-----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, cz3/bXUASULdVgwyINkbNvFJxtm+euRzZek25dj2u6LB+h1P50XZ5ylwJJD46pqX BkOVN99zBIkFoEH4wE8Tog== 0000912057-95-000466.txt : 19950515 0000912057-95-000466.hdr.sgml : 19950515 ACCESSION NUMBER: 0000912057-95-000466 CONFORMED SUBMISSION TYPE: 10-Q/A PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19941231 FILED AS OF DATE: 19950209 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: PACIFICARE HEALTH SYSTEMS INC CENTRAL INDEX KEY: 0000766456 STANDARD INDUSTRIAL CLASSIFICATION: HOSPITAL & MEDICAL SERVICE PLANS [6324] IRS NUMBER: 330064895 STATE OF INCORPORATION: DE FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 10-Q/A SEC ACT: 1934 Act SEC FILE NUMBER: 000-14181 FILM NUMBER: 95507462 BUSINESS ADDRESS: STREET 1: 5995 PLAZA DR CITY: CYPRESS STATE: CA ZIP: 90630 BUSINESS PHONE: 7149521121 MAIL ADDRESS: STREET 1: 5995 PLAZA DRIVE CITY: CYPRESS STATE: CA ZIP: 90630 10-Q/A 1 10-Q/A UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM 10-Q/A (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended DECEMBER 31, 1994 --------------------------- [ ] 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 0-14181 PACIFICARE HEALTH SYSTEMS, INC. (Exact name of registrant as specified in its charter) Delaware 33-0064895 (State or other jurisdiction of (IRS Employer Identification Number) incorporation or organization) 5995 Plaza Drive, Cypress, California 90630-5028 (Address of principal executive offices, including zip code) (Registrant's telephone number, including area code) (714) 952-1121 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 January 31, 1995, there were 12,264,083 shares of the Registrant's Class A Common Stock, par value $0.01 per share, outstanding and 15,346,314 shares of Class B Common Stock, par value $0.01 per share, outstanding. 1 Part 1: FINANCIAL INFORMATION Item 1: FINANCIAL STATEMENTS
PacifiCare Health Systems, Inc. Condensed Consolidated Balance Sheets - -------------------------------------------------------------------------------- December 31, September 30, (Amounts in thousands, 1994 1994 execpt per share data) (Unaudited) - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- Assets - ------------------------------------------------------------------------------- Current assets: Cash and equivalents $ 218,590 $ 192,609 Marketable securities 532,735 517,999 Receivables, net 73,720 73,976 Prepaid expenses 10,133 8,883 Deferred income taxes 29,263 28,415 - -------------------------------------------------------------------------------- Total current assets 864,441 821,882 - -------------------------------------------------------------------------------- Property, plant and equipment, net 98,397 97,018 Marketable securities - restricted 16,572 15,994 Goodwill and intangible assets 173,507 167,085 Other assets 5,634 3,569 - -------------------------------------------------------------------------------- $ 1,158,551 $ 1,105,548 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- Liabilities and Shareholders' Equity - -------------------------------------------------------------------------------- Current liabilities: Medical claims and benefits payable $309,100 $302,900 Accounts payable and accrued liabilities 126,673 108,595 Unearned premium revenue 186,828 170,970 Long-term debt due within one year 8,275 8,175 - -------------------------------------------------------------------------------- Total current liabilities 630,876 590,640 - -------------------------------------------------------------------------------- Long-term debt due after one year 97,590 101,137 Minority interest 413 413 Shareholders' equity: Preferred shares, par value $1.00 per share; 10,000 shares authorized; none issued - - Class A common shares, par value $0.01 per share; 30,000 shares authorized, 12,258 and 12,238 issued at December 31, 1994 and September 30, 1994, respectively 123 122 Class B common shares, par value $0.01 per share; 60,000 shares authorized, 15,335 and 15,290 issued at December 31, 1994 and September 30, 1994, respectively 153 153 Additional paid-in capital 143,083 141,955 Unrealized holding loss on available-for-sale securities net of tax effect of $3,314 (4,872) - Retained earnings 291,185 271,128 - -------------------------------------------------------------------------------- Total shareholders' equity 429,672 413,358 - -------------------------------------------------------------------------------- $ 1,158,551 $ 1,105,548 - -------------------------------------------------------------------------------- - --------------------------------------------------------------------------------
See accompanying notes. 2
PacifiCare Health Systems, Inc. Consolidated Statements of Income (unaudited) - -------------------------------------------------------------------------------- (Amounts in thousands, Three months ended except per share data) December 31, ---------------------------- 1994 1993 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- Revenue: Commercial premiums $ 332,438 $ 286,788 Government premiums (Medicare and Medicaid) 477,595 348,500 Other income 11,581 10,460 - -------------------------------------------------------------------------------- Total operating revenue 821,614 645,748 - -------------------------------------------------------------------------------- Expenses: Health care services: Medical services 322,484 258,547 Hospital services 279,267 217,292 Other services 74,548 59,424 - -------------------------------------------------------------------------------- Total health care services 676,299 535,263 - -------------------------------------------------------------------------------- Marketing, general and administrative expenses 