsidiaries, FHP International Corporation, a Delaware corporation (the "Company"), delivers managed health care services and sells indemnity health, group life and workers' compensation insurance. The Company's oldest and largest subsidiary, FHP, Inc., a California corporation ("FHP"), is a federally qualified multistate licensed health maintenance organization ("HMO"), which has been operating managed health care programs since 1961. Unless the context otherwise requires, the term "Company" as used in this Form 10-K Annual Report refers to FHP International Corporation and its direct and indirect subsidiaries, including FHP and TakeCare, Inc. and its subsidiaries ("TakeCare"). The Company provides a broad range of managed health care services to approximately 1,712,000 HMO members, comprised of commercial and governmental employees and Medicare beneficiaries, in California, Colorado, Arizona, Utah, Illinois, Ohio, New Mexico, Nevada and Guam. These managed health care services include ambulatory and outpatient physician care, hospital care, pharmacy, dental care, eye care, home health nursing, skilled nursing, physical therapy, psychological counseling and health education. The Company also offers group life and health insurance products through its insurance subsidiaries. At June 30, 1994, the Company provided group term life insurance coverage for approximately 63,000 individuals and group health and accident indemnity insurance coverage for approximately 48,000 individuals. In its 24 Hour Managed Care ProgramSM the Company offers in a single package workers' compensation coverage, HMO plans and group indemnity medical, dental and life insurance benefit plans through several of its subsidiaries. The Company also offers third party administration and utilization review services and several PPO networks. In October 1993, FHP acquired all of the issued and outstanding stock of Aetna Health Plans of Colorado, Inc., an IPA model HMO with approximately 4,700 members, for an aggregate purchase price, subject to adjustment, of $3.5 million. Upon consummation of the acquisition, Aetna Health Plans of Colorado, Inc. was renamed FHP of Colorado, Inc. In May 1994, FHP of Texas, Inc. became licensed as an HMO in the State of Texas and expects to begin providing healthcare to HMO members in the Houston, Texas area effective October 1, 1994. On June 17, 1994, the Company consummated the acquisition of TakeCare by merging TakeCare with and into a wholly-owned subsidiary of the Company. TakeCare, through its direct and indirect subsidiaries, is a managed health care company that provides comprehensive health care services to approximately 786,000 HMO members as of June 30, 1994, in California, Colorado, Illinois and Ohio. In September 1993, TakeCare acquired Comprecare, Inc. ("Comprecare"), a 178,000-member HMO in Colorado, making TakeCare the largest HMO in Colorado. In connection with the acquisition of TakeCare, the Company entered into a Credit Agreement, dated as of March 24, 1994 (the "Credit Agreement"), among the Company, the lenders named therein and Chemical Bank, as Administrative Agent. The Credit Agreement provides for a $250 million five-year term loan facility and a $100 million five-year revolving credit facility. The Credit Agreement contains financial and other covenants, including limitations on indebtedness, liens, dividends, sale and lease-back transactions and certain other transactions. At June 30, 1994, the Company had approximately 14,000 full and part-time employees. The Company's primary business activities consist of two business segments: HMO services and group life, health and accident and workers' compensation insurance. Information concerning revenue, operating profit or loss and identifiable assets of the Company's two business segments is set forth in the financial statements and relative notes included in Part II of this Form 10-K. 1 4 (B) HMO DELIVERY MODELS The Company operates primarily through two different HMO delivery models. The Company delivers health care services through independent practice association and group model HMOs in which the Company contracts with individual medical and dental providers, provider networks and multi-specialty medical groups to provide healthcare in facilities not operated by the Company. The term "IPA" used hereafter in this Form 10-K Annual Report refers to both of these contractual HMO models. Each IPA model centers around one or more contract hospitals where IPA physicians maintain practice privileges. The Company's members receive health care through the offices of more than 41,000 independent contract providers and more than 500 contract hospitals. In its staff model, the Company delivers health care services through an employed staff of primary health care physicians, physician specialists, dentists, nurses and other health care providers. These providers deliver health care to members in Company-operated facilities rather than in the offices of private doctors and dentists. At June 30, 1994, the Company employed approximately 800 primary care physicians and physician specialists, 200 dentists and 6,000 other health care professionals. Company-operated facilities include 59 medical and dental care centers ranging in size from approximately 2,000 to 96,000 square feet, three acute care hospitals and two sub-acute skilled nursing facilities. In a number of the Company's service areas, members receive health care in mixed models where members have a choice of seeing either independent contracting physicians in their offices or staff physicians employed at Company-operated medical centers. This mixed model combines elements of both the Company's staff and IPA models. The Company also offers its members IPA models in certain areas previously served only by its staff model operations. (C) HMO MEMBERSHIP Commercial Members. As used herein, the term commercial members means all HMO members except Senior PlanSM members. The Company acquires most of its commercial members by contracting with employers that offer health benefits to their employees. These employers generally offer a selection of insurance and managed health care plans, pay for all or part of the monthly costs thereof and make payroll deductions for any costs payable by the employee. Supplemental benefits such as dental and eye care are often included as part of employer health benefit plans. During a designated open enrollment period, employees may select their desired health care coverage. Monthly premiums are negotiated between the Company and the employers, and are typically fixed for a one-year period. Commercial members, including TakeCare membership, comprised approximately 80% of the Company's total membership at June 30, 1994. Senior Plan Members. The Company also delivers managed health care services to Medicare beneficiaries under its Senior Plan pursuant to contracts with the Health Care Financing Administration of the United States Department of Health and Human Services ("HCFA"). These contracts entitle the Company to a fixed fee per member premium, and are subject to adjustment annually based on certain demographic information relating to the Medicare population, and the cost of providing health care in a particular geographic area. Senior Plan membership comprised approximately 35% of the Company's total membership (excluding TakeCare membership) at June 30, 1994, but accounted for approximately 65% of the Company's total revenue for the fiscal year. Including TakeCare membership, Senior Plan membership comprised 20% of the Company's total membership at June 30, 1994. The Company receives substantially more revenue for each Senior Plan member than it receives for each commercial member. In addition to physician care, hospitalization and other benefits covered by Medicare, Senior Plan benefits also include prescription drugs, routine physical exams, hearing tests, immunizations, eye examinations, counseling and health education services. Senior Plan members are enrolled on an individual basis and may disenroll at any time. Medicare beneficiaries can also choose to enroll in the Senior Plan PlusSM program which offers more comprehensive medical and dental benefits. Seniors who enroll in this plan pay a small monthly premium. 2 5 The Company anticipates further growth opportunities for its Senior Plan, based in part on demographic trends that show that the senior population is growing faster than any other segment of the nation's population. The Company is currently one of the largest providers of health care services to Medicare beneficiaries in the United States. The following table shows an approximate breakdown of the Company's HMO membership at June 30, 1994:
STAFF IPA (2) TOTAL STAFF IPA (2) TOTAL STAFF IPA (2) TOTAL % -------- ---------- ---------- ------- -------- -------- -------- ---------- ---------- ---- California (3)............. 90,000 583,000 673,000 50,000 155,000 205,000 140,000 738,000 878,000 51 Colorado (4)............... 0 284,000 284,000 0 19,000 19,000 0 303,000 303,000 18 Arizona.................... 0 88,000 88,000 0 83,000 83,000 0 171,000 171,000 10 Utah....................... 160,000 0 160,000 10,000 0 10,000 170,000 0 170,000 10 Illinois (5)............... 0 43,000 43,000 0 0 0 0 43,000 43,000 3 Ohio (6)................... 0 40,000 40,000 0 0 0 0 40,000 40,000 2 Guam....................... 33,000 5,000 38,000 0 0 0 33,000 5,000 38,000 2 New Mexico................. 0 20,000 20,000 0 17,000 17,000 0 37,000 37,000 2 Nevada..................... 0 18,000 18,000 0 14,000 14,000 0 32,000 32,000 2 -------- --------- --------- ------ ------- ------- ------- --------- --------- --- Total.................. 283,000 1,081,000 1,364,000 60,000 288,000 348,000 343,000 1,369,000 1,712,000 100 ======= ========= ========= ====== ======= ======= ======= ========= ========= ===
- - --------------- (1) Includes government employees and Medicaid recipients. (2) Includes mixed model membership in Arizona, New Mexico and portions of Southern California, where members may choose to receive care in an IPA or staff model setting. (3) Includes 406,000 TakeCare commercial IPA members and 1,000 TakeCare Senior Plan IPA members. (4) Includes 277,000 TakeCare commercial IPA members and 19,000 TakeCare Senior Plan IPA members. (5) Represents TakeCare members and includes 1,000 members located in Northwest Indiana. (6) Represents TakeCare members and includes 15,000 members located in Northern Kentucky. (D) INSURANCE OPERATIONS The Company also offers group health and life insurance products through its insurance subsidiaries. At June 30, 1994, the Company provided group term life insurance coverage for approximately 63,000 individuals and group health and accident indemnity coverage for approximately 48,000 individuals. 24 Hour Managed Care Program. The Company operates a 24 Hour Managed Care Program, which provides HMO and preferred provider organization ("PPO")/indemnity medical coverage and workers' compensation coverage in one coordinated managed care system. Through this program, both occupational and nonoccupational injuries and illnesses are covered by products offered in a single package and administered on a coordinated basis in a managed care system. As of June 30, 1994, the 24 Hour Managed Care Program provided services to approximately 125 employer groups for approximately 16,000 insured employees. (E) GOVERNMENT REGULATION Most of the Company's HMO subsidiaries are qualified under the federal Health Maintenance Organization Act of 1973, as amended (the "HMO Act"). In addition, each of the states in which the Company does business has enacted statutes regulating or affecting the HMO subsidiaries. As a result, the Company is subject to extensive regulation regarding the scope of benefits provided to HMO members and the terms of group benefit agreements, the Company's financial condition, including minimum tangible net equity, quality assurance and utilization review procedures, enrollment requirements, manner of structuring member premiums, member grievance procedures, provider contracts, marketing and advertising. Changes in govern- 3 6 mental regulations could adversely affect the operations, profitability and business prospects of the HMO subsidiaries. Certain minimum tangible net equity and other financial viability requirements are imposed on the Company's HMO and insurance subsidiaries by regulatory authorities in each state in which these subsidiaries operate and restrict the Company's ability to transfer cash and short-term investments from such subsidiaries to the Company. While the Company currently believes its regulated subsidiaries are in compliance with these minimum tangible net equity and other financial viability requirements, a change in these requirements or an adverse determination by one or more regulatory authorities could have a material adverse effect on the Company's ability to make timely payments on preferred stock dividend obligations and principal and interest obligations under its Credit Agreement and its 7% Senior Notes due 2003. In order to obtain approvals for HMO and insurance company expansions into additional states, the regulated subsidiaries are required to meet certain minimum capital, surplus and deposit requirements which may require the Company to make additional capital contributions to such subsidiaries. The Company's Senior Plan services are provided under contracts with, and are subject to regulation by, HCFA and certain state agencies. HCFA requires that an HMO be federally qualified in order to be eligible for Medicare fixed-fee-per-member contracts. Under the Company's Medicare contracts and HCFA regulations, if the premiums received for Medicare-covered health care services provided to Senior Plan members are more than the premiums received for the same health care services provided to non-Senior Plan members, then the Company must provide its Senior Plan members with additional benefits beyond those required by Medicare or reduce any of the premiums, deductibles or co-payments that it may charge. The Company's Senior Plan is not permitted to account for more than one-half of the Company's total HMO members in each of the Company's geographic markets as those markets are defined by HCFA. HCFA has the right to audit HMOs operating under Medicare contracts to determine the quality of care being rendered and the degree of compliance with HCFA's contracts and regulations. The Company's Medicare contracts are renewed annually unless the Company or HCFA elects to terminate the contracts. HCFA may also unilaterally terminate the Company's Medicare contracts if the Company fails to continue to meet compliance and eligibility standards. While the federal government may implement changes in the Medicare risk-based program, the Company believes that the HMO will continue to be an important factor in the federal government's overall efforts to control medical costs. However, the loss of Medicare contracts or termination or modification of the HCFA risk-based Medicare program could have a material adverse effect on the revenue, profitability and business prospects of the Company. The services reimbursed by Medicare and Medicaid are subject to various requirements and restrictions imposed by contract law and regulation. Non-compliance with government regulations could subject the Company to adverse action by the government. To maintain compliance, the Company will take such action, or modify its practices, as it deems necessary. The HMO and insurance subsidiaries of the Company must file periodic reports with, and their operations are subject to periodic examination by, federal and state licensing authorities. To remain licensed and accredited, it is necessary for the Company's HMO and insurance subsidiaries to comply with various fiscal standards imposed by regulatory authorities and to make changes from time to time in their services, procedures, structure and marketing methods. Such changes may be required as a result of amendment to, or other significant modification of, federal and state laws and regulations controlling the subsidiaries' operations. The Company contracts with the United States Office of Personnel Management ("OPM") to provide or arrange managed health care services under the Federal Employees Health Benefits Program for federal employees ("FEHBP"), annuitants and their dependents. These contracts with OPM and applicable government regulations establish premium rating requirements for the FEHBP. OPM conducts periodic audits of its contractors to, among other things, verify that the premiums established under the OPM contracts are established in compliance with the community rating and other requirements under the FEHBP. In May 1993, after conducting a periodic audit of the Company's FEHBP contracts covering primarily the years 1988 through 1991, OPM sent a draft audit report to the Company alleging certain defects in the Company's rating practices under applicable regulatory and contractual requirements, and invited the 4 7 Company to comment. Following its evaluation of additional information and comments which have been provided by the Company, the OPM auditors will issue a final report; the OPM Audit Resolution Division will then be responsible for resolving the audit findings. As part of the resolution process, the Audit Resolution Division may reconsider the findings of the auditors and the information provided by the Company. It is likely that the final audit report will recommend that OPM seek a monetary recovery from the Company, and that such recommended recovery could be a substantial amount. At this time, the Company's management and legal counsel are unable to determine the amounts that may be required to be refunded to OPM to resolve the audit findings. Management currently believes, however, that after application of available offsets and consideration of established reserves, amounts ultimately required to be refunded to OPM will not have a material adverse effect on the consolidated financial condition of the Company. In addition, management does not currently believe that the audit will have a material effect on future relations with OPM. The Company's insurance subsidiaries are regulated by the department of insurance in each of the states in which they operate. These regulations relate to, among other things, the terms, administration and marketing of the products offered and the financial condition of these subsidiaries, and subject these subsidiaries to periodic audits and continuing oversight. In addition, the offering of certain new insurance products may require the approval of these regulatory agencies. The Company believes that it is in substantial compliance with all governmental regulations affecting its business, the violation of which could have material adverse effect on its operations or financial position. (F) COMPETITION The health care and insurance industries are highly competitive. The Company believes that among the most significant competitive factors in the market are the quality and location of the health care providers, the comprehensiveness of coverage and the pricing of services. The Company has a number of competitors, including commercial insurance carriers and other HMOs, some of which have substantially larger memberships and are better capitalized than the Company. In addition to insurance carriers and other HMOs, the Company also competes with fee-for-service physicians, hospitals, and preferred provider organizations which contract directly with employers, thus by-passing HMOs. The Company's largest HMO competitor in California is Kaiser Foundation Health Plan, Inc., which served approximately 4.6 million members in California at January 1, 1994. In addition to Kaiser, there is at least one other HMO with more members than the Company in California at January 1, 1994. At June 30, 1994, the Company served approximately 878,000 HMO members in California. At June 30, 1994, the Company served approximately 303,000 and 170,000 HMO members in the States of Colorado and Utah, respectively, more members than any other HMO in these states. The Company believes that Kaiser is its largest competitor in Colorado and that Intermountain Health Care is its largest competitor in Utah. At June 30, 1994, the Company served approximately 171,000, 37,000 and 32,000 HMO members in Arizona, New Mexico and Nevada, respectively. The Company believes that its largest competitors in Arizona are CIGNA Healthplan of Arizona-Phoenix and Intergroup Prepaid Health Services of Arizona, that its largest competitor in New Mexico is Lovelace Healthplan, Inc. and that its largest competitor in Nevada is Health Plan of Nevada. The Company also believes that Blue Cross/Blue Shield serves a substantial portion of the total health care markets in California, Utah, Arizona, Nevada and New Mexico. At June 30, 1994, the Company served approximately 43,000 and 40,000 HMO members in Illinois and Ohio, respectively. The Company believes its largest competitor in Illinois is Chicago HMO, Ltd., and that its largest competitor in Ohio is ChoiceCare. At June 30, 1994, the Company served approximately 38,000 HMO members in Guam. The largest competitor of the Company in Guam served approximately 40,000 members at January 1, 1994. All membership data for other HMOs is obtained from "The InterStudy Competitive Edge, 1994 Volume 3, Number 2," published by InterStudy Center for Managed Care Research, a research organization. 5 8 ITEM 2. PROPERTIES The Company's staff model health care services are provided primarily through its medical and dental centers ranging in size from approximately 2,000 to 96,000 square feet. The Company currently operates (i) 30 medical and dental centers in Southern California, of which 10 are owned and 20 are leased; (ii) 7 medical and dental centers in Utah, of which 6 are owned and 1 is leased; (iii) 12 medical centers in Arizona, of which 4 are owned and 8 are leased; (iv) 3 owned and 2 leased medical centers in New Mexico; (v) 1 medical center in Nevada, which is owned; and (vi) 1 owned and 3 leased medical centers in Guam and a neighboring island. The Company also leases two 99-bed sub-acute skilled nursing facilities, owns a hospital licensed for 239 beds and manages another hospital licensed for 150 beds in Southern California. In August 1993, the Company opened a hospital currently licensed for 117 beds in South Salt Lake City, Utah. The Company owns a 40,000 square foot administrative office building in Southern California and a 58,000 square foot administrative office building in Utah. The Company leases administrative offices in more than one dozen states and public affairs offices in California and Washington, D.C. On June 30, 1994, the Company owned buildings totaling approximately 1.5 million square feet in size, some of which were subject to outstanding encumbrances which totaled approximately $2.6 million. At June 30, 1994, the Company leased approximately 2.1 million square feet of buildings. In addition, the Company owns undeveloped acreage in California, Utah, Arizona, New Mexico, Nevada and Guam which is held for future development. ITEM 3. LEGAL PROCEEDINGS During the ordinary course of business, the Company has become a party to pending and threatened legal actions and proceedings, a significant number of which involve claims of medical malpractice. Management of the Company is of the opinion, taking into account its insurance coverage and reserves that have been established, that the outcome of the currently known legal actions and proceedings will not, singly or in the aggregate, have a material effect on the consolidated financial position of the Company. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS At a special meeting of stockholders of the Company on June 10, 1994, the stockholders voted on the following proposals: (a) the Agreement and Plan of Merger, dated as of March 3, 1994, as amended (the "Merger Agreement"), among the Company, FHP Sub, Inc. a wholly-owned subsidiary of the Company ("FHP Sub"), and TakeCare, and the transactions contemplated thereby, pursuant to which TakeCare was merged with and into FHP Sub (the "Merger"); and (b) amendments (the "Proposed Amendments") to the Company's Restated Certificate of Incorporation to increase the authorized number of shares of the Company's common stock and the Company's preferred stock. The stockholders approved the Merger by a vote of 25,463,105 in favor of the proposal, 996,592 against the proposal and 53,027 shares abstaining. The stockholders approved the Proposed Amendments by a vote of 23,417,081 in favor of the proposal, 3,002,875 against the proposal and 92,768 shares abstaining. EXECUTIVE OFFICERS OF THE REGISTRANT Set forth below are the names of the executive officers of the Company as of September 15, 1994. The Company's day-to-day operations are managed by an appointed Executive Operating Committee comprised of eight Company officers. Currently serving on this committee are Westcott W. Price III, Mark B. Hacken, Burke F. Gumbiner, Jack D. Massimino, Ryan M. Trimble, R. Judd Jessup, Kenneth S. Ord and Gary E. 6 9 Goldstein. The executive officers of the Company are chosen annually to serve until the first meeting of the Board of Directors following the next annual meeting of stockholders and until their successors are elected and have qualified, or until death, resignation or removal, whichever is sooner. Westcott W. Price III, age 55, has been Vice Chairman of the Board of Directors of the Company since 1986, and has been a Director of the Company since 1984. Mr. Price was a Vice President of the Company from 1987 to 1989 and was elected President in 1989. Mr. Price joined FHP in 1981, first serving as Senior Vice President and later as Executive Vice President, and was elected President in 1987. Mr. Price became Chief Executive Officer of the Company in 1990. Mark B. Hacken, age 59, has been a Director of the Company since 1992 and a Director of FHP since 1986. Mr. Hacken served as a consultant to FHP on a periodic basis for several years and in October of 1993, joined Mr. Price as President and CEO in the Office of the Chief Executive of the Company and FHP. From 1989 to 1991, Mr. Hacken served as Senior Vice President in charge of jewelry merchandising of Best Products Co., Inc. Best Products Co., Inc. entered into Chapter 11 bankruptcy in 1991. From 1992 to 1993 Mr. Hacken was president of his own business, providing consulting services to the retail industry. Mr. Hacken has also been President of Thrifty, Jr. Drug Stores and President and Chief Executive Officer of Drug King, Inc. and Elliott's Drugs. Timothy J. Brady, age 47, joined FHP in 1975 as Staff Pharmacist. Mr. Brady has served in several capacities in FHP's Guam and California regional operations including Director of Operations; Associate Vice President of Administrative Services; Vice President of Commercial Plan; and Regional Vice President. In 1994, Mr. Brady became the Company's Senior Vice President, Mountain Division. Valerie A. Fletcher, age 47, joined FHP in 1989 as Associate Vice President, Finance, having previously held several finance positions with Times Mirror Cable Television, Inc. In 1992, Ms. Fletcher was appointed Corporate Vice President, Accounting of FHP and in 1993 was elected Controller of the Company. In 1994, Ms. Fletcher became Vice President, Accounting of the Company. Nick Franklin, age 51, joined FHP in 1990 and served as Vice President, Government Affairs before being appointed Senior Vice President, Public Affairs in 1993. From 1979 to 1990 he was President and co-founder of Southwest Public Affairs, Inc., a lobbying and government relations consulting firm and an attorney in private practice in Albuquerque, New Mexico. John F. Fritz, age 50, joined FHP in 1991 and served as Vice President and Chief Actuary of FHP and FHP Life Insurance Company before becoming President of FHP Life Insurance Company and a Senior Vice President of the Company in 1994. From 1976 to 1991, Mr. Fritz was a Vice President and Principal of Tillinghast, a Towers Perrin Co., in Irvine, California. Gary E. Goldstein, M.D., age 44, joined FHP in 1982 from private practice and has held the positions of Regional Medical Director, Corporate Medical Director, and California Regional Vice President. He was appointed Corporate Vice President of Medical Affairs in 1990 and in 1992, a Senior Vice President of FHP. In 1994, Dr. Goldstein was appointed Senior Vice President, Medical Affairs of the Company. Burke F. Gumbiner, age 43, has been a Director of the Company since 1984 and was a Vice President from 1986 to November 1989, when he was appointed Senior Vice President. He joined FHP in 1977 and served in several executive capacities before being appointed a Senior Vice President in 1986. In 1994, Burke Gumbiner was appointed Senior Vice President and Chief Operating Officer, Insurance and Support Services of the Company. Mr. Gumbiner is the son of Robert Gumbiner, the Company's Chairman of the Board. R. Judd Jessup, age 46, joined the Company in 1994 as President of its Health Plans Division. Mr. Jessup was TakeCare Health Plan, Inc.'s Executive Director from June 1987 to January 1990 and has been its President since January 1990. He served as President of TakeCare, Inc. from 1991 until June of 1994 when it was acquired by the Company. Jack D. Massimino, age 45, first joined FHP in 1975 and served in several executive capacities, including Utah Regional General Manager, before leaving FHP in 1979 to join a health care consulting firm. He later 7 10 served as President, CEO and a Director of Texas Health Plans from 1987 to 1988. In 1988, he returned to FHP as Vice President of Corporate Development and in 1990 was appointed a Senior Vice President of FHP. In 1994, he became Executive Vice President and Chief Operating Officer of the Company. Michael A. Montevideo, age 40, joined FHP in 1985, became Treasurer of the Company and FHP in 1989 and was appointed an Associate Vice President of FHP in 1990 and a Vice President of FHP in 1993. In 1994, Mr. Montevideo became a Vice President of the Company. Kenneth S. Ord, age 48, joined the Company in 1994 as Senior Vice President and Chief Financial Officer. From 1982 to 1994, he was employed by Kelly Services, Inc. in Troy, Michigan most recently as Vice President of Finance, Controller and Treasurer. Christobel E. Selecky, age 39, joined FHP in 1981 and served as Associate Vice President in the New Mexico Region, Associate Vice President of Operations and Regional Vice President of the Los Angeles Region before becoming a Senior Vice President of FHP in 1993. In 1994, Ms. Selecky was appointed Senior Vice President of Health Plans of the Company's Western Division. Eric D. Sipf, age 45, joined the Company in 1994 as Senior Vice President of Health Plans of the Company's Eastern Division. From 1985 to 1993, he was President and Chief Executive Officer of Comprecare, Inc. and from 1993 to 1994 was President of Comprecare Health Care Services, Inc. and TakeCare of Colorado, Inc. Ryan M. Trimble, D.D.S., age 42, joined FHP in 1982 from private practice. He served as Dental Director, Director of Associated Provider Services and as Associate Vice President in the Utah Region. He became Vice President of the Arizona region in 1990, a Senior Vice President of FHP in 1992 and a Senior Vice President of the Company in 1993. In 1994, Dr. Trimble was appointed President of the Health Care Delivery Division of the Company. Michael J. Weinstock, age 53, has been General Counsel and Secretary of the Company and FHP since 1987. He became a Vice President of the Company and FHP in 1989 and a Senior Vice President of the Company and FHP in 1993. Edward F. Zutler, age 52, joined FHP in 1987 and served as President of FHP Life Insurance Company until 1994. He was appointed a Senior Vice President of FHP in 1992. In 1994, Mr. Zutler became Senior Vice President, Marketing of the Company. 8 11 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS (A) MARKET INFORMATION The Company's Common Stock is traded over-the-counter on the National Association of Securities Dealers Automated Quotation ("NASDAQ") National Market System under the symbol "FHPC." The following table sets forth the range of high and low closing bid prices per share for the fiscal periods indicated, as reported on the NASDAQ National Market System. Quotations represent prices between dealers and do not reflect retail markups, mark-downs or commissions and may not necessarily represent actual transactions.
