-----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, jrYJZmEwBgd3AjhxH27lQgcvkX+R8u4VxZkUz5QzmS2hmymv9JmGqjnudIpwdEmU pTxv2R6Jfun6VCnfLL1uyA== 0000912057-95-001466.txt : 19950615 0000912057-95-001466.hdr.sgml : 19950615 ACCESSION NUMBER: 0000912057-95-001466 CONFORMED SUBMISSION TYPE: 424B1 PUBLIC DOCUMENT COUNT: 1 FILED AS OF DATE: 19950317 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: 424B1 SEC ACT: 1933 Act SEC FILE NUMBER: 033-57783 FILM NUMBER: 95521545 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 424B1 1 424B1 PROSPECTUS 4,500,000 SHARES PACIFICARE HEALTH SYSTEMS, INC. CLASS B COMMON STOCK ------------- OF THE 4,500,000 SHARES OF CLASS B COMMON STOCK OFFERED HEREBY (THE "SHARES"), 3,000,000 SHARES ARE BEING OFFERED BY PACIFICARE HEALTH SYSTEMS, INC. ("PACIFICARE" OR THE "COMPANY") AND 1,500,000 SHARES ARE BEING OFFERED BY UNIHEALTH, A CALIFORNIA NON-PROFIT PUBLIC BENEFIT COMPANY (THE "SELLING STOCKHOLDER"). SEE "PRINCIPAL AND SELLING STOCKHOLDER." THE COMPANY WILL NOT RECEIVE ANY OF THE PROCEEDS FROM THE SHARES SOLD BY THE SELLING STOCKHOLDER. -------------------- THE CLASS B COMMON STOCK IS QUOTED ON THE NASDAQ NATIONAL MARKET UNDER THE SYMBOL PHSYB. ON MARCH 16, 1995, THE LAST REPORTED SALE PRICE OF THE CLASS B COMMON STOCK WAS $69.50 PER SHARE. SEE "PRICE RANGE OF COMMON STOCK." -------------------- THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
UNDERWRITING PROCEEDS PRICE TO DISCOUNTS AND PROCEEDS TO TO SELLING PUBLIC COMMISSIONS(1) COMPANY(2) STOCKHOLDER(2) PER SHARE $68.00 $1.95 $66.05 $66.05 TOTAL (3) $306,000,000 $8,775,000 $198,150,000 $99,075,000 (1) THE COMPANY AND THE SELLING STOCKHOLDER HAVE AGREED TO INDEMNIFY THE SEVERAL UNDERWRITERS AGAINST CERTAIN LIABILITIES, INCLUDING LIABILITIES UNDER THE SECURITIES ACT OF 1933. SEE "UNDERWRITING." (2) BEFORE DEDUCTING EXPENSES PAYABLE BY THE COMPANY ESTIMATED AT $380,000 AND EXPENSES PAYABLE BY THE SELLING STOCKHOLDER ESTIMATED AT $190,000. (3) THE SELLING STOCKHOLDER HAS GRANTED THE SEVERAL UNDERWRITERS A 30-DAY OPTION TO PURCHASE UP TO AN ADDITIONAL 675,000 SHARES OF CLASS B COMMON STOCK TO COVER OVER-ALLOTMENTS, IF ANY. IF ALL SUCH SHARES ARE PURCHASED, THE TOTAL PRICE TO PUBLIC, UNDERWRITING DISCOUNTS AND COMMISSIONS AND PROCEEDS TO THE SELLING STOCKHOLDER WILL BE $351,900,000, $10,091,250 AND $143,658,750, RESPECTIVELY.
-------------------- THE SHARES ARE OFFERED BY THE SEVERAL UNDERWRITERS NAMED HEREIN WHEN, AS AND IF RECEIVED AND ACCEPTED BY THEM, SUBJECT TO THEIR RIGHT TO REJECT ORDERS IN WHOLE OR IN PART AND SUBJECT TO CERTAIN OTHER CONDITIONS. IT IS EXPECTED THAT DELIVERY OF THE SHARES WILL BE MADE IN NEW YORK, NEW YORK ON OR ABOUT MARCH 23, 1995. -------------------- DEAN WITTER REYNOLDS INC. SALOMON BROTHERS INC DILLON, READ & CO. INC. LEHMAN BROTHERS ROBERTSON, STEPHENS & COMPANY MARCH 16, 1995 IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK OF THE COMPANY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NASDAQ NATIONAL MARKET OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME. THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE COMMISSIONER OF INSURANCE FOR THE STATE OF NORTH CAROLINA NOR HAS THE COMMISSIONER PASSED UPON THE ACCURACY OR ADEQUACY OF THE PROSPECTUS. IN CONNECTION WITH THIS OFFERING, CERTAIN UNDERWRITERS MAY ENGAGE IN PASSIVE MARKET MAKING TRANSACTIONS IN THE COMMON STOCK ON THE NASDAQ NATIONAL MARKET IN ACCORDANCE WITH RULE 10B-6A UNDER THE SECURITIES EXCHANGE ACT OF 1934. SEE "UNDERWRITING." -------------------- AVAILABLE INFORMATION The Company is subject to the informational requirements of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and, in accordance therewith, files reports, proxy statements, information statements and other information with the Securities and Exchange Commission (the "Commission"). Such reports, proxy statements, information statements and other information filed by the Company can be inspected and copied at the public reference facilities maintained by the Commission at the principal offices of the Commission, Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549, and at the Commission's regional offices located at Suite 1400, Citicorp Center, 500 West Madison Street, Chicago, Illinois 60661-2511, and at Suite 1300, 7 World Trade Center, New York, New York 10048. Copies of such material can be obtained from the Public Reference Section of the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549 at prescribed rates. The Company has filed with the Commission a Registration Statement on Form S-3 (herein together with all amendments thereto called the "Registration Statement") under the Securities Act of 1933, as amended (the "Act"), with respect to the securities offered by this Prospectus. This Prospectus does not contain all the information set forth or incorporated by reference in the Registration Statement and the exhibits and schedules relating thereto, certain portions of which have been omitted as permitted by the rules and regulations of the Commission. For further information with respect to the Company and the securities offered by this Prospectus, reference is made to the Registration Statement and the exhibits and schedules thereto which are on file at the offices of the Commission and may be obtained upon payment of the fee prescribed by the Commission, or may be examined without charge at the offices of the Commission. Statements contained in this Prospectus as to the contents of any contract or other documents referred to are not necessarily complete, and are qualified in all respects by such reference. INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE The following documents previously filed with the Commission are hereby incorporated by reference into this Prospectus: 1. The Company's Annual Report on Form 10-K for the fiscal year ended September 30, 1994. 2. The Company's Quarterly Report on Form 10-Q for the quarter ended December 31, 1994, as amended February 8, 1995. 3. The description of the Class B Common Stock of the Company contained in its Registration Statement on Form 8-A (File No. 0-14181), dated May 20, 1992. All documents subsequently filed by the Company pursuant to Sections 13(a), 13(c), 14 or 15(d) of the Exchange Act prior to the termination of this offering shall be deemed to be incorporated by reference in 2 this Prospectus and to be a part of this Prospectus from the date of filing thereof. Any statement contained in a document incorporated by reference herein shall be deemed to be modified or superseded for purposes of this Prospectus to the extent that a statement contained herein or in any other subsequently filed document which also is or is deemed to be incorporated by reference herein modifies or supersedes such statement. Any such statement so modified or superseded shall not be deemed, except as so modified or superseded, to constitute a part of this Prospectus. The Company hereby undertakes to provide without charge to each person to whom a copy of this Prospectus has been delivered, on the written or oral request of any such person, a copy of any or all of the documents referred to above which have been or may be incorporated in this Prospectus by reference (other than exhibits). Requests for such copies should be directed to: PacifiCare Health Systems, Inc., 5995 Plaza Drive, Cypress, California, 90630-5028, Attention: Investor Relations, telephone (714) 952-1121. Unless the context indicates otherwise, all references herein to "PacifiCare" or the "Company" refer to PacifiCare Health Systems, Inc., its subsidiaries and its non-profit predecessor. Unless the context indicates otherwise, all references herein to the "Selling Stockholder" refer to UniHealth. The Company's principal executive offices are located at 5995 Plaza Drive, Cypress, California, 90630-5028, telephone (714) 952-1121. NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS IN CONNECTION WITH THIS OFFERING OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH OTHER INFORMATION AND REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY, THE SELLING STOCKHOLDER OR THE UNDERWRITERS. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY SECURITIES OTHER THAN THE REGISTERED SECURITIES TO WHICH IT RELATES. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY SUCH SECURITIES IN ANY CIRCUMSTANCES IN WHICH SUCH OFFER OR SOLICITATION IS UNLAWFUL. -------------------- TABLE OF CONTENTS
PAGE ---- Available Information..................................................... 2 Incorporation of Certain Documents by Reference........................... 2 Prospectus Summary........................................................ 4 Use of Proceeds........................................................... 7 Capitalization............................................................ 7 Price Range of Common Stock............................................... 8 Dividend Policy........................................................... 8 Selected Consolidated Financial Data...................................... 9 Business.................................................................. 10 Principal and Selling Stockholder......................................... 20 Description of Capital Stock.............................................. 21 Underwriting.............................................................. 22 Legal Matters............................................................. 23 Experts................................................................... 23
