-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, KurpzadCsKfK0dfKzSXBDYM9Aiz4bDGKQcLTCD1tzImmpHRTYBAEMauk1+bx10ys VBbzirc0POxUlBrqNSX+cA== 0000912057-97-027318.txt : 19970813 0000912057-97-027318.hdr.sgml : 19970813 ACCESSION NUMBER: 0000912057-97-027318 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19970630 FILED AS OF DATE: 19970812 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: PACIFICARE HEALTH SYSTEMS INC /DE/ CENTRAL INDEX KEY: 0001027974 STANDARD INDUSTRIAL CLASSIFICATION: HOSPITAL & MEDICAL SERVICE PLANS [6324] IRS NUMBER: 954591529 STATE OF INCORPORATION: DE FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-21949 FILM NUMBER: 97657294 BUSINESS ADDRESS: STREET 1: 5995 PLAZA DR CITY: CYPRESS STATE: CA ZIP: 90630 BUSINESS PHONE: 7149521121 MAIL ADDRESS: STREET 1: 5995 PLAZA DR CITY: CYPRESS STATE: CA ZIP: 90630 FORMER COMPANY: FORMER CONFORMED NAME: N T HOLDINGS INC DATE OF NAME CHANGE: 19961204 10-Q 1 FORM 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 1997 ----------------------------------------- or [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ----------------------------------------------- Commission File Number 000-21949 - ----------------------------------------------------------------------------- PACIFICARE HEALTH SYSTEMS, INC. (Exact name of registrant as specified in its charter) Delaware 95-4591529 (State or other jurisdiction of (IRS Employer Identification Number) incorporation or organization) 3120 Lake Center Drive, Santa Ana, California 92704 (Address of principal executive offices, including zip code) (Registrant's telephone number, including area code) (714) 825-5200 - ----------------------------------------------------------------------------- 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 ------- ------ As of July 31, 1997, there were 14,786,116 shares of the Registrant's Class A Common Stock, par value $0.01 per share, outstanding, and 27,100,028 shares of Class B Common Stock, par value $0.01 per share, outstanding. Part 1: FINANCIAL INFORMATION Item 1: FINANCIAL STATEMENTS PacifiCare Health Systems, Inc. Condensed Consolidated Balance Sheets (unaudited) - ------------------------------------------------------------------------------ (Amounts in thousands, June 30, December 31, except per share data) 1997 1996 - ------------------------------------------------------------------------------ - ------------------------------------------------------------------------------ Assets Current assets: Cash and equivalents $ 238,661 $ 367,748 Marketable securities 804,870 594,734 Receivables, net 272,635 156,212 Assets held for sale 37,208 -- Prepaid expenses and other 25,415 8,876 Deferred income taxes 118,742 54,745 - ------------------------------------------------------------------------------ Total current assets 1,497,531 1,182,315 - ------------------------------------------------------------------------------ Property, plant and equipment, net 202,829 91,239 Marketable securities - restricted 147,491 35,399 Goodwill and other intangible assets, net 2,734,767 227,422 Other assets 21,413 25,097 - ------------------------------------------------------------------------------ $ 4,604,031 $ 1,561,472 - ------------------------------------------------------------------------------ - ------------------------------------------------------------------------------ Liabilities and Shareholders' Equity Current liabilities: Medical claims and benefits payable $ 702,500 $ 278,800 Accounts payable and accrued liabilities 443,290 162,882 Unearned premium revenue 42,192 256,416 Long-term debt due within one year 616 1,511 - ------------------------------------------------------------------------------ Total current liabilities 1,188,598 699,609 - ------------------------------------------------------------------------------ Long-term debt due after one year 1,091,385 1,370 Deferred income taxes 156,534 -- Other liabilities 31,726 -- Minority interest 375 391 Shareholders' equity: Preferred shares, par value $0.01 per share; 40,000 shares authorized; 10,517 shares of Series A Convertible Preferred Stock issued and outstanding at June 30, 1997 ($262,927 aggregate liquidation value) 105 -- Class A common shares, par value $0.01 per share; 100,000 shares authorized; 14,786 and 12,380 issued and outstanding at June 30, 1997 and December 31, 1996, respectively 148 124 Class B common shares, par value $0.01 per share; 100,000 shares authorized; 27,099 and 18,922 issued and outstanding at June 30, 1997 and December 31, 1996, respectively 271 189 Additional paid-in capital 1,593,239 373,405 Unrealized gains on available-for-sale securities, net of taxes 760 3,451 Retained earnings 540,890 482,933 - ------------------------------------------------------------------------------ Total shareholders' equity 2,135,413 860,102 - ------------------------------------------------------------------------------ $ 4,604,031 $ 1,561,472 - ------------------------------------------------------------------------------ - ------------------------------------------------------------------------------ See accompanying notes. 2 PacifiCare Health Systems, Inc. Consolidated Statements of Income (unaudited) - ------------------------------------------------------------------------------ Three months ended June 30, (Amounts in thousands, ------------------------ except per share data) 1997 1996 - ------------------------------------------------------------------------------ - ------------------------------------------------------------------------------ Revenue: Commercial premiums $ 995,961 $ 476,048 Government premiums (Medicare and Medicaid) 1,374,203 705,652 Other income 10,936 13,018 - ------------------------------------------------------------------------------ Total operating revenue 2,381,100 1,194,718 - ------------------------------------------------------------------------------ Expenses: Health care services: Commercial services 870,298 393,110 Government services 1,179,420 602,990 - ------------------------------------------------------------------------------ Total health care services 2,049,718 996,100 - ------------------------------------------------------------------------------ Marketing, general and administrative expenses 266,913 145,119 Amortization of goodwill and intangible assets 22,241 2,323 Disposition and restructuring charges -- 17,147 Office of Personnel Management reserve charge -- 25,000 - ------------------------------------------------------------------------------ Operating income 42,228 9,029 Interest income 20,368 10,275 Interest expense (18,695) (395) - ------------------------------------------------------------------------------ Income before income taxes 43,901 18,909 Provision for income taxes 25,904 10,331 - ------------------------------------------------------------------------------ Net income $ 17,997 $ 8,578 - ------------------------------------------------------------------------------ - ------------------------------------------------------------------------------ Weighted average common shares and equivalents outstanding used to calculate earnings per share 46,194 31,697 - ------------------------------------------------------------------------------ Earnings per share $ 0.39 $ 0.27 - ------------------------------------------------------------------------------ - ------------------------------------------------------------------------------ See accompanying notes. 