PRICE RANGE OF COMMON STOCK ------------ HIGH LOW ---- --- YEAR ENDED JUNE 30, 1994: First Quarter.......................................... 29 1/2 18 1/4 Second Quarter......................................... 26 3/4 19 1/4 Third Quarter.......................................... 29 24 Fourth Quarter......................................... 25 1/4 20 3/4 YEAR ENDED JUNE 30, 1993: First Quarter.......................................... 18 3/4 14 1/2 Second Quarter......................................... 22 1/2 17 3/4 Third Quarter.......................................... 28 1/4 18 Fourth Quarter......................................... 27 3/4 19 1/2
As of September 15, 1994, the reported closing bid price per share was $30.50. (B) HOLDERS The approximate number of holders of record of the Company's Common Stock as of August 31, 1994 was 694. This number did not include individual participants in security position listings. Based on available information, the Company believes there are several thousand beneficial holders of its Common Stock. (C) DIVIDENDS The Company has retained its fiscal year 1994 earnings for use in its business and anticipates, for the foreseeable future, that no cash dividends will be paid on its Common Stock. The Company's Credit Agreement restricts the payment of cash dividends on the Company's Common Stock. ITEM 6. SELECTED FINANCIAL DATA Information with respect to this item is located at page 13 herein. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Information with respect to this item is located at pages 14 through 18 herein. 9 12 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The following documents are filed as part of this Form 10-K Annual Report:
PAGE REFERENCE --------- Index to Financial Statements and Supplementary Data....................... 19 Consolidated Balance Sheets, June 30, 1994 and 1993........................ 20 Consolidated Statements of Income for the years ended June 30, 1994, 1993 and 1992................................................................. 21 Consolidated Statements of Stockholders' Equity for the years ended June 30, 1994, 1993 and 1992.................................................. 22 Consolidated Statements of Cash Flows for the years ended June 30, 1994, 1993 and 1992............................................................ 24 Notes to Consolidated Financial Statements................................. 25 Independent Auditors' Report............................................... 40
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE There have been no changes in the Company's independent auditors or disagreements with such auditors on accounting principles or practices or financial statement disclosures. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Information with respect to Directors of the Company is incorporated by reference from the Company's 1994 Proxy Statement. Certain information relating to Executive Officers of the Company appears on pages 6 through 8 herein. ITEM 11. EXECUTIVE COMPENSATION Information with respect to this item is incorporated by reference from the Company's 1994 Proxy Statement. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Information with respect to this item is incorporated by reference from the Company's 1994 Proxy Statement. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Information with respect to this item is incorporated by reference from Item 14(a) -- Financial Statement Schedules -- Schedule II -- Amounts Receivable from Related Parties and Underwriters, Promoters, and Employees Other Than Related Parties. Additional information with respect to this item is incorporated by reference from the Company's 1994 Proxy Statement. 10 13 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K The following documents are filed as part of this Form 10-K Annual Report: (a) Financial Statement Schedules:
PAGE REFERENCE --------- I Marketable Securities and Other Investments............................ 41 II Amounts Receivable from Related Parties and Underwriters, Promoters, and Employees Other Than Related Parties............................... 42 V Property, Plant and Equipment.......................................... 43 VI Accumulated Depreciation, Depletion and Amortization of Property, Plant and Equipment.......................................................... 44 X Supplementary Income Statement Information Charged to Costs and Expenses............................................................... 45
Schedules not included herein have been omitted because of the absence of conditions under which they are required or because the required information, where material, is shown in the financial statements, financial notes or supplementary financial information. (b) Exhibits: See the Exhibit Index on pages 46 through 48 herein. (c) Reports on Form 8-K: (1) A current report on Form 8-K was filed on May 27, 1994, describing Amendment No. 2 to the Merger Agreement. 11 14 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. FHP INTERNATIONAL CORPORATION Date: September 27, 1994 By: /s/ WESTCOTT W. PRICE III ------------------------------------ Westcott W. Price III Chief Executive Officer and President Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. /s/ ROBERT GUMBINER Chairman of the Board September 27, 1994 - - --------------------------------------------- Robert Gumbiner /s/ WESTCOTT W. PRICE III President, Chief September 27, 1994 - - --------------------------------------------- Executive Officer Westcott W. Price III (Principal Executive Officer), and Vice Chairman of the Board /s/ MARK B. HACKEN President, Chief September 27, 1994 - - --------------------------------------------- Executive Officer Mark B. Hacken (Principal Executive Officer) and Director /s/ BURKE F. GUMBINER Senior Vice President September 27, 1994 - - --------------------------------------------- and Director Burke F. Gumbiner /s/ JACK R. ANDERSON Director September 27, 1994 - - --------------------------------------------- Jack R. Anderson /s/ JOSEPH F. PREVRATIL Director September 27, 1994 - - --------------------------------------------- Joseph F. Prevratil /s/ WARNER HEINEMAN Director September 27, 1994 - - --------------------------------------------- Warner Heineman /s/ RICHARD M. BURDGE, SR. Director September 27, 1994 - - --------------------------------------------- Richard M. Burdge, Sr. /s/ KENNETH S. ORD Senior Vice President September 27, 1994 - - --------------------------------------------- and Chief Financial Kenneth S. Ord Officer (Principal Financial Officer) /s/ VALERIE A. FLETCHER Controller (Principal September 27, 1994 - - --------------------------------------------- Accounting Officer) Valerie A. Fletcher
12 15 FHP INTERNATIONAL CORPORATION SELECTED CONSOLIDATED FINANCIAL DATA
YEARS ENDED JUNE 30, ------------------------------------------------------------ 1994 1993 1992 1991 1990 ---------- ---------- ---------- ---------- -------- (AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA) INCOME STATEMENT DATA: Revenue............................... $2,472,958 $2,005,854 $1,586,086 $1,296,843 $980,394 ---------- ---------- ---------- ---------- -------- Expenses: Primary health care................. 1,963,112 1,595,231 1,243,020 989,706 744,191 Other health care................... 94,577 85,913 81,680 69,021 53,937 General, administrative and marketing........................ 332,249 269,645 231,916 188,333 148,923 ---------- ---------- ---------- ---------- -------- 2,389,938 1,950,789 1,556,616 1,247,060 947,051 ---------- ---------- ---------- ---------- -------- Operating income...................... 83,020 55,065 29,470 49,783 33,343 Interest income....................... 20,365 14,919 22,211 19,664 16,450 Interest expense...................... (6,565) (211) (189) (3,771) (4,147) ---------- ---------- ---------- ---------- -------- Income before income taxes............ 96,820 69,773 51,492 65,676 45,646 Provision for income taxes............ 37,510 25,607 18,602 25,614 16,889 ---------- ---------- ---------- ---------- -------- Net income............................ 59,310 44,166 32,890 40,062 28,757 Preferred stock dividends............. 1,032 -- -- -- -- ---------- ---------- ---------- ---------- -------- Net income attributable to common stock............................... $ 58,278 $ 44,166 $ 32,890 $ 40,062 $ 28,757 ========== ========== ========== ========== ======== Earnings per share(a)................. $1.71 $1.33 $1.00 $1.37 $1.00 ===== ===== ===== ===== =====
JUNE 30, ------------------------------------------------------------ 1994 1993 1992 1991 1990 ---------- ---------- ---------- ---------- -------- (AMOUNTS IN THOUSANDS) BALANCE SHEET DATA: Total assets.......................... $2,169,269 $ 745,684 $ 615,659 $ 528,808 $431,518 Long-term obligations................. 377,986 20,802 23,279 29,826 32,800 Stockholders' equity.................. 1,113,136 364,422 311,381 269,761 141,825
- - --------------- (a) Earnings per share were computed as explained in Note 11 of the Notes to Consolidated Financial Statements. All earnings per share amounts have been adjusted to reflect a two-for-one stock split effective December 13, 1989, and a ten percent stock dividend effective March 28, 1991. 13 16 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS TAKECARE ACQUISITION FHP International Corporation acquired TakeCare, Inc. ("TakeCare") effective June 17, 1994 and the transaction was accounted for as a purchase. TakeCare operates contract model ("IPA") HMOs in California, Colorado, Illinois and Ohio. Unless otherwise indicated, the term "Company" as used herein refers to FHP International Corporation and its direct and indirect subsidiaries including TakeCare and its direct and indirect subsidiaries. The impact of the TakeCare transaction on fiscal year 1994 operating results of the Company, net of related expenses, was immaterial. Prospectively, the operating results of the Company will be impacted by the operating results of the former TakeCare group of companies, offset by significant additional intangible amortization and interest expense. The intangible amortization is non-deductible for tax purposes. Accordingly, the effective tax rate of the Company is expected to increase from 38.7% for fiscal year 1994 to at least 46.0% for fiscal year 1995. As a result of the acquisition, the Company has reorganized its operations, creating three divisions. HMO operations, formerly divided geographically, have been aligned with the delivery of healthcare, into staff models and IPAs. The Company's third area of operation is insurance and support services. The Company has identified certain duplicative facilities and positions and is in the process of eliminating this duplication. Most facility consolidations and related employee relocations are located in California. The Company has eliminated positions in sales, operations, administration and information services. Other costs related to the acquisition include changes in corporate identity, including signage and membership cards, and information systems network and software. The estimated costs associated with these changes have been recognized in the Company's financial statements at June 30, 1994. There was no material impact on fiscal year 1994 earnings. REVENUE AND MEMBERSHIP The Company generates substantially all of its revenue from premiums received for health care services provided to its HMO members. For the year ended June 30, 1994, the Company generated approximately 4.4% of its revenue from the sale of indemnity health, group life and workers' compensation insurance and related lines of business. This compares to 3.9% for the previous fiscal year. This increase primarily reflects the inclusion of a full year's revenue of the Company's workers' compensation subsidiary. The Company experienced significant revenue growth during the three-year period ended June 30, 1994, primarily due to increases in its HMO membership. Total HMO membership growth (exclusive of TakeCare HMO members) averaged 13.1% per year during the three-year period ended June 30, 1994 and increased by 10.5% for the year ended June 30, 1994. Membership growth resulted from expansion of HMO operations into new market areas and increased penetration in existing markets. Most of this membership growth has occurred in the IPA/mixed model plans (mixed models include elements of IPA and staff models). As a result of the TakeCare acquisition, the Company added approximately 786,000 HMO members which included approximately 20,000 senior members (individuals eligible for benefits under the federal Medicare program) and 766,000 commercial HMO members (including federal employees and Medicaid recipients). In October, 1993, the Company acquired approximately 4,700 members through the purchase of Aetna Health Plans of Colorado, Inc. Also, the Company began offering its commercial products in Northern California in fiscal year 1994. In fiscal year 1995, the Company will begin offering commercial products in Houston, Texas. Commercial HMO membership (exclusive of TakeCare members) grew 10.7% for the year ended June 30, 1994, and averaged 11.7% per year during the three-year period ended June 30, 1994. Senior membership (exclusive of TakeCare members) grew 10.1% for the year ended June 30, 1994, and averaged 15.9% per year during the three-year period ended June 30, 1994. 14 17 During the past three fiscal years, the Company has been experiencing declining HMO membership in certain staff model medical centers in Southern California. The decline has been greater among commercial members than senior members, and management believes this has been caused primarily by increased competition, the economic recession and substantial employment reductions in several industry sectors. The TakeCare acquisition, a continuing decline in California staff model membership and substantial IPA/mixed model expansion in recent years, have resulted in the Company's IPA/mixed model network membership increasing significantly as a percentage of total membership to approximately 80.0%. Commercial HMO premium rates increased an average of 5.7% per year over the three-year period ended June 30, 1994, and increased an average of 2.9% during the fiscal year ended June 30, 1994. Management believes this decline is the result of increased competition among HMOs and insurers in the Company's service areas. Competition may continue to adversely impact the Company's ability to increase commercial premium rates. A substantial portion of the Company's HMO commercial premium rate increases becomes effective in January of each year. Approximately 25.0% of the Company's fiscal year 1994 commercial premium rate increases became effective in January, 1994. The Company receives senior premium rate increases from HCFA on January 1 of each year. Senior premium rate increases averaged 6.2% per year during the three years ended June 30, 1994. Effective January 1, 1994, the Company received an average 2.0% rate increase for calendar year 1994. Revenue per senior member is substantially higher than revenue per commercial plan member because senior members use substantially more health care services. In September, 1994, HCFA announced the Medicare rate increases that will become effective January 1, 1995. These rate increases become the basis for determining the amounts that HCFA will pay to the Company. Based upon this announcement, the Company currently estimates that it will receive an average 5.0% senior premium rate increase. COST OF HEALTH CARE The largest factor affecting the Company's profitability is its ability to manage and control its health care costs. Since the Company receives fixed monthly premiums, any unusually high number of catastrophic claims (such as organ transplants and costly premature births) can cause substantial additional health care costs without any corresponding revenue increases. Periodically, the Company's results of operations are materially affected by such costs. Management believes that the Company's cost control measures, which include risk-sharing arrangements with its contracted medical providers and administrative and medical review of its health care delivery services, help to mitigate the effects of rising health care costs. During the last three years, certain California staff model medical centers have had high fixed facility and operating costs relative to enrollment, creating excess capacity and therefore higher health care costs as a percentage of revenue. Staff model medical centers have a relatively high percentage of fixed operating costs. Steps taken to address the problem include the consolidation of four medical centers into two centers over the previous two fiscal years and implementation of new staff model provider incentives based on, among other things, member satisfaction and quality of care. The following table sets forth the percentage relationships of various income statement items to revenue for the periods indicated:
YEARS ENDED JUNE 30, ------------------------- 1994 1993 1992 ----- ----- ----- Revenue............................................. 100.0% 100.0% 100.0% Health care costs................................... 83.2 83.8 83.5 General, administrative and marketing expense....... 13.4 13.4 14.6 Operating income.................................... 3.4 2.8 1.9 Interest income, net................................ 0.5 0.7 1.4 Income before income taxes.......................... 3.9 3.5 3.3 Net income.......................................... 2.4 2.2 2.1
15 18 RESULTS OF OPERATIONS Fiscal Year 1994 Compared to Fiscal Year 1993 Revenue increased 23.3% to $2,473 million for fiscal year 1994 from $2,005.9 million for fiscal year 1993. Approximately 67.3% of revenue was generated by IPA and mixed model membership, and approximately 28.3% of revenue was generated by staff model membership during fiscal year 1994. Approximately 4.4% of the Company's revenue was generated by insurance products and support services. Health care costs increased 22.4% to $2,057.7 million for fiscal year 1994 from $1,681.1 million for fiscal year 1993, primarily due to membership growth during the period. Health care costs decreased to 83.2% of revenue in 1994 from 83.8% in 1993, primarily due to improvement in the Company's health administration and health operations costs. In addition, pharmacy costs in Arizona as well as optometry costs in California and Nevada were significantly reduced. The Company experienced certain health care cost increases during the year. In Utah, the Company opened its own acute care hospital in August, 1993. The hospital did not reach break-even occupancy by the end of the fiscal year. California and Nevada experienced higher physician services costs as a percent of revenue in fiscal year 1994 than in fiscal year 1993. General, administrative and marketing ("G & A") expenses increased 23.2% to $332.2 million for fiscal year 1994 from $269.6 million for the fiscal year 1993, primarily as a result of growth in the Company's operations. G & A expenses as a percentage of revenue were 13.4% in the fiscal year 1994, unchanged from 13.4% in the fiscal year 1993. Cost control measures included hiring freezes, reductions in the Company's work force and administrative reorganizations. Net interest income was $13.8 million for fiscal year 1994 as compared to $14.7 million for the previous year. Net interest income decreased primarily as the result of interest expense on the $100 million of 7% Senior Notes due 2003 (the "Notes") issued in September, 1993 and a decrease in capitalized interest of approximately $2 million, due to the completion of several major construction projects including the Company's Utah hospital. The decreases were partially offset by higher average invested cash balances during the period. Fiscal Year 1993 Compared to Fiscal Year 1992 Revenue rose to $2,005.9 million for fiscal year 1993, increasing 26.5% over revenue of $1,586.1 million for fiscal year 1992, primarily due to membership growth and premium rate increases. Approximately 3.9% of the revenue for fiscal year 1993 was related to the Company's indemnity health and life insurance and workers' compensation products, compared to 3.2% for the same period in the previous fiscal year. Health care costs increased 26.9% to $1,681.1 million for fiscal year 1993 from $1,324.7 million for fiscal year 1992. Health care costs were 83.8% of total revenue for fiscal year 1993 versus 83.5% of total revenue for the previous year. Health care costs in fiscal year 1992 were favorably impacted by a $6.9 million award received in a binding arbitration decision against one of the Company's insurers. Before adjusting for the $6.9 million insurance recovery, the Company's cost of health care as a percentage of revenue in fiscal year 1992 was 84.0%. During fiscal year 1993, the Company experienced higher physician specialty costs in California and Utah, as well as higher pharmacy costs in every region except New Mexico and Guam. The cost of health care, however, improved to 82.6% as a percent of revenue in the fourth quarter of fiscal year 1993, primarily due to reductions in hospital costs as well as decreases in health administration and health care operations costs as a percentage of revenue. These improvements were partially offset by higher medical services costs due to the inclusion of medical costs of Great States Insurance Company which was acquired during the third quarter of fiscal year 1993. Additionally, health care costs continued to be impacted negatively by less than full absorption of fixed costs incurred in certain under-utilized California staff model medical centers. G & A expenses increased 16.3% to $269.6 million from $231.9 million in the preceding year, due to continuing expansion of the Company's operations. As a percentage of total revenue, G & A expenses were 13.4% for fiscal year 1993 versus 14.6% of total revenue for the previous year. The reduction of G & A 16 19 expenses as a percentage of total revenue for fiscal year 1993 was the result of spending controls (including hiring constraints) and the achievement of certain economies of scale. G & A expenses for fiscal year 1992 were unfavorably impacted by the establishment of a $5.2 million reserve in connection with the settlement of certain class action stockholder litigation for damages allegedly sustained as a result of a decline in the Company's stock price in October, 1991. Before the establishment of the reserve for the litigation, G & A expenses as a percentage of revenue were 14.3% in fiscal year 1992. Net interest income decreased to $14.7 million in fiscal year 1993 from $22 million in fiscal year 1992, primarily as a result of lower interest rates. LIQUIDITY AND CAPITAL RESOURCES The Company's cash, cash equivalents and short-term investments increased by $70 million to $246.8 million at June 30, 1994 from $176.8 million at June 30, 1993. Generally, the Company receives premiums on a monthly prepaid basis. Major sources of cash during the year ended June 30, 1994, included cash generated from operations of $102 million and net proceeds from the Notes issued in September, 1993. The net proceeds from the sale of the Notes were used to repay, in full, certain outstanding indebtedness of approximately $21 million. The Company used $25 million of the remaining net proceeds to increase the net surplus of an indirect insurance subsidiary of the Company, with the balance used in the TakeCare acquisition. Other uses of cash during the period included $86.1 million for capital expenditures and $55.8 million in transfers to long-term and restricted investments. The Company acquired all of the outstanding stock of TakeCare on June 17, 1994 for approximately $1,053 million. In addition, the Company recorded acquisition related costs of $84.6 million. The acquisition was paid for by the issuance of approximately 21 million shares of Series A Cumulative Convertible Preferred Stock ("Series A Preferred Stock"), 6.3 million shares of Common Stock, cash and Series B Adjustable Rate Cumulative Preferred Stock ("Series B Preferred Stock"). The Series A Preferred Stock has a stated value of $25 per share with a dividend rate of 5% per annum. Annual dividend obligations on the Series A Preferred Stock are estimated to be approximately $26 million. The Series B Preferred Stock has a stated value of $25 per share with a variable dividend rate which resets quarterly. Annual dividend obligations on the Series B Preferred Stock are estimated to be less than $200,000. Dividends are payable quarterly in arrears. In order to fund a portion of the cash required for the TakeCare acquisition, the Company entered into a $350 million Credit Agreement (the "Credit Agreement"). The Credit Agreement provides for a $250 million five-year Term Loan facility (the "Term Loan") and a $100 million five-year Revolving Credit facility (the "Revolving Credit Loan"). On June 17, 1994, the Company borrowed $250 million under the Term Loan. The Company also borrowed $50 million under the Revolving Credit Loan. The Term Loan and Revolving Credit Loan carry interest rates currently ranging from 5.2% to 5.5% based on the LIBOR rate. The Term Loan is repayable at the rate of $25 million every six months, commencing on January 2, 1995. The final payment is due June 17, 1999. The Credit Agreement contains financial and other covenants, including limitations on indebtedness, liens, dividends, sale and lease-back transactions and certain other transactions. In addition to borrowed funds, the Company used approximately $100 million of its own funds to substantially complete the transaction. These funds came from the Company's existing cash balances (including proceeds from the Notes) and maturing investments held in the Company's investment portfolio. The Company's ability to make a payment on or repayment of its obligations under the Notes, the Credit Agreement and dividends on its preferred stock is dependent in part on the payment of funds to 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, which fiscal 17 20 standards may, from time to time, impact the amount of funds paid by one or more of the Regulated Subsidiaries to the Company as referred to above. The Company believes the payments referred to above by the subsidiaries together with other financing sources including the Revolving Credit Loan should be sufficient to enable the Company to meet its payment obligations under the Notes, the Credit Agreement and the Company's preferred stock (approximately $100 million annually). The Company believes that cash flow from operations and existing cash balances will be sufficient to fund operations and capital expenditures in fiscal year 1995. Effects of Regulatory Changes and Inflation Recently, the Company has been informed by HCFA that effective January 1, 1995, it will receive an annual premium rate increase of approximately 5.0% for its Senior Plan members. Over calendar years 1993 and 1994, annual Senior Plan premium increases granted by HCFA were approximately 11.6% and 2.0%, respectively. Periodically, the Company evaluates the effects of HCFA premium adjustments on its liquidity and capital resources, and incorporates the actual and anticipated impact of such adjustments into its planning process. 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, however, that premium rate increases combined with its cost control measures and financial risk-sharing arrangements with its contract medical providers 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 premium rate increases will equal or exceed increased costs. 18 21 INDEX TO FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