113,191 89,382 Amortization of intangibles 1,258 766 - -------------------------------------------------------------------------------- Operating income 30,866 20,337 Interest income 4,901 6,089 Interest expense (1,684) (486) - -------------------------------------------------------------------------------- Income before income taxes and cumulative effect of a change in accounting principle 34,083 25,940 Provision for income taxes 14,026 11,201 - -------------------------------------------------------------------------------- Income before cumulative effect of a change in accounting principle 20,057 14,739 Cumulative effect on prior years of a change in accounting principle - 5,658 - -------------------------------------------------------------------------------- Net income $ 20,057 $ 20,397 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- Weighted average common shares and equivalents outstanding used to calculated earnings per share 28,231 27,813 - -------------------------------------------------------------------------------- Earnings per share: Before cumulative effect of a change in accounting principle $ 0.71 $ 0.53 Cumulative effect on prior years of a change in accounting principle - 0.20 - -------------------------------------------------------------------------------- Earnings per share $ 0.71 $ 0.73 - -------------------------------------------------------------------------------- - --------------------------------------------------------------------------------
See accompanying notes. 3
PacifiCare Health Systems, Inc. Consolidated Statements of Cash Flows (unaudited) - -------------------------------------------------------------------------------- (Amounts in thousands) Three months ended December 31, ------------------------- 1994 1993 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- Operating activities: Net income $20,057 $20,397 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 4,912 4,182 Cumulative effect of a change in accounting principle - (5,658) Deferred income taxes 2,466 1,794 Amortization of intangibles 1,258 766 Provision for doubtful accounts 90 16 Loss on disposal of fixed assets 32 322 Other - 15 Changes in assets and liabilities, net of effects from acquisitions: Accounts receivable 167 1,582 Prepaid, intangible and other assets (3,315) 2,989 Medical claims and benefits payable 6,200 32,157 Accounts payable and accrued liabilities 16,380 10,167 Unearned premium revenue 15,858 117,550 - -------------------------------------------------------------------------------- Net cash flows provided by operating activities 64,105 186,279 - -------------------------------------------------------------------------------- Investing activities: (Purchase) sale of marketable securities (22,922) 1,643 Purchase of property, plant and equipment (5,980) (7,049) Acquisitions, net of cash acquired (5,553) (16,136) (Purchase) sale of marketable securities - restricted (578) 90 - -------------------------------------------------------------------------------- Net cash flows used in investing activities (35,033) (21,452) - -------------------------------------------------------------------------------- Financing activities: Principal payments on long-term debt (87,292) (1,192) Borrowings under long-term lines of credit 83,502 - Proceeds from issuance of common stock 699 625 Purchase and retirement of common stock - (1,077) - -------------------------------------------------------------------------------- Net cash flows used in financing activities (3,091) (1,644) - -------------------------------------------------------------------------------- Net increase in cash and equivalents 25,981 163,183 Beginning cash and equivalents 192,609 33,262 - -------------------------------------------------------------------------------- Ending cash and equivalents $ 218,590 $ 196,445 - -------------------------------------------------------------------------------- - --------------------------------------------------------------------------------
See accompanying notes. 4
PacifiCare Health Systems, Inc. Consolidated Statements of Cash Flows (unaudited) - ----------------------------------------------------------------------------------- (Amounts in thousands) Three months ended December 31, ------------------------- 1994 1993 - ----------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------- Supplemental cash flow information Cash paid during the period for: Income taxes $ 569 $ 3,057 Interest $ 2,054 $ 303 - ----------------------------------------------------------------------------------- Supplemental schedule of noncash investing and financing activities: Leases capitalized $ 343 $ 3,817 Tax benefit realized upon exercise of stock options $ 429 $ 429 Compensation awarded in Class B Common Stock $ - $ 849 Details of unrealized holding loss on available-for-sale securities: Decrease in marketable securities $ 8,186 $ - Increase in deferred taxes $ 3,314 $ - - ----------------------------------------------------------------------------------- Decrease in shareholders' equity $ 4,872 $ - - ----------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------- Details of businesses acquired in purchase transactions: Fair value of assets acquired $ 7,680 $ 34,399 Less liabilities assumed or created, including notes to seller 2,127 13,768 - ----------------------------------------------------------------------------------- Cash paid for acquisitions 5,553 20,631 Cash acquired in acquisitions - 4,495 - ----------------------------------------------------------------------------------- Net cash paid for acquisitions $ 5,553 $ 16,136 - ----------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------- See accompanying notes.
