-----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, sRbOfnKHipcjQnzhB0vkjLoFJvFFn8V0UI9WSkgjZqIjDw4/n2neEpmJJfNmrlf3 JvffFWw/DM44/0ct37TKBA== 0000912057-95-003253.txt : 19950509 0000912057-95-003253.hdr.sgml : 19950509 ACCESSION NUMBER: 0000912057-95-003253 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19950331 FILED AS OF DATE: 19950508 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 SEC ACT: 1934 Act SEC FILE NUMBER: 000-14181 FILM NUMBER: 95535099 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 1 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 1995 -------------- [ ] 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 April 30, 1995, there were 12,304,558 shares of the Registrant's Class A Common Stock, par value $0.01 per share, outstanding and 18,410,377 shares of Class B Common Stock, par value $0.01 per share, outstanding. Part 1: FINANCIAL INFORMATION Item 1: FINANCIAL STATEMENTS PacifiCare Health Systems, Inc. Condensed Consolidated Balance Sheets - -------------------------------------------------------------------------------
March 31, September 30, (Amounts in thousands, 1995 1994 except per share data) (Unaudited) - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- Assets - ------------------------------------------------------------------------------- Current assets: Cash and equivalents $ 213,639 $ 192,609 Marketable securities 622,397 517,999 Receivables, net 87,529 73,976 Prepaid expenses 8,710 8,883 Deferred income taxes 22,778 28,415 - ------------------------------------------------------------------------------- Total current assets 955,053 821,882 - ------------------------------------------------------------------------------- Property, plant and equipment, net 98,700 97,018 Marketable securities - restricted 19,403 15,994 Goodwill and intangible assets 295,044 167,085 Other assets 7,417 3,569 - ------------------------------------------------------------------------------- $1,375,617 $1,105,548 - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- Liabilities and Shareholders' Equity Current liabilities: Medical claims and benefits payable $ 312,400 $ 302,900 Accounts payable and accrued liabilities 114,387 108,595 Acquisition payable 75,000 -- Unearned premium revenue 188,251 170,970 Long-term debt due within one year 8,681 8,175 - ------------------------------------------------------------------------------- Total current liabilities 698,719 590,640 - ------------------------------------------------------------------------------- Long-term debt due after one year 13,403 101,137 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, 12,305 and 12,238 issued at March 31, 1995 and September 30, 1994, respectively 123 122 Class B common shares, par value $0.01 per share; 60,000 shares authorized 18,410 and 15,290 issued at March 31, 1995 and September 30, 1994, respectively 184 153 Additional paid-in capital 344,192 141,955 Unrealized holding gain on available-for- sale securities net of tax effect of $52 39 -- Retained earnings 318,544 271,128 - ------------------------------------------------------------------------------- Total shareholders' equity $663,082 $413,358 - ------------------------------------------------------------------------------- $1,375,617 $1,105,548 - ------------------------------------------------------------------------------- - -------------------------------------------------------------------------------
See accompanying notes. 2 PacifiCare Health Systems, Inc. Consolidated Statements of Income (unaudited) - -------------------------------------------------------------------------------
Three months ended March 31, (Amounts in thousands --------------------------------- except per share data) 1995 1994 - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- Revenue: Commercial premiums $ 367,079 $ 311,695 Government premiums (Medicare and Medicaid) 531,661 393,794 Other income 14,026 8,935 - ------------------------------------------------------------------------------- Total operating revenue 912,766 714,424 - ------------------------------------------------------------------------------- Expenses: Health care services: Medical services 348,743 282,513 Hospital services 309,775 241,013 Other services 91,331 67,733 - ------------------------------------------------------------------------------- Total health care services 749,849 591,259 - ------------------------------------------------------------------------------- Marketing, general and administrative expenses 124,095 91,517 Amortization of intangibles 1,374 815 - ------------------------------------------------------------------------------- Operating income 37,448 30,833 Interest income 10,604 6,296 Interest expense (2,010) (519) - ------------------------------------------------------------------------------- Income before income taxes 46,042 36,610 Provision for income taxes 18,683 15,766 - ------------------------------------------------------------------------------- Net income $ 27,359 $ 20,844 - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- Weighted average common shares and equivalents outstanding used to calculate earnings per share 28,601 27,991 - ------------------------------------------------------------------------------- Earnings per share $ 0.96 $ 0.75 - ------------------------------------------------------------------------------- - -------------------------------------------------------------------------------