3 PROSPECTUS SUMMARY THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED INFORMATION APPEARING ELSEWHERE IN THIS PROSPECTUS AND IN THE DOCUMENTS INCORPORATED IN THIS PROSPECTUS BY REFERENCE. THE CLASS A AND CLASS B COMMON STOCK ARE SOMETIMES REFERRED TO COLLECTIVELY IN THIS PROSPECTUS AS THE "COMMON STOCK." UNLESS OTHERWISE INDICATED, THE INFORMATION IN THIS PROSPECTUS ASSUMES THE UNDERWRITERS' OVER-ALLOTMENT OPTION IS NOT EXERCISED. THE COMPANY PacifiCare-Registered Trademark- is one of the nation's leading managed health care services companies, serving approximately 1.5 million commercial, Medicare and Medicaid members, and is a leader in the management, development and marketing of diversified health maintenance organization ("HMO") products and related services. The Company operates HMOs in California, Florida, Oklahoma, Oregon, Texas and Washington. Through internal growth and strategic acquisitions, the Company believes it has built a strong competitive position in California and has expanded operations into new geographic markets. Since fiscal 1990, the Company has achieved 42 percent compound annual earnings per share growth and 19 percent compound annual membership growth. The Company's growth strategy is to solidify its position as one of the leading managed health care service companies by (i) expanding its Secure Horizons Medicare programs, (ii) marketing a broader range of managed care products and services, (iii) capitalizing on its experience in developing long-term relationships with health care providers and (iv) selectively expanding into new markets in order to further develop its multi-regional servicing capabilities. The Company serves more than 1,040,000 commercial HMO members and offers a comprehensive range of products including HMOs, preferred provider organizations and point-of-service plans. The Company has historically focused on the larger employer market, but has recently entered the smaller employer and individual markets. The Company believes that these markets have lower HMO penetration levels than the larger employer market and represent significant growth opportunities. The Company has enhanced its competitive position by entering into innovative relationships with health care providers which the Company believes will facilitate expansion into new and existing geographic markets. Through its Secure Horizons-Registered Trademark- programs, the Company operates the largest and one of the fastest growing Medicare risk programs in the United States (as measured by membership) with approximately 409,000 members enrolled as of January 31, 1995. The Company believes that its Secure Horizons programs are attractive to Medicare beneficiaries because these programs provide a more comprehensive package of benefits than offered under traditional Medicare, and because these programs substantially reduce the member's administrative responsibilities. In addition, as of January 31, 1995, the Company had enrolled more than 33,000 Medicaid eligibles. The Company believes that its ability to provide a comprehensive range of products and services through its commercial, Medicare and Medicaid programs, together with its specialty managed care products and services and its long-term relationships with health care providers, are the major factors that will enable the Company to respond effectively to changes and needs in the health care marketplace and continue to be among the nation's leading managed health care services companies. 4 THE OFFERING Class B Common Stock Offered by the Company... 3,000,000 shares Class B Common Stock Offered by the Selling Stockholder (1)............................... 1,500,000 shares Common Stock Outstanding after the Offering (2): Class A Common Stock........................ 12,278,783 shares Class B Common Stock........................ 18,384,092 shares Rights of Common Stock........................ The Class B Common Stock offered hereby has no voting rights, other than as required by Delaware law, and the Class A Common Stock has one vote per share. The Class A Common Stock and the Class B Common Stock have equal rights to cash dividends, if any, and upon liquidation. See "Dividend Policy" and "Description of Capital Stock." Use of Proceeds by the Company................ To repay amounts outstanding under its credit line, to increase working capital and for general corporate purposes, including acquisitions. See "Use of Proceeds." Nasdaq National Market Symbols: Class A Common Stock........................ PHSYA Class B Common Stock........................ PHSYB - ------------------------ (1) Currently, the Selling Stockholder owns 5,910,000 shares of Class A Common Stock or 48.1 percent of the outstanding Class A Common Stock and 3,159,500 shares of the Class B Common Stock or 20.5 percent of the outstanding Class B Common Stock. Upon completion of this offering, the Selling Stockholder will own 5,910,000 shares of the Class A Common Stock or 48.1 percent of the outstanding Class A Common Stock and 1,659,500 shares of the Class B Common Stock or 9.0 percent of the outstanding Class B Common Stock. See "Principal and Selling Stockholder." (2) Based on the number of shares of Class A and Class B Common Stock outstanding as of February 16, 1995 and excluding (i) 409,934 shares of the Class A Common Stock and 1,945,192 shares of the Class B Common Stock issuable upon the exercise of outstanding stock options, of which options to purchase 394,109 shares of the Class A Common Stock and 524,662 shares of the Class B Common Stock are currently exercisable and (ii) 90,000 shares of the Class B Common Stock which certain health care providers are obligated to purchase over a five year period as a result of an offering of shares of Class B Common Stock to certain of the Company's health care providers (the "Provider Offering").
5 SUMMARY FINANCIAL INFORMATION
THREE MONTHS ENDED YEARS ENDED SEPTEMBER 30, DECEMBER 31, ------------------------------------------------------------- -------------------- 1990 1991 1992 1993 1994 (1) 1993 (1) 1994 (1) --------- ----------- ----------- ----------- ----------- --------- --------- (IN THOUSANDS, EXCEPT PER SHARE DATA) CONSOLIDATED INCOME STATEMENT DATA: Total operating revenue............... $ 975,849 $ 1,242,357 $ 1,686,314 $ 2,221,073 $ 2,893,252 $ 645,748 $ 821,614 Operating income (2).................. 14,388 29,734 60,549 87,244 120,930 20,337 30,866 Income before income taxes and cumulative effect of a change in accounting principle................. 29,438 44,521 74,852 108,327 145,468 25,940 34,083 Income before cumulative effect of a change in accounting principle (3)... 17,638 25,702 43,590 62,696 84,593 14,739 20,057 Earnings per share before cumulative effect of a change in accounting principle (3)........................ $ 0.74 $ 1.10 $ 1.78 $ 2.25 $ 3.02 $ 0.53 $ 0.71 Weighted average number of shares of common stock and equivalents outstanding.......................... 23,770 23,346 24,509 27,847 28,004 27,813 28,231 OPERATING STATISTICS: Medical loss ratio (4): Commercial.......................... 86.0% 84.0% 80.2% 82.5% 80.5% 83.2% 81.7% Medicare............................ 87.4% 87.1% 86.6% 85.6% 85.2% 85.1% 85.1% Operating income margin (5)........... 1.5% 2.4% 3.6% 3.9% 4.2% 3.1% 3.8% Period-end HMO membership: Commercial.......................... 546 567 742 807 949 830 971 Medicare (6)........................ 127 159 214 290 409 319 434 --------- ----------- ----------- ----------- ----------- --------- --------- Total............................... 673 726 956 1,097 1,358 1,149 1,405 --------- ----------- ----------- ----------- ----------- --------- --------- --------- ----------- ----------- ----------- ----------- --------- ---------
AS ADJUSTED SEPTEMBER 30, DECEMBER 31, DECEMBER 31, 1994 1994 1994 (7) ------------- ------------ ------------- (IN THOUSANDS) CONSOLIDATED BALANCE SHEET DATA: Working capital.................................................... $ 231,242 $ 233,565 $ 348,335 Total assets....................................................... 1,105,548 1,158,551 1,273,321 Long-term debt, excluding current maturities....................... 101,137 97,590 14,590 Shareholders' equity............................................... 413,358 429,672 627,442 - ------------------------------ (1) Operating results of the Acquisitions (as defined under the caption "Business -- Acquisitions") are included in the historical operating results of the Company from the date of acquisition. See "Business -- Acquisitions." (2) Certain reclassifications have been made to the 1990 and 1991 amounts to conform to the 1992, 1993 and 1994 presentations. (3) Net income after cumulative effect of a change in accounting principle was $90.3 million or $3.22 per share for the year ended September 30, 1994 and $20.4 million or $0.73 per share for the three months ended December 31, 1993. See "Selected Consolidated Financial Data." (4) Health care costs as a percentage of premium revenue. Medicare medical loss ratios include Medicaid premiums and health care costs, which were immaterial to the resulting ratios. (5) Operating income as a percentage of total operating revenue. (6) Includes Medicaid membership which as of September 30, 1993 and 1994 was 1,597 and 22,010, respectively, and as of December 31, 1993 and 1994 was 1,665 and 30,751, respectively. (7) As adjusted to give effect to (i) the sale by the Company of the Class B Common Stock being offered at the offering price set forth on the cover page of this Prospectus, less underwriting discounts and commissions and estimated offering expenses payable by the Company and (ii) the application of the net proceeds therefrom. See "Use of Proceeds." Does not give effect to the 1995 Acquisitions (as defined under the caption "Business -- Acquisitions"). See "Business -- Acquisitions."