PAGE REFERENCE --------- Consolidated Balance Sheets, June 30, 1994 and 1993................................ 20 Consolidated Statements of Income for the years ended June 30, 1994, 1993 and 1992............................................................................. 21 Consolidated Statements of Stockholders' Equity for the years ended June 30, 1994, 1993 and 1992.................................................................... 22 Consolidated Statements of Cash Flows for the years ended June 30, 1994, 1993 and 1992............................................................................. 24 Notes to Consolidated Financial Statements......................................... 25 Independent Auditors' Report....................................................... 40
Supplemental Schedules: Schedule I -- Marketable Securities and Other Investments.................... 41 Schedule II -- Amounts Receivable from Related Parties and Underwriters, Promoters and Employees other than Related Parties............. 42 Schedule V -- Property, Plant and Equipment.................................. 43 Schedule VI -- Accumulated Depreciation, Depletion and Amortization of Property, Plant and Equipment.................................. 44 Schedule X -- Supplementary Income Statement Information Charged to Costs and Expenses....................................................... 45
19 22 FHP INTERNATIONAL CORPORATION CONSOLIDATED BALANCE SHEETS ASSETS
JUNE 30, ----------------------- 1994 1993 ---------- -------- (AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA) Cash and cash equivalents (Note 1)................................... $ 60,571 $ 2,700 Short-term investments (Notes 1 and 6)............................... 186,212 174,057 Accounts receivable (net of allowance for doubtful accounts of $13,448 and $7,147 at June 30, 1994 and 1993, respectively)........ 112,092 56,288 Inventories (Note 1)................................................. 13,520 11,658 Prepaid expenses and other current assets............................ 43,188 11,238 Deferred income taxes (Note 5)....................................... 30,360 10,929 ---------- -------- Total current assets....................................... 445,943 266,870 Property and equipment, net (Notes 1, 2 and 4)....................... 403,754 343,269 Long-term investments (Notes 1 and 6)................................ 122,782 38,723 Restricted investments (Notes 1 and 6)............................... 97,879 67,025 Excess purchase price over net assets acquired, net (Notes 1 and 12)................................................................ 1,073,839 2,848 Other assets, net (Notes 1 and 7).................................... 25,072 26,949 ---------- -------- Total assets............................................... $2,169,269 $745,684 ========== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Current portion of long-term obligations (Note 4).................... $ 25,154 $ 2,474 Accounts payable..................................................... 94,725 39,935 Medical claims payable............................................... 283,612 149,060 Accrued salaries and employee benefits (Note 7)...................... 84,371 69,940 Deferred premiums (Note 1)........................................... 32,738 17,678 Income taxes payable and other current liabilities (Notes 3 and 5)... 67,203 16,817 ---------- -------- Total current liabilities.................................. 587,803 295,904 Long-term obligations (Note 4)....................................... 377,986 20,802 Other liabilities (Notes 3, 5 and 7)................................. 90,344 64,556 ---------- -------- Total liabilities.......................................... 1,056,133 381,262 ---------- -------- Commitments and contingencies (Note 8) Stockholders' equity: Series A Convertible and Series B preferred stock, $0.05 par value; 40,000,000 shares authorized; issued and outstanding 21,031,733 (Series A) and 32,850 (Series B); aggregate liquidation preference $526,825 (Series A) and $821 (Series B) (Notes 1, 7, 10 and 12)...................................................... 1,053 Common stock, $0.05 par value; 100,000,000 shares authorized; issued and outstanding 39,503,675 and 32,836,079 shares at June 30, 1994 and 1993, respectively (Notes 1, 7, 10 and 12)......... 1,976 1,642 Paid-in capital...................................................... 915,816 222,375 Unrealized holding loss on available-for-sale securities, net of tax effect of $2,617 (Note 6).......................................... (4,392) Retained earnings.................................................... 198,683 140,405 ---------- -------- Total stockholders' equity................................. 1,113,136 364,422 ---------- -------- Total liabilities and stockholders' equity................. $2,169,269 $745,684 ========== ========
See accompanying notes to consolidated financial statements. 20 23 FHP INTERNATIONAL CORPORATION CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED JUNE 30, ---------------------------------------- 1994 1993 1992 ---------- ---------- ---------- (AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA) Revenue (Note 1)....................................... $2,472,958 $2,005,854 $1,586,086 ---------- ---------- ---------- Expenses (Note 1): Primary health care: Medical services.................................. 923,560 744,912 582,647 Hospital services................................. 839,980 681,543 536,541 Dental, optometry, pharmacy and other primary health care services............................ 199,572 168,776 123,832 Other health care.................................... 94,577 85,913 81,680 General, administrative and marketing................ 332,249 269,645 231,916 ---------- ---------- ---------- 2,389,938 1,950,789 1,556,616 ---------- ---------- ---------- Operating income............................. 83,020 55,065 29,470 Interest income........................................ 20,365 14,919 22,211 Interest expense (Notes 1 and 4)....................... (6,565) (211) (189) ---------- ---------- ---------- Income before income taxes............................. 96,820 69,773 51,492 Provision for income taxes (Note 5).................... 37,510 25,607 18,602 ---------- ---------- ---------- Net income................................... 59,310 44,166 32,890 Preferred stock dividends (Note 10).................... 1,032 ---------- ---------- ---------- Net income attributable to common stock................ $ 58,278 $ 44,166 $ 32,890 ========== ========== ========== Earnings per share attributable to common stock (Note 11).................................................. $1.71 $1.33 $1.00 ===== ===== =====
See accompanying notes to consolidated financial statements. 21 24 FHP INTERNATIONAL CORPORATION CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
NUMBER OF NUMBER OF PREFERRED COMMON PREFERRED COMMON PAID-IN SHARES SHARES STOCK STOCK CAPITAL --------- --------- --------- ------ -------- (AMOUNTS IN THOUSANDS) BALANCE AT JULY 1, 1991........................ -- 32,188 $ -- $1,610 $213,350 Amortization of restricted stock awards (Note 7)..................................... 1,434 Reduction of notes receivable from Employee Stock Ownership Plan................ Increase in notes receivable from Employee Stock Ownership Plan......................... Stock options exercised........................ 200 10 922 Income tax benefit from exercise of stock options...................................... 1,966 Net income..................................... --------- --------- --------- ------ -------- BALANCE AT JUNE 30, 1992....................... -- 32,388 -- 1,620 217,672 --------- --------- --------- ------ -------- Amortization of restricted stock awards (Note 7)..................................... 220 Reduction of notes receivable from Employee Stock Ownership Plan................ Stock options exercised........................ 448 22 2,452 Income tax benefit from exercise of stock options...................................... 2,031 Net income..................................... --------- --------- --------- ------ -------- BALANCE AT JUNE 30, 1993....................... -- 32,836 -- 1,642 222,375 --------- --------- --------- ------ -------- Stock options exercised........................ 356 18 2,697 Income tax benefit from exercise of stock options...................................... 3,229 Issuance of Series A Convertible Preferred Stock (Note 12).............................. 21,032 1,052 524,741 Issuance of Series B Preferred Stock (Note 12).................................... 33 1 820 Issuance of Common Stock (Note 12)............. 6,312 316 161,954 Dividends on Series A Convertible and Series B Preferred Stock (Note 10)........... Unrealized holding loss on available-for- sale securities, net (Note 6)................ Net income..................................... --------- --------- --------- ------ -------- BALANCE AT JUNE 30, 1994....................... 21,065 39,504 $ 1,053 $1,976 $915,816 ======== ======== ======= ====== ========
See accompanying notes to consolidated financial statements 22 25 FHP INTERNATIONAL CORPORATION CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (CONTINUED)
NOTES RECEIVABLE UNREALIZED FROM HOLDING LOSS ON TOTAL RETAINED ESOP AVAILABLE-FOR-SALE STOCKHOLDERS' EARNINGS (NOTE 9) SECURITIES EQUITY -------- ---------- ------------------ ------------- (AMOUNTS IN THOUSANDS) BALANCE AT JULY 1, 1991........................ $ 63,349 $ (8,548) $-- $ 269,761 Amortization of restricted stock awards (Note 7)..................................... 1,434 Reduction of notes receivable from Employee Stock Ownership Plan................ 8,548 8,548 Increase in notes receivable from Employee Stock Ownership Plan......................... (4,150) (4,150) Stock options exercised........................ 932 Income tax benefit from exercise of stock options...................................... 1,966 Net income..................................... 32,890 32,890 -------- ---------- ---------- ------------- BALANCE AT JUNE 30, 1992....................... 96,239 (4,150) -- 311,381 -------- ---------- ---------- ------------- Amortization of restricted stock awards (Note 7)..................................... 220 Reduction of notes receivable from Employee Stock Ownership Plan................ 4,150 4,150 Stock options exercised........................ 2,474 Income tax benefit from exercise of stock options...................................... 2,031 Net income..................................... 44,166 44,166 -------- ---------- ---------- ------------- BALANCE AT JUNE 30, 1993....................... 140,405 -- -- 364,422 -------- ---------- ---------- ------------- Stock options exercised........................ 2,715 Income tax benefit from exercise of stock options...................................... 3,229 Issuance of Series A Convertible Preferred Stock (Note 12).............................. 525,793 Issuance of Series B Preferred Stock (Note 12).................................... 821 Issuance of Common Stock (Note 12)............. 162,270 Dividends on Series A Convertible and Series B Preferred Stock (Note 10)........... (1,032) (1,032) Unrealized holding loss on available-for- sale securities, net (Note 6)................ (4,392) (4,392) Net income..................................... 59,310 59,310 -------- ---------- ---------- ------------- BALANCE AT JUNE 30, 1994....................... $198,683 $ -- $ (4,392) $ 1,113,136 ======== ======= ============= ==========
See accompanying notes to consolidated financial statements. 23 26 FHP INTERNATIONAL CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED JUNE 30, --------------------------------------- 1994 1993 1992 ----------- --------- --------- (AMOUNTS IN THOUSANDS) Operating Activities Net income........................................................ $ 59,310 $ 44,166 $ 32,890 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization................................... 45,271 29,912 23,366 Increase (decrease) in allowance for doubtful accounts.......... 6,301 4,837 (1,331) Loss on disposal of equipment................................... 4,954 2,300 1,689 Amortization of restricted stock awards......................... 220 1,434 Deferred income taxes........................................... 2,630 (1,192) (5,027) Effect on cash of changes in operating assets and liabilities, net of effects from acquisitions in 1994 and 1993: Accounts receivable.......................................... (30,051) (9,226) (14,102) Inventories.................................................. (1,862) (2,951) (1,441) Prepaid expenses and other current assets.................... (16,237) 899 (2,782) Other assets................................................. 47 (10,901) (2,491) Accounts payable............................................. 8,060 12,089 6,721 Medical claims payable....................................... 12,138 11,124 15,571 Accrued salaries and employee benefits....................... 7,931 6,372 12,508 Deferred premiums............................................ (2,815) 923 9,264 Other liabilities............................................ 6,292 9,166 8,639 ----------- --------- --------- Net cash provided by operating activities........................... 101,969 97,738 84,908 ----------- --------- --------- Investing Activities Decrease (increase) in short-term investments..................... 57,014 (8,686) 58,461 Purchase of TakeCare, Inc., net of cash acquired.................. (341,602) Purchase of Colorado HMO, net of cash acquired.................... (3,419) Purchase of Great States Financial Corporation, net of cash acquired........................................................ (21,706) Purchases of property and equipment............................... (86,052) (87,403) (110,598) Increase in long-term and restricted investments.................. (55,847) (57,447) (345) Payments received from Employee Stock Ownership Plan notes receivable...................................................... 4,150 8,548 Increase in notes receivable from Employee Stock Ownership Plan... (4,150) ----------- --------- --------- Net cash used in investing activities............................... (429,906) (171,092) (48,084) ----------- --------- --------- Financing Activities Proceeds from issuance of long-term debt.......................... 400,000 Payments on long-term obligations................................. (20,136) (2,011) (7,472) Exercise of stock options including tax benefit................... 5,944 4,505 2,898 ----------- --------- --------- Net cash provided by (used in) financing activities................. 385,808 2,494 (4,574) ----------- --------- --------- Net increase (decrease) in cash and cash equivalents................ 57,871 (70,860) 32,250 Cash and cash equivalents at beginning of year...................... 2,700 73,560 41,310 ----------- --------- --------- Cash and cash equivalents at end of year............................ $ 60,571 $ 2,700 $ 73,560 =========== ========= ========= Supplemental cash flow information: Interest payments (net of portion capitalized).................... $ 4,695 $ 571 $ 274 Income tax payments (net of refunds).............................. $ 34,583 $ 25,552 $ 25,505 Supplemental schedule of noncash investing and financing activities: The Company purchased all of the outstanding common stock of TakeCare, Inc. in exchange for common stock, preferred stock and cash as follows: Total TakeCare acquisition cost................................. $ 1,137,642 Cash acquired................................................... (60,402) Liabilities accrued............................................. (46,754) Common and preferred stock issued............................... (688,884) ----------- Net cash paid................................................... $ 341,602 ===========
See accompanying notes to consolidated financial statements. 24 27 FHP INTERNATIONAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 -- ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES Organization FHP International Corporation (the "Company"), through its direct and indirect subsidiaries, delivers managed health care services and sells indemnity medical, group life and workers' compensation insurance. On June 17, 1994, the Company completed its acquisition of TakeCare, Inc. ("TakeCare") in exchange for cash, common stock and preferred stock. The acquisition has been accounted for as a purchase business combination and consequently, all balances and results of operations of TakeCare since the date of acquisition have been included in the accompanying financial statements (see Note 12 for further description of the acquisition). Most of the Company's subsidiaries are federally qualified, multi-state licensed health maintenance organizations ("HMO") which provide comprehensive health care to their members for a fixed monthly fee per member. In the course of providing health care services to commercial and governmental employees, the Company extends credit to various federal government agencies and hospitals, independent physician groups and to other health care providers and intermediaries located in California, Colorado, Arizona, Utah, Guam, New Mexico, Illinois, Nevada, Ohio, Indiana and Kentucky (and effective October 1, 1994, Texas). Principles of Consolidation The accompanying consolidated financial statements include the accounts of the Company and its subsidiaries. All significant intercompany accounts and transactions have been eliminated. Revenue Recognition and Health Care Costs Premiums from enrolled groups for prepaid health care are recognized in the month in which the enrollees are entitled to care. Deferred premiums represent cash received from employer groups in advance of the applicable period of coverage. Health care costs are recorded in the period when services are provided to enrolled members, including estimates for contracted medical specialists and hospital costs which have been incurred as of the balance sheet date but not yet reported. Medicare risk contracts with the Health Care Financing Administration provided 63%, 65% and 65% of revenue in fiscal years 1994, 1993 and 1992, respectively. Excess Purchase Price Over Net Assets Acquired The excess purchase price over net assets acquired arose primarily from the purchase of TakeCare. Amortization is provided on a straight-line basis over periods not exceeding 40 years. Cash Equivalents The Company considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents. The carrying value of cash and cash equivalents approximates fair value based on their short-term maturity. Short-term, Long-term and Restricted Investments Short-term, long-term and restricted investments consist of U.S. Treasury securities, certificates of deposit and other marketable debt securities. Long-term investments have maturities in excess of one year. Restricted investments primarily include investments placed on deposit with various state regulatory agencies to comply with regulatory requirements (Note 6). 25 28 FHP INTERNATIONAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Inventories Inventories, which consist of prescription drugs, optometry products and medical supplies, are stated at the lower of average cost or market. Property and Equipment Property and equipment are recorded at cost. Depreciation and amortization are provided principally by the straight-line method over the estimated useful lives of the respective classes of assets as follows: buildings, 20 to 40 years; leasehold improvements, lesser of the useful lives (3 to 10 years) or the lease term; and equipment and fixtures, 3 to 10 years. Property and equipment also includes capitalized interest expense of approximately $596,000, $2,597,000 and $3,600,000 in fiscal years 1994, 1993 and 1992, respectively, associated with the Company's major construction projects. Other Assets The principal components of other assets are as follows:
JUNE 30, AMORTIZATION ------------------- PERIOD 1994 1993 ------------ ------- ------- (AMOUNTS IN THOUSANDS) Preoperating costs, net of accumulated amortization of $3,356 and $839........................................... 3 years $ 6,265 $ 7,093 Real estate held for sale................................... 3,450 3,688 Covenants not to compete, net of accumulated amortization of $1,903 and $444........................................ 3 years 2,597 3,556 Cash surrender value of life insurance policies (Note 7).... 3,747 2,496 Deposits.................................................... 2,998 3,390 Deferred income taxes....................................... 2,178 Other....................................................... 6,015 4,548 ------- ------- $25,072 $26,949 ======= =======
The covenants not to compete and preoperating costs are amortized on a straight-line basis. The covenants not to compete resulted from the Company's acquisitions of Great States Financial Corporation ("Great States") in March, 1993 and a Colorado HMO in October, 1993 (Note 12). Preoperating costs represent direct charges incurred in developing HMO operations in new, non-contiguous geographic service areas prior to the commencement of operations. Amortization begins on the first date members are eligible to receive services. Total amortization expense related to other assets was $3,976,000, $1,163,000 and $142,000 for fiscal years 1994, 1993 and 1992, respectively. Reclassifications Certain prior year amounts have been reclassified to conform to the 1994 financial statement presentation. 26 29 FHP INTERNATIONAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 2 -- PROPERTY AND EQUIPMENT Property and equipment consist of the following:
JUNE 30, --------------------- 1994 1993 -------- -------- (AMOUNTS IN THOUSANDS) Land................................................... $ 68,420 $ 58,529 Buildings.............................................. 165,439 124,649 Leasehold improvements................................. 47,849 42,262 Equipment and fixtures................................. 237,640 170,227 Construction in progress............................... 30,767 57,209 -------- -------- 550,115 452,876 Less accumulated depreciation and amortization......... 146,361 109,607 -------- -------- $403,754 $343,269 ======== ========
NOTE 3 -- OTHER LIABILITIES The Company was self-insured with respect to certain professional liability claims during calendar years 1975 through 1983. From January, 1984 through March, 1986, the Company maintained commercial insurance on a claims occurrence basis with nominal deductibles. Since April 1986, the Company has maintained commercial insurance on a claims made basis. The Company currently carries $50,000,000 of professional liability insurance with annual deductibles of $2,000,000 per occurrence and $12,000,000 in the aggregate. An estimate of the Company's liability for professional liability claims, including deductibles, was actuarially computed on a present value basis using a discount rate of 7%, and amounted to approximately $31,400,000 and $30,300,000 at June 30, 1994 and 1993, respectively. Such amounts are allocated between other current liabilities and other liabilities based on estimates of the amounts of claims which will be paid during the subsequent fiscal year (Note 8). Other liabilities also include approximately $40,785,000 and $30,250,000 of reserves for losses and loss adjustment expenses at June 30, 1994 and 1993, respectively, associated with the Company's insurance operations. These reserves are estimates based on actuarial computations and industry standards for the eventual costs of claims incurred but not settled, less reinsurance recoverable from other companies. As claims are settled, as amounts required to settle become known and as anticipated claims are actuarially revised, the professional liability and loss reserve expenses and liabilities are adjusted accordingly. 27 30 FHP INTERNATIONAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 4 -- LONG-TERM OBLIGATIONS Long-term obligations consist of the following:
JUNE 30, -------------------- 1994 1993 -------- ------- (AMOUNTS IN THOUSANDS) Term loans under bank credit agreement, due in semi-annual installments of $25,000 plus interest, floating rates averaging 5.2%................................................ $250,000 $ -- Revolving loan under bank credit agreement, due June, 1999, interest payable at various intervals no less frequent than quarterly, floating rates averaging 5.3%...................... 50,000 7% Senior Notes due September, 2003, interest payable semi-annually................................................. 100,000 Real estate mortgages payable, due monthly through 2010, interest at fixed rates averaging 9.9%, collateralized by certain land and buildings.................................... 2,617 2,680 Promissory note and certain real estate mortgages retired using proceeds generated by the Company's September, 1993 Senior Notes offering................................................ 19,996 Other........................................................... 523 600 -------- ------- Total................................................. 403,140 23,276 Less current portion.......................................... 25,154 2,474 -------- ------- Long-term obligations......................................... $377,986 $20,802 ======== =======
Scheduled maturities of long-term obligations are as follows:
(AMOUNTS IN YEARS ENDING JUNE 30: THOUSANDS) --------------------- ---------- 1995........................................ $ 25,154 1996........................................ 50,169 1997........................................ 50,187 1998........................................ 50,204 1999........................................ 125,224 Later years................................. 102,202 ----------- $ 403,140 =========
In March, 1994, in connection with the acquisition of TakeCare (Note 12), the Company entered into a $350 million Credit Agreement with a group of banks which provides for a $250 million term loan facility and a $100 million revolving credit facility (the "Credit Agreement") expiring June 17, 1999. Prime rate, LIBOR based and competitive bid (revolving credit facility only) interest rate options are available for borrowings under the Credit Agreement. In addition, a facility fee of 0.225% is payable, regardless of usage, on the $100 million revolving credit facility portion of the Credit Agreement. The Credit Agreement contains financial and other covenants. The Company was in compliance with these covenants as of June 30, 1994. NOTE 5 -- INCOME TAXES The Company adopted Statement of Financial Accounting Standards No. 109 ("SFAS 109"), "Accounting for Income Taxes," effective as of July 1, 1993. SFAS 109 supersedes Accounting Principles Board ("APB") Opinion No. 11, "Accounting for Income Taxes." Under SFAS 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 28 31 FHP INTERNATIONAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 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. The tax effects of significant items comprising the Company's net deferred tax assets are as follows:
JUNE 30, 1994 ---------------------- (AMOUNTS IN THOUSANDS) Deferred tax assets: Reserves not currently deductible...................... $ 43,248 Vacation expense not currently deductible.............. 5,396 State income taxes..................................... 3,258 -------- Total deferred tax assets........................... 51,902 Valuation allowance................................. -- -------- Total deferred tax assets........................... 51,902 Deferred tax liabilities: Differences between book and tax bases of property.......................................... (22,441) Other............................................... (514) -------- Total deferred tax liabilities...................... (22,955) -------- Net deferred tax assets............................. $ 28,947 ========
There was no change in the valuation allowance during the year ended June 30, 1994. The components of the provision for income taxes are summarized as follows:
YEARS ENDED JUNE 30, ------------------------------- 1994 1993 1992 ------- ------- ------- (AMOUNTS IN THOUSANDS) Current: Federal..................................................... $27,806 $21,143 $17,930 State....................................................... 5,999 4,494 4,693 Guam........................................................ 1,075 1,162 1,006 ------- ------- ------- Total current provision....................................... 34,880 26,799 23,629 ------- ------- ------- Deferred: Federal..................................................... 2,201 (1,033) (5,027) State....................................................... 429 (159) ------- ------- ------- Total deferred provision (benefit)............................ 2,630 (1,192) (5,027) ------- ------- ------- Total provision for income taxes.............................. $37,510 $25,607 $18,602 ======= ======= =======
29 32 FHP INTERNATIONAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) The provision for income taxes differs from the amount of tax determined by applying the Federal statutory rate to pretax income. Components of this difference are summarized as follows:
YEARS ENDED JUNE 30, ------------------------------------------------------------ 1994 1993 1992 ------------------ ------------------ ------------------ AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT ------- -------- ------- -------- ------- -------- (AMOUNTS IN THOUSANDS) Taxes on income at Federal statutory tax rate..................................... $33,887 35% $23,722 34% $17,507 34% Guam and state income taxes, net of Federal tax benefit...................... 4,178 4 2,862 4 3,098 6 Utilization of net operating loss carryforwards............................ (812) (2) Tax exempt interest........................ (444) (473) (296) Other, net................................. (111) (504) (1) (895) (2) ------- -- ------- -- ------- -- Total provision for income taxes........... $37,510 39% $25,607 37% $18,602 36% ======= == ======= == ======= ==
The provision (benefit) for deferred income taxes results from reporting the following items in different periods for financial statement and income tax purposes:
YEARS ENDED JUNE 30, ------------------------------ 1994 1993 1992 ------ ------- ------- (AMOUNTS IN THOUSANDS) Tax depreciation and amortization in excess of book depreciation................................................. $2,494 $ 2,048 $ 824 Stockholder litigation......................................... 1,785 (1,785) Self-insurance and other non-deductible reserves............... 175 (1,702) (3,392) Deferred premiums and other revenue............................ 296 (1,677) Discounted loss reserves....................................... (728) (1,186) (42) Vacation and other deferred compensation....................... (183) (1,151) (541) Preoperating costs............................................. 516 1,005 Deferred acquisition costs..................................... 546 Policyholder dividends......................................... 631 Bad debt expense............................................... (340) (541) 252 Other, net..................................................... (777) 227 (343) ------ ------- ------- Total deferred provision (benefit)............................. $2,630 $(1,192) $(5,027) ====== ======= =======
At June 30, 1994, an acquired subsidiary had approximately $2,000,000 of net operating loss carryforwards expiring in varying amounts through 2005. The net operating loss carryforwards are available to offset income at the subsidiary level and are not available to offset income of other entities in the Company's consolidated group. At June 30, 1991, one subsidiary had approximately $2,387,000 of net operating loss carryforwards which were fully utilized during the year ended June 30, 1992, resulting in a reduction of tax expense of $812,000. NOTE 6 -- INVESTMENTS In May, 1993, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 115 ("SFAS 115"), "Accounting for Certain Investments in Debt and Equity Securities." As permitted by SFAS 115, the Company elected to apply the Statement as of June 30, 1994. The Company has classified all of its investment portfolio as "available-for-sale." In accordance with SFAS 115, investments classified as "available-for-sale" are carried at fair value, and unrealized gains or losses, net of applicable income taxes, are reported in a separate caption of stockholders' equity. The adoption of SFAS 115 had no 30 33 FHP INTERNATIONAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) effect on net income but decreased short-term, long-term and restricted investments by $7,009,000, representing net unrealized losses, and decreased stockholders' equity by $4,392,000 (net unrealized losses less deferred income taxes of $2,617,000). In accordance with SFAS 115, prior period financial statements have not been restated. The following table summarizes required disclosures regarding the Company's short-term, long-term and restricted investments as of June 30, 1994:
GROSS GROSS AMORTIZED UNREALIZED UNREALIZED ESTIMATED COST GAINS LOSSES FAIR VALUE --------- ---------- ---------- ---------- (AMOUNTS IN THOUSANDS) Classified as short-term: U.S. Government and its agencies............. $125,309 $ 31 $ (1,816) $123,524 Corporate bonds.............................. 25,218 2 (474) 24,746 Medium term notes............................ 20,248 (367) 19,881 Other........................................ 18,251 6 (196) 18,061 -------- ------ -------- -------- Total short-term.......................... 189,026 39 (2,853) 186,212 -------- ------ -------- -------- Classified as long-term: U.S. Government and its agencies............. 96,098 12 (3,530) 92,580 Corporate bonds.............................. 16,697 10 (591) 16,116 Municipal obligations........................ 4,479 (45) 4,434 Other........................................ 6,710 3,270 (328) 9,652 -------- ------ -------- -------- Total long-term........................... 123,984 3,292 (4,494) 122,782 -------- ------ -------- -------- Classified as restricted investments: U.S. Government and its agencies............. 92,818 36 (3,030) 89,824 Certificates of deposit...................... 3,150 3,150 Money market funds........................... 4,904 1 4,905 -------- ------ -------- -------- Total restricted.......................... 100,872 37 (3,030) 97,879 -------- ------ -------- -------- Total................................ $413,882 $3,368 $(10,377) $406,873 ======== ====== ======== ========
The contractual maturities of short-term, long-term and restricted investments at June 30, 1994, were as follows:
AMORTIZED ESTIMATED COST FAIR VALUE --------- ---------- (AMOUNTS IN THOUSANDS) Due in one year or less................................ $135,993 $138,235 Due after one year through five years.................. 169,950 165,576 Due after five years through ten years................. 62,344 57,998 Due after ten years.................................... 45,595 45,064 -------- -------- $413,882 $406,873 ======== ========
The Company also determined that marketable securities, classified as short-term, are available for use in current operations and, accordingly, classified such securities as current assets without regard to the securities' contractual maturity dates. 31 34 FHP INTERNATIONAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) At June 30, 1993, short-term, long-term and restricted investments were reported at amortized cost, which was approximately the same as fair value:
AMORTIZED ESTIMATED COST FAIR VALUE --------- ---------- (AMOUNTS IN THOUSANDS) Short-term investments................................. $174,057 $174,855 Long-term investments.................................. 38,723 39,123 Restricted investments................................. 67,025 67,189
The fair value of short-term, long-term and restricted investments is estimated based on quoted market prices. NOTE 7 -- EMPLOYEE BENEFITS The Company has a defined contribution pension plan and an Employee Stock Ownership Plan ("ESOP") covering substantially all employees. Under the provisions of these plans, the Company has contributed or is committed to contribute into trusts for the benefit of employees an amount equal to 12% of eligible annual compensation, as defined, of all plan participants. Participants employed prior to July 1, 1990 become fully vested in their balances over a five year period. Participants beginning employment on or after July 1, 1990 will not vest until they have completed five years of service with the Company, at which time they become 100% vested. Nonvested contributions which are forfeited upon an employee's termination are treated as a reduction in the amount of the Company's contribution. The combined contribution expenses for the pension plan and ESOP were $35,020,000, $32,970,000 and $27,125,000 for fiscal years 1994, 1993 and 1992, respectively. Under an Executive Incentive Plan (the "Plan"), the Company is authorized to grant restricted stock awards, incentive stock options, nonqualified stock options and bonus awards to directors, officers, key employees, consultants and other agents. Under the terms of the Plan, the exercise price of the stock options must be equal to the fair market value of the Company's common stock at the date of grant. Stock options are subject to forfeitures due to termination and other circumstances. Beginning July 1, 1992, the first of a series of four annual stock option grants for a total of 2,240,000 shares was made to certain executives under the Plan. These grants are intended to provide a strong linkage between long-term incentives and the Company's financial performance. Accelerated vesting of each of these stock options is tied directly to growth in the Company's earnings per share ("EPS"). Total stock options for 435,000 and 1,085,000 shares were granted under this Plan on July 1, 1993 and 1992, respectively. Each year's stock option grant allows the optionee up to six consecutive annual opportunities for accelerated vesting of portions of the employee's stock options only if the Company's EPS exceeds both: (1) EPS for the previous fiscal year, and (2) average EPS for the two previous fiscal years. The terms of accelerated vesting for 25% of the stock options granted on July 1, 1992 and 10% of the stock options granted on July 1, 1993 have been met. If a stock option in the series does not become subject to accelerated vesting by the sixth anniversary of its grant, the stock option automatically becomes vested on the seventh anniversary of its grant. The exercise price of the stock option at each date of grant is equal to the fair market value of the Company's common stock at the date of grant. The Company may periodically issue stock options under similar terms and conditions as those above. The Company granted additional stock options for 982,000 and 407,000 shares during fiscal years 1994 and 1993, respectively. Key executives, employees, and directors of TakeCare participated in TakeCare's stock option programs. The Company established a new stock option program for the conversion of TakeCare stock options (the "New Plan"). As a result of the acquisition, TakeCare's stock option programs were terminated and the rights to participate in these programs were rolled over into the Company's New Plan. Certain TakeCare stock 32 35 FHP INTERNATIONAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) options were converted to Company stock options at a conversion ratio of 3.2 Company stock options for each TakeCare stock option. The terms (including the vesting schedule) and the aggregate exercise price of the Company stock options are the same as the original TakeCare stock options, but the per share exercise price was adjusted accordingly. The adjusted exercise prices range from $1.16 to $17.85. Stock options for a total of 964,000 shares were issued by the Company. These stock options retained their original TakeCare vesting schedule which provided that stock options became exercisable either at the rate of 25% within two years after the date of grant and an additional 25% each year thereafter, or at the rate of 20% within three years after the date of grant of the original stock options. There were also fully vested TakeCare stock options for 236,000 shares which were exchanged for merger consideration (Note 12) less the applicable exercise price and required withholding taxes. The Company granted option rights to purchase approximately 449,000 shares to former employees of TakeCare on June 17, 1994. These option rights vest in accordance with the provisions of the Plan described above. All stock options granted by the Company through June 30, 1994 were nonqualified. The following is a summary of stock option activity for fiscal years 1994, 1993 and 1992:
YEARS ENDED JUNE 30, ---------------------------------------------- 1994 1993 1992 ------------ ------------ ------------ Outstanding at beginning of year............... 2,386,000 1,457,000 1,472,000 Granted...................................... 2,830,000 1,492,000 268,000 Cancelled.................................... (219,000) (115,000) (83,000) Exercised.................................... (356,000) (448,000) (200,000) ------------ ------------ ------------ Outstanding at end of year..................... 4,641,000 2,386,000 1,457,000 =========== =========== =========== Exercisable at end of year..................... 390,000 366,000 440,000 =========== =========== =========== Price range of options outstanding at end of year......................................... $1.16-$28.25 $2.73-$27.63 $2.73-$27.63 Price range of options exercised............... $2.73-$27.63 $2.73-$24.00 $2.73-$16.76
At June 30, 1994, 1,519,000 shares remained available under the Plan for future grants of stock awards and stock options. Outstanding stock options at June 30, 1994, expire at the earlier of the date the stock option holder ceases to be an employee or a director, or ten years after the date of grant, based on the date of grant of the original stock options. The Company has established a deferred compensation plan for certain of its executives and physicians which is designed to provide supplemental retirement income benefits by enabling the participants to defer receipt of up to 50% of their gross annual salaries and 100% of their gross annual bonuses. Deferred amounts are included in other liabilities and the deferred amounts are deemed to be invested in one or more mutual funds selected by the participants. The Company pays premiums on individual life insurance policies whose policy benefits are equal to the deferred amounts. Account balances, including earnings from investments, are distributed to a participant upon two years' advance request or upon a participant's termination of employment, death or disability. Such distributions are offset by any values in the cash surrender value of the life insurance policies provided by the Company which are included in other assets. On November 1, 1989, 187,000 shares of common stock were issued as restricted stock awards at a purchase price of $0.02 per share. Compensation expense was determined based on the excess of the estimated market value of the stock over the purchase price on the date of the grant and was recognized ratably over the vesting period which ended on October 31, 1992. 33 36 FHP INTERNATIONAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 8 -- COMMITMENTS AND CONTINGENCIES Operating Leases The Company leases certain buildings and equipment under operating leases. Future minimum rental payments required under operating leases that have initial or remaining noncancellable lease terms in excess of one year as of June 30, 1994 are as follows:
(AMOUNTS IN YEARS ENDING JUNE 30: THOUSANDS) --------------------- ----------- 1995..................................... $ 31,638 1996..................................... 25,628 1997..................................... 17,365 1998..................................... 11,462 1999..................................... 8,762 Later years.............................. 13,085 --------- Total minimum payments required..... $ 107,940 =========
Total rental expense on operating leases aggregated $28,663,000, $23,579,000 and $21,255,000 for fiscal years 1994, 1993 and 1992, respectively. OPM Audit The Company contracts with the United States Office of Personnel Management ("OPM") to provide or arrange managed health care services under the Federal Employees Health Benefits Program ("FEHBP") for federal employees, annuitants and their dependents. OPM is the Company's largest commercial customer. These contracts with OPM and applicable government regulations establish premium rating requirements for the FEHBP. OPM conducts periodic audits of its contractors to, among other things, verify that the premiums established under the OPM contracts were established in compliance with the community rating and other requirements under the FEHBP. In May, 1993, after conducting a periodic audit of the Company covering primarily the years 1988 through 1991, OPM sent a draft audit report alleging certain defects in the Company's rating practices under applicable regulatory and contractual requirements, and invited the Company to comment. Following its evaluation of the additional information and comments which have been provided by the Company, the OPM auditors will issue a final report; the OPM Audit Resolution Division will then be responsible for resolving the audit findings. As part of the resolution process, the Audit Resolution Division may reconsider the findings of the auditors and the information provided by the Company. It is likely that the final audit report will recommend that OPM seek a monetary recovery from the Company, and that such recommended recovery could be a substantial amount. At this time, the Company's management and legal counsel are unable to determine the amounts that may be required to be refunded to OPM to resolve the audit findings. Management currently believes, however, that after application of available offsets and consideration of established reserves, amounts ultimately required to be refunded to OPM will not have a material adverse effect on the consolidated financial condition of the Company. In addition, the Company's management does not currently believe that the audit will have a material effect on future relations with OPM. Litigation During the ordinary course of business, the Company and its subsidiaries have become a party to pending and threatened legal actions and proceedings, a significant number of which involve alleged claims of medical malpractice. Management of the Company is of the opinion, taking into account its insurance coverage and 34 37 FHP INTERNATIONAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 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 statements of the Company and its subsidiaries. NOTE 9 -- NOTES RECEIVABLE FROM EMPLOYEE STOCK OWNERSHIP PLAN During fiscal years 1993 and 1992, the ESOP repaid the Company amounts previously loaned of $4,150,000 and $8,548,000, respectively. The loans were made to enable the ESOP to purchase the Company's common stock on a periodic basis and were repaid from periodic contributions to the ESOP received from the Company (Note 7). The Company currently makes quarterly contributions (pursuant to the annual contribution described in Note 7) to the ESOP to fund quarterly purchases by the ESOP on the open market. For fiscal years 1994 and 1993, the Company contributed $9,140,000 and $6,870,000, respectively, for this purpose. NOTE 10 -- STOCKHOLDERS' EQUITY In June, 1994, the Company amended its Certificate of Incorporation to increase the authorized number of shares of common stock from 70,000,000 to 100,000,000 and the authorized number of shares of preferred stock from 5,000,000 to 40,000,000. As the Company issues preferred stock, it is designated as either Series A Cumulative Convertible Preferred Stock ("Series A Preferred Stock") or Series B Adjustable Rate Cumulative Preferred Stock ("Series B Preferred Stock"). The Company issued 6,311,781 shares of common stock, 21,031,733 shares of Series A Preferred Stock and 32,850 shares of Series B Preferred Stock as merger consideration in the acquisition of TakeCare (Note 12). Holders of the Series A Preferred Stock are entitled to receive cumulative cash dividends of 5.0% per annum. Dividends will be payable quarterly in arrears when and if declared by the Company's Board of Directors. On or after the fourth anniversary of the acquisition, the Company may, at its option, redeem all or part of the outstanding shares of Series A Preferred Stock, at fixed redemption prices per share plus an amount equal to any accrued and unpaid dividends. Each share of Series A Preferred Stock may be convertible at the option of the holder into the Company's common stock at any time commencing six months after the acquisition date. The conversion price for the Series A Preferred Stock is $31 per share. Holders of Series B Preferred Stock are entitled to receive cumulative cash dividends of not less than 5.0% per annum or greater than 11.0% per annum. The actual dividend rate will be determined quarterly based upon prevailing market interest rates. The dividend established as of June 17, 1994, was 6.86%. Dividends will be payable quarterly in arrears when and if declared by the Company's Board of Directors. Beginning nine months after June 17, 1994, the Company may, at its option, redeem all or part of the outstanding shares of Series B Preferred Stock, at $25 per share plus an amount equal to accrued and unpaid dividends. In June, 1990, the Board of Directors of the Company declared a dividend of one common share purchase right (a "Right") for each outstanding share of common stock to the holders of record on June 29, 1990 and authorized and directed the issuance of one Right with respect to each share of common stock that shall become outstanding prior to the occurrence of certain terminating events. Each Right entitles the registered holder to purchase from the Company one-fourth of a share of common stock at a price which varies based on the market price of a share of the Company's stock ($24.00 at June 30, 1994), subject to adjustment (the "Purchase Price"). Upon the occurrence of certain events associated with an unsolicited takeover attempt of the Company, the Rights will become exercisable and will cease to automatically trade with the common stock. Thereafter, upon the occurrence of certain further triggering events, each Right will become exercisable, at an adjusted Purchase Price (the "Adjusted Purchase Price") equal to four times the Purchase Price immediately prior to such adjustment, for that number of shares of common stock having a market value of two times such Adjusted Purchase Price. The Rights have certain anti-takeover effects that will cause 35 38 FHP INTERNATIONAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) substantial dilution to a person or group that attempts to acquire the Company in a manner which causes the Rights to become exercisable. The terms of the Rights may be amended by the Board of Directors of the Company without the consent of the holders of the Rights. At June 30, 1994, there was one Right outstanding for each share of common stock outstanding and a sufficient number of authorized but unissued shares of common stock available for issuance upon (i) the exercise of the Rights, (ii) the issuance of common stock (and associated Rights) in connection with the future exercise of outstanding stock options, and (iii) the issuance of common stock (and associated Rights) in connection with the future conversion of the Series A Preferred Stock. NOTE 11 -- EARNINGS PER SHARE ATTRIBUTABLE TO COMMON STOCK Earnings per share for fiscal years 1994, 1993 and 1992 were computed by dividing net income attributable to common stock by 34,051,000, 33,270,000 and 32,921,000 shares, respectively, which represent the weighted average number of outstanding common shares and common share equivalents during the respective periods. Common share equivalents include the effect of dilutive stock options calculated using the treasury stock method. NOTE 12 -- ACQUISITIONS The Company acquired all of the outstanding common stock of TakeCare on June 17, 1994. The acquisition was treated as a purchase for accounting purposes, assuming all common shares were tendered as of the acquisition date. The consolidated financial statements include the operations of TakeCare beginning June 17, 1994. The purchase price was approximately $1,053 million and was financed through the issuance of 6,311,781 shares of common stock, 21,031,733 shares of Series A Preferred Stock, 32,850 shares of Series B Preferred Stock, a term loan facility of $250 million with a consortium of banks, a revolving loan facility of $100 million (of which $50 million was utilized) and internally generated funds of approximately $100 million to substantially complete the transaction, including non-shareholder related costs. These costs included the repayment of TakeCare's outstanding long-term debt of $24.3 million and other costs of $60.3 million related to the transaction. The acquisition 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. As of September 2, 1994, 457,531 shares of TakeCare common stock had not been presented for redemption. Consequently, additional shares of Series B Preferred Stock may be issued after June 30, 1994, at the election of these shareholders. These consolidated financial statements assume that untendered shares will not elect Series B Preferred Stock. The following table summarizes the unaudited pro forma consolidated results of operations of the Company as though the acquisition of TakeCare had occurred on July 1, 1992. The unaudited pro forma consolidated results of operations shown below do not necessarily represent what the consolidated results of operations of the Company would have been if the acquisition had actually occurred on July 1, 1992, nor do they represent a forecast of the consolidated results of operations of the Company for any future period.