See accompanying notes. 3 PacifiCare Health Systems, Inc. Consolidated Statements of Income (unaudited) - -------------------------------------------------------------------------------
Six months ended March 31, (Amounts in thousands,) ---------------------------------- except per share data) 1995 1994 - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- Revenue: Commercial premiums $ 699,517 $ 598,483 Government premiums (Medicare and Medicaid) 1,009,256 742,294 Other income 25,607 19,395 - ------------------------------------------------------------------------------- Total operating revenue 1,734,380 1,360,172 - ------------------------------------------------------------------------------- Expenses: Health care services: Medical services 671,227 541,060 Hospital services 589,042 458,304 Other services 165,879 127,157 - ------------------------------------------------------------------------------- Total health care services 1,426,148 1,126,521 - ------------------------------------------------------------------------------- Marketing, general and administrative expenses 237,286 180,899 Amortization of intangibles 2,632 1,581 - ------------------------------------------------------------------------------- Operating income 68,314 51,171 Interest income 15,505 12,385 Interest expense (3,694) (1,005) - ------------------------------------------------------------------------------- Income before income taxes and cumulative effect of a change in accounting principle 80,125 62,551 Provision for income taxes 32,709 26,968 - ------------------------------------------------------------------------------- Income before cumulative effect of a change in accounting principle 47,416 35,583 Cumulative effect on prior years of a change in accounting principle -- 5,658 - ------------------------------------------------------------------------------- Net income $ 47,416 $ 41,241 - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- Weighted average common shares and equivalents outstanding used to calculate earnings per share 28,414 27,885 - ------------------------------------------------------------------------------- Earnings per share: Before cumulative effect of a change in accounting principle $ 1.67 $ 1.28 Cumulative effect on prior years of a change in accounting principle -- 0.20 - ------------------------------------------------------------------------------- Earnings per share $ 1.67 $ 1.48 - ------------------------------------------------------------------------------- - -------------------------------------------------------------------------------
See accompanying notes. 4 PacifiCare Health Systems, Inc. Consolidated Statements of Cash Flows (unaudited) - -------------------------------------------------------------------------------
(Amounts in thousands) Six months ended March 31, -------------------------------- 1995 1994 - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- Operating activities: Net income $ 47,416 $ 41,241 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 10,059 8,639 Cumulative effect of a change in accounting principle -- (5,658) Deferred income taxes 5,585 1,971 Amortization of intangibles 2,632 1,581 Provision for doubtful accounts 1,187 177 Loss on disposal of fixed assets 73 176 Other 113 26 Changes in assets and liabilities, net of effects from acquisitions: Accounts receivable (11,905) 6,116 Prepaid, intangible and other assets (3,597) 7,578 Medical claims and benefits payable 9,184 59,795 Accounts payable and accrued liabilities 5,389 15,298 Unearned premium revenue 17,281 116,641 - ------------------------------------------------------------------------------- Net cash flows provided by operating activities 83,417 253,581 - ------------------------------------------------------------------------------- Investing activities: Purchase of marketable securities (104,307) (79,878) Acquisitions, net of cash acquired (54,454) (13,720) Purchase of property, plant and equipment (10,640) (13,708) Purchase of marketable securities - restricted (3,409) (742) - ------------------------------------------------------------------------------- Net cash flows used in investing activities (172,810) (108,048) - ------------------------------------------------------------------------------- Financing activities: Proceeds from issuance of common stock 199,404 1,257 Principal payments on long-term debt (172,316) (2,449) Borrowings under long-term lines of credit 83,335 21,500 Purchase and retirement of common stock -- (1,077) - ------------------------------------------------------------------------------- Net cash flows provided by financing activities 110,423 19,231 - ------------------------------------------------------------------------------- Net increase in cash and equivalents 21,030 164,764 Beginning cash and equivalents 192,609 33,262 - ------------------------------------------------------------------------------- Ending cash and equivalents $ 213,639 $ 198,026 - ------------------------------------------------------------------------------- - -------------------------------------------------------------------------------
See accompanying notes. 5 PacifiCare Health Systems, Inc. Consolidated Statements of Cash Flows (unaudited) - -------------------------------------------------------------------------------