6 USE OF PROCEEDS The net proceeds to be received by the Company from the sale of the 3,000,000 shares of Class B Common Stock offered by the Company, at the offering price set forth on the cover page of this Prospectus, after deducting underwriting discounts and commissions and estimated expenses of the offering payable by the Company, are approximately $198 million. The Company will not receive any of the proceeds from the sale of shares of Class B Common Stock by the Selling Stockholder. Approximately $83 million of the net proceeds to the Company of this offering will be used to repay the amount outstanding under its $250 million revolving line of credit (the "Credit Line") established with Bank of America National Trust and Savings Association and a syndicate of banks. The Credit Line has a five year term ending on November 30, 1999 and may be extended through November 30, 2001. The Credit Line may be increased at the Company's option provided certain debt to equity ratios and other financial covenants are satisfied. Interest is payable at the London Interbank Offered Rate plus a margin ranging from 29 to 48 basis points. As of February 28, 1995, the interest rate on amounts outstanding under the Credit Line was 6.17 percent. The remaining net proceeds of this offering will be used by the Company to increase working capital and for general corporate purposes. Such purposes may include acquisitions, including certain of the Acquisitions (as defined under the caption "Business -- Acquisitions") for which the purchase price has not yet been paid and future acquisitions (for which the Company currently has no agreements or understandings), the introduction of new products and services, increased investment in existing operations and expansion of geographic markets. Expansion of geographic markets may include states in which the Company currently does not have a presence. Pending the above-described uses, the net proceeds will be invested in investment-grade, interest bearing securities. CAPITALIZATION The following table sets forth the consolidated capitalization of the Company as of December 31, 1994 (i) on an actual basis and (ii) as adjusted to give effect to the sale by the Company of the Class B Common Stock being offered, at the offering price set forth on the cover page of this Prospectus, less underwriting discounts and commissions and estimated offering expenses payable by the Company, and the application of the net proceeds therefrom, as described under "Use of Proceeds."
DECEMBER 31, 1994 -------------------------- ACTUAL AS ADJUSTED(1) ---------- -------------- (IN THOUSANDS) Current maturities of long-term debt.................................................. $ 8,275 $ 8,275 ---------- -------------- ---------- -------------- Long-term debt, excluding current maturities (2)...................................... $ 97,590 $ 14,590 ---------- -------------- Shareholders' equity: Preferred Shares, par value $1.00 per share; 10,000,000 shares authorized; none issued........................................................................ -- -- Class A Common Shares, par value $0.01 per share; 30,000,000 shares authorized; 12,258,000 shares issued and as adjusted (3)....................................... 123 123 Class B Common Shares, par value $0.01 per share; 60,000,000 shares authorized; 15,335,000 shares issued; and 18,335,000 shares as adjusted (3).................... 153 183 Additional paid-in capital.......................................................... 143,083 340,823 Unrealized holding loss on available-for-sale securities net of tax effect of $3,314,000........................................................... (4,872) (4,872) Retained earnings................................................................... 291,185 291,185 ---------- -------------- Total shareholders' equity........................................................ 429,672 627,442 ---------- -------------- Total capitalization.............................................................. $ 527,262 $ 642,032 ---------- -------------- ---------- -------------- - ------------------------ (1) Does not give effect to the 1995 Acquisitions. See "Business -- Acquisitions." (2) Long-term debt as of December 31, 1994 included $83 million outstanding under the Credit Line and $14.6 million of long-term capitalized leases and other long-term indebtedness. (3) Excludes 424,634 shares of the Class A Common Stock and 1,975,254 shares of the Class B Common Stock issuable upon the exercise of outstanding stock options as of December 31, 1994 and 90,000 shares of Class B Common Stock to be issued pursuant to the Provider Offering. See Note 2 on page 5 for information as of a more recent date.
7 PRICE RANGE OF COMMON STOCK The Class A and Class B Common Stock are traded on the Nasdaq National Market under the symbols PHSYA and PHSYB, respectively. The following tables set forth, for the indicated periods, the high and low last reported sale prices per share of the Class A and Class B Common Stock as reported on Nasdaq.
CLASS A CLASS B COMMON STOCK COMMON STOCK ---------------- ---------------- FISCAL PERIOD HIGH LOW HIGH LOW - ----------------------------------------------------------------------------- ------- ------- ------- ------- 1993 First Quarter.............................................................. $51 $38 $44 3/4 $32 1/4 Second Quarter............................................................. 56 3/4 26 49 20 5/8 Third Quarter.............................................................. 44 34 40 28 5/8 Fourth Quarter............................................................. 43 3/4 31 40 3/4 29 1/2 1994 First Quarter.............................................................. 42 1/4 31 41 1/2 29 7/8 Second Quarter............................................................. 57 38 1/4 56 3/8 37 3/4 Third Quarter.............................................................. 59 3/4 47 1/2 59 1/2 47 1/2 Fourth Quarter............................................................. 79 3/16 47 75 46 1995 First Quarter.............................................................. 77 62 73 3/4 62 1/4 Second Quarter (through March 16, 1995).................................... 72 62 72 1/2 62 7/8
The last sale prices of the Class A and Class B Common Stock as reported on the Nasdaq National Market on March 16, 1995 were $68.50 and $69.50 per share, respectively. As of February 10, 1995, there were approximately 274 and 249 holders of record of the Class A and Class B Common Stock, respectively. Based upon information available to it, the Company believes that there are approximately 21,000 beneficial holders in the aggregate of the Class A and Class B Common Stock. DIVIDEND POLICY The Company has never paid any cash dividends on its Common Stock. The Company currently anticipates that no cash dividends on its Common Stock will be declared in the foreseeable future and that all of its earnings will be retained for the development of the Company's business. Any future dividends would be conditioned upon, among other things, future earnings, the financial condition of the Company and regulatory requirements, which may limit the Company's ability to pay dividends. 8 SELECTED CONSOLIDATED FINANCIAL DATA The following consolidated income statement data and consolidated balance sheet data for each of the five years ended September 30, 1994 are derived from the audited consolidated financial statements of the Company. The following consolidated income statement data and consolidated balance sheet data for the three month periods ended December 31, 1994 and 1993 are derived from the unaudited consolidated financial statements of the Company. The following summary financial information should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations," found in the Consolidated Financial Statements and related notes and other financial information which are incorporated herein by reference.