5 PACIFICARE HEALTH SYSTEMS, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS December 31, 1994 (unaudited) NOTE 1 - BASIS OF PRESENTATION The interim condensed consolidated financial statements included herein have been prepared by PacifiCare Health Systems, Inc. (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, the 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 most recent Annual Report on Form 10-K, filed with the SEC in November 1994 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. The results of operations for the interim periods are not necessarily indicative of the results for the full year. NOTE 2 - MARKETABLE SECURITIES On October 1, 1994, the Company adopted Financial Accounting Standards Board Statement of Financial Accounting Standard ("SFAS") No. 115, "Accounting for Certain Investments in Debt and Equity Securities." This statement addresses the accounting and reporting for investments in equity and debt securities. All current unrestricted investments have been designated as "available for sale" and, their carrying values have been adjusted to fair market value. Marketable securities-restricted have been designated as held to maturity and continue to be stated at amortized cost. The cumulative effect of adopting SFAS No. 115 on October 1, 1994 was a decrease to marketable securities of $6.3 million, a decrease to shareholders' equity of $3.8 million and an increase to deferred tax assets of $2.5 million. NOTE 3 - ACQUISITIONS The Company completed several acquisitions during fiscal year 1994. In October 1993, the Company acquired certain assets including approximately 14,000 members from Freedom Plan, Inc. In November 1993, the Company acquired all of the issued and outstanding capital stock of each of California Dental Health Plan, Inc. ("CDHP") and Dental Plan Administrators ("DPA"). CDHP is a licensed provider of prepaid dental and optometric benefits for individuals and groups, and DPA is an affiliated company of CDHP that provides administrative services to CDHP and other companies. In December 1993, the Company acquired all of the issued and outstanding capital stock of Advantage Health Plans, Inc., a Miami-based health maintenance organization ("HMO") with approximately 20,000 members. In February 1994, the Company acquired all of the issued and outstanding capital stock of Preferred Health Resources, Inc. ("PHRI"), a Seattle-based corporation. PHRI owns all of the issued and outstanding capital stock of Network Health Plan, Inc., a Seattle-based health care services contractor with approximately 28,000 members, and Network Management Incorporated, an affiliated company that provides administrative services to the health plan and other companies. In September 1994, the Company acquired all of the issued and outstanding capital stock of 6 Pasteur Health Plans, Inc. ("PHP"), Pasteur Delivery Systems, Inc. ("PDS") and Interstate Medical Equipment, Inc. ("IME"). PHP is a Miami-based HMO with approximately 50,000 members. PDS and IME are affiliated companies of PHP that provide medical and administrative services to PHP and other companies. The total purchase price for these acquisitions including estimated contingent purchase payments, is expected to be approximately $97 million. Of the total purchase price, $92 million has been paid to date. This amount includes approximately $5.6 million in contingent payments made in the first quarter of fiscal year 1995. The remaining contingent purchase payments for these acquisitions will be paid in 1995 if certain events occur. Based on the fair values of assets acquired and liabilities assumed in connection with these acquisitions, the preliminary estimate of excess purchase price is approximately $98 million. A final allocation of purchase price will be determined when appraisals and other studies are completed and contingent purchase payments are determined. The transactions have been accounted for as purchases and the operating results of each completed acquisition are included in the consolidated financial statements from the date of purchase. Amortization of the excess purchase price is made over a period not to exceed forty years. The following table summarizes the unaudited pro forma consolidated results of the Company as though the completed acquisitions occurred at the beginning of the periods presented giving effect to the interest income foregone, the costs associated with the integration of the operations into those of the Company and the amortization of the excess of the purchase price over the fair value of the assets acquired. The unaudited pro forma information is not necessarily indicative of the actual consolidated results of operations that would have occurred had the completed acquisitions occurred at the beginning of the period and is not intended to be indicative of results which may occur in the future.