(Amounts in thousands) Six months ended March 31, -------------------------------- 1995 1994 - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- Supplemental cash flow information Cash paid during the period for: Income taxes $ 26,882 $ 23,528 Interest $ 2,236 $ 640 - ------------------------------------------------------------------------------- Supplemental schedule of noncash investing and financing activities: Tax benefit realized upon exercise of stock options $ 1,840 $ 858 Compensation awarded in Class B Common Stock $ 1,024 $ 849 Leases capitalized $ 392 $ 3,903 Capital leases terminated $ -- $ 1 - ------------------------------------------------------------------------------- Details of unrealized holding gain on available- for-sale securities: Increase in marketable securities $ 91 $ -- Increase in deferred income taxes $ 52 $ -- - ------------------------------------------------------------------------------- Increase in shareholders' equity $ 39 $ -- - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- Details of businesses acquired in purchase transactions: Fair value of assets acquired $ 134,710 $ 67,645 Less liabilities assumed or created, including acquisition payable 79,831 37,217 - ------------------------------------------------------------------------------- Cash paid for acquisitions 54,879 30,428 Cash acquired in acquisitions 425 16,708 - ------------------------------------------------------------------------------- Net cash paid for acquisitions $ 54,454 $ 13,720 - ------------------------------------------------------------------------------- - -------------------------------------------------------------------------------
See accompanying notes. 6 PACIFICARE HEALTH SYSTEMS, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS March 31, 1995 (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. At March 31, 1995, the net unrealized gains increased current marketable securities by approximately $91,000 and increased stockholders' equity by $39,000 (net of deferred income taxes of $52,000). NOTE 3 - ACQUISITIONS a) 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"). On March 31, 1995, the Company acquired ValuCare, a Fresno based health maintenance organization ("HMO") with approximately 67,000 members located in central California (the "ValuCare Acquisition") and membership of Pacific Health Plans, an HMO located in Washington with approximately 33,000 members (the "PHP Acquisition"). The Preferred Solutions Acquisition, the ValuCare Acquisition and the PHP Acquisition collectively shall be referred to herein as the "1995 Acquisitions." The membership and results of operations for the March 31, 1995 acquisitions will be reflected in the Company's financial statements beginning April 1, 1995. 7 b) 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 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." The total purchase price for the Acquisitions, including contingent purchase payments, is expected to be approximately $220 million. Of the total purchase price, $218 million was paid or accrued at March 31, 1995. This amount includes approximately $6 million in contingent payments made in fiscal 1995. The acquisition payable of $75 million at March 31, 1995 was paid on April 3, 1995. The remaining contingent purchase payments for the Acquisitions will be paid in 1995 and 1996 if certain events occur. Based on the fair values of the assets and liabilities of the Acquired Companies, the preliminary estimate of excess purchase price is approximately $226 million. A final allocation of purchase price will be determined when appraisals and other studies are completed and contingent purchase payments are determined. The Acquisitions 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 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 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 Acquisitions occurred at the beginning of the period and is not intended to be indicative of results which may occur in the future.
- ------------------------------------------------------------------------------- Three months ended Six months ended (Unaudited) March 31, March 31, (Amounts in thousands, ------------------------------------------------- except per share amounts) 1995 1994 1995 1994 - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- Premium revenue $ 933,573 $ 761,812 $ 1,778,440 $ 1,470,303 Total operating revenue $ 948,552 $ 772,780 $ 1,805,333 $ 1,494,364 Pretax income $ 43,436 $ 30,837 $ 75,635 $ 53,963 Net income(1) $ 25,594 $ 17,016 $ 44,318 $ 35,298 Earnings per share(1) $ 0.89 $ 0.61 $ 1.56 $ 1.27 - ------------------------------------------------------------------------------- 1 The unaudited pro forma income before cumulative effect of a change in accounting principle for the six months ended March 31, 1994 was $29.6 million or $1.06 per share. The unaudited pro forma cumulative effect on prior years of a change in accounting principle for the six months ended March 31, 1994 was $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 8 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 amounts. As permitted by SFAS No. 109, the Company 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 Saving Association 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 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 BofA Credit Line may be extended beyond its five year term but not beyond November 