THREE MONTHS ENDED YEARS ENDED SEPTEMBER 30, DECEMBER 31, -------------------------------------------------------- ------------------ 1990 1991 1992 1993 1994 (1) 1993 (1) 1994 (1) -------- ---------- ---------- ---------- ---------- -------- -------- (IN THOUSANDS, EXCEPT PER SHARE DATA) CONSOLIDATED INCOME STATEMENT DATA: Revenue: Commercial premiums........................... $525,113 $657,715 $890,330 $1,046,186 $1,237,411 $286,788 $332,438 Medicare premiums (2)......................... 444,552 575,069 784,844 1,153,964 1,618,145 348,500 477,595 Other income.................................. 6,184 9,573 11,140 20,923 37,696 10,460 11,581 -------- ---------- ---------- ---------- ---------- -------- -------- Total operating revenue..................... 975,849 1,242,357 1,686,314 2,221,073 2,893,252 645,748 821,614 Expenses: Health care services: Medical services............................ 405,204 503,816 675,607 867,157 1,127,785 258,547 322,484 Hospital services........................... 352,329 440,244 554,532 766,770 968,605 217,292 279,267 Other services.............................. 83,001 109,179 163,506 216,542 277,868 59,424 74,548 -------- ---------- ---------- ---------- ---------- -------- -------- Total health care services................ 840,534 1,053,239 1,393,645 1,850,469 2,374,258 535,263 676,299 Marketing, general and administrative expenses..................................... 120,581 158,985 229,881 279,865 394,620 89,382 113,191 Amortization of intangibles................... 346 399 2,239 3,495 3,444 766 1,258 -------- ---------- ---------- ---------- ---------- -------- -------- Operating income (3)............................ 14,388 29,734 60,549 87,244 120,930 20,337 30,866 Interest income................................. 13,577 14,960 17,725 23,459 28,588 6,089 4,901 Gain on sale of Austin, Texas operations........ 1,750 -- -- -- -- -- -- Interest expense................................ (277) (173) (3,422) (2,376) (4,050) (486) (1,684) -------- ---------- ---------- ---------- ---------- -------- -------- Income before income taxes and cumulative effect of a change in accounting principle............ 29,438 44,521 74,852 108,327 145,468 25,940 34,083 Provision for income taxes...................... 11,800 18,819 31,262 45,631 60,875 11,201 14,026 -------- ---------- ---------- ---------- ---------- -------- -------- Income before cumulative effect of a change in accounting principle........................... 17,638 25,702 43,590 62,696 84,593 14,739 20,057 Cumulative effect on prior years of a change in accounting principle........................... -- -- -- -- 5,658 5,658 -- -------- ---------- ---------- ---------- ---------- -------- -------- Net income...................................... $ 17,638 $ 25,702 $ 43,590 $ 62,696 $ 90,251 $ 20,397 $ 20,057 -------- ---------- ---------- ---------- ---------- -------- -------- -------- ---------- ---------- ---------- ---------- -------- -------- Earnings per share: Before cumulative effect of a change in accounting principle......................... $ 0.74 $ 1.10 $ 1.78 $ 2.25 $ 3.02 $ 0.53 $ 0.71 Cumulative effect on prior years of a change in accounting principle...................... -- -- -- -- 0.20 0.20 -- -------- ---------- ---------- ---------- ---------- -------- -------- Earnings per share.............................. $ 0.74 $ 1.10 $ 1.78 $ 2.25 $ 3.22 $ 0.73 $ 0.71 -------- ---------- ---------- ---------- ---------- -------- -------- -------- ---------- ---------- ---------- ---------- -------- -------- Weighted average number of shares of common stock and equivalents outstanding.............. 23,770 23,346 24,509 27,847 28,004 27,813 28,231 OPERATING STATISTICS: Medical loss ratio (4): Commercial.................................... 86.0% 84.0% 80.2% 82.5% 80.5% 83.2% 81.7% Medicare...................................... 87.4% 87.1% 86.6% 85.6% 85.2% 85.1% 85.1% Operating income margin (5)..................... 1.5% 2.4% 3.6% 3.9% 4.2% 3.1% 3.8% Period-end HMO membership: Commercial.................................... 546 567 742 807 949 830 971 Medicare (6).................................. 127 159 214 290 409 319 434 -------- ---------- ---------- ---------- ---------- -------- -------- Total....................................... 673 726 956 1,097 1,358 1,149 1,405 -------- ---------- ---------- ---------- ---------- -------- -------- -------- ---------- ---------- ---------- ---------- -------- --------
SEPTEMBER 30, DECEMBER 31, -------------------------------------------------- -------------------- 1990 1991 1992 1993 1994 1993 1994 -------- -------- -------- -------- ---------- -------- ---------- (IN THOUSANDS) CONSOLIDATED BALANCE SHEET DATA: Working capital................................. $ 43,080 $ 21,837 $ 49,550 $162,781 $ 231,242 $151,578 $ 233,565 Total assets.................................... 231,608 322,328 498,082 693,646 1,105,548 891,482 1,158,551 Long-term debt, excluding current maturities.... 305 2,280 18,488 21,821 101,137 21,488 97,590 Shareholders' equity............................ 74,550 99,678 198,884 319,294 413,358 340,516 429,672 - ---------------------------------- (1) Operating results of the Acquisitions are included in the historical operating results of the Company from the date of acquisition. See "Business -- Acquisitions." (2) Medicare premiums include premiums from the Company's Medicaid programs, which premiums were immaterial in amount. (3) Certain reclassifications have been made to the 1990 and 1991 amounts to conform to the 1992, 1993 and 1994 presentations. (4) Health care costs as a percentage of premium revenue. Medicare medical loss ratios include Medicaid premiums and health care costs, which were immaterial to the resulting ratios. (5) Operating income as a percentage of total operating revenue. (6) Includes Medicaid membership which as of September 30, 1993 and 1994 was 1,597 and 22,010, respectively, and as of December 31, 1993 and 1994 was 1,665 and 30,751, respectively.
9 BUSINESS PacifiCare-Registered Trademark- is one of the nation's leading managed health care services companies, serving approximately 1.5 million commercial, Medicare and Medicaid members, and is a leader in the management, development and marketing of diversified health maintenance organization ("HMO") products and related services. The Company operates HMOs in California, Florida, Oklahoma, Oregon, Texas and Washington. Through internal growth and strategic acquisitions, the Company believes it has built a strong competitive position in California and has expanded operations into new geographic markets. The Company has historically focused on the larger employer market, but recently has entered the smaller employer and individual markets, which the Company believes represent significant growth opportunities. Since fiscal 1990, the Company has achieved 42 percent compound annual earnings per share growth and 19 percent compound annual membership growth. GROWTH STRATEGY The Company's growth strategy is to solidify its position as one of the leading managed health care services companies by (i) expanding its Secure Horizons Medicare programs, (ii) marketing a broader range of managed care products and services, (iii) capitalizing on its experience in developing long-term relationships with health care providers and (iv) selectively expanding into new markets in order to further develop its multi-regional servicing capabilities. SECURE HORIZONS MEDICARE PROGRAMS. Through its Secure Horizons programs, PacifiCare operates the largest and one of the fastest growing Medicare risk programs in the United States (as measured by membership). The Company believes the Medicare market offers significant growth opportunities since only approximately seven percent of the country's Medicare beneficiaries are enrolled in at-risk HMO programs such as those offered by the Company. The Company will seek to continue its rapid growth in the Medicare risk arena by entering into new geographic markets with its Secure Horizons programs. In markets where the Company does not currently operate a commercial HMO, it has the ability to develop Medicare risk programs through licensing or other arrangements. See "-- Products and Services -- Specialty Managed Care Products and Services -- Secure Horizons USA, Inc." COMPREHENSIVE RANGE OF PRODUCTS AND SERVICES. The Company offers a comprehensive range of products and services, including traditional HMOs, preferred provider organizations ("PPOs") and point-of-service plans ("POS plans"), as well as specialty managed care products and services such as prescription pharmacy benefit management, dental and vision care and behavioral health care services. The Company intends to leverage its ability to offer a comprehensive range of products and services by targeting new geographic markets and market segments where it has not historically focused, such as the smaller employer and individual markets. PROVIDER RELATIONSHIPS. The Company has enhanced its competitive position by entering into innovative relationships with health care providers which the Company believes will facilitate expansion into new and existing geographic markets. For example, the Company has entered into provider service contracts, with terms up to 10 years, which pay providers a percentage of premium revenue. The Company believes that percentage of premium arrangements with providers lessen the risk associated with changes in government reimbursement policies and competitive pricing pressures. The Company has been able to customize its contractual arrangements with health care providers to recognize the unique needs of each market. In addition, the Company has recently completed an equity offering to certain providers aimed at developing more strategic and long-term alliances. ENTRY INTO NEW MARKETS. During the last 18 months, the Company has entered into new markets, including South Florida, Houston and Dallas, Texas, Washington and Central California. The Company has been successful in building its membership through expansion of its existing HMOs into additional geographic markets within the same state. For example, in Texas, the Company utilized its existing HMO in San Antonio to establish HMOs in Houston and Dallas which currently service approximately 20,600 and 1,400 members, respectively. The Company plans to enhance its presence in the Central California and Washington markets through its agreements to acquire (i) ValuCare, a Fresno-based 10 HMO with approximately 61,000 members and (ii) Pacific Health Plans, a Washington-based HMO with approximately 33,000 members. See "-- Acquisitions." The Company believes it can continue to expand its membership through selective acquisitions and by establishing HMOs in new markets. The strategy of growth through acquisitions will be enhanced commencing in December 1995 when, for the first time, the Company will have the ability to use the pooling-of-interests method of accounting in connection with stock-for-stock acquisitions. PRODUCTS AND SERVICES The Company's total HMO membership has grown from 615,317 at January 31, 1990 to 1,483,346 at January 31, 1995, a 19 percent compound annual growth rate. The following table provides a breakdown of the Company's membership at January 31, 1995.
PERCENT COMMERCIAL MEDICARE(1) COMBINED OF TOTAL ---------- ----------- --------- -------- California....................................................... 689,733 322,817 1,012,550 68.3% Florida.......................................................... 56,466 11,636 68,102 4.6 Oklahoma......................................................... 111,671 12,913 124,584 8.4 Oregon........................................................... 81,047 37,717 118,764 8.0 Texas............................................................ 65,296 39,343 104,639 7.0 Washington....................................................... 37,211 17,496 54,707 3.7 ---------- ----------- --------- -------- Total Membership................................................. 1,041,424 441,922 1,483,346 100.0% ---------- ----------- --------- -------- ---------- ----------- --------- -------- - ------------------------ (1) Includes Medicaid membership of 11,437 in California, 11,636 in Florida and 9,974 in Oregon.