3 PacifiCare Health Systems, Inc. Consolidated Statements of Income (unaudited) - ------------------------------------------------------------------------------ Six months ended June 30, (Amounts in thousands, -------------------------- except per share data) 1997 1996 - ------------------------------------------------------------------------------ Revenue: Commercial premiums $ 1,752,888 $ 943,790 Government premiums (Medicare and Medicaid) 2,449,198 1,383,888 Other income 22,617 24,210 - ------------------------------------------------------------------------------ Total operating revenue 4,224,703 2,351,888 - ------------------------------------------------------------------------------ Expenses: Health care services: Commercial services 1,500,091 778,505 Government services 2,097,282 1,182,722 - ------------------------------------------------------------------------------ Total health care services 3,597,373 1,961,227 - ------------------------------------------------------------------------------ Marketing, general and administrative expenses 481,427 292,890 Amortization of goodwill and intangible assets 32,560 4,630 Disposition and restructuring charges -- 17,147 Office of Personnel Management reserve charge -- 25,000 - ------------------------------------------------------------------------------ Operating income 113,343 50,994 Interest income 38,053 22,487 Interest expense (28,414) (1,224) - ------------------------------------------------------------------------------ Income before income taxes 122,982 72,257 Provision for income taxes 61,491 31,810 - ------------------------------------------------------------------------------ Net income $ 61,491 $ 40,447 - ------------------------------------------------------------------------------ - ------------------------------------------------------------------------------ Weighted average common shares and equivalents outstanding used to calculate earnings per share 42,596 31,713 - ------------------------------------------------------------------------------ Earnings per share $ 1.44 $ 1.28 - ------------------------------------------------------------------------------ - ------------------------------------------------------------------------------ See accompanying notes. 4 PacifiCare Health Systems, Inc. Consolidated Statements of Cash Flows (unaudited) - ------------------------------------------------------------------------------ Six months ended June 30, ------------------------ (Amounts in thousands) 1997 1996 - ------------------------------------------------------------------------------ Operating activities: Net income $ 61,491 $ 40,447 Adjustments to reconcile net income to net cash used in operating activities: Amortization of goodwill and intangible assets 32,560 4,630 Depreciation and amortization 21,943 11,579 Loss on disposal of property, plant and equipment 6,205 529 Provision for doubtful accounts 2,435 468 Deferred income taxes 1,080 993 Disposition and restructuring charges -- 17,147 Office of Personnel Management reserve charge -- 25,000 Changes in assets and liabilities, net of effects from acquisitions: Accounts receivable 46,770 (24,215) Prepaid expenses and other assets (6,453) 2,269 Medical claims and benefits payable 5,138 (51,688) Accounts payable and accrued liabilities (85,189) (23,425) Unearned premium revenue (211,749) (198,719) - ------------------------------------------------------------------------------ Net cash flows used in operating activities (125,769) (194,985) - ------------------------------------------------------------------------------ Investing activities: Acquisitions, net of cash acquired (982,285) (5,877) Sale of marketable securities 38,007 6,614 Purchase of property, plant and equipment (28,584) (11,753) Purchase of marketable securities - restricted (16,977) (484) - ------------------------------------------------------------------------------ Net cash flows used in investing activities (989,839) (11,500) - ------------------------------------------------------------------------------ Financing activities: Proceeds from long-term borrowing, net of expenses 1,108,974 -- Principal payments on long-term debt (150,240) (2,709) Proceeds from issuance of common stock 38,723 6,365 Capitalization of Talbert (67,000) -- Proceeds from sale of Talbert stock 59,598 -- Cash dividends paid to preferred shareholders (3,534) -- - ------------------------------------------------------------------------------ Net cash flows provided by financing activities 986,521 3,656 - ------------------------------------------------------------------------------ Net decrease in cash and equivalents (129,087) (202,829) Beginning cash and equivalents 367,748 357,290 - ------------------------------------------------------------------------------ Ending cash and equivalents $ 238,661 $ 154,461 - ------------------------------------------------------------------------------ - ------------------------------------------------------------------------------ See accompanying notes. 5 PacifiCare Health Systems, Inc. Consolidated Statements of Cash Flows (unaudited) - ------------------------------------------------------------------------------ Six months ended June 30, ------------------------- (Amounts in thousands) 1997 1996 - ------------------------------------------------------------------------------ - ------------------------------------------------------------------------------ Supplemental cash flow information Cash paid during the period for: Income taxes $ 77,316 $48,653 Interest $ 20,356 $ 1,237 - ------------------------------------------------------------------------------ Supplemental schedule of noncash investing and financing activities: Tax benefit realized upon exercise of stock options $ 16,911 $ 4,694 Compensation awarded in Class B Common Stock $ 721 $ 1,161 Leases capitalized $ -- $ 35 - ------------------------------------------------------------------------------ Details of businesses acquired in purchase transactions: Fair value of assets acquired $3,362,943 $ 9,718 Liabilities assumed or created 1,170,179 2,361 Preferred and common consideration 1,163,689 -- - ------------------------------------------------------------------------------ Cash paid 1,029,075 7,357 Cash acquired (46,790) (1,480) - ------------------------------------------------------------------------------ Net cash paid for acquisitions $ 982,282 $ 5,877 - ------------------------------------------------------------------------------ - ------------------------------------------------------------------------------ Details of unrealized gains on available-for-sale securities, net of acquisition: Increase in marketable securities $ 640 $ (1,258) Increase in deferred tax liabilities (222) (488) - ------------------------------------------------------------------------------ Increase in shareholders' equity $ 418 $ (770) - ------------------------------------------------------------------------------ - ------------------------------------------------------------------------------ See accompanying notes. 6 PACIFICARE HEALTH SYSTEMS, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS June 30, 1997 (unaudited) NOTE 1 - BASIS OF PRESENTATION PacifiCare Health Systems, Inc. (the "Company") is one of the leading health care services companies in the United States, serving approximately four million members in the commercial, Medicare and Medicaid lines of business. On February 27, 1997, the Company's board of directors approved a change in its fiscal year end from September 30 to December 31. Accordingly, the Company's current year will end on December 31, 1997. The Company will include audited financial statements for the October 1, 1996 to December 31, 1996 transition period in its Annual Report on Form 10-K for the year ended December 31, 1997. The interim condensed consolidated financial statements included herein have been prepared by the Company without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (the "SEC"). Certain information and footnote disclosures, normally included in the financial statements prepared in accordance with generally accepted accounting principles, have been condensed or omitted pursuant to such SEC rules and regulations; nevertheless, management of the Company believes that the disclosures herein are adequate to make the information presented not misleading. It is suggested that these condensed consolidated financial statements be read in conjunction with the consolidated financial statements and notes thereto included in the Company's September 30, 1996 Annual Report on Form 10-K/A, filed with the SEC in January 1997, and the interim condensed consolidated financial statements included in the Company's December 31, 1996 Transition Report on Form 10-Q/A, filed with the SEC in February 1997, and the April 11, 1997 Form 