30, 2001. In November 1994, the Company borrowed $83 million under the BofA Credit Line to pay the balance owed on the Chase Credit Line. The amount borrowed under the BofA Credit Line was repaid in March 1995 from the proceeds of the sale of Class B Common Stock (see Note 6 - "Shareholders' Equity"). NOTE 6 - SHAREHOLDERS' EQUITY As of March 29, 1995, the Company completed a public offering of 5,175,000 shares of its Class B Common Stock, par value $0.01 per share (the "Class B Common Stock"), of which 3,000,000 shares were issued and sold by the Company and 2,175,000 shares were sold by UniHealth, the Company's largest shareholder. The sale of 4,500,000 shares of the Class B Common Stock closed on March 23, 1995 with the sale of the additional 675,000 shares of the Class B Common Stock occurring on March 29, 1995 pursuant to the exercise of the underwriters' over-allotment option. The net proceeds received by the Company from the sale of the 3,000,000 shares of Class B Common Stock were approximately $199 million after deducting the estimated underwriting discounts and commissions and expenses of the offering payable by the Company. The Company did not receive any of the proceeds from the sale of shares of Class B Common Stock by UniHealth. The Company used approximately $186 million of the net proceeds to repay the amount outstanding under its BofA Credit Line and to replenish working capital used to pay for certain of the Acquisitions (see Note 3 - "Acquisitions"). The remaining net proceeds of the offering will be used by the Company to increase working capital and for general corporate purposes. Such purposes may include future acquisitions, the introduction of new products and services, increased investment in existing operations and expansion of geographic markets. Pending the above described uses, the net proceeds will be invested in investment-grade, interest bearing securities. In December 1994, the Company completed a public offering of 90,000 shares of its Class B Common Stock to certain physician groups ("the groups") which currently contract with the Company. 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. 9 On December 13, 1993, UniHealth 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 from this offering. 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. 10 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 MARCH 31, 1995 AT MARCH 31, 1994 - --------------------------------------------------------------------------------------------- Medicare & Medicare & Medicaid Medicaid MEMBERSHIP DATA Commercial (Government) Total Commercial (Government) Total - --------------------------------------------------------------------------------------------- California 705,009 337,880 1,042,889 609,525 256,194 865,719 Florida 55,995 11,650 67,645 8,025 12,500 20,525 Oklahoma 112,107 14,332 126,439 111,669 10,520 122,189 Oregon 84,675 39,175 123,850 52,452 33,046 85,498 Texas 65,982 41,112 107,094 59,691 30,688 90,379 Washington 38,828 19,155 57,983 27,502 15,008 42,510 - --------------------------------------------------------------------------------------------- Total membership 1,062,596 463,304 1,525,900 868,864 357,956 1,226,820 - --------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------
THREE MONTHS ENDED SIX MONTHS ENDED OPERATING STATISTICS MARCH 31, MARCH 31, - ------------------------------------------------------------------------------------------------------- 1995 1994 1995 1994 - ------------------------------------------------------------------------------------------------------- - ------------------------------------------------------------------------------------------------------- Medical loss ratio (health care services as a percent of premium revenue) 83.4% 83.8% 83.5% 84.0% Marketing, general and administrative expense as a percent of operating revenue 13.6% 12.8% 13.7% 13.3% Operating income as a percent of operating revenue 4.1% 4.3% 3.9% 3.8% - ------------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------------
RESULTS OF OPERATIONS Three and Six Months Ended March 31, 1995 Compared to the Three and Six Months Ended March 31, 1994 Total operating revenue increased 28 percent to $913 million for the three months ended March 31, 1995 from $714 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 $165 million. In addition, approximately $25 million of the increase in total operating revenue represents the incremental operations included in the quarter ended March 31, 1995 of the Acquisitions described in Note 3 of the Notes to Condensed Consolidated Financial 11 Statements. The Company's specialty managed care products and services and its joint venture medical groups contributed the remainder of the increase. Total operating revenue increased 28 percent to $1.73 billion for the six months ended March 31, 1995 from $1.36 billion for the same period in the prior year. Growth in both the commercial and government programs, a result of enrollment gains, offset slightly by decreases in commercial premium rates, provided an increase in total operating revenue of $296 million. In addition, approximately $66 million of the increase in total operating revenue represents the incremental operations included in the six months ended March 31, 1995 of the Acquisitions. The Company's specialty managed care products and services and its joint venture medical groups contributed