COMMERCIAL HMO OPERATIONS The Company's commercial HMO membership has grown from 506,280 at January 31, 1990 to 1,041,424 at January 31, 1995, a 16 percent compound annual growth rate. Commercial members generally join the Company's HMOs through an employer, which typically offers employees a selection of indemnity insurance and managed health care plans, pays for all or part of the monthly costs thereof and makes payroll deductions for any costs payable by the employee. The Company has historically focused on the larger employer market, but has recently entered the smaller employer and individual markets. The Company believes that these markets have lower HMO penetration levels than the larger employer market and represent significant growth opportunities. The Company has also developed PPOs and POS plans, which combine the features of an HMO (a defined provider network providing care to members with reduced deductibles and co-payments) with the features of a traditional indemnity insurance product (the option to use any physician, with higher deductibles and co-payments). In addition, the Company also offers specialty managed care products and services, such as prescription pharmacy benefit management, dental and vision care and behavioral health care services. SECURE HORIZONS PROGRAMS Through its Secure Horizons programs, the Company operates the largest and one of the fastest growing Medicare risk programs in the United States (as measured by membership). The Company's Medicare membership has grown from 109,037 at January 31, 1990 to 408,875 at January 31, 1995, a 30 percent compound annual growth rate. The Company has provided health care services to Medicare beneficiaries through its Secure Horizons programs pursuant to annual contracts with the Health Care Financing Administration ("HCFA") since 1985. The Company believes that its Secure Horizons programs are attractive to Medicare beneficiaries because these programs provide a more comprehensive package of benefits than offered under traditional Medicare, and because these programs substantially reduce the member's administrative responsibilities. Members in the Secure Horizons programs are enrolled on an individual basis and may disenroll upon 30 days' notice. The Company believes that its Secure Horizons programs have one of the lowest disenrollment rates relative to other Medicare risk plans. 11 In response to employers' needs to provide cost-effective health care coverage for their retired employees who may not yet be eligible for Medicare benefits, the Company developed the Secure Horizons retiree product. The retiree product provides the Company with access to individuals who, once familiar with the Company's services and delivery system, may enroll in Secure Horizons programs after they become eligible for Medicare benefits. The premium rate structure and provider networks for this product are similar to the Company's Secure Horizons programs. This product takes advantage of the expertise the Company has developed in its Secure Horizons Medicare risk programs. Because the use of health care services by Medicare recipients generally exceeds the use of services by those who are under the age of 65, the Company's Medicare contracts provide for substantially larger revenue per member than do the Company's non-Medicare plans. Premium revenue for each Secure Horizons member is generally more than three times that of a commercial member, reflecting, in part, the higher medical and administrative costs of serving a Medicare member. As a result, although members in the Secure Horizons programs represented approximately 28 percent of the Company's membership at December 31, 1994, they accounted for approximately 57 percent of the consolidated premium revenue and a greater percentage of the Company's profits for the three-month period ended December 31, 1994. MEDICAID HMO OPERATIONS Since 1993, the Company has arranged for health care services to Medicaid eligibles through its HMO subsidiaries pursuant to annual contracts with the Department of Health and Human Services ("HHS"). The Company's Medicaid membership has grown from 1,597 at September 30, 1993 to 33,047 at January 31, 1995. Currently, the Company arranges for the provision of health care services to Medicaid eligibles in California, Florida and Oregon and anticipates enrolling Medicaid eligibles in other geographic markets. The Company receives a premium for each Medicaid member comparable to that of a commercial member. The Company believes that its programs are attractive to Medicaid eligibles because these programs provide access to quality health care providers, continuity of medical care and an introduction into mainstream managed care. The Company's Medicaid contracts with HHS are subject to annual renewal. SPECIALTY MANAGED CARE PRODUCTS AND SERVICES In addition to its HMO operations, the Company provides a wide range of specialty managed care products and services. These products and services are offered to HMOs, insurers, employers, governmental entities, providers and PPOs through various affiliated operations of the Company. SECURE HORIZONS-REGISTERED TRADEMARK- USA, INC. ("SHUSA") was formed in March 1993 to take advantage of the Company's expertise in the Medicare risk area. SHUSA is authorized to license the use of the Secure Horizons service mark, trade name and systems, in exchange for license fees, to qualified HMOs that want to engage in Medicare risk contracting. SHUSA provides consulting, marketing, provider contracting, administrative services and other various services in support of the operation of a Medicare risk program by such HMOs. SHUSA is reimbursed for its expenses and receives a percentage of the revenue derived from each program in the form of license fees. SHUSA may also enter into joint ventures related to Medicare risk contracting. In September 1993, SHUSA formed an alliance with Tufts Associated Health Maintenance Organization, Inc. ("Tufts"). Through this alliance, Tufts operates Secure Horizons, Tufts Health Plan for Seniors, under a license from and with the assistance of SHUSA. As of October 1, 1994, Tufts began enrolling Medicare beneficiaries in Secure Horizons, Tufts Health Plan for Seniors in the Boston area and, as of February 1, 1995, had approximately 7,100 members. The Company believes Secure Horizons, Tufts Health Plan for Seniors will be ultimately offered throughout Massachusetts and other parts of New England. PACIFICARE LIFE AND HEALTH INSURANCE COMPANY-SM- ("PLHIC"), formerly Columbia General Life Insurance Company, offers employer groups managed health care insurance products which have been integrated with the Company's existing HMO products to form multi-option health benefits programs. PLHIC is a health and life insurance company licensed to operate in 37 states including California, Florida, Oklahoma, Oregon and Texas. 12 PRESCRIPTION SOLUTIONS was established in May 1993 to offer pharmacy benefit management services. Clients of Prescription Solutions have access to a pharmacy provider network that features independent and chain pharmacies, as well as a variety of cost and quality management capabilities. In January 1995, Prescription Solutions acquired Preferred Solutions, a San Jose-based pharmacy benefit management company. The acquisition of Preferred Solutions enables Prescription Solutions to provide fully integrated services, including mail order distribution, an extensive network of retail pharmacies, claims processing and sophisticated drug utilization reporting. In addition, the Company believes this acquisition makes Prescription Solutions one of the industry's 10 largest pharmacy benefit management companies covering approximately 3.5 million total lives. LIFELINK-SM-, INC. ("LIFELINK"), a licensed specialized health care service plan, provides behavioral health care services, including chemical dependency benefit programs, in California directly to corporate customers and indirectly through the Company's California HMO to its commercial members. Outside of California, PacifiCare Behavioral Health, Inc. contracts with various HMOs, insurers and employers to manage their respective mental health and chemical dependency benefit programs. Other specialty products and services offered by the Company through various affiliated operations include (i) dental and vision care through California Dental Health Plan, Inc., (ii) coordination of managed care products for multi-region employers through Covantage, Inc., (iii) military health care management through PacifiCare-Registered Trademark- Military Health Systems, Inc., (iv) workers' compensation managed care through COMPREMIER-SM-, Inc. and (v) health promotion through PacifiCare Wellness Company. The Company believes that its wide range of specialty managed care products and services complements its core HMO business and, given increasing market demand for greater choice and flexibility in the design of health care products and funding arrangements, will contribute to the Company's competitive position in the health care services marketplace. HEALTH CARE PROVIDER RELATIONSHIPS AND CONTROL OF HEALTH CARE COSTS The Company manages health care costs primarily by entering into contractual arrangements with health care providers and by sharing the risk of certain health care costs with the Company's contracting physicians or physician groups and hospitals. For the three-month period ended December 31, 1994, fixed fee capitated payments to providers represented 56 percent and 70 percent of total health care costs for the commercial and Medicare programs, respectively. The Company contracts for hospital services under a variety of arrangements including per diem, percentage of premium or per-member-per-month capitation, discounted fee-for-service, flat fee and fee-for-service arrangements. The loss of contracts with certain physician groups and with certain hospitals could have a material adverse effect on the Company's HMO operations. 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. 