8-K. In the opinion of management, all adjustments, consisting only of normal recurring adjustments necessary to present fairly the consolidated financial position of the Company with respect to the interim condensed consolidated financial statements, and the consolidated results of its operations and its cash flows for the interim periods then ended, have been included. Certain prior period amounts in the accompanying unaudited condensed consolidated financial statements have been reclassified to conform to the 1997 presentation. The results of operations for the interim periods are not necessarily indicative of the results for the full year. NOTE 2- ACQUISITIONS AND DISPOSITIONS On February 14, 1997, the Company consummated the acquisition of FHP International Corporation ("FHP") (the "FHP Acquisition"). Pursuant to the FHP Acquisition, each outstanding share of FHP common stock (41,779,927 shares) was exchanged for $17.50 in cash, 0.056 shares of the Company's Class A Common Stock and 0.176 shares of the Company's Class B Common Stock. Each outstanding share of FHP's preferred stock (21,034,163 shares) was exchanged for $14.113 in cash and one-half of one share of the Company's Series A Cumulative Convertible Preferred Stock (the "Series A Preferred"). In connection with the FHP Acquisition, the Company issued 2,339,674 shares of Class A Common Stock, 7,353,266 shares of Class B Common Stock and 10,517,081 shares of Series A Preferred (see Note 4 - "Shareholders' Equity"). The terms of the FHP Acquisition also required FHP to contribute $67 million to Talbert Medical Management Corporation, a wholly owned subsidiary of FHP, which increased its net worth to approximately $60 million on February 14, 1997. Also at that time, FHP sold its investment in Talbert Medical Management 7 Holdings Corporation ("Talbert") in exchange for a $60 million non-recourse promissory note and rights to purchase shares of Talbert common stock. As part of the FHP Acquisition, each former FHP shareholder was entitled to receive one Talbert right for each 21.19154 shares of FHP common stock and one Talbert right for each 26.27752 shares of FHP preferred stock. Holders of Talbert rights were able to purchase one share of Talbert common stock for each Talbert right for the subscription price of $21.50 per share. Holders of Talbert rights were entitled to subscribe for all, or any portion of, the shares of Talbert common stock underlying their Talbert rights as well as to subscribe for any unallocated additional shares. On May 20, 1997, Talbert successfully completed its rights offering and shares of Talbert common stock were distributed. Proceeds from the Talbert rights offering were used to repay the non-recourse promissory note issued to FHP. The FHP Acquisition has been accounted for as a purchase. Total consideration, including transaction costs, of approximately $2.2 billion has been preliminarily allocated to the assets acquired and liabilities assumed based on estimates of their fair values. The purchase price allocation is based on currently available information which may be adjusted upon completion of the final valuation of FHP's assets and liabilities. The preliminary fair value estimates of the assets acquired and liabilities assumed were $0.8 billion and $1.2 billion, respectively. A total of $2.5 billion, net of related deferred taxes, representing the excess of the purchase price over the estimated fair values of the net assets acquired, has been preliminarily allocated to goodwill and other acquired intangible assets and is being amortized over a four to 40-year period. On February 21, 1997, the Company sold the outstanding common stock of its Florida subsidiary, at which time the buyer assumed the daily operations. The sales price, which approximated net book value, totaled $9 million. The close of the sale was completed in July 1997 when the Company received regulatory approval from the state of Florida. The Company's consolidated results of operations include FHP from February 14, 1997 and its Florida subsidiary through February 21, 1997. The pro forma information below presents combined results of operations as if the FHP Acquisition, as well as if the sale of the Company's Florida subsidiary, had occurred at the beginning of 1996. The pro forma information reflects adjustments which include interest expense related to the assumed financing of the cash consideration paid for the FHP Acquisition; amortization of goodwill and other acquired intangible assets; costs associated with the integration of FHP's operations into those of the Company and conformity of FHP's accounting policies with the Company's. No adjustment has been made to give effect to any synergies which may be realized as a result of the FHP Acquisition. - ------------------------------------------------------------------------------ Three Months Ended Six Months Ended (Unaudited) June 30 June 30 (Amounts in thousands, ------------------------------------------------ except per share amounts) 1996 1997 1996 - ------------------------------------------------------------------------------ - ------------------------------------------------------------------------------ Total operating revenue $ 2,277,845 $ 4,777,583 $ 4,480,783 Pretax income $ 48,526 $ 114,564 $ 73,947 Net income $ 17,567 $ 50,763 $ 26,068 Earnings per share $ 0.39 $ 1.10 $ 0.57 - ------------------------------------------------------------------------------ In May 1997 the Company signed a definitive agreement to sell all of the outstanding stock of its New Mexico FHP subsidiary to New Mexico-based Presbyterian Healthcare Services ("Presbyterian"). In conjunction with the sale, the Company and Presbyterian will enter into a long-term license agreement by which Presbyterian will operate their Medicare risk program in New Mexico under the Company's Secure 8 Horizons-Registered Trademark- name. Terms of the agreement call for the Company to provide Presbyterian with manuals and assistance regarding provider network development, state and federal regulatory compliance, marketing and sales, and business systems implementation. FHP of New Mexico currently services 59,000 commercial and Medicare members. Closing of the transaction is subject to state and federal regulatory approval. For financial reporting purposes, the assets and liabilities attributable to the pending New Mexico disposition and the planned disposition of Illinois have been stated at the lower of cost or net realizable value, and have been classified in the accompanying unaudited condensed consolidated balance sheet as of June 30, 1997 as assets held for sale. Because management presently expects the dispositions to occur within one year, such assets have been classified as current. Net losses from February 14, 1997 through June 30, 1997 from the FHP assets held for sale totaled approximately $8.6 million. These losses have been accounted for as an adjustment to the net assets acquired and are excluded from the unaudited consolidated statements of income for the three and six months ended June 30, 1997. The proforma financial information has not been adjusted for these pending dispositions due to immateriality. NOTE 3 - LONG-TERM DEBT AND INTEREST-RATE SWAPS In October 1996, the Company entered into a $1.5 billion credit facility under which it borrowed $1.1 billion in February 1997 to pay $1.0 billion in cash consideration to former holders of FHP common and preferred stock and to make other acquisition related payments. During March and June 1997, the Company repaid $80 million and $50 million, respectively, of its borrowings under the credit facility, resulting in $990 million outstanding as of June 30, 1997. The credit facility has mandatory step-downs beginning on January 1, 1999 with final maturity on January 1, 2002. Interest under the credit facility is presently based on the London Interbank Offering Rate ("LIBOR") plus a spread. The credit facility contains various covenants usual for financing of this type, including a minimum net worth requirement, a minimum fixed charge requirement and leverage ratios. At June 30, 1997, the Company