YEARS ENDED JUNE 30, ------------------------- 1994 1993 ---------- ---------- (AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA) Revenue............................................. $3,596,000 $3,050,000 Income before income taxes.......................... 139,848 101,652 Net income attributable to common stock............. 44,986 25,507 Earnings per share attributable to common stock..... $1.12 $0.64
36 39 FHP INTERNATIONAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) In March, 1993, the Company acquired Great States and its subsidiaries for approximately $21.7 million, net of cash acquired. Through its subsidiaries, Great States writes workers' compensation insurance policies in California and Arizona and provides various claims administration services. The acquisition, which has been accounted for as a purchase, was financed through cash generated from operations of the Company. As a result of the purchase, the Company recorded costs in excess of net assets acquired of approximately $2.5 million. The Company also obtained a covenant not to compete for which it paid $4 million (Note 1). In October, 1993, the Company acquired an approximately 4,700 member HMO located 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 million. The Company also obtained a covenant not to compete for which it paid $0.5 million (Note 1). NOTE 13 -- INFORMATION REGARDING THE COMPANY'S OPERATIONS IN DIFFERENT SEGMENTS The Company offers a full range of products to achieve its strategic goal of becoming a sole source provider of health care services. These products can be classified into two principal segments of business: HMO and insurance services. The HMO offers a full range of related products to consumers and employers in the direct delivery of managed health care services. Complementing the operations of the HMO are the products offered by the insurance segment. These products include traditional indemnity health and life insurance, workers' compensation and third party administration of self-insured employer programs. Often, the products offered by the HMO and insurance segments are sold to the same account; that is, an employer is able to offer a "dual choice" to employees of enrollment in either the HMO or the indemnity coverage provided through group health insurance coverage. 37 40 FHP INTERNATIONAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Information regarding the two segments is summarized below for the years ended June 30, 1994, 1993 and 1992:
1994 1993 1992 ---------- ---------- ---------- (AMOUNTS IN THOUSANDS) Revenue: HMO.......................................... $2,363,832 $1,926,832 $1,535,988 Insurance.................................... 109,126 79,022 50,098 ---------- ---------- ---------- $2,472,958 $2,005,854 $1,586,086 ========== ========== ========== Pretax income (loss): HMO.......................................... $ 160,202 $ 134,162 $ 111,106 Insurance.................................... 9,913 448 (2,312) Corporate.................................... (87,095) (79,545) (79,324) Interest income, net......................... 13,800 14,708 22,022 ---------- ---------- ---------- $ 96,820 $ 69,773 $ 51,492 ========== ========== ========== Assets: HMO.......................................... $1,896,081 $ 341,895 $ 276,889 Insurance.................................... 167,092 143,075 55,859 Corporate.................................... 106,096 260,714 282,911 ---------- ---------- ---------- $2,169,269 $ 745,684 $ 615,659 ========== ========== ========== Depreciation and amortization: HMO.......................................... $ 35,284 $ 23,526 $ 18,663 Insurance.................................... 1,399 270 175 Corporate.................................... 8,588 6,116 4,528 ---------- ---------- ---------- $ 45,271 $ 29,912 $ 23,366 ========== ========== ========== Capital expenditures: HMO.......................................... $ 72,509 $ 75,509 $ 97,942 Insurance.................................... 3,287 1,399 252 Corporate.................................... 10,256 10,495 12,404 ---------- ---------- ---------- $ 86,052 $ 87,403 $ 110,598 ========== ========== ==========
38 41 FHP INTERNATIONAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 14 -- UNAUDITED QUARTERLY INFORMATION
QUARTERS ENDED --------------------------------------------------------- SEPTEMBER 30 DECEMBER 31 MARCH 31 JUNE 30 ------------- ------------ --------- -------- (AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA) Year ended June 30, 1994: Revenue................................... $576,379 $591,107 $622,461 $683,011 Operating income.......................... 13,484 13,684 24,356 31,496 Income before income taxes................ 17,608 16,891 27,698 34,623 Net income(a)............................. 11,246 10,253 16,813 20,998 Earnings per share attributable to common stock.................................. 0.33 0.31 0.50 0.57 Year ended June 30, 1993: Revenue................................... $444,167 $464,509 $535,775 $561,403 Operating income.......................... 6,266 6,260 19,048 23,491 Income before income taxes................ 10,116 9,710 22,896 27,051 Net income(b)............................. 6,444 6,151 14,448 17,123 Earnings per share........................ 0.20 0.19 0.43 0.51
- - --------------- (a) Net income for the fourth quarter ended June 30, 1994 included TakeCare's operations from the date of acquisition and favorable net adjustments of approximately $838,000, resulting primarily from changes of estimates with respect to certain fiscal year 1994 compensation and benefit related accruals and reserves for professional liability claims. Management's estimates were based on the most recent information available, including events and changes in circumstances which occurred during the period. (b) Net income for the fourth quarter ended June 30, 1993 included favorable net adjustments of approximately $2,121,000, resulting primarily from billings to the Health Care Financing Administration and changes of estimates with respect to certain fiscal year 1993 compensation related accruals, workers' compensation reserves for the Company's self-insured program for its California employees and other operating accruals. Management's estimates were based on the most recent information available, including events and changes in circumstances which occurred during the period. 39 42 INDEPENDENT AUDITORS' REPORT FHP International Corporation: We have audited the accompanying consolidated balance sheets of FHP International Corporation and its subsidiaries as of June 30, 1994 and 1993, and the related consolidated statements of income, stockholders' equity and cash flows for each of the three years in the period ended June 30, 1994. Our audits also included the financial statement schedules listed in the index at Item 14(a). These consolidated financial statements and financial statement schedules are the responsibility of the Corporation's management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedules based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of FHP International Corporation and its subsidiaries at June 30, 1994 and 1993, and the results of their operations and their cash flows for each of the three years in the period ended June 30, 1994, in conformity with generally accepted accounting principles. Also, in our opinion, such financial statement schedules, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly in all material respects the information set forth therein. Deloitte & Touche LLP Costa Mesa, California September 8, 1994 40 43 FHP INTERNATIONAL CORPORATION SCHEDULE I -- MARKETABLE SECURITIES AND OTHER INVESTMENTS JUNE 30, 1994
COLUMN E ------------ AMOUNT AT WHICH EACH PORTFOLIO OF EQUITY SECURITY COLUMN B COLUMN D ISSUES AND ---------------- ------------ EACH OTHER NUMBER OF SHARES MARKET VALUE SECURITY OR COLUMN C OF EACH ISSUE IS COLUMN A UNITS -- PRINCIPAL ------------ ISSUE AT CARRIED IN - - --------------------------------------- AMOUNT OF BONDS COST OF BALANCE THE BALANCE NAME OF ISSUER AND TITLE OF EACH ISSUE AND NOTES EACH ISSUE SHEET DATE SHEET - - --------------------------------------- ---------------- ------------ ------------ ------------ SHORT-TERM INVESTMENTS United States Government and its agencies... $126,918,000 $125,309,000 $123,524,000 $123,524,000 Corporate bonds........................ 24,762,000 25,218,000 24,746,000 24,746,000 Medium term notes...................... 20,000,000 20,248,000 19,881,000 19,881,000 Other: Asset backed securities.............. 3,663,000 3,708,000 3,608,000 3,608,000 Municipal obligations................ 3,150,000 3,154,000 3,154,000 3,154,000 Bank deposit notes................... 4,000,000 4,000,000 3,953,000 3,953,000 Certificates of deposit.............. 3,137,000 3,137,000 3,137,000 3,137,000 Other................................ 4,306,000 4,252,000 4,209,000 4,209,000 ---------------- ------------ ------------ ------------ 18,256,000 18,251,000 18,061,000 18,061,000 ---------------- ------------ ------------ ------------ Total short-term............. 189,936,000 189,026,000 186,212,000 186,212,000 ---------------- ------------ ------------ ------------ LONG-TERM INVESTMENTS United States Government and its agencies... 95,869,000 96,098,000 92,580,000 92,580,000 Corporate bonds........................ 16,371,000 16,697,000 16,116,000 16,116,000 Municipal obligations.................. 4,300,000 4,479,000 4,434,000 4,434,000 Other.................................. 5,679,000 6,710,000 9,652,000 9,652,000 ---------------- ------------ ------------ ------------ Total long-term.............. 122,219,000 123,984,000 122,782,000 122,782,000 ---------------- ------------ ------------ ------------ RESTRICTED INVESTMENTS United States Government and its agencies... 90,511,000 92,818,000 89,824,000 89,824,000 Certificates of deposit................ 3,150,000 3,150,000 3,150,000 3,150,000 Money market funds..................... 4,904,000 4,904,000 4,905,000 4,905,000 ---------------- ------------ ------------ ------------ Total restricted............. 98,565,000 100,872,000 97,879,000 97,879,000 ---------------- ------------ ------------ ------------ Total........................ $410,720,000 $413,882,000 $406,873,000 $406,873,000 ============= =========== =========== ===========
41 44 FHP INTERNATIONAL CORPORATION SCHEDULE II -- AMOUNTS RECEIVABLE FROM RELATED PARTIES AND UNDERWRITERS, PROMOTERS AND EMPLOYEES OTHER THAN RELATED PARTIES
COLUMN B COLUMN E -------- ------------------- BALANCE COLUMN A AT COLUMN D BALANCE AT END OF - - ----------------------- BEGINNING COLUMN C -------- PERIOD NAME OF DEBTOR AND OF -------- AMOUNTS ------------------- FISCAL YEAR ENDED PERIOD ADDITIONS COLLECTED CURRENT NONCURRENT - - ----------------------- -------- -------- -------- -------- -------- Jack Massimino June 30, 1992........ $100,000 $ -- $ -- $100,000 $ -- June 30, 1993........ 100,000 100,000 Nick Franklin (a) June 30, 1992........ 100,000 100,000 June 30, 1993........ 100,000 25,000 75,000 June 30, 1994........ 100,000 25,000 25,000 50,000 Joseph Ruggio (b) June 30, 1992........ 100,000 100,000 June 30, 1993........ 100,000 6,250 93,750 June 30, 1994........ 93,750 18,750 25,000 50,000 Paul LoCascio (c) June 30, 1992........ 84,000 84,000 June 30, 1993........ 84,000 84,000 June 30, 1994........ 84,000 84,000 Ryan Trimble (d) June 30, 1993........ 150,000 20,000 130,000 June 30, 1994........ 130,000 20,000 20,000 90,000 Kenneth Ord (e) June 30, 1994........ 100,000 20,000 80,000
- - --------------- (a) Principal plus accrued interest at the rate of 9% per year may be forgiven in installments of $25,000 a year if Mr. Franklin remains employed with the Company through September 1996. In the interim, the loan is collateralized by a recorded second lien on his personal residence. (b) Principal plus accrued interest at the rate of 9% per year may be forgiven in installments of $6,250 per quarter if Dr. Ruggio remains employed with the Company through February 1997. In the interim, the loan is collateralized by a recorded second lien on his personal residence. (c) Interest at 10%, all due January 1996. Collateralized by Deed of Trust on his personal residence. (d) Principal plus accrued interest at a rate of 6.5% per year may be forgiven in installments of $20,000 a year if Dr. Trimble remains employed with the Company through July 1997, at which time the remaining $50,000 principal balance, together with interest at the rate of 6.5% a year will be due and payable. In the interim, the loan is collateralized by a recorded second lien on his personal residence. (e) Principal plus accrued interest at the rate of 8.5% per year may be forgiven in installments of $20,000 per year if Mr. Ord remains employed with the Company through February 1999. In the interim, the loan is collateralized by a recorded second lien on his personal residence. 42 45 FHP INTERNATIONAL CORPORATION SCHEDULE V -- PROPERTY, PLANT AND EQUIPMENT
COLUMN B COLUMN F ------------ ------------ COLUMN A BALANCE AT COLUMN C COLUMN D COLUMN E BALANCE AT - - ------------------------ BEGINNING OF ------------ ------------ ------------ END OF CLASSIFICATION PERIOD ADDITIONS RETIREMENTS OTHER PERIOD - - ------------------------ ------------ ------------ ------------ ------------ ------------ Fiscal Year Ended June 30, 1992: Land.................. $ 39,121,000 $11,154,000 $ -- $ -- $50,275,000 Buildings............. 75,985,000 7,978,000 20,392,000 104,355,000 Construction in progress........... 22,479,000 49,290,000 (746,000 ) (29,663,000 ) 41,360,000 Leasehold improvements....... 25,422,000 5,865,000 (51,000 ) 3,593,000 34,829,000 Equipment and fixtures........... 97,922,000 36,311,000 (2,352,000 ) 5,678,000 137,559,000 ------------ ------------ ------------ ------------ ------------ Totals........ $260,929,000 $110,598,000 $(3,149,000 ) $ -- $368,378,000 =========== ============ ============ ============ ============ Fiscal Year Ended June 30, 1993: Land.................. $ 50,275,000 $ 8,413,000 $ (159,000 ) $ -- $58,529,000 Buildings............. 104,355,000 2,388,000 (731,000 ) 18,637,000 124,649,000 Construction in progress........... 41,360,000 46,935,000 (31,086,000 ) 57,209,000 Leasehold improvements....... 34,829,000 6,381,000 (1,078,000 ) 2,130,000 42,262,000 Equipment and fixtures........... 137,559,000 23,683,000 (1,334,000 ) 10,319,000 170,227,000 ------------ ------------ ------------ ------------ ------------ Totals........ $368,378,000 $87,800,000 $(3,302,000 ) $ -- $452,876,000 =========== ============ ============ ============ ============ Fiscal Year Ended June 30, 1994: Land.................. $ 58,529,000 $10,244,000 $(1,054,000 ) $ 701,000 $68,420,000 Buildings............. 124,649,000 1,169,000 (115,000 ) 39,736,000 165,439,000 Construction in progress........... 57,209,000 33,615,000 (21,000 ) (60,036,000 ) 30,767,000 Leasehold improvements....... 42,262,000 4,302,000 (1,459,000 ) 2,744,000 47,849,000 Equipment and fixtures........... 170,227,000 56,096,000 (5,538,000 ) 16,855,000 237,640,000 ------------ ------------ ------------ ------------ ------------ Totals........ $452,876,000 $105,426,000 $(8,187,000 ) $ -- $550,115,000 =========== ============ ============ ============ ============
- - --------------- Note: The additions column for the fiscal year ended June 30, 1994, includes additions of property, plant and equipment of $19,374,000 related to the TakeCare, Inc. acquisition. The additions column for the fiscal year ended June 30, 1993, includes additions of property, plant and equipment of $397,000 related to the Great States Financial Corporation acquisition. 43 46 FHP INTERNATIONAL CORPORATION SCHEDULE VI -- ACCUMULATED DEPRECIATION, DEPLETION AND AMORTIZATION OF PROPERTY, PLANT AND EQUIPMENT
COLUMN B COLUMN F ------------ ------------ COLUMN A BALANCE AT COLUMN C COLUMN D COLUMN E BALANCE AT - - ------------------------ BEGINNING OF ------------ ------------ ------------ END OF CLASSIFICATION PERIOD ADDITIONS RETIREMENTS OTHER PERIOD - - ------------------------ ------------ ------------ ------------ ------------ ------------ Fiscal Year Ended June 30, 1992: Buildings............. $ 9,827,000 $ 2,768,000 $ -- $ -- $12,595,000 Leasehold improvements....... 9,403,000 4,110,000 (51,000 ) 13,462,000 Equipment and fixtures........... 40,866,000 16,346,000 (1,409,000 ) 55,803,000 ------------ ------------ ------------ ------------ ------------ Totals........ $ 60,096,000 $23,224,000 $(1,460,000 ) $ -- $81,860,000 =========== ============ ============ ============ ============ Fiscal Year Ended June 30, 1993: Buildings............. $ 12,595,000 $ 3,898,000 $ (87,000 ) $ -- $16,406,000 Leasehold improvements....... 13,462,000 4,878,000 (160,000 ) 18,180,000 Equipment and fixtures........... 55,803,000 19,973,000 (755,000 ) 75,021,000 ------------ ------------ ------------ ------------ ------------ Totals........ $ 81,860,000 $28,749,000 $(1,002,000 ) $ -- $109,607,000 =========== ============ ============ ============ ============ Fiscal Year Ended June 30, 1994: Buildings............. $ 16,406,000 $ 5,979,000 $ (66,000 ) $ -- $22,319,000 Leasehold improvements....... 18,180,000 6,388,000 (383,000 ) 24,185,000 Equipment and fixtures........... 75,021,000 27,620,000 (2,784,000 ) 99,857,000 ------------ ------------ ------------ ------------ ------------ Totals........ $109,607,000 $39,987,000 $(3,233,000 ) $ -- $146,361,000 =========== ============ ============ ============ ============
44 47 FHP INTERNATIONAL CORPORATION SCHEDULE X -- SUPPLEMENTARY INCOME STATEMENT INFORMATION CHARGED TO COSTS AND EXPENSES
YEARS ENDED JUNE 30, --------------------------------------- 1994 1993 1992 ----------- ----------- ----------- Advertising costs..................................... $23,800,000 $17,018,000 $13,649,000
45 48 INDEX TO EXHIBITS
SEQUENTIALLY EXHIBIT NUMBERED NUMBER DESCRIPTION PAGE - - ------- ------------------------------------------------------------------ ------------- *2.1 Agreement and Plan of Merger, dated March 3, 1994 (incorporated by reference to Exhibit 2.1 to Form S-4 No. 33-53431)................ * *2.2 Amendment No. 1 to Agreement and Plan of Merger, dated April 29, 1994 (incorporated by reference to Exhibit 2.2 to Form S-4 No. 33-53431)......................................................... * *2.3 Amendment No. 2 to Agreement and Plan of Merger, dated May 25, 1994 (incorporated by reference to Exhibit 2.1 to Form 8-K, filed with the Commission on May 26, 1994).............................. * *3.1 Restated Certificate of Incorporation of FHP International Corporation (Exhibit 3.1 to Form S-4 No. 33-53431)................ * *3.2 Amendment to Restated Certificate of Incorporation of FHP International Corporation (Exhibit 3.2 to Form S-4 No. 33-53431)......................................................... * *3.3 Certificate of Designation for Series A Cumulative Convertible Preferred Stock of FHP International Corporation. (Exhibit 3.3 to Form 8-K, filed with the Commission on July 6, 1994.)............. * *3.4 Certificate of Designation for Series B Adjustable Rate Cumulative Preferred Stock of FHP International Corporation. (Exhibit 3.4 to Form 8-K, filed with the Commission on July 6, 1994.)............. * 3.5 Bylaws of FHP International Corporation as amended to date........ *4.1 Specimen Common Stock Certificate (Exhibit 4.1 to Form S-3 Registration Statement No. 33-39984).............................. * *4.2 Indenture dated as of September 22, 1993 between Registrant and The Chase Manhattan Bank, N.A. in regard to $100,000,000 7% Senior Notes due 2003. (Exhibit 4.2 to Form 10-K for the Fiscal Year Ended June 30, 1993.)............................................. * *4.3 Credit Agreement dated as of March 24, 1994, among the Registrant, the Lenders named therein and Chemical Bank as Administrative Agent (Exhibit 10.1 to Form 8-A filed with the Commission on May 9, 1994).......................................................... * 4.4 Registrant agrees to furnish to the Commission, upon request, a copy of each instrument with respect to issues of long-term debt of the Registrant, the authorized principal amount of which does not exceed 10% of the total assets of Registrant.................. * *10.1 Health Insurance Benefits for the Aged and Disabled Contracts dated January 1, 1992 between FHP, Inc. and the Secretary of Health and Human Services (Exhibit 10.2 to Form 10-K for the Fiscal Year Ended June 30, 1992).................................. * *10.2 Group Health Benefits Contract dated January 1, 1986 between FHP, Inc. and the Federal Office of Personnel Management (Exhibit 10.3 to Form S-1 Registration Statement No. 33-5596)................... * *10.3 Lease between Plaza Land Corporation and FHP, Inc. dated December 29, 1977, as amended, concerning the lease of FHP's Plaza Medical Center in Long Beach, California (Exhibit 10.4 to Form S-1 Registration Statement No. 33-5596)............................... * *10.4 Fourth Addendum to Lease between Plaza Land Corporation and FHP, Inc. dated December 4, 1987 concerning the lease of FHP's Plaza Medical Center in Long Beach, California (Exhibit 10.5 to Form 10-K for the Fiscal Year Ended June 30, 1988)..................... *
49
SEQUENTIALLY EXHIBIT NUMBERED NUMBER DESCRIPTION PAGE - - ------- ----------- ------------ *10.5 Medical Building Lease between Downtowners Associates, Ltd. and FHP, Inc. dated October 7, 1983, as amended, concerning the lease of FHP's Hippodrome Senior Center in Long Beach, California (Exhibit 10.5 to Form S-1 Registration Statement No. 33-5596)..... * 10.6 Amendment to Lease between Downtowners Associates, Limited and FHP, Inc. dated July 1, 1994 concerning the lease of FHP's Hippodrome Senior Center in Long Beach, California................ *10.7 Employment Agreement dated December 12, 1984 between FHP, Inc. and Robert Gumbiner, M.D. (Exhibit 10.8 to Form S-1 Registration Statement No. 33-5596)............................................ * *10.8 Amendment to Employment Agreement dated June 15, 1988 between FHP, Inc. and Robert Gumbiner, M.D. (Exhibit 10.9 to Form 10-K Annual Report for the Fiscal Year Ended June 30, 1988)................... * *10.9 Supplement to Employment Agreement dated June 20, 1990 between FHP, Inc. and Robert Gumbiner, M.D. (Exhibit 10.10 to Form 10-K Annual Report for the Fiscal Year Ended June 30, 1990)............ * *10.10 Amendment to Employment Agreement dated February 1, 1992 between FHP, Inc. and Robert Gumbiner, M.D. (Exhibit 10.11 to Form 10-K Annual Report for the Fiscal Year Ended June 30, 1992)............ * *10.11 Employment Contract dated as of November 1, 1993, between the Registrant, FHP, Inc. and Mark B. Hacken (Exhibit 10.1 to Form 10-Q for the Quarter Ended December 31, 1993)..................... * *10.12 Form of Employment Agreement dated as of March 12, 1994 by and between the Registrant and 11 key executives (Exhibit 10.2 to Form 10-Q for the Quarter Ended March 31, 1994)........................ * *10.13 FHP International Corporation Executive Incentive Plan, as amended November 19, 1992. (Exhibit 10.11 to Form 10-K for the Fiscal Year Ended June 30, 1993.)............................................. * *10.14 FHP Money Purchase Pension Plan, as amended and restated June 7, 1993. (Exhibit 10.12 to Form 10-K for the Fiscal Year Ended June 30, 1993.)........................................................ * *10.15 FHP International Corporation Employee Stock Ownership Plan, as amended and restated June 7, 1993. (Exhibit 10.13 to Form 10-K for the Fiscal Year Ended June 30, 1993.)............................. * *10.16 FHP, Inc. Deferred Compensation Plan for Executives and Physicians, dated June 28, 1991. (Exhibit 10.14 to Form 10-K for the Fiscal Year Ended June 30, 1993.)............................. * *10.17 FHP International Corporation/TakeCare, Inc. Stock Option Plan (successor to the TakeCare, Inc. Amended and Restated 1990 Stock Option Plan and the TakeCare, Inc. 1993 Stock Option Plan) (Exhibit 4 to Form S-8 Registration Statement No. 33-54313)....... * *10.18 TakeCare Savings and Retirement Plan and Trust Agreement (1992 Restatement) (Exhibit 4.1 to Form S-8 Registration Statement No. 33-55545)......................................................... * *10.19 Amendment No. 1 to the TakeCare Savings and Retirement Plan and Trust Agreement (1992 Restatement) (Exhibit 4.2 to Form S-8 Registration No. 33-55545)........................................ *
50
SEQUENTIALLY EXHIBIT NUMBERED NUMBER DESCRIPTION PAGE - - ------- ------------------------------------------------------------------ ------------- *10.20 Amendment No. 2 to the TakeCare Savings and Retirement Plan and Trust Agreement (Exhibit 4.3 to Form S-8 Registration Statement No. 33-55545)..................................................... * *10.21 Amended and Restated Rights Agreement evidencing rights to purchase Common Stock of Registrant (Exhibit 1 to Form 8-A/A filed with the Commission on April 5, 1994)............................. * 11.1 Computation of Earnings Per Share for the years ended June 30, 1994, 1993 and 1992............................................... 21.0 Subsidiaries of the Registrant.................................... 23.1 Independent Auditors' Consent..................................... 27.0 Financial Data Schedule........................................... 28.1 Information required by Form 11-K with respect to the FHP International Corporation Employee Stock Ownership Plan for the Fiscal Year Ended June 30, 1994...................................