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, levels of utilization of health care services, new technologies, hospital costs, major epidemics, and numerous other external influences may affect the ability of HMOs to control health care costs. GOVERNMENT REGULATION The Company's HMOs are licensed and subject to periodic examination by governmental agencies and are subject to state and federal statutes and regulations which extensively regulate the activities and licensing of HMOs. As a result of the continued escalation of health care costs and the inability of many individuals to obtain health care insurance, numerous proposals relating to health care reform have been, and additional proposals may be, introduced in the United States Congress and the legislatures of the states in which the 13 Company operates or may seek to operate. The Company cannot predict what effect, if any, such proposals would have on the Company if and when enacted. Although the Company believes that it would benefit from proposals encouraging the use of managed health care, there can be no assurance that the enactment of any of such reforms would not adversely affect the operations, profitability or business prospects of the Company. The Company's Secure Horizons programs provide services pursuant to contracts with HCFA and are subject to regulation by HCFA and certain state agencies. As a result of HCFA's regulations governing the Company's Medicare fixed-fee-per-member programs, the Company's premiums are determined through formulas established by HCFA for the Company's Medicare contracts in a particular region. If these premiums are reduced, or if premium rate increases in a particular region are lower than the rate of increase in health care service expenses for the Company's Secure Horizons members in such region, the Company's operations, profitability or business prospects could be affected. The Company has mitigated this risk by paying approximately 70 percent of the health care service expenses for the Secure Horizons programs on a percentage of premium basis, and believes that any slowdown in the rate of premium growth may be offset by the effect of proposals encouraging managed health care for Medicare beneficiaries. The Secure Horizons programs are subject to certain risks relative to commercial programs, such as higher comparative medical costs, higher levels of utilization and higher marketing and advertising costs associated with selling to individuals rather than to groups. The Company's Medicare contracts are automatically renewed every 12 months unless the Company or HCFA elects either not to renew or to terminate them. These contracts (a "risk contract") are also subject to periodic unilateral revisions by HCFA based on certain demographic information relating to the Medicare population and the cost of providing health care in a particular geographic area. HCFA may unilaterally terminate the Company's Medicare contracts if the Company fails to continue to meet compliance and eligibility standards. Unilateral termination or failure to renew could have a material adverse effect on the Company. The Company's Secure Horizons programs are not permitted, under federal regulations, to account for more than one-half of the Company's total HMO members in each of the Company's non-contiguous geographic state markets. This limitation may constrain the Company's rate of growth in markets where the Company is able to add Medicare members at a faster rate than commercial members. ACQUISITIONS Consistent with its stated growth strategy, the Company has entered into a number of acquisitions, which together (i) strengthen the Company's position in markets in which it currently operates, (ii) expand the Company's comprehensive range of products and services and (iii) enable the Company to participate in the consolidation trend of the HMO industry. 1995 ACQUISITIONS In January 1995, Prescription Solutions, the Company's pharmacy benefit management company, acquired Preferred Solutions, a San Jose-based pharmacy benefit management company (the "Preferred Solutions Acquisition"). Also in January 1995, the Company entered into a definitive agreement to acquire ValuCare, a Fresno-based HMO with approximately 61,000 members located in Central California (the "ValuCare Acquisition"). The ValuCare Acquisition is subject to, among other things, various regulatory approvals and is expected to close by April 1995. See "-- Growth Strategy -- Entry Into New Markets." On February 28, 1995, the Company entered into a definitive agreement to acquire Pacific Health Plans, an HMO located in Washington with approximately 33,000 members (the "PHP Acquisition"). Upon completion, the PHP Acquisition will increase enrollment in Washington to more than 87,000 members. The PHP Acquisition, which is subject to federal and state regulatory approvals, is expected to close by June 1995. See "-- Growth Strategy -- Entry Into New Markets." The Preferred Solutions Acquisition, the 14 ValuCare Acquisition and the PHP Acquisition collectively shall be referred to herein as the "1995 Acquisitions." The total purchase price of the 1995 Acquisitions is expected to be approximately $119 million, including contingent payments. See "-- Pro Forma Condensed Consolidated Financial Statements (Unaudited)." 1994 ACQUISITIONS During fiscal 1994, the Company made the following acquisitions (the "1994 Acquisitions"): (i) Freedom Plan, Inc., a Santa Barbara, California-based HMO, with approximately 14,000 members in October 1993; (ii) California Dental Health Plan, Inc., a southern California-based dental HMO and its affiliate Dental Plan Administrators, a third party administrator, in November 1993; (iii) Advantage Health Plans, Inc., a Southern Florida-based HMO, with approximately 20,000 members in December 1993; (iv) Network Health Plan, Inc., a Washington-based health care service contractor, with approximately 28,000 members in February 1994; and (v) Pasteur Health Plans, Inc., a Southern Florida-based HMO, with approximately 50,000 members in September 1994. The total purchase price of the 1994 Acquisitions is expected to be approximately $99 million (including contingent payments) of which $94 million has been paid to date. See "-- Pro Forma Condensed Consolidated Financial Statements (Unaudited)." The 1994 and the 1995 Acquisitions shall together be referred to herein as the "Acquisitions" and the companies acquired or to be acquired through the Acquisitions shall be referred to as the "Acquired Companies." PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) The accompanying pro forma condensed consolidated financial statements have been prepared by the Company based on certain pro forma adjustments to the historical financial statements of the Company, which are incorporated in this Prospectus by reference. The Company's historical financial statements have been prepared in accordance with generally accepted accounting principles. The pro forma adjustments presented are shown for comparative purposes only and should not be considered to reflect the actual results of operations of the combined companies had the Acquisitions taken place at the beginning of each pro forma period. The pro forma information is not intended to be indicative of results which may occur in the future. The Acquisitions have been or will be accounted for as purchases and the operating results of each completed acquisition are included in the Company's historical financial statements from the date of purchase. These unaudited pro forma statements should be read in conjunction with the Company's historical financial statements and related notes, which are incorporated in this Prospectus by reference. The Company believes it will achieve synergies from the integration of the Acquisitions by eliminating redundant administrative costs and using its greater purchasing power to achieve lower health care and general and administrative costs. The anticipated impact of such synergies has not been reflected in the pro forma condensed consolidated statements of income. The accompanying pro forma condensed consolidated balance sheet as of December 31, 1994 has been prepared to give pro forma effect to the 1995 Acquisitions as if they had occurred on December 31, 1994. The accompanying pro forma condensed consolidated statements of income for the three months ended December 31, 1994 and the year ended September 30, 1994, have been prepared to give pro forma effect to the Acquisitions as if they had occurred on October 1, 1993. 15 PACIFICARE HEALTH SYSTEMS, INC. PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET (UNAUDITED) DECEMBER 31, 1994
ACQUIRED PRO FORMA PRO FORMA THE COMPANY COMPANIES ADJUSTMENTS RESULTS ----------- --------- ---------------- ---------- (IN THOUSANDS) ASSETS Current assets: Cash and equivalents............................ $ 218,590 $ 357 $ (18,250)(a) $ 200,697 Marketable securities........................... 532,735 532,735 Receivables, net................................ 73,720 2,321 76,041 Prepaid expenses................................ 10,133 62 10,195 Deferred income taxes........................... 29,263 29,263 ----------- --------- -------- ---------- Total current assets.......................... 864,441 2,740 (18,250) 848,931 ----------- --------- -------- ---------- Property, plant and equipment, net................ 98,397 947 99,344 Marketable securities - restricted................ 16,572 16,572 Goodwill and intangible assets.................... 173,507 119,823(a) 293,330 Other assets...................................... 5,634 71 5,705 ----------- --------- -------- ---------- $1,158,551 $ 3,758 $ 101,573 $1,263,882 ----------- --------- -------- ---------- ----------- --------- -------- ---------- LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Medical claims and benefits payable............. $ 309,100 $ 309,100 Accounts payable and accrued liabilities........ 126,673 $ 2,079 128,752 Unearned premium revenue........................ 186,828 88 186,916 Current maturities of long-term debt............ 8,275 187 8,462 ----------- --------- -------- ---------- Total current liabilities..................... 630,876 2,354 633,230 ----------- --------- -------- ---------- Long-term debt, excluding current maturities...... 97,590 1,977 $ 101,000(a) 200,567 Minority interest................................. 413 413 Shareholders' equity: Preferred shares................................ Class A common shares........................... 123 6,115 (6,115)(a) 123 Class B common shares........................... 153 153 Additional paid-in capital...................... 143,083 143,083 Unrealized holding loss on available-for-sale securities net of tax effect of $3,314........ (4,872 ) (4,872) Retained earnings............................... 291,185 (6,688 ) 6,688(a) 291,185 ----------- --------- -------- ---------- Total shareholders' equity.................... 429,672 (573 ) 573 429,672 ----------- --------- -------- ---------- $1,158,551 $ 3,758 $ 101,573 $1,263,882 ----------- --------- -------- ---------- ----------- --------- -------- ----------