was in compliance with all such covenants. On February 14, 1997, the Company assumed $100 million senior notes of FHP which carry an interest rate of seven percent, are payable semiannually and mature on September 15, 2003. The Company has entered into interest-rate swap agreements to manage interest costs and limit exposure to changing interest rates on borrowings for its long-term debt. The swap agreements are contracts to exchange floating rates for fixed interest payments periodically over the life of the agreements without the exchange of the underlying notional amounts. The notional amounts of the swap agreements are used to measure interest to be paid or received and do not represent the amount of exposure to credit loss. The differential paid or received on swap agreements is recognized as an adjustment of interest expense. The average fixed interest rate paid by the Company on the existing swap agreements is approximately six percent, covering $350 million of the long-term debt. NOTE 4 - SHAREHOLDERS' EQUITY The Company's Certificate of Incorporation provides for authorized capital stock of 100,000,000 shares each of Class A Common Stock and Class B Common Stock, and 40,000,000 shares of Preferred Stock, each with a par value of $0.01 per share. The Preferred Stock authorized includes 11,000,000 authorized shares of Series A Preferred. On February 14, 1997, each outstanding share of PacifiCare Operations, Inc.'s (formerly PacificCare Health Systems, Inc.) Class A and Class B Common Stock, par value $0.01 per share, was exchanged for one share of the Company's Class A and Class B Common Stock, respectively. Shares of the Company's Class A and Class B Common Stock and Series A Preferred were issued in connection with the FHP Acquisition (see Note 2 - "Acquisitions and Dispositions"). 9 Each share of Series A Preferred entitles its owner to convert it at any time to 0.374 shares of Class B Common Stock, assuming no unpaid accrued dividends in arrears. Series A Preferred shareholders also have a preference of $25.00 per share over the Common Stock in the event of involuntary or voluntary liquidation. Dividends on the Series A Preferred accrue at an annual rate of $1.00 per share, are cumulative and payable quarterly in arrears when, as and if declared by the board of directors. In March 1997, the Company made a one-time special quarterly dividend payment, as required by the Certificate of Incorporation and pursuant to the FHP Acquisition, which included a proration of dividends paid on the Company's Series A Preferred from February 15, 1997 through March 15, 1997 totaling $0.9 million in the aggregate or $0.086 per share. In June 1997, the Company paid $0.25 per share or $2.6 million in dividends to preferred shareholders of record as of May 30, 1997. Unpaid cumulative dividends earned were $0.4 million on the 10,517,081 Series A Preferred shares outstanding at June 30, 1997. On or after June 17, 1998, Series A Preferred may be redeemed at the option of the Company for cash plus unpaid dividends. The redemption price ranges from 103 percent to 100 percent of the stated value of Series A Preferred, or $25.00 per share, in one-half percent decrements for each successive anniversary of June 17, 1998 through 2004. Series A Preferred ranks senior to Class A and B Common Stock with respect to dividend and liquidation rights, and holders of Series A Preferred generally have no voting rights; however, there are certain exceptions including the right to elect two additional directors if the equivalent of six quarterly dividends payable on the Series A Preferred are in default. NOTE 5 - DISPOSITION AND RESTRUCTURING CHARGES The pretax disposition and restructuring charges involved the sale of the Pastuer Delivery Systems ("PDS") staff-model medical clinics to PrimeCare of Florida, Inc. resulting in a pretax loss of $9.3 million ($8.3 million or $0.26 loss per share, net of tax) and a pretax restructuring charge of $7.8 million ($4.7 million or $0.15 per share, net of tax). The sale to PrimeCare was effective June 1, 1996. The restructuring plan, which was completed in December 1996, involved the discontinuation of certain specialty health care products and services that did not meet the Company's economic return objectives and restructuring of regional operations. Costs encompassed employee separation, asset write-offs and certain other costs. The Company is currently performing a review of its managed care operations, cost structures and information technology services, and has not yet fully estimated the Company's costs associated with the integration of FHP's operations. The Company anticipates that it will incur costs to integrate and restructure its operations, which may result in a restructuring charge in a future period. NOTE 6 - CONTINGENCIES The Company is involved in legal actions in the normal course of business, some of which seek substantial monetary damages, including claims for punitive damages which are not covered by insurance. Additionally, the Company's programs, including services provided to government employees, are subject to retrospective audits by the respective regulating agencies in the normal course of business. After review, including consultation with counsel, management believes any ultimate liability in excess of amounts accrued which could arise from audits or legal actions would not materially affect the Company's consolidated financial position, results of operations or cash flows. The Company has set aside reserves in anticipation of negotiations relating to potential governmental claims for contracts with the United States Office of Personnel Management ("OPM"). The results for the three and six months ended June 30, 1996 include a pretax charge of $25 million ($14.9 million, or $0.47 loss per share, net of tax) to increase reserves in anticipation of resolving these negotiations. The Company's HMO subsidiaries which provide managed health care services under the 10 Federal Employees Health Benefits Program are subject to audit, in the normal course of business, by OPM. Currently, OPM audits for multiple periods are in various stages of completion for several of the Company's HMO subsidiaries, including subsidiaries acquired in the FHP Acquisition. The Company intends to negotiate with OPM on all matters to attain a mutually satisfactory result. While there is no assurance that the negotiations will be concluded satisfactorily or that additional liability will not be incurred, management believes that any ultimate liability in excess of amounts accrued which could arise upon completion of the audits by OPM of the health plans, would not materially affect the Company's consolidated financial position, results of operations or cash flows; however, such liability could be material to net income of a future quarter if resolved unfavorably. NOTE 7 - EARNINGS PER SHARE Earnings per share were computed as net income divided by the weighted average number of shares outstanding during the period and the dilutive effect of common stock equivalents. Primary earnings per share includes the effect of stock options using the average market price assuming the conversion of Series A Preferred, which are considered to be common stock equivalents, to common shares. Fully diluted earnings per share assumes the maximum dilution that would have resulted from the exercise of stock options. There is not a material difference between primary and fully diluted earnings per share. The Class A Common, Class B Common and Series A Preferred shares issued in conjunction with the FHP Acquisition (see Note 2 - "Acquisitions and Dispositions") caused a significant increase in the shares outstanding used in computing earnings per share between the March 31, 1997 and June 30, 1997 quarters. Due to this significant increase in shares outstanding, the sum of the quarterly earnings per share does not equal the year-to-date earnings per share. 11 Part I: FINANCIAL INFORMATION Item 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following table presents HMO membership data by state and by consumer type as of the dates indicated.