the remainder of the increase. For the three and six months ended March 31, 1995, commercial HMO premiums increased $52 million to $346 million and $96 million to $662 million, respectively, as compared to the same periods in the prior year. Excluding the effects of the Acquisitions, membership growth provided the increase in the commercial HMO program. Because of increased competition in the Company's markets, overall commercial HMO premium rates decreased an average of three percent and one percent for the three and six months ended March 31, 1995, respectively, primarily in California and Oregon. The Company expects commercial HMO premium rates to remain flat or decrease for the remainder of fiscal 1995. Government premiums rose $138 million to $532 million and $267 million to $1 billion for the three and six months ended March 31, 1995, respectively. Enrollment gains predominately in the Secure Horizons programs contributed approximately 88 percent of this increase in both periods. Total health care service expenses as a percent of premium revenue (the "medical loss ratio") for the quarter ended March 31, 1995, have decreased to 83.4 percent from 83.8 percent for the same period in the prior year. The commercial medical loss ratio increased to 81.1 percent from 78.2 percent while the government medical loss ratio decreased to 85.0 percent from 88.3 percent. For the six months ended March 31, 1995, the consolidated medical loss ratio of 83.5 percent decreased compared to a ratio of 84.0 percent for the same period in the prior year. The commercial medical loss ratio increased to 81.4 percent from 80.6 percent while the government medical loss ratio decreased to 84.9 percent from 86.8 percent for the same period in the prior year. The increase in the commercial medical loss ratio for the three and six months ended March 31, 1995 is primarily attributable to the impact of the Company's acquisitions in the Florida and Washington markets which have higher commercial loss ratios. Because the Company's provider contracting approach has not been fully integrated in the recently acquired markets of Florida and Washington, the Company expects a higher commercial medical loss ratio for the year ended September 30, 1995 compared to the prior year. The decrease in the medical loss ratio for the government programs for the three and six months ended March 31, 1995, respectively, as compared to the same period of the prior year, is primarily related to decreases in outpatient surgery expenses and payment to physicians as a result of more cost effective contracts. The government medical loss ratio for the remainder of the year is expected to remain consistent with the ratio for the six months ended March 31, 1995 The Company has historically made adjustments to health care service expenses in the quarter ended June 30 to reflect the impact of net positive reserve adjustments resulting primarily from the periodic reconciliation of amounts reserved for physician incentive programs. Based on estimates made as of March 31, 1995, the Company does not anticipate that the actual net positive reserve adjustments for the year ended September 30, 1995 will be as significant as amounts recorded in prior years. 12 Marketing, general and administrative expenses increased $32 million to $124 million for the three months ended March 31, 1995 from $92 million for the same period in 1994. As a percentage of operating revenue, marketing, general and administrative expenses increased to 13.6 percent from 12.8 percent. For the six months ended March 31, 1995, marketing, general and administrative expenses totaled $237 million, an increase of $56 million over the same period in the prior year. As a percentage of total operating revenue, marketing, general, and administrative expenses increased slightly to 13.7 percent from 13.3 percent for the same period in 1994. These increases are primarily attributable to higher costs in developing markets including Florida, Washington and Houston and Dallas, Texas. Marketing, general and administrative expenses determined as a percentage of operating revenue for the balance of fiscal 1995 are expected to be comparable to the rate for the six months ended March 31, 1995 and above the prior year's results as efficiencies in mature market process improvements are offset by investment in the new markets discussed above. Earnings per share ("EPS") rose 28 percent to $0.96 for the quarter ended March 31, 1995, compared to $0.75 for the comparable quarter in the prior year. For the six months ended March 31, 1995, before the cumulative effect of a change in accounting principle, EPS increased 30 percent to $1.67. These increases are primarily attributable to membership growth derived substantially from the government programs and a lower government medical loss ratio. For the six months ended March 31, 1994, changes in income tax accounting principles (see Note 4 of the Notes to Condensed Consolidated Financial Statements) increased EPS by approximately $0.20, resulting in earnings per share of $1.48. The Company's ability to expand depends, 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 is becoming difficult due to increasing competition among HMOs for physician contracts. In addition, the Company's profitability depends, 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 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. 