16 PACIFICARE HEALTH SYSTEMS, INC. PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF INCOME (UNAUDITED) FOR THE THREE MONTHS ENDED DECEMBER 31, 1994
ACQUIRED PRO FORMA PRO FORMA THE COMPANY COMPANIES ADJUSTMENTS RESULTS ----------- -------- ----------- --------- (IN THOUSANDS, EXCEPT PER SHARE DATA) Revenue: Premiums........................................ $ 810,033 $35,915 $845,948 Other income.................................... 11,581 887 12,468 ----------- -------- ----------- --------- Total operating revenue....................... 821,614 36,802 858,416 ----------- -------- ----------- --------- Expenses: Health care services............................ 676,299 29,779 706,078 Marketing, general and administrative expenses........................................ 113,191 8,206 $ 500(b) 121,897 Amortization of intangibles..................... 1,258 1,235(c) 2,493 ----------- -------- ----------- --------- Operating income (loss)........................... 30,866 (1,183 ) (1,735) 27,948 Interest income................................... 4,901 214 (182)(d) 4,933 Interest expense.................................. (1,684 ) (143 ) (1,417)(e) (3,244 ) ----------- -------- ----------- --------- Income before income taxes........................ 34,083 (1,112 ) (3,334) 29,637 Provision for income taxes........................ 14,026 (439 ) (1,141)(f) 12,446 ----------- -------- ----------- --------- Net income (loss)................................. $ 20,057 $ (673 ) $(2,193) $ 17,191 ----------- -------- ----------- --------- ----------- -------- ----------- --------- Weighted average number of shares of common stock and equivalents outstanding...................... 28,231 28,231 28,231 28,231 ----------- -------- ----------- --------- Earnings per share................................ $ 0.71 $ (0.02 ) $ (0.08) $ 0.61 ----------- -------- ----------- --------- ----------- -------- ----------- ---------
17 PACIFICARE HEALTH SYSTEMS, INC. PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF INCOME (UNAUDITED) FOR THE YEAR ENDED SEPTEMBER 30, 1994
THE ACQUIRED PRO FORMA PRO FORMA COMPANY COMPANIES ADJUSTMENTS RESULTS ---------- -------- ------------ --------- (IN THOUSANDS, EXCEPT PER SHARE DATA) Revenue: Premiums........................................ $2,855,556 $211,799 $ (25)(g) $3,067,330 Other income.................................... 37,696 7,387 (291)(h) 44,792 ---------- -------- ------------ --------- Total operating revenue....................... 2,893,252 219,186 (316) 3,112,122 ---------- -------- ------------ --------- Expenses: Health care services............................ 2,374,258 171,237 (21)(g) 2,545,474 Marketing, general and administrative expenses.. 394,620 40,864 5,038(b) 440,522 Amortization of intangibles..................... 3,444 6,536(c) 9,980 ---------- -------- ------------ --------- Operating income.................................. 120,930 7,085 (11,869) 116,146 Interest income................................... 28,588 691 (1,693)(d) 27,586 Interest expense.................................. (4,050 ) (877 ) (7,642)(e) (12,569) ---------- -------- ------------ --------- Income before income taxes and cumulative effect of a change in accounting principle.............. 145,468 6,899 (21,204) 131,163 Provision for income taxes........................ 60,875 2,763 (7,042)(f) 56,596 ---------- -------- ------------ --------- Income before cumulative effect of a change in accounting principle............................. 84,593 4,136 (14,162) 74,567 Cumulative effect on prior years of a change in accounting principle............................. 5,658 5,658 ---------- -------- ------------ --------- Net income........................................ $ 90,251 $ 4,136 $(14,162) $ 80,225 ---------- -------- ------------ --------- ---------- -------- ------------ --------- Weighted average number of shares of common stock and equivalents outstanding...................... 28,004 28,004 28,004 28,004 ---------- -------- ------------ --------- Earnings per share: Before cumulative effect of a change in accounting principle........................... $ 3.02 $ 0.15 $ (0.51) $ 2.66 Cumulative effect on prior years of a change in accounting principle........................... 0.20 -- -- 0.20 ---------- -------- ------------ --------- Earnings per share................................ $ 3.22 $ 0.15 $ (0.51) $ 2.86 ---------- -------- ------------ --------- ---------- -------- ------------ ---------
18 PACIFICARE HEALTH SYSTEMS, INC. NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS THREE MONTHS ENDED DECEMBER 31, 1994 YEAR ENDED SEPTEMBER 30, 1994 Pro forma Condensed Consolidated Balance Sheet as of December 31, 1994: (a) The total consideration for the 1995 Acquisitions is expected to be approximately $119 million, of which $18 million was paid in cash and the remaining $101 million is assumed to be financed using borrowings under the Credit Line. Under purchase accounting, the assets and liabilities of the Acquired Companies are required to be adjusted to estimated fair market values. For the purpose of preparing pro forma condensed financial statements, the entire excess of the cost of the 1995 Acquisitions over the book value of the net assets to be acquired has been allocated to goodwill and intangible assets as of the assumed acquisition date (December 31, 1994). Pro forma Condensed Consolidated Statements of Income for the three months ended December 31, 1994 and year ended September 30, 1994: (b) Assumes that marketing, general and administrative expenses for the three months ended December 31, 1994 totaling approximately $500,000 and the year ended September 30, 1994 totaling approximately $5,333,000, are incurred in connection with the integration of the Acquisitions. The amount incurred for integration for the year ended September 30, 1994 is partially offset by a reduction in marketing, general and administrative expenses of $295,000 related to footnotes (g) and (h) below. The Company believes it will achieve synergies from the integration of the Acquisitions by eliminating redundant administrative costs and using its greater purchasing power to achieve lower health care and general and administrative costs. The anticipated impact of such synergies has not been reflected in the pro forma condensed consolidated statements of income. (c) Under purchase accounting, the assets and liabilities of the Acquired Companies are required to be adjusted to estimated fair values. For the purpose of preparing the pro forma financial statements, goodwill was determined based on the excess of the cost over the fair market values of the net assets acquired or to be acquired for the Acquisitions. This entry represents the amortization of goodwill and intangible assets from the beginning of each pro forma period on a straight line basis over periods from five to forty years as if the Acquisitions were completed on October 1, 1993. (d) This entry represents the reduction of interest income from the beginning of each pro forma period through the earlier of the acquisition date or the end of the pro forma period assuming cash payments for the 1995 Acquisitions of $18 million were made on October 1, 1994 and for the 1994 Acquisitions of $50 million were made on October 1, 1993. The interest income is assumed to be earned at an average rate of four percent for the three months ended December 31, 1994 and six percent for the year ended September 30, 1994. (e) Certain acquisitions are assumed to be funded using borrowings under the Credit Line at weighted average interest rates of approximately six percent for the three months ended December 31, 1994 and five percent for the year ended September 30, 1994. This entry represents additional interest expense incurred for the three months ended December 31, 1994 and the year ended September 30, 1994, as if the Acquisitions were completed on October 1, 1993. (f) This entry represents the tax effect of the pro forma adjustments, excluding non-deductible goodwill amortization, at the statutory rate in effect during the three months ended December 31, 1994 and year ended September 30, 1994. (g) This entry represents the reduction in premium revenue and health care services expense related to employee health coverage provided by the Company to the Acquired Companies. (h) This entry represents the elimination of administrative fees paid by the Company to certain Acquired Companies and recognized as other income by such Acquired Companies prior to acquisition. 19 PRINCIPAL AND SELLING STOCKHOLDER Of the 4,500,000 shares of the Class B Common Stock being offered, 1,500,000 shares of the Class B Common Stock are being sold by the Selling Stockholder. The following table sets forth, as of the date hereof and as adjusted to reflect the sale of the shares being offered, certain information regarding the ownership of the Class A and Class B Common Stock by the Selling Stockholder:
BENEFICIAL OWNERSHIP PRIOR TO BENEFICIAL OWNERSHIP CLASS OF OFFERING AFTER OFFERING COMMON ------------------ ---------------------- STOCKHOLDER STOCK NUMBER PERCENT NUMBER PERCENT - ------------------------------ -------- --------- ------- ------------ ------- UniHealth A 5,910,000 48.1% 5,910,000 48.1 % 4100 West Alameda Avenue B 3,159,500 20.5% 1,659,500(1) 9.0 % Burbank, California 91505 - ------------------------ (1) If the Underwriters' over-allotment option is exercised in full, the Selling Stockholder will own 984,500 shares of the Class B Common Stock or 5.4 percent of the outstanding Class B Common Stock after completion of the offering.