- - --------------- * Document has previously been filed with the Commission and is incorporated by reference and made a part hereof. The Registrant will furnish any of the foregoing exhibits upon the payment of a reasonable fee based upon the Registrant's expenses in furnishing such exhibit(s). Written inquiries should be addressed to FHP International Corporation, Investor Relations Department, 9900 Talbert Avenue, Fountain Valley, California 92708. EX-3.5 2 BYLAWS OF FHP INTERNATIONAL CORP. 1 EXHIBIT 3.5 TABLE OF CONTENTS BYLAWS OF FHP INTERNATIONAL CORPORATION ARTICLE I. MEETINGS OF STOCKHOLDERS . . . . . . . . . . . . . . . . . . 1 --------- ------------------------ 1. Annual Meetings . . . . . . . . . . . . . . . . . . . . . . . 1 2. Special Meetings . . . . . . . . . . . . . . . . . . . . . . 1 3. Place of Meeting . . . . . . . . . . . . . . . . . . . . . . 1 4. Calling and Notice of Meetings . . . . . . . . . . . . . . . 2 5. Quorum . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 6. Loss of Quorum . . . . . . . . . . . . . . . . . . . . . . . 3 7. Adjournments . . . . . . . . . . . . . . . . . . . . . . . . 3 8. Conduct of Meeting . . . . . . . . . . . . . . . . . . . . . 3 9. List of Stockholders . . . . . . . . . . . . . . . . . . . . 3 10. Record Date . . . . . . . . . . . . . . . . . . . . . . . . . 4 11. Voting . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 12. Notice of Stockholder Business and Nominations . . . . . . . . . . . . . . . . . . . . . . . 4 13. Inspectors; Opening and Closing the Polls . . . . . . . . . . . . . . . . . . . . . . . . . . 8 14. Proxies . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 15. Record Date for Action by Written Consent . . . . . . . . . . . . . . . . . . . . . . . 8 16. Inspectors of Written Consent . . . . . . . . . . . . . . . . 9 17. Effectiveness of Written Consent . . . . . . . . . . . . . . 10 ARTICLE II. BOARD OF DIRECTORS . . . . . . . . . . . . . . . . . . . . . 10 ---------- ------------------ 1. General Powers . . . . . . . . . . . . . . . . . . . . . . . 10 2. Number and Term of Office . . . . . . . . . . . . . . . . . . 10 3. Regular Meetings . . . . . . . . . . . . . . . . . . . . . . 11 4. Special Meetings . . . . . . . . . . . . . . . . . . . . . . 12 5. Notice of Special Meetings . . . . . . . . . . . . . . . . . 12 6. Quorum . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 7. Loss of Quorum . . . . . . . . . . . . . . . . . . . . . . . 12 8. Adjournments . . . . . . . . . . . . . . . . . . . . . . . . 12 9. Conduct of Meetings . . . . . . . . . . . . . . . . . . . . . 12 10. Consent in Lieu of Meeting . . . . . . . . . . . . . . . . . 13 11. Resignations . . . . . . . . . . . . . . . . . . . . . . . . 13 12. Removal of Directors . . . . . . . . . . . . . . . . . . . . 13 13. Vacancies . . . . . . . . . . . . . . . . . . . . . . . . . . 13 14. Telephonic Meetings . . . . . . . . . . . . . . . . . . . . . 13
i 2 TABLE OF CONTENTS BYLAWS OF FHP INTERNATIONAL CORPORATION ARTICLE III. COMMITTEES OF THE BOARD OF DIRECTORS . . . . . . . . . . . . . . 14 ----------- ------------------------------------ 1. Committees Designated by the Board of Directors . . . . . . . . . . . . . . . . . . . . . . . 14 2. Meetings; Minutes . . . . . . . . . . . . . . . . . . . . . . . . 14 3. Quorum; Loss of Quorum . . . . . . . . . . . . . . . . . . . . . 14 4. Resignations . . . . . . . . . . . . . . . . . . . . . . . . . . 14 5. Consent in Lieu of Meeting . . . . . . . . . . . . . . . . . . . 15 6. Telephonic Meetings . . . . . . . . . . . . . . . . . . . . . . . 15 7. Adjournments . . . . . . . . . . . . . . . . . . . . . . . . . . 15 ARTICLE IV. OFFICERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 ---------- -------- 1. Number; Positions . . . . . . . . . . . . . . . . . . . . . . . . 15 2. Powers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 3. Appointment; Qualifications . . . . . . . . . . . . . . . . . . . 16 4. Resignations . . . . . . . . . . . . . . . . . . . . . . . . . . 16 5. Succession . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 ARTICLE V. SHARES OF STOCK . . . . . . . . . . . . . . . . . . . . . . . . . 17 --------- --------------- 1. Stock Certificates . . . . . . . . . . . . . . . . . . . . . . . 17 2. Lost, Destroyed, Stolen and Mutilated Certificates . . . . . . . . . . . . . . . . . . . . . 17 ARTICLE VI. GENERAL MATTERS . . . . . . . . . . . . . . . . . . . . . . . . . 18 ---------- --------------- 1. Waiver of Notice . . . . . . . . . . . . . . . . . . . . . . . . 18 2. Indemnification . . . . . . . . . . . . . . . . . . . . . . . . . 18 3. Records . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 4. Reports . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 5. Right of Inspection . . . . . . . . . . . . . . . . . . . . . . . 19 6. Conformity with Law . . . . . . . . . . . . . . . . . . . . . . . 19
ii 3 BYLAWS OF FHP INTERNATIONAL CORPORATION A DELAWARE CORPORATION ________________________________ ARTICLE I MEETINGS OF STOCKHOLDERS 1. Annual Meetings. An annual meeting of the stockholders of the Corporation for the election of directors and for the transaction of such other business as may come before the meeting shall be held on the third Thursday in November of each calendar year, or on such other date as may be fixed by the Board of Directors, at a time to be fixed by the Board of Directors. 2. Special Meetings. Subject to the rights of the holders of any series of stock having a preference over the Common Stock of the Corporation as to dividends or upon liquidation ("Preferred Stock") with respect to such series of Preferred Stock, a special meeting of the stockholders of the Corporation for any purpose may be called at any time as follows: A. By the Chairman of the Board; or B. By resolution adopted by a majority of the total number of directors which the Corporation would have if there were no vacancies (the "Whole Board"). 3. Place of Meeting. The Board of Directors may designate the place of meeting, within or without the State of Delaware, for any annual meeting or for any 4 special meeting of the stockholders called by the Board of Directors or the Chairman of the Board. If no designation is so made, the place of meeting shall be the principal office of the Corporation. 4. Calling and Notice of Meetings. Not less than 10 or more than 60 days before the date on which any meeting of the stockholders is to be held, written notice of the meeting shall be provided to each stockholder of record entitled to vote at the meeting. This notice shall be provided by mailing it, postage prepaid, to the address furnished by each stockholder to the Secretary for that purpose, or if he has not done so, then to his address as it appears on the records of the Corporation. This notice may also be provided by telex, telegraph, cable or personal delivery. This notice must state the place, date and hour of the meeting, and, in the case of a special meeting, the purpose for which the meeting is called. Only such business shall be conducted at a special meeting of stockholders as shall have been brought before the meeting pursuant to the Corporation's notice of meeting. Meetings may be held without notice if all stockholders entitled to vote are present, or if notice is waived by those not present in accordance with Article VI, Section 1 of these Bylaws. Any previously scheduled meeting of the stockholders may be postponed, and (unless the Certificate of Incorporation otherwise provides) any special meeting of the stockholders may be cancelled, by resolution of the Board of Directors upon public notice given prior to the date previously scheduled for such meeting of stockholders. 5. Quorum. Except as otherwise required by law or by the Certificate of Incorporation, the holders of shares of stock constituting a majority of the voting power of the Corporation, present in person or by proxy, shall constitute a quorum, except that when specified business is to be voted on by a class or series of stock voting as a class, the holders of a majority of the shares of such class or series shall constitute a quorum of such class or series for the transaction of such business. -2- 5 6. Loss of Quorum. In the event of withdrawal from a meeting of enough stockholders such that less than a quorum remains, business may continue to be transacted so long as any action taken is approved by at least a majority of votes required to constitute a quorum. 7. Adjournments. The Chairman of any stockholders' meeting or the holders of shares of stock constituting a majority of the voting power present in person or by proxy may adjourn the meeting from time to time, whether or not there is a quorum present. No notice of the time and place of adjourned meetings need be given except as required by law. At any such resumed stockholders' meeting at which a quorum is present, any business may be transacted which otherwise might have been transacted at the original meeting. 8. Conduct of Meeting. Every meeting of stockholders shall be chaired by the Chairman of the Board or, in his absence, the President or, in his absence, any other officer or director of the Corporation chosen as meeting chairman by a majority of the votes cast by the stockholders present in person or by proxy and entitled to vote. 9. List of Stockholders. The Secretary, or other officer or Director who has charge of the Corporation's stock ledger, shall prepare or cause to be prepared, at least 10 days before each meeting of the stockholders at which Directors of the Corporation are to be elected, a list of all stockholders entitled to vote at the meeting, showing alphabetically, the name and address of, and number of shares registered to, each stockholder. This list shall be present during the meeting and shall be available to all stockholders throughout this 10-day period at or within reasonable distance from the place where the meetings to be held. This list shall be conclusive evidence of the stockholders of record and entitled to examine it or the books of the Corporation, or to vote at meetings. -3- 6 10. Record Date. The Board of Directors may fix in advance a date as the record date for determining the following: A. The stockholders entitled to notice of or to vote at any meeting, or to vote on any corporate action; B. The stockholders entitled to receive dividends or distributions; C. The stockholders entitled to exercise any rights in respect of any change, conversion or exchange of stock; or D. The stockholders entitled to participate in any other lawful transaction. 11. Voting. At each meeting of stockholders, each stockholder of record as of the record date shall be entitled to one vote for each share of voting stock of the Corporation registered in his name on the books of the Corporation. Subject to the rights of the holders of any series of Preferred Stock to elect Directors under specified circumstances, Directors shall be elected by the greatest number of the affirmative votes cast. Except as otherwise provided by law, the Certificate of Incorporation, or these Bylaws, all other matters shall be decided by the majority of votes cast. Neither the election of Directors nor any other action need be by ballot. 12. Notice of Stockholder Business and Nominations. A. Annual Meetings of Stockholders. (1) Nominations of persons for election to the Board of Directors of the Corporation and the proposal of business to be considered by the stockholders may be made at an annual meeting of stockholders (a) pursuant to the Corporation's notice of meeting, (b) by or at the direction of the Board of Directors or (c) by any stockholder of the Corporation who was a stockholder -4- 7 of record at the time of giving of notice provided for in this Bylaw, who is entitled to vote at the meeting and who complies with the notice procedures set forth in this Bylaw. (2) For nominations or other business to be properly brought before an annual meeting by a stockholder pursuant to clause (c) of paragraph (A)(1) of this Bylaw, the stockholder must have given timely notice thereof in writing to the Secretary of the Corporation and such other business must otherwise be a proper matter for stockholder action. To be timely, a stockholder's notice shall be delivered to the Secretary at the principal executive offices of the Corporation not later than the close of business on the 60th day nor earlier than the close of business on the 90th day prior to the first anniversary of the preceding year's annual meeting; provided, however, that in the event that the date of the annual meeting is more than 30 days before or more than 60 days after such anniversary date, notice by the stockholder to be timely must be so delivered not earlier than the close of business on the 90th day prior to such annual meeting and not later than the close of business on the later of the 60th day prior to such annual meeting or the 10th day following the day on which public announcement of the date of such meeting is first made by the Corporation. In no event shall the public announcement of an adjournment of an annual meeting commence a new time period for the giving of a stockholder's notice as described above. Such stockholder's notice shall set forth (a) as to each person whom the stockholder proposes to nominate for election or reelection as a Director all information relating to such person that is required to be disclosed in solicitations of proxies for election of Directors in an election contest, or is otherwise required, in each case pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended (the "Exchange Act") and Rule 14a-11 thereunder (including such person's written consent to being named in the proxy statement as a nominee and to serving as a Director if elected); (b) as to any other business that the stockholder proposes to bring before the meeting, a brief description of the business desired to be brought before the meeting, the reasons for conducting such business at the meeting and any -5- 8 material interest in such business of such stockholder and the beneficial owner, if any, on whose behalf the proposal is made; and (c) as to the stockholder giving the notice and the beneficial owner, if any, on whose behalf the nomination or proposal is made (i) the name and address of such stockholder, as they appear on the Corporation's books, and of such beneficial owner and (ii) the class and number of shares of the Corporation which are owned beneficially and of record by such stockholder and such beneficial owner. (3) Notwithstanding anything in the second sentence of paragraph (A)(2) of this Bylaw to the contrary, in the event that the number of Directors to be elected to the Board of Directors of the Corporation is increased and there is no public announcement by the Corporation naming all of the nominees for Director or specifying the size of the increased Board of Directors at least 70 days prior to the first anniversary of the preceding year's annual meeting, a stockholder's notice required by this Bylaw shall also be considered timely, but only with respect to nominees for any new positions created by such increase, if it shall be delivered to the Secretary at the principal executive offices of the Corporation not later than the close of business on the 10th day following the day on which such public announcement is first made by the Corporation. B. Special Meetings of Stockholders. Only such business shall be conducted at a special meeting of stockholders as shall have been brought before the meeting pursuant to the Corporation's notice of meeting. Nominations of persons for election to the Board of Directors may be made at a special meeting of stockholders at which Directors are to be elected pursuant to the Corporation's notice of meeting (a) by or at the direction of the Board of Directors or (b) provided that the Board of Directors has determined that Directors shall be elected at such meeting, by any stockholder of the Corporation who is a stockholder of record at the time of giving of notice provided for in this Bylaw, who shall be entitled to vote at the meeting and who complies with the notice procedures set forth in this Bylaw. In the event the -6- 9 Corporation calls a special meeting of stockholders for the purpose of electing one or more Directors to the Board of Directors, any such stockholder may nominate a person or persons (as the case may be), for election to such position(s) as specified in the Corporation's notice of meeting, if the stockholder's notice required by paragraph (A)(2) of this Bylaw shall be delivered to the Secretary at the principal executive offices of the Corporation not earlier than the close of business on the 90th day prior to such special meeting and not later than the close of business on the later of the 60th day prior to such special meeting or the 10th day following the day on which public announcement is first made of the date of the special meeting and of the nominees proposed by the Board of Directors to be elected at such meeting. In no event shall the public announcement of an adjournment of a special meeting commence a new time period for the giving of a stockholder's notice as described above. C. General. (1) Only such persons who are nominated in accordance with the procedures set forth in this Bylaw shall be eligible to serve as Directors and only such business shall be conducted at a meeting of stockholders as shall have been brought before the meeting in accordance with the procedures set forth in this Bylaw. Except as otherwise provided by law, the Chairman of the meeting shall have the power and duty to determine whether a nomination or any business proposed to be brought before the meeting was made or proposed, as the case may be, in accordance with the procedures set forth in this Bylaw and, if any proposed nomination or business is not in compliance with this Bylaw, to declare that such defective proposal or nomination shall be disregarded. (2) For purposes of this Bylaw, "public announcement" shall mean disclosure in a press release reported by the Dow Jones News Service, Associated Press or comparable national news service or in a document publicly filed by the Corporation with the Securities and Exchange Commission pursuant to Section 13, 14 or 15(d) of the Exchange Act. -7- 10 (3) Notwithstanding the foregoing provisions of this Bylaw, a stockholder shall also comply with all applicable requirements of the Exchange Act and the rules and regulations thereunder with respect to the matters set forth in this Bylaw. Nothing in this Bylaw shall be deemed to affect any rights (i) of stockholders to request inclusion of proposals in the Corporation's proxy statement pursuant to Rule 14a-8 under the Exchange Act or (ii) of the holders of any series of Preferred Stock to elect Directors under specified circumstances. 13. Inspectors; Opening and Closing the Polls. The Chairman of the meeting may appoint one or more inspectors of an election of directors. The inspectors, who need not be stockholders, but who may serve the Corporation in other capacities, shall decide the qualification of voters and the validity of ballots, count votes and declare results. Each inspector, before discharging his or her duties, shall take and sign an oath faithfully to execute the duties of inspector with strict impartiality and according to the best of his or her ability. The Chairman of the meeting shall fix and announce at the meeting the date and time of the opening and the closing of the polls for each matter upon which the stockholders will vote at a meeting. 14. Proxies. Every stockholder may authorize in writing another person, who need not be a stockholder, to take any action and exercise any right held by the stockholder. Every such proxy must be signed by the stockholder or his attorney in fact, and shall, unless stated otherwise, be valid for a period of 3 years. 15. Record Date for Action by Written Consent. In order that the Corporation may determine the stockholders entitled to consent to corporate action in writing without a meeting, the Board of Directors may fix a record date, which record date shall not precede the date upon which the resolution fixing the record date is adopted by the Board of Directors, and which date shall not be more than 10 -8- 11 days after the date upon which the resolution fixing the record date is adopted by the Board of Directors. Any stockholder of record seeking to have the stockholders authorize or take corporate action by written consent shall, by written notice to the Secretary, request the Board of Directors to fix a record date. The Board of Directors shall promptly, but in all events within 10 days after the date on which such a request is received, adopt a resolution fixing the record date. If no record date has been fixed by the Board of Directors within 10 days of the date on which such a request is received, the record date for determining stockholders entitled to consent to corporate action in writing without a meeting, when no prior action by the Board of Directors is required by applicable law, shall be the first date on which a signed written consent setting forth the action taken or proposed to be taken is delivered to the Corporation by delivery to its registered office in Delaware, its principal place of business or to any officer or agent of the Corporation having custody of the book in which proceedings of meetings of stockholders are recorded. Delivery made to the Corporation's registered office shall be by hand or by certified or registered mail, return receipt requested. If no record date has been fixed by the Board of Directors and prior action by the Board of Directors is required by applicable law, the record date for determining stockholders entitled to consent to corporate action in writing without a meeting shall be at the close of business on the date on which the Board of Directors adopts the resolution taking such prior action. 16. Inspectors of Written Consent. In the event of the delivery, in the manner provided by Article I, Section 15, to the Corporation of the requisite written consent or consents to take corporate action and/or any related revocation or revocations, the Corporation shall engage nationally recognized independent inspectors of elections for the purpose of promptly performing a ministerial review of the validity of the consents and revocations. For the purpose of permitting the inspectors to perform such review, no action by written consent without a meeting shall be effective until such date as the independent inspectors certify to the Corporation that the consents delivered to the Corporation in accordance with -9- 12 Article I, Section 15 represent at least the minimum number of votes that would be necessary to take the corporate action. Nothing contained in this paragraph shall in any way be construed to suggest or imply that the Board of Directors or any stockholder shall not be entitled to contest the validity of any consent or revocation thereof, whether before or after such certification by the independent inspectors, or to take any other action (including, without limitation, the commencement, prosecution or defense of any litigation with respect thereto, and the seeking of injunctive relief in such litigation). 17. Effectiveness of Written Consent. Every written consent shall bear the date of signature of each stockholder who signs the consent and no written consent shall be effective to take the corporate action referred to therein unless, within 60 days of the date the earliest dated written consent was received in accordance with Article I, Section 15, a written consent or consents signed by a sufficient number of holders to take such action are delivered to the Corporation in the manner prescribed in Article I, Section 15. ARTICLE II BOARD OF DIRECTORS 1. General Powers. The business and affairs of the Corporation shall be managed under the direction of the Board of Directors. The Board of Directors shall have such authority and powers of the Corporation to do all such lawful acts as are not required to be done by the stockholders. 2. Number and Term Of Office. The Board of Directors shall consist of not less than seven or more than eleven members. The initial number of Directors shall be seven. Thereafter, the number of Directors shall be fixed from time to time by the Board of Directors. Directors need not be stockholders of the Corporation. Commencing with the annual meeting of stockholders to be held in 1986, the Board -10- 13 of Directors shall be classified, with respect to the time for which the Directors severally hold office, into three classes, as nearly equal in number as possible, as determined by the Board of Directors, such that approximately one-third of the members of the Board shall be elected at each annual meeting of stockholders. One class, to be comprised of approximately one-third of the Directors, as designated by the Board of Directors, shall hold office until the annual meeting of stockholders to be held in 1987; a second class, to be comprised of approximately one-third of the Directors, as designated by the Board of Directors, shall hold office until the annual meeting of stockholders to be held in 1988; and a third class, to be comprised of approximately one-third of the Directors, as designed at the Board of Directors, shall hold office until the annual meeting of stockholders to be held in 1989. The successors to each class of Directors whose terms expire shall be elected to hold office for a term expiring at the annual meeting of stockholders held in the third year following the year of their election and until the election and qualification of the successors to such class of Directors. In case of any increase in the number of Directors of any class, any additional Directors elected to such class shall hold office for a term which shall coincide with the term of such class. A. Advance notice of stockholder nominations for the election of Directors shall be given in the manner provided in Article I, Section 12 of these Bylaws. 3. Regular Meetings. The Board of Directors shall hold a regular meeting for the election of officers, the constitution of committees, and the transaction of other business as soon as is practicable after each annual meeting of stockholders. Other regular meetings of the Board of Directors may be held. Regular meetings shall be held at such time and place as the Board fixes at its annual meeting. No additional notice of any regular meeting shall be required. -11- 14 4. Special Meetings. Special meetings of the Board of Directors shall be called by the Secretary, or in his absence, the Assistant Secretary, on the request of: A. The Chairman of the Board; B. The written request of a majority of directors. 