AT JUNE 30, 1997 AT JUNE 30, 1996 Government Government (Medicare & (Medicare & MEMBERSHIP DATA Commercial Medicaid) Total Commercial Medicaid) Total - ------------------------------------------------------------------------------------------------- Arizona 105,135 88,371 193,506 - - - California 1,677,030 626,533 2,303,563 947,908 407,325 1,355,233 Colorado 279,249 49,182 328,431 - - - Florida - - - 41,365 4,048 45,413 Guam 42,974 - 42,974 - - - *Illinois 54,123 4,261 58,384 - - - Nevada 39,574 23,606 63,180 - - - *New Mexico 40,843 17,924 58,767 - - - Ohio 53,852 10,594 64,446 - - - Oklahoma 111,847 25,589 137,436 113,814 24,564 138,378 Oregon 118,220 40,474 158,694 109,489 45,020 154,509 Texas 137,002 69,314 206,316 105,411 58,013 163,424 Utah 159,773 31,118 190,891 - - - Washington 96,270 55,045 151,315 89,011 49,764 138,775 - ------------------------------------------------------------------------------------------------- Total membership 2,915,892 1,042,011 3,957,903 1,406,998 588,734 1,995,732 - ------------------------------------------------------------------------------------------------- - ------------------------------------------------------------------------------------------------- Three months ended Six months ended June 30, June 30, ------------------------------------------- OPERATING STATISTICS 1997 1996 1997 1996 - ------------------------------------------------------------------------------------------------- - ------------------------------------------------------------------------------------------------- Medical loss ratio (health care services as a percent of premium revenue) Consolidated 86.5% 84.3% 85.6% 84.3% Commercial 87.4% 82.6% 85.6% 82.5% Government (Medicare and Medicaid) 85.8% 85.5% 85.6% 85.5% Marketing, general and administrative expenses as a percent of operating revenue 11.2% 12.1% 11.4% 12.5% Operating income as a percent of operating revenue 1.8% 0.8% 2.7% 2.2% Effective tax rate 59.0% 54.6% 50.0% 44.0% - ------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------
* Results of operations are not included in the consolidated statements of income but have been included in assets held for sale for the respective periods. 12 Three and Six Months Ended June 30, 1997 Compared to the Three and Six Months Ended June 30, 1996 RESULTS OF OPERATIONS The following discussion includes FHP's results of operations from February 14, 1997 (see Note 2 of the Notes to the Condensed Consolidated Financial Statements). Compared to FHP's historical financial statements, there have been presentation changes in the consolidation with the Company including classifying certain medical management costs as marketing, general and administrative expenses and excluding these amounts from health care costs. In addition, there have been conforming changes to FHP's definition of members. As of February 14, 1997, FHP Medicaid membership has been reclassified from commercial to government. Moreover, the Company has excluded self-funded members totaling approximately 33,000 members and is reporting Medicare members on a basis consistent with the Health Care Financing Administration ("HCFA") premium payments, a difference totaling approximately 1,800 members. These changes resulted in a decrease of 34,800 members from those previously reported by FHP. For the three and six months ended June 30, 1997, total operating revenue increased $1.2 and $1.9 billion to $2.4 and $4.2 billion, respectively, as compared to the same periods in the prior year. For the three months ended June 30, 1997, approximately 88 percent of the increase in HMO revenue was due to the FHP Acquisition. Enrollment and premium rate increases contributed $121 million or 10 percent of the increase. FHP contributed 83 percent of the increase for the six months ended June 30 1997, while enrollment gains in the HMOs' commercial and government programs, as well as increases in premium rates, contributed approximately 15 percent of the increase. The Company's specialty managed care products and services contributed the remainder of the increase in operating revenue. Primarily as a result of the FHP Acquisition, total HMO membership increased 98 percent at June 30, 1997 as compared to June 30, 1996, to approximately 4.0 million members. FHP contributed $465 million of a $519 million increase in commercial premiums for the three months ended June 30, 1997 as compared to the same period in the prior year. For the six months ended June 30, 1997, commercial premiums increased $809 million, with the FHP Acquisition contributing 87 percent of the increase. Excluding the effects of the acquisitions and dispositions, commercial membership growth combined with slight increases in commercial premium rates averaging less than one percent, plus the Company's specialty managed care products and services contributed the remainder of the increase. Enrollment gains in the commercial programs, net of acquisition membership, accounted for an additional 5 percent and 8 percent for the three and six months ended June 30, 1997, respectively, of the increase in commercial premiums. The decrease in the rate of membership growth compared to the six months ended June 30, 1996 reflects the sale of the Florida commercial membership and the Company's more disciplined product pricing. At June 30, 1997, FHP commercial members totaled approximately 1,447,000 or 50 percent of the Company's total commercial members. Government premiums rose $669 million to $1.4 billion for the three months ended June 30, 1997 with 86 percent or $575 million related to the FHP Acquisition. For the six months ended June 30, 1997, FHP's government program added $862 million of the $1.0 billion increase in government premiums to $2.4 billion from $1.4 billion for the same period in the prior year. On January 1, 1997, the Company received average premium rate increases from HCFA averaging over six percent. Government premium rates also increased as a result of the Company's exit of its Medicaid lines of business in Florida and Oregon, offset slightly by reductions in member paid supplemental premiums in several of the Company's markets. These combined 13 increases in the average of the premium rates contributed an additional $69 million and $145 million for the three and six months ended June 30, 1997, respectively as compared to the same periods of the prior year. Enrollment gains in the government programs, net of acquisition membership, accounted for an additional 4 percent and 6 percent for the three and six months ended June 30, 1997, respectively, of the increase in government premiums. At June 30, 1997, FHP government members totaled approximately 435,000 or 42 percent of the Company's total government members. The increased consolidated medical loss ratio is attributable to increased health care costs in the commercial and Medicare lines of business in a number of the Company's markets. Specifically, for the acquired FHP markets compared to prior performance: - Utah is performing below expectations due to a shift of membership from capitated to non-capitated portions of its health care provider network, resulting in higher health care costs. Also, increases in commercial product pricing are lower than anticipated. - California experienced a decline in commercial prices in late 1996, resulting in a higher medical loss ratio in 1997. - Increased health care costs in Nevada are a result of contracting and pricing decisions made in late 1996 and early 1997 which were based on claims information from a new administrative processing area which reduced timely visibility to actual costs. - Texas medical loss ratios reflect the start-up efforts in both the commercial and Medicare lines of business. For the existing PacifiCare markets: - California has been impacted by higher than expected prescription drug costs and other health care costs in its Medicare program. Some of these increases are believed to be attributable to regulatory restrictions the Company agreed to as a condition of acquiring FHP. - Oregon experienced higher than prior year medical loss ratios due to expansion efforts into the southern part of the state and the recent addition of new commercial products that are not yet profitable. Management's plans are discussed in the forward looking information under the Private Securities Litigation Act of 1995. Additionally, the Company recorded a pre-tax charge during the three months ended June 30, 1997 which resulted in higher than expected commercial health care costs. This $14 million ($7 million or $0.15 per share, net of tax) was caused by a computer system conversion which had temporarily reduced timely visibility and