Currently, the Selling Stockholder owns 5,910,000 shares of the Class A Common Stock, or 48.1 percent of all such shares outstanding, and 3,159,500 shares of the Class B Common Stock, or 20.5 percent of all such shares outstanding. Combined, the Selling Stockholder owns 32.8 percent of the total shares outstanding of the Company. Upon completion of this offering of the Class B Common Stock, the Selling Stockholder will own 5,910,000 shares of the Class A Common Stock, or 48.1 percent of all such shares outstanding, and 1,659,500 shares of the Class B Common Stock, or 9.0 percent of all such shares outstanding. Combined, the Selling Stockholder will own 24.7 percent of the total shares outstanding of the Company. The Selling Stockholder is a California non-profit public benefit corporation which is the parent corporation of an integrated health care delivery system consisting of 10 non-profit medical centers and various for-profit health care companies, including one company in the HMO business. The Selling Stockholder's HMO, which is not federally qualified, and certain of its operations compete with the Company in California. The Company purchases health care services from hospitals owned and managed by the Selling Stockholder on terms the Company believes are at least as favorable to the Company as would be available from unaffiliated third parties. In addition, the Company pays a management fee to the Selling Stockholder for certain services, including certain consulting services, pays a fee to the Selling Stockholder for payroll processing and reimburses the Selling Stockholder for the Company's share of joint insurance purchasing. The Company anticipates paying fees to, and purchasing services from, the Selling Stockholder in the future. Future transactions between the Company and the Selling Stockholder will be on terms no less favorable than could be obtained from unaffiliated third parties. Terry Hartshorn, President and Chief Executive Officer, director and Executive Committee member of the Selling Stockholder, is the Chairman of the Board of PacifiCare. Gary L. Leary, Executive Vice President, Chief Operating Officer, General Counsel and Secretary, director and Executive Committee member of the Selling Stockholder, David R. Carpenter, director, Chairman of the Board and Chairman of the Executive Committee of the Selling Stockholder, and Jean Bixby Smith, a director of the Selling Stockholder, are directors of the Company. In connection with the current offering, the Selling Stockholder and the Company have agreed to contribute to certain liabilities, including liabilities under the Act, in amounts proportionate to the proceeds received by the Selling Stockholder and the Company and in certain circumstances to indemnify the other against certain liabilities, including liabilities under the Act. The Selling Stockholder's liability to the Company under such agreement is limited to the proceeds received by the Selling Stockholder in this offering. 20 DESCRIPTION OF CAPITAL STOCK The authorized capital stock of the Company consists of 30 million shares of the Class A Common Stock, par value $0.01 per share, 60 million shares of the Class B Common Stock, par value $0.01 per share, and 10 million shares of Preferred Stock, par value $1.00 per share (the "Preferred Stock"). As of February 16, 1995, there were 12,278,783 shares of the Class A Common Stock outstanding, 15,384,092 shares of the Class B Common Stock outstanding and no shares of Preferred Stock outstanding. The Class A Common Stock and the Class B Common Stock are more fully described in the Company's Registration Statement on Form 8-A (File No 0-14181), dated May 20, 1992, incorporated in this Prospectus by reference. The comparison of the Class A Common Stock and the Class B Common Stock set forth below is qualified in its entirety by reference thereto. COMPARISON OF CLASS A COMMON STOCK AND CLASS B COMMON STOCK VOTING. Holders of the Class A Common Stock have one vote per share, while holders of the Class B Common Stock have no voting rights other than as required by the Delaware General Corporation Law. DIVIDENDS, OTHER DISTRIBUTIONS AND MERGERS OR CONSOLIDATIONS. Holders of the Class A Common Stock and Class B Common Stock are entitled to equal per share cash dividends, if any, distributions upon liquidation of the Company and consideration in a merger or consolidation of the Company (whether or not the Company is the surviving corporation). Holders of the Class A Common Stock and Class B Common Stock are entitled to equal per share stock dividends and stock splits, if any, except that if stock dividends in shares of Class A Common Stock are made to holders of Class A Common Stock, holders of Class B Common Stock may receive, on a share-for-share basis, shares of Class B Common Stock. CLASS B PROTECTION. Certain provisions of the Company's Certificate of Incorporation, as amended (the "Certificate of Incorporation"), suspend the voting rights of any person or group that acquires a beneficial interest of 10 percent or more of the then outstanding shares of the Class A Common Stock (excluding the number of shares beneficially owned by such person or group prior to the reclassification in 1992 of the Certificate of Incorporation, dividing the Company's common stock into the Class A Common Stock and the Class B Common Stock, other than upon issuance or sale by the Company, by operation of law, by will or the laws of descent or distribution, by gift or by foreclosure of a bona fide loan), unless such person or group (a "Significant Shareholder") then owns an equal or greater percentage of all outstanding shares of the Class B Common Stock acquired after the date of reclassification or acquires additional shares of the Class B Common Stock. These provisions will also be triggered if any Significant Shareholder acquires the next higher integral multiple of five percent (e.g., 15%, 20%, 25%, etc.) of the outstanding Class A Common Stock after the date of the reclassification of the Certificate of Incorporation (other than upon issuance or sale by the Company, by operation of law, by will or the laws of descent or distribution, by gift or by foreclosure of a bona fide loan). PREEMPTIVE RIGHTS. The Class A and Class B Common Stock do not carry any preemptive rights enabling a holder to subscribe for or receive shares of any class of stock of the Company or any other securities convertible into shares of any class of stock of the Company. 21 UNDERWRITING The underwriters named below (the "Underwriters"), for whom Dean Witter Reynolds Inc., Salomon Brothers Inc, Dillon, Read & Co. Inc., Lehman Brothers Inc. and Robertson, Stephens & Company, L.P. are acting as Representatives (the "Representatives"), have severally agreed, subject to the terms and conditions set forth in the Underwriting Agreement by and among the Company, the Selling Stockholder and the Underwriters (the "Underwriting Agreement"), to purchase from the Company and the Selling Stockholder, and the Company and the Selling Stockholder have agreed to sell to the Underwriters, the number of shares of Class B Common Stock set forth opposite their names below:
NUMBER UNDERWRITERS OF SHARES - ---------------------------------------------------------------------- --------- Dean Witter Reynolds Inc.............................................. 805,000 Salomon Brothers Inc.................................................. 805,000 Dillon, Read & Co. Inc................................................ 530,000 Lehman Brothers Inc................................................... 530,000 Robertson, Stephens & Company, L.P.................................... 530,000 Bear, Stearns & Co. Inc. ............................................. 100,000 Alex. Brown & Sons Incorporated....................................... 100,000 Donaldson, Lufkin & Jenrette Securities Corporation................... 100,000 Goldman, Sachs & Co. ................................................. 100,000 Merrill Lynch, Pierce, Fenner & Smith Incorporated.................... 100,000 Montgomery Securities................................................. 100,000 Morgan Stanley & Co. Incorporated..................................... 100,000 Oppenheimer & Co., Inc. .............................................. 100,000 Smith Barney Inc. .................................................... 100,000 UBS Securities Inc. .................................................. 100,000 Sanford C. Bernstein & Co., Inc. ..................................... 100,000 Cowen & Co. .......................................................... 50,000 Furman Selz Incorporated.............................................. 50,000 Punk, Ziegel & Knoell................................................. 50,000 Volpe, Welty & Company................................................ 50,000 --------- Total............................................................. 4,500,000 --------- ---------
The Underwriters are obligated to purchase all of the Shares offered hereby if any are purchased. The Representatives have advised the Company that the Underwriters propose to offer the Shares to the public at the offering price set forth on the cover page of this Prospectus and to certain securities dealers at such price less a concession not in excess of $1.10 per share and that the Underwriters and such dealers may reallow a concession not in excess of $.10 per share of sales to other dealers, including the Underwriters. After the Shares are released for sale to the public, the public offering price and concessions and discounts may be changed by the Underwriters. The Company and the Selling Stockholder have agreed to indemnify the Underwriters against certain liabilities, including liabilities under the Act, or to contribute to payments which the Underwriters may be required to make in respect thereof. The Selling Stockholder and the Company have agreed that they will not sell, contract to sell or otherwise dispose of any shares of the Class A or the Class B Common Stock for a period of 90 days after the effective date of this offering, except for the shares of the Class B Common Stock offered hereby, the issuance of shares by the Company pursuant to employee stock options and the issuance of shares or options by the Company pursuant to employee benefit, stock option and compensation plans of the Company, without the prior written consent of Dean Witter Reynolds Inc. The officers and directors of the Company and of the Selling Stockholder have not individually entered into any such agreements. 22 The Selling Stockholder has granted to the Underwriters an option, exercisable within 30 days from the date of this Prospectus, to purchase up to an additional 675,000 shares of the Class B Common Stock at the same price per share as the 4,500,000 shares of the Class B Common Stock offered hereby, less underwriting discounts and commissions. The Underwriters may exercise the option only for the purpose of covering over-allotments, if any, made in connection with the distribution of the shares of the Class B Common Stock to the public. Pursuant to regulations promulgated by the Securities and Exchange Commission, market makers in the Common Stock who are underwriters and prospective underwriters ("Passive Market Makers") may, subject to certain limitations, make bids for or purchases of Common Stock until the earlier of the time of commencement (the "Commencement Date") of offers or sales of the Common Stock contemplated by this Prospectus or the time at which a stabilizing bid for such Common Stock is made. In general, on and after the date two business days prior to the Commencement Date (i) such market maker's net daily purchase of the Common Stock may not exceed 30% of its average daily trading volume in such Common Stock for the two full consecutive calendar months immediately preceding the filing date of the registration statement of which this Prospectus forms a part, (ii) such market maker may not effect transactions in, or display bids for, the Common Stock at a price that exceeds the highest bid for the Common Stock by persons who are not Passive Market Makers, and (iii) bids made by Passive Market Makers must be identified as such. LEGAL MATTERS The validity of the Class B Common Stock offered hereby will be passed upon for the Company by Shereff, Friedman, Hoffman & Goodman, LLP, New York, New York, and for the Underwriters by Milbank, Tweed, Hadley & McCloy, Los Angeles, California. Certain legal matters related to the offering will be passed upon for the Selling Stockholder by O'Melveny & Myers, Los Angeles, California. EXPERTS The Consolidated Financial Statements of the Company included in the Company's Annual Report (Form 10-K) for the year ended September 30, 1994 have been audited by Ernst & Young LLP, independent auditors, as set forth in their report thereon included therein and incorporated herein by reference. Such consolidated financial statements are incorporated herein by reference in reliance upon such report given upon the authority of such firm as experts in accounting and auditing. 23 PACIFICARE HEALTH SYSTEMS, INC. 4,500,000 SHARES CLASS B COMMON STOCK PROSPECTUS DEAN WITTER REYNOLDS INC. SALOMON BROTHERS INC DILLON, READ & CO. INC. LEHMAN BROTHERS ROBERTSON, STEPHENS & COMPANY MARCH 16, 1995 -----END PRIVACY-ENHANCED MESSAGE-----