- -------------------------------------------------------------------------------- (Unaudited) Three months ended December 31, (Amounts in thousands, except per share data) 1993 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- Premium revenue $ 674,185 Total operating revenue $ 686,637 Pretax income $ 24,614 Net income $ 19,358 Earnings per share $ 0.70 - ------------------------------------------------------------------------------- (1) The unaudited pro forma income before cumulative effect of a change in accounting principle for the quarter ended December 31, 1993 was $13.7 million or $0.50 per share. The unaudited pro forma cumulative effect on prior years of a change in accounting principle for the quarter ended December 31, 1993 is $5.7 million or $0.20 per share (see Note 4 of the Notes to Condensed Consolidated Financial Statements).
NOTE 4 - INCOME TAXES As of October 1, 1993, the Company adopted SFAS No. 109, ACCOUNTING FOR INCOME TAXES and recorded a benefit for the cumulative effect prior to October 1, 1993 of the change in accounting principle of $5,658,000 or approximately $0.20 per share. SFAS No. 109 is an asset and liability approach that requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been recognized in the Company's financial statements or tax returns. In estimating future tax consequences, SFAS No. 109 generally considers all expected future events other than enactments of changes in the tax law or rates. Previously, the Company used the SFAS No. 96 asset and liability approach that gave no recognition to future events other than the recovery of assets and settlement of liabilities at their carrying 7 amounts. As permitted by SFAS No. 109, the Company has elected not to restate the financial statements of prior years. NOTE 5 - LONG-TERM DEBT In November 1994, the Company established a $250 million revolving line of credit with Bank of America National Trust and Savings Association ("B of A") and a syndicate of banks (the "BofA Credit Line"). The BofA Credit Line was established to replace the syndicated $130 million credit line with The Chase Manhattan Bank, N.A. (the "Chase Credit Line"). The BofA Credit Line has a five year term with interest payable at a rate per annum equal to the London Interbank Offered Bank Rate plus a margin. The BofA Credit Line is subject to, among other things, certain financial covenants, including a fixed charge ratio and a leverage ratio. The Credit Line may be extended beyond its five year term, but not beyond November 30, 2001. As of December 31, 1994, advances under the BofA Credit Line were $83 million; the advances were used to pay the balance owed on the Chase Credit Line. NOTE 6 - SHAREHOLDERS' EQUITY In September 1994, the Company commenced a public offering of 750,000 shares of the Company's Class B Common Stock to certain physician groups (the "groups") which currently contract with the Company. The Company completed this public offering in December 1994 with six groups entering into agreements to purchase an aggregate of 90,000 shares of Class B Common Stock at $64.88 per share. Each group has entered into an irrevocable obligation to purchase a fixed number of shares of the Class B Common Stock at $64.88 per share payable over a five year period beginning May 1, 1996. On December 13, 1993, UniHealth, Inc. ("UniHealth"), the Company's largest shareholder, completed a public offering of 575,000 shares of the Company's Class A Common Stock, par value $0.01 per share (the "Class A Common Stock"). The Company did not receive any of the proceeds of this offering. Subsequent to the offering, UniHealth's ownership of Class A Common Stock was reduced to less than 50 percent. NOTE 7 - 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. After review, including consultation with counsel, management believes any ultimate liability in excess of amounts accrued which could arise from the actions would not materially affect the Company's consolidated financial position or results of operations. NOTE 8 - SUBSEQUENT EVENTS In January 1995, Prescription Solutions, the Company's pharmacy benefit management company, acquired all of the issued and outstanding stock of Preferred Solutions, a San Jose, California based pharmacy benefit management company. Also in January 1995, the Company entered into a definitive agreement to purchase certain assets, including 61,000 members, of ValuCare, a central California HMO owned and operated by Priority Health Services of Fresno, California. The ValuCare acquisition is subject to, among other things, various regulatory approvals, and is expected to close by April 1995. 8 Part I: FINANCIAL INFORMATION Item 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following table presents membership data by region and by consumer type as of the dates indicated.