recognition of prior claims costs. The commercial medical loss ratio increased for both the three and six months ended June 30, 1997 as compared to the same periods in the prior year. The current period reflects the Company's absorption of a full quarter of FHP provider contracts which resulted in a higher commercial medical loss ratio. These higher costs combined with increases in provider capitation and out of area health care services as well as increased prescription drug utilization, contributed to the increase in the commercial medical loss ratio. The medical loss ratio for the three and six months ended June 30, 1997 in the government programs increased slightly as compared with the same periods in the prior year. The increase was due mainly to 14 enhanced prescription drug benefits provided to enrollees and lower member paid supplemental premiums. These increases were partially offset by FHP's lower cost provider contracts, HCFA premium rate increases and the wind down of the Medicaid business. Marketing, general and administrative expenses increased $122 million to $267 million and $188 million to $481 million for the three and six months ended June 30, 1997 from $145 million and $293 million in the same periods of 1996. As a percentage of operating revenue, marketing, general and administrative expenses for the three and six months ended June 30, 1997 decreased 0.9 percent and 1.1 percent, respectively, as compared to the same periods in the prior year. The decreases reflect delays in staffing, reduced or eliminated FHP marketing and continued administrative efficiencies which have allowed the Company to control its overhead. The Company recognized pretax charges for the three and six months ended June 30, 1996 totaling $42.1 million ($27.9 million or $0.88 loss per share, net of tax), including a reserve for potential government claims with OPM for multiple contract years, the disposition of PDS, and certain restructuring charges. These charges are described below and in Notes 5 and 6 of the Notes to the Condensed Consolidated Financial Statements. The Company has set aside reserves in anticipation of negotiations relating to potential governmental claims for contracts with OPM. The results for the three and six months ended June 30, 1996 include a pretax charge of $25 million ($14.9 million, or $0.47 loss per share, net of tax) for an increase of reserves in anticipation of negotiations relating to potential governmental claims. The Company's HMO subsidiaries which provide managed health care services under the Federal Employees Health Benefits Program are subject to audit, in the normal course of business, by OPM. Currently, OPM audits for multiple periods are in various stages of completion for several of the Company's HMO subsidiaries, including subsidiaries acquired in the FHP Acquisition. The Company intends to negotiate with OPM on all matters to attain a mutually satisfactory result. While there is no assurance that the negotiations will be concluded satisfactorily or that additional liability will not be incurred, management believes that any ultimate liability in excess of amounts accrued which could arise upon completion of the audits by OPM of the health plans, would not materially affect the Company's consolidated financial position, results of operations or cash flows; however, such liability could be material to net income of a future quarter if resolved unfavorably. The pretax disposition and restructuring charges involved the sale of the PDS staff-model medical clinics to PrimeCare resulting in a pretax loss of $9.3 million ($8.3 million or $0.26 loss per share, net of tax) and a pretax restructuring charge of $7.8 million ($4.7 million or $0.15 per share, net of tax). The sale to PrimeCare was effective June 1, 1996. The restructuring plan, which was completed in December 1996, involved the discontinuation of certain specialty health care products and services that did not meet the Company's economic return objectives and restructuring of regional operations. Costs encompassed employee separation, asset write-offs and certain other costs. Net interest income declined approximately $12 million for the six months ended June 30, 1997 compared to the same period in the prior year due primarily to increased borrowings under the Company's credit facility to finance the FHP Acquisition. The goodwill established in the FHP Acquisition is not deductible for income tax purposes, and therefore, the Company reports a higher effective income tax rate. The effective income tax rates for the three and six months ended June 30, 1997 were 59 percent and 50 percent, respectively, reflecting increases from the same periods in the prior year. The increased effective tax rate for the quarter ended June 30, 1997 reflects the Company's decreased earnings expectations for the year as compared to expectations as of March 31, 1997. Lower results of operations combined with the effect of non-deductible goodwill will yield a higher effective income tax rate. 15 Net income increased $9 million to $18 million for the quarter ended June 30, 1997 compared to $9 million in the same period of the prior year. For the six months ended June 30, 1997, net income increased $21 million to $61 million compared to $40 million for the same period in the prior year. The impact of the equity securities issued to acquire FHP diluted the increase in earnings per share compared to the increases in net income. Earnings per share of $0.39 were 44 percent greater than the prior year's quarterly earnings per share of $0.27. For the six months ended June 30, 1997, earnings per share increased 13 percent to $1.44 from $1.28 for the same period in the prior year. The Class A Common, Class B Common and Series A Preferred shares issued in conjunction with the FHP Acquisition (see Note 2 of the Notes to the Condensed Consolidated Financial Statements) caused a significant increase in the shares outstanding used in computing earnings per share between the March 31, 1997 and June 30, 1997 quarters. Due to this significant increase in shares outstanding, the sum of the quarterly earnings per share does not equal the year-to-date earnings per share. LIQUIDITY AND CAPITAL RESOURCES The Company's cash and equivalents plus its current marketable securities increased $81 million to $1.0 billion at June 30, 1997 from $962 million at December 31, 1996, due primarily to the FHP Acquisition. Cash flows provided by operations, excluding the impact of the January 1997 advance Medicare payment from HCFA were $86 million and are primarily attributable to results of operations. The Company borrowed $1.1 billion under its credit facility in February 1997. The cash was used to pay $1.0 billion in cash consideration to former holders of FHP common and preferred stock and other acquisition related payments (see Note 2 of the Notes to the Condensed Consolidated Financial Statements). Through June 1997 the Company repaid $130 million of its borrowings under the credit facility, resulting in $990 million outstanding as of June 30, 1997. In February 1997, the Company assumed $100 million of subordinated notes (the "FHP Notes") which carry an interest rate of seven percent, are payable semiannually, and mature on September 15, 2003 (see Note 3 of the Notes to the Condensed Consolidated Financial Statements). The Company has entered into interest-rate swap agreements to manage interest costs and limit exposure to changing interest rates on borrowings for its long-term debt. The swap agreements are contracts to exchange floating rates for fixed interest payments periodically over the life of the agreements without the exchange of the underlying notional amounts. The notional amounts of swap agreements are used to measure interest to be paid or received and do not represent the amount of exposure to credit loss. The differential paid or received on swap agreements is recognized as an adjustment of interest expense. The average fixed interest rate paid by the Company on the existing swap agreements is approximately six percent, covering $350 million of the long-term debt. In February 1997, the Financial Accounting Standards Board issued Statement No. 128, "Earnings per Share," ("SFAS No. 128") which is required to be adopted on December 31, 1997. At that time, the Company will be required to change the method currently used to compute earnings per share and to restate all prior periods. SFAS No. 128 requires the presentation of basic earnings per share which excludes the dilutive effect of stock options. In addition, SFAS No. 128 requires calculation and presentation of dilutive earnings per share. The impact of SFAS