5. Notice of Special Meetings. Written notice of the time and place of each special meeting of the Board of Directors shall be given to each Director at least 5 calendar days prior to said meeting. Such notice need not state the purpose of the meeting. 6. Quorum. A majority of Directors shall constitute a quorum at any meeting. 7. Loss of Quorum. In the event of withdrawal from a meeting of enough Directors such that less than a quorum remains, business may continue to be transacted so long as any action taken is approved by at least a majority of Directors required to constitute a quorum. 8. Adjournments. At any Directors' meeting, a majority of the Directors present, although less than a quorum, may vote to adjourn the meeting from time to time without notice other than announcement of the time and place at which the meeting shall resume. At any such resumed meeting, any business may be transacted which otherwise might have been transacted at the original meeting. 9. Conduct of Meetings. Every meeting of the Board of Directors shall be chaired by the Chairman of the Board or, in his absence, the President or, in his absence, any other officer or director of the corporation designated in advance as meeting chairman by the Chairman of the Board or, if the Chairman of the Board -12- 15 fails to so designate, then any other officer or director of the Corporation chosen by a majority of the Directors present. 10. Consent in Lieu of Meeting. Any action of the Board of Directors may be taken without a meeting if all Directors consent to the action in writing and the writings evidencing such consent are filed with the minutes of Board proceedings. 11. Resignations. Any Director may resign at any time by giving written notice to the Board of Directors. Acceptance of such resignation shall not be necessary to make it effective. 12. Removal of Directors. Any or all Directors may be removed only with cause by a vote of the holders of a majority of the voting power of the Corporation entitled to vote at an election of Directors. 13. Vacancies. Any vacancy on the Board of Directors may be filled as follows: A. By a vote of a majority of the remaining Directors; or B. By the sole remaining Director. The Director filling a vacancy shall hold office for the remainder of the term of the Director causing the vacancy. No decrease in the number of authorized Directors constituting the Board of Directors shall shorten the term of any incumbent Director. 14. Telephonic Meetings. Subject to the notice provisions of paragraph 5 of Article II, the members of the Board of Directors may be present at, and participate -13- 16 in, a Board meeting by means of conference telephone or similar communications equipment, so long as all participants in the meeting can hear each other. ARTICLE III COMMITTEES OF THE BOARD OF DIRECTORS 1. Committees Designated by Board of Directors. The Board of Directors may, by resolution adopted by a majority of the authorized number of directors, designate a Compensation Committee and an Audit Committee. The Chairman of the Board and the President shall be members of the Executive Committee. The other members of all committees shall be nominated by the Chairman of the Board subject to approval by a majority of the authorized number of directors. All committees shall possess those powers and duties as the Board may lawfully delegate to them from time to time. 2. Meetings; Minutes. Each committee shall meet at such times and places as it so decides, and shall fix whatever procedures it shall follow. Each committee shall keep minutes of its meetings, which shall be presented at the next regular meeting of the Board of Directors and shall be entered into the minutes of the Board. 3. Quorum; Loss of Quorum. A majority of the members of a committee shall constitute a quorum. In the event of withdrawal from a meeting of enough committee members such that less than a quorum remains, business may continue to be transacted so long as any action taken is approved by at least a majority of members required to constitute a quorum. 4. Resignations. Any member of a committee may resign at any time by giving written notice to the Board of Directors. Acceptance of such resignation shall not be necessary to make it effective. -14- 17 5. Consent in Lieu of Meeting. Any action of a committee may be taken without a meeting if all members consent to the action in writing and the writings evidencing such consent are filed with the minutes of committee proceedings. 6. Telephonic Meetings. Subject to the procedures adopted by its members pursuant to paragraph 2 of this Article III the members of a committee may be present at and participate in a committee meeting by means of conference telephone or similar communications equipment, so long as all participants in the meeting can hear each other. 7. Adjournments. At any committee meeting, a majority of the members present, although less than a quorum, may vote to adjourn the meeting from time to time without notice other than announcement of the time and place at which the meeting shall resume. At any such resumed meeting, any business may be transacted which otherwise might have been transacted at the original meeting. ARTICLE IV OFFICERS 1. Number; Positions. The officers of the Board of Directors shall include the Chairman of the Board and, if desired by the Board, a Vice Chairman of the Board. The officers of the Corporation shall include the President, Secretary and Treasurer, and such other officers, including one or more Executive Vice Presidents, Senior Vice Presidents and Vice Presidents as the Board of Directors may deem desirable. One person may hold the offices and perform the duties of any two or more offices. 2. Powers. (a) Subject to these Bylaws and any determination by the Board of Directors, each officer shall have such powers and duties as are customarily inherent in and exercised by his office. -15- 18 (b) The Chief Executive Officer of the Corporation, subject to direction and control of the Board of Directors, shall have overall responsibility for the management and direction of the business and affairs of the Corporation. (c) The Chief Operating Officer of the Corporation, subject to direction and control of the Board of Directors and the Chief Executive Officer, shall have active direction of the business and day-to-day operations of the Corporation. (d) Notwithstanding any other provisions of this Article IV, and at the discretion of the Board of Directors, the powers and duties of the Chief Executive Officer may be conferred upon and exercised by an "Office of the Chief Executive" consisting of one or more officers designated by the Board. Such officers may hold the same or different titles as determined by the Board. (e) Unless otherwise determined by the Board of Directors pursuant to Section 2(d) of this Article IV, the Chief Executive Officer shall also be the President. 3. Appointment; Qualifications. Board and corporate officers shall be chosen by majority vote of the Board of Directors, and shall serve at the pleasure of the Board. The President shall be a Director of the Corporation; otherwise, officers need not be stockholders or Directors of the corporation. 4. Resignations. Any officer may resign at any time by giving written notice to the Board of Directors. Acceptance of such resignation shall not be necessary to make it effective. 5. Succession. In the event the Chairman of the Board is unable to serve due to death or incapacity, then the President shall assume the Chairmanship. In the event the President of the Corporation is unable to serve due to death or incapacity, then the Executive Vice President shall assume the Presidency. In the -16- 19 event the Executive Vice President of the Corporation is unable to serve due to death or incapacity, the Senior Vice President with the most tenure as Senior Vice President shall assume the Executive Vice Presidency. In any case, such succession to the Chairmanship or Presidency or Executive Vice Presidency shall last only until the Board acts to elect new officers. ARTICLE V SHARES OF STOCK 1. Stock Certificates. Stock certificates shall be in such form as the Board of Directors shall specify. Certificates shall be issued in consecutive order and shall be signed by the Chairman of the Board, the President, or a Vice President and by the Secretary, Assistant Secretary or Treasurer, and sealed with the seal of the Corporation. Each certificate shall specify the number and class of shares held by the person named therein as a stockholder. The signatures and corporate seal on the certificate may be facsimiles. In case any officer, transfer agent or registrar who has signed any certificate has ceased to hold his position with the Corporation before such certificate is issued, such certificate may nevertheless be issued with the same effect as if such person continued to hold his position with the Corporation. Any restrictions on the transfer of any shares shall be noted conspicuously on the certificate. 2. Lost, Destroyed, Stolen and Mutilated Certificates. In the event a certificate is lost, destroyed, stolen or mutilated, the Board of Directors may in its discretion authorize the issuance of a replacement certificate on such terms and conditions as the Board may require, including the provision of indemnification of the Corporation. -17- 20 ARTICLE VI GENERAL MATTERS 1. Waiver of Notice. Whenever any notice is required to be given the person entitled to such notice or his attorney in fact may waive such notice in writing before or after the matter in respect of which notice is required has occurred. Any waiver need not specify the matter for which notice is waived. Presence in person or by proxy at any portion of a meeting shall constitute a waiver of notice of such meeting, unless such presence is for the purpose of objecting to the transaction of any business thereat. 2. Indemnification. Indemnification by the Corporation of any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative ("proceeding"), by reason of the fact that such person is or was a Director, officer, employee or agent ("agent") of the Corporation, or is or was serving at the request of the Corporation as an agent of another Corporation, partnership, joint venture, trust or other enterprise ("other entity"), against expenses (including attorneys' fees), judgments, fines and amounts paid in settlement and other amounts actually and reasonably incurred by such persons (including advancement of expenses incurred in defending any such-proceeding), shall, to the full extent permitted by, and in accordance with the procedures and requirements set forth in, applicable law (i) be mandatory if such agent is or was a Director or officer of the Corporation or of such other entity and (ii) be authorized, subject to the discretion of the Board of Directors, if such person is or was an employee or other agent (not a Director or officer) of the Corporation or such other entity; provided, however, that the Corporation shall not be required to indemnify any person with respect to any proceeding which was initiated by such person. -18- 21 3. Records. The Secretary shall keep written minutes of the proceedings of the stockholders, Board of Directors and committees of the Corporation at the principal executive office of the Corporation. These records shall be open to inspection and copying during ordinary business hours by any Director. This right of inspection shall also be enjoyed by all stockholders so long as it is exercised for a purpose reasonably related to the person's interest as a stockholder. 4. Reports. The Board of Directors may employ accountants and auditors to prepare such statements and reports which are required by applicable law or which the Board desires. 5. Right of Inspection. Any stockholder shall have the right to inspect the books and records of the Corporation during normal business hours for any purpose reasonably related to that person's status as a stockholder. 6. Conformity with Law. A. In General. In the event that any portion of these Bylaws is found not to be in conformance with applicable law, such portion shall, if possible, be deemed modified to conform retrospectively and prospectively with applicable law. If any portion of these Bylaws is found fatally inconsistent with applicable law, then the remainder of these Bylaws shall continue in full force and effect. B. Conformity With Applicable California Law. In the event the Corporation is advised by its counsel that it is subject to the provisions of California Corporations Code Section 2115, then these Bylaws shall be deemed amended to include, and the Corporation shall follow the requirements of those applicable provisions of the Code set forth in said Section. In the event the Corporation is so advised and inasmuch, as and for as long as, there are fewer than 100 shareholders, -19- 22 the requirement of an annual report to shareholders referred to in Section 1501 of the California Corporations Code is expressly waived. BYLAWS\EXH3-5.10K -20- EX-10.6 3 AMENDMENT TO LEASE BETWEEN DOWNTOWNERS ASSOC & FHP 1 EXHIBIT 10.6 AMENDMENT To that lease by and between DOWNTOWNERS ASSOCIATES, LIMITED, LANDLORD, AND FHP, INC., TENANT, dated October 7, 1983. As of this date, July 1, 1994, it is agreed that the Lease referred to herein shall be amended subject to all agreements, covenants, and conditions included therein, with the exception that the termination of the lease period shall be amended from December 31, 1993 to DECEMBER 31, 1995, a term extension of twenty-four (24) months. At the termination of this extension, all clauses contained in the original lease shall apply regarding termination, holdover and any other pertinent conditions. Reference to lease payments shall be amended and for the term of this extension shall be $1.05 per square foot (20,000 square feet) or a total of $21,000.00 per month. It is the intent that FHP will vacate these premises on December 31, 1995. In the event that FHP desires to holdover for any reason after that date, the Landlord, Downtowners Associates, shall be given ninety (90) days notice of said intent. Otherwise, it is the understanding of the Landlord that as of said date of termination, FHP will have removed all of its personal property from the premises and will leave the premises in a neat and orderly condition and state of repair. Downtowners Associates, Limited FHP, Inc., a corporation A Limited Partnership By:/s/ Robert Gumbiner, Partner By:/s/ Westcott W. Price III, President --------------------------------- ------------------------------------ Robert Gumbiner, General Partner "Tenant", July 1, 1994 "Landlord", July 1, 1994 EX-11.1 4 COMPUTATION OF EARNINGS PER SHARE 1 EXHIBIT 11.1 FHP INTERNATIONAL CORPORATION COMPUTATION OF EARNINGS PER SHARE
YEARS ENDED JUNE 30, ------------------------------- 1994 1993 1992 ------- ------- ------- (AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA) Primary earnings per share attributable to common stock: Net income attributable to common stock................... $58,278 $44,166 $32,890 ======= ======= ======= Weighted average number of common shares and common share equivalents: Common stock........................................... 33,285 32,644 32,293 Assumed exercise of options............................ 766 626 628 ------- ------- ------- Total shares...................................... 34,051 33,270 32,921 ======= ======= ======= Primary earnings per share attributable to common stock... $ 1.71 $ 1.33 $ 1.00 ======= ======= ======= Fully diluted earnings per share attributable to common stock: Net income................................................ $59,310 $44,166 $32,890 ======= ======= ======= Weighted average number of common shares and common share equivalents: Common stock........................................... 33,951 32,644 32,293 Assumed exercise of options............................ 766 943 652 ------- ------- ------- Total shares, assuming full dilution.............. 34,717 33,587 32,945 ======= ======= ======= Fully diluted earnings per share attributable to common stock..................................................... $ 1.71 $ 1.31 $ 1.00 ======= ======= =======
EX-21.0 5 SUBSIDIARIES OF THE REGISTRANT 1 EXHIBIT 21.0 SUBSIDIARIES OF THE REGISTRANT There is no parent of the Registrant. The following is a listing of the active subsidiaries of the Registrant, or if indented, subsidiaries of the subsidiary under which they are listed:
JURISDICTION OF INCORPORATION ----------- FHP, Inc. ..................................................... California FHP Life Insurance Company................................... California FHP of Utah, Inc. ........................................... Utah FHP of New Mexico, Inc. ..................................... New Mexico FHP of Texas, Inc. .......................................... Texas FHP of Colorado, Inc. ....................................... Colorado Hippodrome Galleries Corporation............................. California Employees Choice Health Option............................... Utah Health Maintenance Life, Inc. ............................... Guam FHP Reinsurance Limited...................................... Bermuda UltraLink, Inc. ............................................. California Great States Financial Corporation............................. Delaware Great States Insurance Company............................... California Great States Administrators, Inc. ........................... Delaware TakeCare, Inc. ................................................ Delaware TakeCare Administrative Services Corporation................. Indiana TakeCare Health Plan, Inc. ............................... California TakeCare Life Insurance Company........................... Arizona TakeCare of California, Inc. ............................. California TakeCare of Colorado, Inc. ............................... Colorado TakeCare Health Plan of Illinois, Inc. ................... Illinois TakeCare Health Plan of Ohio, Inc. ....................... Ohio Comprecare Health Care Services, Inc. .................... Colorado Peak Health Plan of Idaho, Inc. .......................... Idaho TakeCare Insurance Company................................ Colorado FHP International Consulting Group, Inc. ...................... Delaware
EX-23.1 6 CONSENT OF DELOITTE & TOUCHE LLP 1 EXHIBIT 23.1 INDEPENDENT AUDITORS' CONSENT We consent to the incorporation by reference in Registration Statements 33-30200, 33-14257, 33-30090, 33-36521, 33-54313 and 33-55545 on Form S-8 of our report with respect to FHP International Corporation's financial statements dated September 8, 1994 appearing in this Annual Report on Form 10-K of FHP International Corporation for the year ended June 30, 1994 and our report with respect to the FHP International Corporation Employee Stock Ownership Plan's financial statements dated September 9, 1994 appearing as Exhibit 28.1 to the Annual Report on Form 10-K of FHP International Corporation for the year ended June 30, 1994. DELOITTE & TOUCHE LLP Costa Mesa, California September 26, 1994 EX-27.0 7 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM (A) THE CONSOLIDATED STATEMENTS OF INCOME, BALANCE SHEETS AND CASH FLOWS OF FHP INTERNATIONAL CORPORATION AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH (B) 1994 ANNUAL REPORT ON FORM 10-K. 1,000 U.S. DOLLARS YEAR JUN-30-1994 JUL-01-1993 JUN-30-1994 1 60,571 186,212 125,540 13,448 13,520 445,943 550,115 146,361 2,169,269 587,803 377,986 392,231 0 526,614 194,291 2,169,269 2,472,958 2,472,958 2,389,938 2,389,938 0 6,301 6,565 96,820 37,510 59,310 0 0 0 59,310 1.71 1.71
EX-28.1 8 INFO REQUIRED BY 11-K W/RESPECT TO THE FHP ESOP 1 EXHIBIT 28.1 INFORMATION REQUIRED BY FORM 11-K WITH RESPECT TO THE FHP INTERNATIONAL CORPORATION EMPLOYEE STOCK OWNERSHIP PLAN ("PLAN") For the fiscal year ended June 30, 1994 A. Full title of the plan and the address of the plan, if different from that of the issuer named below: FHP INTERNATIONAL CORPORATION EMPLOYEE STOCK OWNERSHIP PLAN B. Name of issuer of the securities held pursuant to the plan and the address of its principal executive office: FHP INTERNATIONAL CORPORATION 9900 TALBERT AVENUE FOUNTAIN VALLEY, CALIFORNIA 92708 2 FHP INTERNATIONAL CORPORATION EMPLOYEE STOCK OWNERSHIP PLAN Financial Statements and Supplemental Schedules for the Years Ended June 30, 1994 and 1993 and Independent Auditors' Report 3 FHP International Corporation Employee Stock Ownership Plan Index To Financial Statements and Supplemental Schedules Item 4(a)
Page ---- Independent Auditors' Report 1 Financial Statements: Statements of Net Assets Available for Benefits at June 30, 1994 and 1993 2 Statements of Changes in Net Assets Available for Benefits for the Years Ended June 30, 1994 and 1993 4 Notes to Financial Statements 6 Supplemental Schedules: Item 27a - Schedule of Assets Held for Investment Purposes as of June 30, 1994 14 Item 27d - Schedule of Reportable Transactions for the year ended June 30, 1994 15
Supplemental schedules are included pursuant to Department of Labor's Rules and Regulations. All other schedules are omitted because of the absence of conditions under which they are required. 4 INDEPENDENT AUDITORS' REPORT The Trustees and Participants of the FHP International Corporation Employee Stock Ownership Plan: We have audited the accompanying financial statements of the FHP International Corporation Employee Stock Ownership Plan (the Plan) listed in the accompanying index. These financial statements are the responsibility of the Plan's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such financial statements present fairly, in all material respects, the net assets available for benefits of the FHP International Corporation Employee Stock Ownership Plan at June 30, 1994 and 1993, and the changes in net assets available for benefits for the years then ended, in conformity with generally accepted accounting principles. Our audits were conducted for the purpose of forming an opinion on the basic financial statements taken as a whole. The supplemental information by fund in the statements of net assets available for benefits and statements of changes in net assets available for benefits is presented for the purpose of additional analysis of the basic financial statements rather than to present information regarding the net assets available for benefits and changes in net assets available for benefits of the individual funds, and is not a required part of the basic financial statements. Also, the supplemental schedules listed in the accompanying index are presented for the purpose of additional analysis and are not a required part of the basic financial statements, but are supplementary information required by the Department of Labor's Rules and Regulations for Reporting and Disclosure under the Employee Retirement Income Security Act of 1974. The supplemental information by fund and supplemental schedules are the responsibility of the Plan's management. The supplemental information by fund and supplemental schedules have been subjected to the auditing procedures applied in our audits of the basic financial statements and, in our opinion, are fairly stated in all material respects when considered in relation to the basic financial statements taken as a whole. /s/ Deloitte & Touche LLP September 9, 1994 5 FHP INTERNATIONAL CORPORATION EMPLOYEE STOCK OWNERSHIP PLAN STATEMENT OF NET ASSETS AVAILABLE FOR BENEFITS JUNE 30, 1994
Supplemental Information by Fund ---------------------------------------------------------------------------------------------- 401K ----------------------------------------------------------------------------------- Fidelity Fidelity IDS Bank T.Rowe Price Retirement Equity Fidelity & Trust International FHP ESOP/ Money Market Income Magellan Income Stock Stock Participant PAYSOP Portfolio Fund Fund Fund Fund Fund Loans Total ------ --------- ---- ---- ---- ---- ---- ----- ----- ASSETS ------ Investments (Note 4) $53,710,522 $3,496,561 $7,112,678 $13,726,024 $3,951,326 $740,890 $29,419,859 $112,157,860 Contributions receivable from the Company (Note 2) 2,138,692 872,638 3,011,330 Interfund receivable (payable) (7,805) (24,782) (58,605) (12,824) (4,266) 108,282 Participant loans (Note 2) $1,151,517 1,151,517 ----------- ---------- ---------- ----------- ---------- -------- ----------- ---------- ----------- Total assets 55,849,214 3,488,756 7,087,896 13,667,419 3,938,502 736,624 30,400,779 1,151,517 116,320,707 ----------- ---------- ---------- ----------- ---------- -------- ----------- ---------- ----------- LIABILITIES ----------- Accrued expenses 45,039 1,482 46,521 ----------- ---------- ---------- ----------- ---------- -------- ----------- ---------- ----------- Total liabilities 45,039 1,482 46,521 ----------- ---------- ---------- ----------- ---------- -------- ----------- ---------- ----------- NET ASSETS AVAILABLE FOR BENEFITS -------- Vested 39,970,377 3,488,756 7,087,896 13,667,419 3,937,020 736,624 28,434,721 1,151,517 98,474,330 Nonvested 15,833,798 1,966,058 17,799,856 ----------- ---------- ---------- ----------- ---------- -------- ----------- ---------- ----------- Total net assets $55,804,175 $3,488,756 $7,087,896 $13,667,419 $3,937,020 $736,624 $30,400,779 $1,151,517 $116,274,186 =========== ========== ========== =========== ========== ======== =========== ========== ============
See accompanying notes to financial statements. 2 6 FHP INTERNATIONAL CORPORATION EMPLOYEE STOCK OWNERSHIP PLAN STATEMENT OF NET ASSETS AVAILABLE FOR BENEFITS JUNE 30, 1993
SUPPLEMENTAL INFORMATION BY FUND ----------------------------------------------------------------- 401K ----------------------------------------------------------------- Fidelity Retirement Fidelity Fidelity ESOP/ Money Market Equity Income Magellan PAYSOP Portfolio Fund Fund ----------- ------------ ------------- ----------- ASSETS ------ Investments (Note 4) $51,473,522 $3,046,232 $5,319,277 $11,202,701 Contributions receivable from the Company (Note 2) 3,130,391 Interfund receivable (payable) (44,802) (58,378) (43,092) Participant loans (Note 2) ----------- ---------- ---------- ----------- Total assets 54,603,913 3,001,430 5,260,899 11,159,609 ----------- ---------- ---------- ----------- LIABILITIES Accrued expenses 91,598 ----------- Total liabilities 91,598 ----------- NET ASSETS AVAILABLE FOR BENEFITS Vested 37,993,351 3,001,430 5,260,899 11,159,609 Nonvested 16,518,964 ----------- ---------- ---------- ----------- Total net assets available for benefits $54,512,315 $3,001,430 $5,260,899 $11,159,609 =========== ========== ========== ===========
See accompanying notes to financial statements.