AT DECEMBER 31, 1994 AT DECEMBER 31, 1993 - --------------------------------------------------------------------------------------------- Government Government (Medicare & (Medicare & MEMBERSHIP DATA Commercial Medicaid) Total Commercial Medicaid) Total - --------------------------------------------------------------------------------------------- California 638,090 313,960 952,050 591,652 240,664 832,316 Florida 56,768 11,549 68,317 8,000 12,000 20,000 Oklahoma 112,963 12,590 125,553 107,836 9,809 117,645 Oregon 67,105 40,639 107,744 52,532 29,586 82,118 Texas 62,419 38,557 100,976 57,338 26,874 84,212 Washington 33,274 17,047 50,321 12,352 - 12,352 - -------------------------------------------------------------------------------------------- Total membership 970,619 434,342 1,404,961 829,710 318,933 1,148,643 - -------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------
OPERATING STATISTICS Three months ended December 31, ------------------ 1994 1993 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- Medical loss ratio (health care services as a percent of premium revenue) 83.5% 84.3% Marketing, general and administrative expenses as a percent of operating revenue 13.8% 13.8% Operating income as a percent of operating revenue 3.8% 3.1% - -------------------------------------------------------------------------------- - --------------------------------------------------------------------------------
RESULTS OF OPERATIONS Three months Ended December 31, 1994 Compared to the Three months Ended December 31, 1993 Total operating revenue increased 27 percent to $822 million for the three months ended December 31, 1994 from $646 million for the same period in the prior year. Growth in both the government (Medicare and Medicaid) and commercial programs, a result of enrollment gains offset slightly by decreases in premium rates, provided an increase in total operating revenue of $128 million. In addition, approximately $41 million of the remaining increase in total operating revenue represents the incremental operations included in the quarter ended December 31, 1994 of acquisitions described in Note 3 of the Notes to Condensed 9 Consolidated Financial Statements. The Company's specialty managed care products and services and its joint venture medical groups contributed the remainder of the increase. For the three months ended December 31, 1994, commercial HMO premiums increased $42 million to $315 million as compared to the same period in the prior year. Excluding the effects of acquisitions described above, membership growth provided the majority of the increase in the commercial HMO program. The remainder of the increase in commercial premiums was derived from commercial specialty managed care products and services and joint venture medical groups. Because of increased competition in the Company's markets, overall commercial HMO premium rates decreased an average of one percent for the three months ended December 31, 1994. In California, the decrease was 3 percent. The Company expects commercial HMO premium rates to remain flat or decrease slightly for the remainder of fiscal year 1995. Government premiums rose $129 million to $478 million for the three months ended December 31, 1994. Excluding the effects of acquisitions described above, enrollment gains predominately in the Secure Horizons program contributed 86 percent of this increase. Effective January 1, 1995, the Company received a weighted average premium rate increase of approximately 5.4 percent from the Health Care Financing Administration ("HCFA") for the areas in which the Company operates its Secure Horizons program. As a result of increasing competition, the rate of government membership growth is expected to decline, as compared to growth rates experienced in prior years. Total health care service expenses as a percent of premium revenue (the "medical loss ratio") for the quarter ended December 31, 1994, have decreased to 83.5 percent from 84.3 percent for the same period in the prior year. The commercial medical loss ratio decreased to 81.7 percent from 83.2 percent while the government medical loss ratio decreased to 84.8 percent from 85.1 percent. The Company expects to experience upward pressure on the consolidated medical loss ratio throughout fiscal 1995. A higher consolidated medical loss ratio is expected because the government program, which has a higher medical loss ratio, continues to grow at a faster rate than the commercial program. In addition, pricing pressures are expected to result in a higher commercial medical loss ratio while the government medical loss ratio is expected to remain flat because premium increases are expected to be offset by enhanced benefits and increased health care costs in new geographic markets. The decrease in the commercial medical loss ratio for the three months ended December 31, 1994 is primarily attributable to decreases in outpatient hospital costs because of seasonally low utilization. As a percentage of premium revenue, these lower costs were partially offset by higher physician payments which resulted from changes in product mix resulting from the addition of dental products and other recent acquisitions (see Note 3 of the Notes to Condensed Consolidated Financial Statements). The decrease in the medical loss ratio for the government program for the three months ended December 31, 1994, as compared to the same period of the prior year, is primarily related to lower capitation and inpatient hospital costs. Marketing, general and administrative expenses increased $24 million to $113 million for the three months ended December 31, 1994 from $89 million for the same period in the prior year. As a percentage of operating revenue, marketing, general and administrative expenses remained the same at 13.8 percent compared to the same period in the prior year. Future marketing, general and administrative expenses as a percentage of operating revenue are expected to be comparable or slightly less than the prior year as the Company obtains efficiency through process improvement offset by new market expansion. 