No. 128 on the calculation of primary and fully diluted earnings per share for the quarters ended June 30, 1997 and March 31, 1997 is not expected to be material. FORWARD LOOKING INFORMATION UNDER THE PRIVATE SECURITIES LITIGATION ACT OF 1995 The Private Securities Litigation Reform Act of 1995 provides a "safe harbor" for forward looking statements to encourage companies to provide prospective information about themselves without fear of litigation so long as those statements are identified as forward looking and are accompanied by meaningful 16 cautionary statements identifying important factors that could cause actual results to differ materially from those projected in the statements. The statements contained in this section, and throughout the document, are based on current expectations. These statements are forward looking and actual results may differ materially from those projected in the forward looking statements, which statements involve risks and uncertainties. In addition, past financial performance is not necessarily a reliable indicator of future performance and investors should not use historical performance to anticipate results or future period trends. Shareholders are also directed to the other risks discussed in other documents filed by the Company with the SEC including those specified below. MEMBERSHIP GROWTH. The Company's membership growth rate for the year ended December 31, 1997 (excluding the impact of the FHP Acquisition) is expected to be significantly lower and possibly negative in both the commercial and government programs. In accordance with the Company's strategic focus shifting from one of rapid growth to improved margin performance, the Company's emphasis is on renewing employer contracts with sufficient price increases to improve gross margin. Specifically, commercial price increases in all markets, including concentrated efforts in California, Nevada, southern Oregon and Utah may result in net membership attrition. The government programs will be impacted by the exit from the Medicaid line of business. Finally, the disposition of New Mexico and Illinois will decrease membership. Combined with continued competition, the Company expects to see a slow-down in membership growth or possible declines in some markets. An unforeseen loss of profitable membership could have a material adverse effect on the Company. Factors which could contribute to the loss of membership include, without limitation, the integration of the Company and FHP, the exit of the Medicaid line of business, the sale of certain acquired FHP managed care operations, failure to obtain new customers or to retain existing customers, reductions in workforce by existing customers, adverse publicity and news coverage, inability to carry out marketing and sales plans, loss or retirement of key executives or key employees or denial of accreditation by independent quality accrediting agencies. HEALTH CARE PROVIDER CONTRACTS. The Company's profitability depends, in part, on its ability to maintain effective control over health care costs while providing members with quality care. Specifically, capitating providers in Utah and Nevada and recontracting with providers in Oregon and Washington will be critical to improved results of operations for those markets. Securing cost effective contracts with existing and new physician groups is more difficult due to increased competition and minimal or no commercial premium rate increases. The negotiation of provider contracts, generally as of January 1, may be impacted by adverse state and federal legislation and regulation discussed below. Factors which could impact the Company's ability to secure contracts with providers include the inability to renegotiate contracts or entering into contracts with less cost-effective rates or terms of payment and factors affecting increased competition as discussed above. COMMERCIAL MEDICAL LOSS RATIO. The commercial medical loss ratio is expected to decrease for the three months ended September 30, 1997 as compared to three months ended June 30, 1997. For the year ended December 31, 1997, the commercial medical loss ratio is expected to be higher than the fiscal year ended September 30, 1996. This increase is expected due to the integration of FHP and changes in estimates in the current quarter and is anticipated to be partially offset by decreases in health care costs through continued renegotiation of provider contracts in most markets. The Company's strategic focus will be on improved product performance. Higher premium rates are anticipated to be offered with employer contract renewals. The combination of higher premiums and the loss of low premium membership is expected to improve the commercial medical loss ratio. While increased prescription drug costs are expected, these costs are anticipated to be offset by the disposition of the Florida subsidiary. 17 GOVERNMENT MEDICAL LOSS RATIO. The three months ended September 30, 1997 is expected to remain consistent with the current quarter. For the year ended December 31, 1997, the government medical loss ratio is expected to be slightly higher than the prior fiscal year. Competitive pressures in the Medicare market are requiring enhanced benefits with lower supplemental premiums. The implementation of Medicare reform provisions which curtail program spending and allow the entry of new forms of network-based plans could further increase competitive pressures. These pressures, which cause increases in the government medical loss ratio, are expected to offset HCFA rate increases, the disposition of the high-cost Medicaid members and the lower acquired government medical loss ratio as a result of the FHP Acquisition. The commercial and government medical loss ratio expectations discussed above could be affected by various uncertainties, including increases in medical and prescription drug costs, increases in utilization and costs of medical services and the effect of actions by competitors or groups of providers and termination of provider contracts or renegotiation thereof at less cost-effective rates or terms of payment. In addition, price increases in health care costs including prescription drug costs, which have been escalating faster than premium increases in recent years, as well as price increases for durable medical equipment and other covered items plus other factors, as discussed below, could also affect expectations. MARKETING, GENERAL AND ADMINISTRATIVE SUPPORT INVESTMENTS. As a percentage of operating revenue, marketing, general and administrative expenses are expected to increase slightly for the three months ended September 30, 1997 as compared to the quarter ended June 30, 1997 as the Company continues to integrate the operations of FHP. Marketing, general and administrative expenses as a percentage of operating revenue in 1997 are expected to be slightly lower than fiscal year 1996. The Company expects to realize synergies, which are expected to be partially offset by increased investments in information systems as the Company integrates the current FHP information systems and maintains and enhances its current competitive advantage in information technology. The ability of the Company to realize the anticipated benefits and synergies is subject to the following additional uncertainties, among others: the ability to integrate the Company's and FHP's management and information systems, on a timely basis, if at all; the ability to eliminate duplicative functions while maintaining acceptable performance levels; and the possibility that the integration of FHP will result in the loss of providers, employers, members or key employees of PacifiCare, FHP or their subsidiaries. The Company is currently performing a review of its managed care operations, cost structures and information technology services, and has not yet fully estimated the Company's costs associated with the integration of FHP's operations. The Company anticipates that it will incur costs to integrate and restructure its operations, which may result in a restructuring charge in a future period. OFFICE OF PERSONNEL MANAGEMENT CONTINGENCIES. The Company intends to negotiate with the OPM on all matters to attain a mutually satisfactory result. While there is no assurance that the negotiations will be concluded satisfactorily or that additional liability will not be incurred, management believes that any ultimate liability in excess of amounts accrued which could arise upon completion of the audits by OPM of the health plans would not materially affect the Company's consolidated financial position, results of operations or cash flows; however, such liability could be