SUPPLEMENTAL INFORMATION BY FUND ----------------------------------------------------------------- 401K ----------------------------------------------------------------- IDS Bank & Trust Income FHP Stock Participant Fund Fund Loans Total ----------- ---------- ---------- ------------ ASSETS ------ Investments (Note 4) $3,531,332 $30,991,846 $105,564,910 Contributions receivable from the Company (Note 2) 726,183 3,856,574 Interfund receivable (payable (2,190) 148,462 Participant loans (Note 2) $928,935 928,935 --------- ----------- -------- ------------ Total assets 3,529,142 31,866,491 928,935 110,350,419 ---------- ----------- -------- ------------ LIABILITIES ----------- Accrued expenses 1,324 92,922 ---------- ------------ Total liabilities 1,324 92,922 ---------- ------------ -------- ------------ NET ASSETS AVAILABLE FOR BENEFITS ------------------------------- Vested 3,527,818 28,795,091 928,935 90,667,133 Nonvested 3,071,400 19,590,364 ---------- ----------- -------- ------------ Total net assets available for benefits $3,527,818 $31,866,491 $928,935 $110,257,497 ========== =========== ======== ============
See accompanying notes to financial statements. 3 7 FHP INTERNATIONAL CORPORATION EMPLOYEE STOCK OWNERSHIP PLAN STATEMENT OF CHANGES IN NET ASSETS AVAILABLE FOR BENEFITS YEAR ENDED JUNE 30, 1994
SUPPLEMENTAL INFORMATION BY FUND ---------------------------------------------------------------------------------------------------- 401K ------------------------------------------------------------------------------------------ Fidelity Fidelity IDS Bank T.Rowe Retirement Equity Fidelity & Trust Price FHP ESOP/ Money Market Income Magellan Income International Stock Participant PAYSOP Portfolio Fund Fund Fund Stock Fund Fund Loans Total ------- ------------ -------- -------- -------- ------------- ------ ----------- ------- ADDITIONS (DEDUCTIONS) TO NET ASSETS: Investment income: Interest $ 30,180 $ 105,548 $ 438 $ 779 $ 215,568 $ 460 $ 3,556 $ 356,529 Participant loan interest 7,305 10,121 23,011 5,992 43,967 90,396 Dividends 451,331 1,321,777 1,773,108 Net appre- ciation (depre- ciation) in fair value of investments (6,274,207) (63,987) (1,290,318) 8 (17,883) (4,033,926) (11,680,313) ----------- ---------- ---------- ----------- ---------- -------- ----------- ---------- ------------ Net investment income (loss) (6,244,027) 112,853 397,903 55,249 221,568 (17,423) (3,986,403) (9,460,280) ----------- ---------- ---------- ----------- ---------- -------- ----------- ---------- ------------ Contributions (Note 2): Participants 911,058 1,708,648 3,086,881 785,502 195,124 5,961,339 12,648,552 Company 11,282,117 1,042,652 12,324,769 ----------- ---------- ---------- ----------- ---------- -------- ----------- ---------- ------------ 11,282,117 911,058 1,708,648 3,086,881 785,502 195,124 7,003,991 24,973,321 ----------- ---------- ---------- ----------- ---------- -------- ----------- ---------- ------------ Participant loans (26,505) (64,357) (127,727) (47,942) (301,208) $567,739 Participant loan repayments 26,708 33,823 48,662 15,060 109,228 (233,481) Benefits, termina- tions and withdrawals (3,595,446) (325,890) (673,995) (1,331,711) (401,794) (175) (2,594,569) (111,676) (9,035,256) Administrative expenses (Note 2) (461,096) (461,096) ----------- ---------- ---------- ----------- ---------- -------- ----------- ---------- ------------ Net increase in net assets 981,548 698,224 1,402,022 1,731,354 572,394 177,526 231,039 222,582 6,016,689 Interfund transfers 310,312 (210,898) 424,975 776,456 (163,192) 559,098 (1,696,751) NET ASSETS AVAILABLE FOR BENEFITS: Beginning of year 54,512,315 3,001,430 5,260,899 11,159,609 3,527,818 31,866,491 928,935 110,257,497 ----------- ---------- ---------- ----------- ---------- -------- ----------- ---------- ------------ End of year $55,804,175 $3,488,756 $7,087,896 $13,667,419 $3,937,020 $736,624 $30,400,779 $1,151,517 $116,274,186 =========== ========== ========== =========== ========== ======== =========== ========== ============
See accompanying notes to financial statements. 4 8 FHP INTERNATIONAL CORPORATION EMPLOYEE STOCK OWNERSHIP PLAN STATEMENT OF CHANGES IN NET ASSETS AVAILABLE FOR BENEFITS YEAR ENDED JUNE 30, 1993
SUPPLEMENTAL INFORMATION BY FUND ----------------------------------------------------------------------------------- 401K ----------------------------------------------------------------------- Fidelity Retirement Fidelity IDS Bank Money Equity Fidelity & Trust FHP Parti- ESOP/ Market Income Magellan Income Stock cipant PAYSOP Portfolio Fund Fund Fund Fund Loans Total ------------ ---------- ---------- ----------- ---------- ----------- -------- ------------ ADDITIONS (DEDUCTIONS) TO NET ASSETS: Investment Income: Interest $ 25,779 $ 89,943 $ 457 $ 974 $ 186,553 $ 2,569 $ 306,275 Participant loan interest 7,690 7,690 20,763 5,383 35,374 76,900 Dividends 148,791 1,112,365 1,261,156 Net appreciation (depreciation) in fair value of investments 16,878,426 674,594 842,919 (28) 10,564,599 28,960,510 ----------- ---------- ---------- ----------- ---------- ----------- -------- ------------ Net investment income 16,904,205 97,633 831,532 1,977,021 191,908 10,602,542 30,604,841 ----------- ---------- ---------- ----------- ---------- ----------- -------- ------------ Contributions (Note 2): Participants 837,988 1,240,041 2,551,768 867,807 4,959,122 10,456,726 Company 10,654,958 878,509 11,533,467 ----------- ---------- ---------- ----------- ---------- ----------- -------- ------------ 10,654,958 837,988 1,240,041 2,551,768 867,807 5,837,631 21,990,193 ----------- ---------- ---------- ----------- ---------- ----------- -------- ------------ Participant loans (55,397) (42,392) (88,409) (35,207) (248,175) $469,580 Participant loan repayments 1,020 16,380 10,950 1,840 124,448 (154,638) Benefits, terminations and withdrawals (1,690,371) (300,448) (333,130) (588,610) (224,968) (1,556,444) (54,488) (4,748,459) Administrative expenses (Note 2) (433,177) (433,177) Interest expense (80,298) (80,298) ----------- ---------- ---------- ----------- ---------- ----------- -------- ------------ Net increase in net assets 25,355,317 580,796 1,712,431 3,862,720 801,380 14,760,002 260,454 47,333,100 Interfund transfers 55,169 (179,939) 377,674 535,167 88,351 (876,422) NET ASSETS AVAILABLE FOR BENEFITS: Beginning of year 29,101,829 2,600,573 3,170,794 6,761,722 2,638,087 17,982,911 668,481 62,924,397 ----------- ---------- ---------- ----------- ---------- ----------- -------- ------------ End of year $54,512,315 $3,001,430 $5,260,899 $11,159,609 $3,527,818 $31,866,491 $928,935 $110,257,497 =========== ========== ========== =========== ========== =========== ======== ============
See accompanying notes to financial statements. 5 9 FHP INTERNATIONAL CORPORATION EMPLOYEE STOCK OWNERSHIP PLAN NOTES TO FINANCIAL STATEMENTS NOTE 1 - BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The FHP International Corporation Employee Stock Ownership Plan (the Plan) was adopted on June 6, 1986 by FHP International Corporation and its wholly owned subsidiary, FHP, Inc. (collectively, the Company). The Plan was amended and restated in its entirety June 7, 1993, effective January 1, 1993. The accompanying financial statements of the Plan are prepared on the accrual basis of accounting in accordance with generally accepted accounting principles. Investments in common stock of the Company are stated at fair value based on the closing bid price reported on the last business day of the Plan year. Investments in mutual funds are stated at the fair value of the respective funds on the last business day of the Plan year. Investments in pooled funds, which consist of money market funds, are stated at cost which approximates fair value. Cost of investments is determined by the average cost method. Security transactions are recorded as of the trade dates. Realized gains and losses on security transactions are recorded based on the difference between proceeds received and weighted average cost. In accordance with the policy of stating investments at fair value, the increase or decrease in net unrealized appreciation is included with realized gains and losses in net appreciation (depreciation) in fair value of investments in the accompanying statements of changes in net assets available for benefits. Certain reclassifications have been made to the 1993 financial statements in order to conform to the 1994 presentation. NOTE 2 - PLAN DESCRIPTION AND RELATED INFORMATION The following description of the Plan provides only general information. Participants should refer to the Plan document for a more complete description of the Plan's provisions. 6 10 FHP INTERNATIONAL CORPORATION EMPLOYEE STOCK OWNERSHIP PLAN NOTES TO FINANCIAL STATEMENTS (CONTINUED) As amended and restated, the Plan is intended to qualify under Internal Revenue Code (Code) Section 401(a). It consists of three separate, but complementary parts designed to satisfy the specific rules in the code applicable to each part. The first part is an employee stock ownership plan (ESOP) intended to qualify under Code Section 4975(e)(7), the second part is a 401(k) cash or deferred arrangement intended to qualify under Code Section 401(k), and the third part is a payroll based tax credit employee stock ownership plan (PAYSOP) intended to qualify under Code Sections 41 and 409. The Plan is subject to the provisions of the Employee Retirement Income Security Act of 1974 (ERISA). The Plan covers substantially all employees of the Company who were employed prior to January 1, 1993 and who have completed at least six months and 1,000 hours of service with the Company and have attained the age of 21. Under the amended Plan (Note 1), employees hired on or after January 1, 1993 become participants on the first day of the month immediately following the later of the date they attain age 21, or the date they complete 12 months of service with the Company. Prior to January 1, 1993, participants were eligible to enroll on January 1 and July 1. Under the amended plan, enrollment may occur monthly. At June 30, 1994 and 1993, there were approximately 10,000 and 9,700 participants in the Plan, respectively. Plan Administration The Plan is administered by the Company. Assets of the Plan are maintained under the custody of the Plan's independent trustee, Wells Fargo Bank, N.A. (Trustee). Under the terms of the Plan, certain costs of the Plan's administration can be charged to the Plan. Administrative and Trustee fees in the amount of $461,096 and $433,177 were charged to the Plan for the years ended June 30, 1994 and 1993, respectively. Participant Accounts Separate accounts are maintained for each participant's ESOP, PAYSOP and 401(k) investments. These accounts have been credited with employee pre-tax contributions for 401(k) accounts only, Company contributions and allocable portions of Plan earnings or losses. Participating employees are not subject to state or Federal income taxes on contributions and related earnings until such amounts are distributed. Contributions During the years ended June 30, 1994 and 1993, the Company contributed $12,324,769 and $11,533,467, respectively, to the Plan, an amount equal to 4% of participating employees' eligible compensation, net of forfeitures and refunds required by IRS limitation testing, plus interest-related contributions and the Company's matching contribution as described below. All participant contributions were remitted to the Plan by June 30, 1994 and 1993. 7 11 FHP INTERNATIONAL CORPORATION EMPLOYEE STOCK OWNERSHIP PLAN NOTES TO FINANCIAL STATEMENTS (CONTINUED) Non-highly compensated employees (as defined in the Code) may participate in the 401(k) program and may make pre-tax contributions not to exceed 10% of their eligible annual compensation. Highly compensated participants can make pre-tax contributions not to exceed 5% of their eligible annual compensation. Contributions are limited to the maximum amount allowed under the Code ($9,240 and $8,994 per employee in calendar year 1994 and 1993, respectively). The 401(k) provides an investment option which permits investment in the Company's common stock (FHP Stock Fund). The Company has committed to make an annual matching ESOP contribution equal to $0.25 for each $1.00 contributed by participants to the FHP Stock Fund (only participant contributions up to 6% of eligible compensation are matched). Matching ESOP contributions are subject to an annual limit of $500 per participant and are only contributed for participants who are employed by the Company on June 30th of each year. The matching ESOP contribution, net of forfeitures, totaled $1,042,652 and $878,509 for the years ended June 30, 1994 and 1993, respectively. Contributions under the PAYSOP are limited to the maximum credit available to the Company for Federal income tax purposes. Due to changes in the tax law pursuant to the Tax Reform Act of 1986, the credit was not available to the Company for any period after December 31, 1986 and, therefore, no PAYSOP contributions have been made by the Company after the year ended June 30, 1987. Vesting Participants are fully vested in their PAYSOP and 401(k) contributions and related earnings at all times. Participants employed prior to July 1, 1990, become fully vested in their ESOP accounts after five years of service. This is accomplished through 10% increments for each of the first four years of employment with the Company, with 100% vesting at the end of the fifth year of service. Participants beginning employment on or after July 1, 1990 will not vest in the Company's contributions to, and the related earnings of, their ESOP accounts until they have completed five years of employment with the Company, at which time they become 100% vested in their accounts. Participants also become fully vested if they achieve age 65, die or become totally and permanently disabled while employed by the Company. 8 12 FHP INTERNATIONAL CORPORATION EMPLOYEE STOCK OWNERSHIP PLAN NOTES TO FINANCIAL STATEMENTS (CONTINUED) Loans Under certain conditions, participants may borrow up to the lesser of $50,000 or one-half of their 401(k) balances (not to exceed $50,000 total borrowing when combined with loans under the FHP Money Purchase Pension Plan). Repayment is generally required within five to fifteen years, and all loans bear interest at a rate equal to Bank of America's prime lending rate plus 2% on the last business day of the month prior to the month the loan application is received. During the years ended June 30, 1994 and 1993, the Plan loaned to participants $567,739 and $469,580 respectively, and loan repayments were $233,481 and $154,638, respectively. Withdrawals and Distributions Participants may withdraw all or part of their 401(k) account balances when they reach age of 59 1/2 or before age 59 1/2 if they meet certain financial hardship conditions. Participants may not withdraw their ESOP and PAYSOP account balances while they remain employed with the Company. Upon termination of employment, death or disability, the vested portions of a participant's accounts are distributed to the participant or beneficiary. Distributions may be made in cash or shares of the Company's common stock (if applicable), and may be made immediately or when the participant reaches age 65. If a participant terminates employment prior to age 65 for reasons other than death or disability, the nonvested portion of the account balances will be forfeited. Forfeited amounts are used to reduce Company contributions. The total amounts forfeited were $1,326,798 and $854,717 for the years ended June 30, 1994 and 1993, respectively. At June 30, 1994 and 1993, the amounts of benefits payables to participants who have withdrawn from participation in the Plan were $2,038,331 and $1,812,263, respectively (see Note 1). Those amounts are reflected on Form 5500's for 1994 and 1993 as benefit claims payable. Such amounts are not considered liabilities for financial reporting purposes and, accordingly, the balances are not included in the $9,035,256 and $4,748,459 benefits, terminations and withdrawals for the years ended June 30, 1994 and 1993, respectively. Plan Termination Although it has not expressed any intent to do so, the Company has the right under the Plan to discontinue its contributions at any time and to terminate the Plan subject to the provisions of ERISA. In the event of Plan termination, participants will become 100% vested in all accounts and the account balances will be distributed. 9 13 FHP INTERNATIONAL CORPORATION EMPLOYEE STOCK OWNERSHIP PLAN NOTES TO FINANCIAL STATEMENTS (CONTINUED) Tax Status of The Plan The Plan obtained its latest determination letter on March 10, 1994, in which the Internal Revenue Service stated that the Plan, as then designed, was in compliance with the applicable requirements of the Code. NOTE 3 - SUBSEQUENT EVENTS On September 9, 1994, the Board of Directors of the Company approved an amendment to the Plan. The principal amendment results in a change of the Plan year from the current fiscal year to a calendar year. The amendment is effective January 1, 1995. The Company acquired all of the outstanding stock of TakeCare, Inc. on June 17, 1994. The acquisition was treated as a purchase for accounting purposes. In connection with the acquisition, the amendment, as noted, allows former TakeCare employees to be eligible to participate in the Plan effective January 1, 1995. NOTE 4 - INVESTMENTS Participants in the 401(k) direct that their contributions be invested in one or more of the investment programs described below. Participants may change their future and existing investment options on January 1, April 1, July 1 and October 1. The following describes the six funds available and the investment objectives of each fund: - Fidelity Retirement Money Market Portfolio: A money market fund which seeks high yield and stability of principal by investing in high-quality, short-term money market instruments. - Fidelity Equity Income Fund: A growth and income fund which invests in equity securities, convertible securities and bonds. - Fidelity Magellan Fund: An aggressive growth fund which invests in stocks of both well-known and lesser-known companies with above average growth potential. 10 14 FHP INTERNATIONAL CORPORATION EMPLOYEE STOCK OWNERSHIP PLAN NOTES TO FINANCIAL STATEMENTS (CONTINUED) - IDS Bank & Trust Income Fund: An income fund which invests primarily in contracts purchased from insurance companies and short-term money market instruments. - T. Rowe Price International Stock Fund: An international stock fund which seeks long term growth of capital through investments primarily in common stocks of established, non-U.S. companies. - The 401(k) participants may also invest in shares of the Company's common stock though participation in the FHP Stock Fund (Note 2). The Company's ESOP and PAYSOP contributions are invested in the Company's common stock. Contributions may be temporarily invested in short-term cash equivalents pending investment in investment programs. 11 15 FHP INTERNATIONAL CORPORATION EMPLOYEE STOCK OWNERSHIP PLAN NOTES TO FINANCIAL STATEMENTS (CONTINUED) Investments at June 30 were as follows:
1994 1993 ------------------------------ ---------------------------- INVESTMENTS AT FAIR VALUE AS DETERMINED BY QUOTED NUMBER OF FAIR NUMBER OF FAIR - - ------------------------------------------------- SHARES VALUE SHARES VALUE MARKET PRICE: --------- ------------ ---------- ------------ - - ------------- ESOP/PAYSOP: Pooled Investment Fund 357,994 $ 357,994 734,430 $ 734,430 FHP International Corporation Common Stock 2,223,022 53,352,528 1,861,985 50,739,092 ------------ ------------ 53,710,522 51,473,522 ------------ ------------ FIDELITY RETIREMENT MONEY MARKET PORTFOLIO: Pooled Investment Fund 11,042 11,042 64 64 Fidelity Retirement Money Market Portfolio 3,485,519 3,485,519 3,046,168 3,046,168 ------------ ------------ 3,496,561 3,046,232 ------------ ------------ FIDELITY EQUITY INCOME FUND: Pooled Investment Fund 60,781 60,781 68 68 Fidelity Equity Income Fund 220,579 7,051,897 166,485 5,319,209 ------------ ------------ 7,112,678 5,319,277 ------------ ------------ FIDELITY MAGELLAN FUND: Pooled Investment Fund 115,616 115,616 180 180 Fidelity Magellan Fund 212,862 13,610,408 160,495 11,202,521 ------------ ------------ 13,726,024 11,202,701 ------------ ------------ IDS BANK & TRUST INCOME FUND: Pooled Investment Fund 23,156 23,156 38 38 IDS Bank & Trust Income Fund 108,366 3,928,170 103,521 3,531,294 ------------ ------------ 3,951,326 3,531,332 ------------ ------------ T. ROWE PRICE INTERNATIONAL STOCK FUND Pooled Investment Fund 16,557 16,557 International Stock Fund 60,512 724,333 ------------ ------------ 740,890 ------------ ------------ FHP STOCK FUND: Pooled Investment Fund 232,139 232,139 191,743 191,743 FHP International Corporation Common Stock 1,216,155 29,187,720 1,130,279 30,800,103 ------------ ------------ 29,419,859 30,991,846 ------------ ------------ Total Investments $112,157,860 $105,564,910 ============ ============
12 16 FHP INTERNATIONAL CORPORATION EMPLOYEE STOCK OWNERSHIP PLAN NOTES TO FINANCIAL STATEMENTS (CONTINUED) During the years ended June 30, 1994 and 1993, the Plan's investments (including investments bought, sold and held during the year) appreciated (depreciated) in value as follows:
INVESTMENT AT FAIR VALUE AS DETERMINED NET APPRECIATION (DEPRECIATION) BY QUOTED MARKET PRICE: IN FAIR VALUE - YEAR ENDED JUNE 30 - - ----------------------- ---------------------------------- 1994 1993 ---- ---- ESOP/PAYSOP: FHP International Corporation Common Stock $ (6,274,207) $16,878,426 FIDELITY EQUITY INCOME FUND (63,987) 674,594 FIDELITY MAGELLAN FUND (1,290,318) 842,919 IDS BANK & TRUST INCOME FUND 8 (28) T. ROWE PRICE INTERNATIONAL STOCK FUND (17,883) FHP STOCK FUND: FHP International Corporation Common Stock (4,033,926) 10,564,599 ------------ ----------- Net Appreciation (Depreciation) in Fair Value $(11,680,313) $28,960,510 ============ ===========
13 17 FHP INTERNATIONAL CORPORATION EMPLOYEE STOCK OWNERSHIP PLAN ITEM 27A: SCHEDULE OF ASSETS HELD FOR INVESTMENT PURPOSES JUNE 30, 1994
FAIR DESCRIPTION SHARES COST VALUE ----------- --------- ----------- ------------ Pooled Investment Funds: Wells Fargo Money Market Fund 817,285 $ 817,285 $ 817,285 Mutual Funds: Fidelity Retirement Money Market Portfolio 3,485,519 3,485,519 3,485,519 Fidelity Equity Income Fund 220,579 6,335,608 7,051,897 Fidelity Magellan Fund 212,862 13,627,584 13,610,408 IDS Bank & Trust Income Fund 108,366 3,932,431 3,928,170 T. Rowe Price International Stock Fund 60,512 742,213 724,333 Common Stock: FHP International Corporation 3,439,177 55,798,782 82,540,248 ----------- ------------ Total Investment Assets $84,739,422 $112,157,860 =========== ============
14 18 FHP INTERNATIONAL CORPORATION EMPLOYEE STOCK OWNERSHIP PLAN ITEM 27D: SCHEDULE OF REPORTABLE TRANSACTIONS (A) YEAR ENDED JUNE 30, 1994
PURCHASES OF SECURITIES SALES OF SECURITIES -------------------------- ----------------------------------------- DESCRIPTION SHARES COST SHARES PROCEEDS GAIN (LOSS) ----------- ---------- ----------- ---------- ----------- ---------- Wells Fargo Money Market Fund 27,794,194 $27,794,194 27,916,459 $27,916,459 (452 purchases and 297 sales transactions) FHP International Corporation Common Stock 1,324,555 30,306,871 877,642 18,997,683 $2,297,554 (84 purchases and 61 sales transactions) Fidelity Retirement Money Market Portfolio 972,255 983,286 532,904 532,904 (36 purchases and 7 sales transactions) Fidelity Equity Income Fund 71,747 2,695,182 17,654 898,507 84,762 (36 purchases and 5 sales transactions) Fidelity Magellan Fund 66,732 4,747,643 14,364 1,049,438 109,777 (35 purchases and 4 sales transactions) IDS Bank & Trust Income Fund 20,032 935,719 15,186 538,851 2,225 (35 purchases and 20 sales transactions) T. Rowe Price International Stock Fund 63,175 774,883 2,663 32,667 (3) (14 purchases and 2 sales transactions) ---------- ----------- ---------- ----------- ---------- Totals 30,312,690 $68,237,778 29,376,872 $49,966,509 $2,494,315 ========== =========== ========== =========== ==========
(A) Schedule includes all purchase and sale transactions during the fiscal year. 15 -----END PRIVACY-ENHANCED MESSAGE-----