10 Earnings per share ("EPS") before the cumulative effect of a change in accounting principle rose 34 percent to $0.71 for the quarter ended December 31, 1994, compared to EPS of $0.53 for the comparable quarter in the prior year. These increases are primarily related to membership growth derived substantially from the government program and a lower commercial medical loss ratio. EPS for the quarter was reduced by $0.07 per share because marketable securities were sold for net realized losses of $2.1 million and reinvested to take advantage of current interest rates. For the quarter ended December 31, 1993, changes in income tax accounting principles (see Note 3 of the Notes to Condensed Consolidated Financial Statements) increased EPS by approximately $0.20, resulting in earnings per share of $0.73. The Company's ability to expand is dependent, in part, on competitive premium pricing and its ability to secure cost-effective contracts with additional physicians or to ensure that existing physician groups expand their operations to accommodate the Company's new HMO membership. Achieving such objectives with respect to competitive premium pricing and physician contracts is becoming difficult due to increasing competition. In addition, the Company's profitability is dependent, in part, on its ability to maintain effective control over health care costs while providing members with quality care. Factors such as health care reform, utilization, new technologies, hospital costs, major epidemics, and numerous other external influences may affect the Company's operating results. Accordingly, past financial performance is not necessarily a reliable indicator of future performance, and investors should not use historical records to anticipate results or future period trends. 11 LIQUIDITY AND CAPITAL RESOURCES The Company's working capital as of December 31, 1994 was $234 million, an increase of $3 million from September 30, 1994. Cash generated from operations decreased by $122 million for the three months ended December 31, 1994 as compared to the same period in the prior year. The majority of this change is the result of a decrease of $102 million in the change in unearned premiums due to the timing of the advanced payment received by the Company from HCFA. For the three months ended December 31, 1994, the Company made purchases of marketable securities of $23 million and capital expenditures of $6 million primarily for computer equipment. These purchases were financed in part by borrowings under capital leases. The Company anticipates that the level of capital expenditures will be similar to fiscal year 1994 due to continuing investments to support the redesign of information systems. In November 1994, the Company established with B of A and a syndicate of banks, the B of A Credit Line (see Note 5 of the Notes to Condensed Consolidated Financial Statements). As of December 31, 1994, advances under the B of A Credit Line were $83 million. These advances were used to repay the balance owed on the Chase Credit Line which was established by the Company in January 1994. The Company's capital resources must fund its existing HMO operations, the introduction of new products and services and the continued development of its health care related business. In addition, regulators in various states, including some states where the Company's HMOs operate, are considering revising existing laws governing HMOs which may result in an increase in the capital requirements of HMOs. The Company believes its current capital resources are adequate for those purposes, however, the Company will continue to pursue new opportunities to raise capital in order to better position itself in a consolidating industry. On October 1, 1994, the Company adopted Financial Accounting Standards Board Statement of Financial Accounting Standard ("SFAS") No. 115, "Accounting for Certain Investments in Debt and Equity Securities." This statement addresses the accounting and reporting for investments in equity and debt securities. All current unrestricted investments have been designated as "available for sale" and, their carrying values have been adjusted to fair market value. Marketable securities-restricted have been designated as held to maturity and continue to be stated at amortized cost. The cumulative effect of adopting SFAS No. 115 on October 1, 1994 was a decrease to marketable securities of $6.3 million, a decrease to shareholders' equity of $3.8 million and an increase to deferred tax assets of $2.5 million. 12 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 a) Exhibit Index Exhibit 10.1 Credit Line, dated November 30, 1994 among PacifiCare Health Systems, Inc., Bank of American National Trust and Savings Association, as Agent and the other financial institutions named therein. Exhibit 10.2 Employment Agreement, dated as of December 1, 1994, between the Company and Alan Hoops. Exhibit 10.3 Employment Agreement, dated as of December 12, 1994, between the Company and Jeffrey Folick. 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 Schedules b) No other reports on Form 8-K were filed during the quarter for which this report is filed. 13 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: February 6, 1995 By: /s/ Alan Hoops ------------------------ --------------------------- Alan Hoops President and Chief Executive Officer Date: February 6, 1995 By: /s/ Wayne Lowell ------------------------ --------------------------- Wayne Lowell Executive Vice President and Chief Financial Officer 14 -----END PRIVACY-ENHANCED MESSAGE-----