material to net income of a future quarter if resolved unfavorably (see Note 6 of the Notes to the Condensed Consolidated Financial Statements). LIQUIDITY AND CAPITAL RESOURCES. The Company believes that cash flows from operations, its Credit Facility, existing cash and equivalents, marketable securities and other financing sources will provide sufficient liquidity for operations in the foreseeable future. However, cash flows could be adversely affected by changes in interest rates causing an increase in interest expense and the fact that the Company will be subject to greater operating leverage due to its higher levels of indebtedness as a result of the FHP Acquisition. Additionally, 18 should the credit facility be fully drawn, the Company's ability to make a payment on, or repayment of, its future obligations under the credit facility and the FHP Notes will be significantly dependent upon the receipt of funds from the Company's subsidiaries. These subsidiary payments represent fees for management services rendered by the Company to the subsidiaries and 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 or insurance regulators. Subsidiaries subject to regulation must meet or exceed various fiscal standards imposed by HMO or insurance regulations. These fiscal standards may, from time to time, impact the amount of funds that may be paid by subsidiaries to the Company. LEGISLATION AND REGULATION. In August 1997, the California Department of Corporations (DOC) granted its approval to merge the California operations of FHP's commercial and Medicare-risk plans into PacifiCare of California. While the DOC approved the Company's FHP Acquisition in February, the Company had been operating the PacifiCare and FHP California health plans separately until the DOC completed its review of the Company's proposal for combining them under one operating system and one license. With the DOC approval, PacifiCare of California will begin converting FHP's operations into its own, including changing the name of FHP health plans to PacifiCare and Secure Horizons. To date, operations in Arizona, Nevada, Colorado, Texas and Utah already have been merged into or renamed PacifiCare and Secure Horizons. The Company's success is significantly impacted by federal and state legislation and regulation, including pending Medicare legislation. Actual results may differ materially from expected results discussed throughout this document because of adverse state and federal legislation and regulation. This includes limitations on premium levels; increases in minimum capital and reserves and other financial viability requirements; prohibition or limitation of capitated arrangements or provider financial incentives; benefit mandates (including mandatory length of stay and emergency room coverage) and limitations on the ability to manage care and utilization of any willing provider and direct access laws. It also includes adverse actions of governmental payors, including unilateral reduction of Medicare premiums payable; discontinuance of, or limitation on, governmentally funded programs and recovery by governmental payors of previously paid amounts; the inability to increase premiums or prospective or retroactive reductions to premium rates for federal employees; adverse regulatory determinations resulting in loss or limitations of licensure, and certification or contracts with governmental payors; delays by regulatory agencies in approval of merger of health plan licenses, consolidation of operations or other efforts to integrate FHP. 19 Part II. OTHER INFORMATION Item 1: Legal Proceedings None Item 2: Changes in Securities None Item 3: Defaults Upon Senior Securities None Item 4: Submission of Matters to a Vote of Security Holders None Item 5: Other Information None Item 6: Exhibits and Reports on Form 8-K a) Exhibit Index Exhibit 11A Computation of Net Income per Share of Common Stock - Primary Exhibit 11B Computation of Net Income per Share of Common Stock - Fully Diluted Exhibit 27 Financial Data Schedule (filed electronically) b) Reports on Form 8-K were filed by the Registrant and its subsidiaries during the quarter ended June 30, 1997 as follows:
Date Reporting Person Description ---------------------------------------------------------------------------------------------------- April 11, 1997 PacifiCare Health Systems, Inc. Acquisition of FHP International Corporation & Disposition of PacifiCare of Florida, Inc.
20 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. PACIFICARE HEALTH SYSTEMS, INC. (Registrant) Date: August 12, 1997 By: /s/ Alan R. Hoops ---------------------------- ------------------------------- Alan R. Hoops President, Chief Executive Officer and Director Date: August 12, 1997 By: /s/ Wayne B. Lowell ---------------------------- ------------------------------- Wayne B. Lowell Executive Vice President, Chief Administrative Officer and Chief Financial Officer 21 EX-11.A 2 EXHIBIT 11A Exhibit 11A PacifiCare Health Systems, Inc. Computation of Net Income per Share of Common Stock - Primary (Dollars and shares in thousands, except per share amounts)
Three months ended Six months ended June 30, June 30, ------------------------------------------------------- 1997 1996 1997 1996 - ---------------------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------------------- Net income $ 17,997 $ 8,578 $ 61,491 $ 40,447 - ---------------------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------------------- Shares outstanding at the beginning of the period 41,710 31,153 31,301 30,987 Weighted average number of shares issued during the period in connection with: Issuance of common shares in connection with FHP Acquisition -- -- 7,283 -- Exercise of stock options 59 17 501 121 Dilutive shares issuable: Net of shares assumed to have been purchased (at the average market price) for treasury with assumed proceeds from the contingent exercise of stock options and registered equity purchase contracts 470 527 539 605 Assumed conversion of Series A Cumulative Convertible Preferred Stock on date of issuance 3,955 -- 2,972 -- - ---------------------------------------------------------------------------------------------------------------------- Total shares - primary 46,194 31,697 42,596 31,713 - ---------------------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------------------- Primary earnings per share $ 0.39 $ 0.27 $ 1.44 $ 1.28 - ---------------------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------------------
22 EX-11.B 3 EXHIBIT 11B Exhibit 11B PacifiCare Health Systems, Inc. Computation of Net Income per Share of Common Stock - Fully Diluted (Dollars and shares in thousands, except per share amounts)
Three months ended Six months ended June 30, June 30, 1997 1996 1997 1996 - ---------------------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------------------- Net income $ 17,997 $ 8,578 $ 61,491 $ 40,447 - ---------------------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------------------- Shares outstanding at the beginning of the period 41,710 31,153 31,301 30,987 Weighted average number of shares issued during the period in connection with: Issuance of common shares in connection with FHP Acquisition -- -- 7,283 -- Exercise of stock options 59 17 501 121 Dilutive shares issuable: Net of shares assumed to have been purchased (at the higher of ending or average market price) for treasury with assumed proceeds from the contingent exercise of stock options and registered equity purchase contracts 470 527 539 607 Assumed conversion of Series A Cumulative Convertible Preferred Stock on date of issuance 3,955 -- 2,972 -- - ---------------------------------------------------------------------------------------------------------------------- Total shares - fully diluted 46,194 31,697 42,596 31,715 - ---------------------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------------------- Fully diluted earnings per share $ 0.39 $ 0.27 $ 1.44 $ 1.28 - ---------------------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------------------
23 EX-27 4 EXHIBIT 27 = FDS
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM PACIFICARE HEALTH SYSTEMS, INC'S CONSOLIDATED BALANCE SHEET AS OF JUNE 30, 1997, AND RELATED CONSOLIDATED STATEMENT OF INCOME FOR THE SIX MONTHS ENDED JUNE 30, 1997, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 6-MOS DEC-31-1997 JAN-01-1997 JUN-30-1997 238,661 804,870 278,723 6,088 0 1,497,531 316,830 114,001 4,604,031 1,188,598 0 419 0 105 2,134,889 4,604,031 0 4,224,703 0 3,597,373 511,552 2,435 28,414 122,982 61,491 61,491 0 0 0 61,491 1.44 1.44
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