13 LIQUIDITY AND CAPITAL RESOURCES The Company's working capital as of March 31, 1995 was $256 million, an increase of $25 million from September 30, 1994. The increase is primarily attributable to an increase in marketable securities of $104 million resulting from the investment of the net proceeds from the public offering completed in March 1995 (see discussion below), offset by an increase in current liabilities of $75 million related to the purchase of ValuCare. As of March 29, 1995, the Company completed a public offering of 5,175,000 shares of its Class B Common Stock, of which 3,000,000 shares were sold by the Company and 2,175,000 shares were sold by UniHealth. The net proceeds received by the Company from the sale of the 3,000,000 shares of Class B Common Stock were approximately $199 million after deducting the estimated underwriting discounts and commissions and expenses of the offering payable by the Company. The Company used approximately $186 million of the net proceeds to repay the amount outstanding under the BofA Credit Line (See Note 5 - "Long Term Debt") and to replenish working capital used to pay for certain of the Acquisitions (see Note 3 - "Acquisitions"). 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 future acquisitions, the introduction of new products and services, increased investments in existing operations and expansion of geographic markets. Pending the above described uses, the net proceeds will be invested in investment grade, interest bearing securities. 14 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 The Annual Meeting of Shareholders (the "Annual Meeting") of PacifiCare Health Systems, Inc. (the "Company") was held on March 1, 1995 at the Company's corporate office in Cypress, California. The following matters were addressed at the meeting: ELECTION OF DIRECTORS David Carpenter, David Reed, Lloyd Ross and Jean Bixby Smith were duly elected to the Board of Directors at the Annual Meeting. Terry Hartshorn, Alan Hoops, Gary L. Leary and Warren Pinkert II are directors whose terms of office continued after the Annual Meeting. The votes of holders of 9,980,005 shares were cast "FOR" the election of the four directors of the Company, the votes of holders of 578 shares were cast "AGAINST" and the holders of 23,006 shares "ABSTAINED" from voting. The votes "FOR" represents approximately 81% of all shares outstanding and entitled to vote and 99% of all shares voted. PROPOSAL TO APPROVE THE SECOND AMENDED AND RESTATED 1989 STOCK OPTION PLAN FOR OFFICERS AND KEY EMPLOYEES OF PACIFICARE HEALTH SYSTEMS, INC. This proposal sought shareholder approval of the Second Amended and Restated 1989 Stock Option Plan for Officers and Key Employees of PacifiCare Health Systems, Inc. (the "Amended Employee Plan"). The Amended Employee Plan supersedes the existing Amended 1989 Stock Option Plan for Officers and Key Employees of PacifiCare Health Systems, Inc. and provides: (i) that "Stock Payments" include both grants of shares of Class B Common Stock in lieu of cash compensation other than based salary and grants of shares of Class B Common Stock to employees as an incentive to employment with the Company: (ii) for the inclusion of consultants to the persons eligible to participate in the Amended Employee Plan; (iii) an increase in the limit on the number of options and stock appreciation rights available for grant to any participant of the Amended Employee Plan from 100,000 shares to 200,000 shares during any fiscal year; and (iv) an increase of the limit on the aggregate number of shares of the Company's common stock which may be subject to awards granted during any fiscal year beginning with October 1994 from one and one-half percent of the aggregate outstanding shares of the Class A and Class B Common Stock of the Company as of the last day of the previous fiscal year to two percent of the aggregate outstanding shares of the Class A and Class B Common Stock of the Company as of the last day of the previous fiscal year. 15 The votes of holders of 8,783,217 shares were cast "FOR" the Proposal to Approve the Second Amended and Restated 1989 Stock Option Plan for Officers and Key Employees of PacifiCare Health Systems, Inc., the votes of holders of 228,822 shares were cast "AGAINST" and the holders of 144,063 shares "ABSTAINED" from voting. The votes "FOR" represents approximately 72% of all shares outstanding and entitled to vote and 96% of all shares voted. PROPOSAL TO APPROVE PERFORMANCE OBJECTIVES TO, AND MAXIMUM AWARDS UNDER THE COMPANY'S AMENDED LONG-TERM PERFORMANCE INCENTIVE PLAN, AS AMENDED. This proposal sought the approval of changes in the performance objectives for the Amended Long-Term Performance Incentive Plan, as amended (the "LTPIP"), from increases in return on equity and increases in revenue of non-core business to earnings per share. In addition, the shareholders were requested to approve the maximum award of $1,000,000 which an Executive Officer (as defined in section 3(b) -7 of the Securities and Exchange Act of 1934 as amended) may receive pursuant to any award under the LTPIP. The votes of holders of 8,847,721 shares were cast "FOR" the Proposal to Approve Performance Objectives To, and Maximum Awards Under the Company's Amended Long-Term Performance Incentive Plan, as Amended, the votes of holders of 216,409 shares were cast "AGAINST" and the holders of 54,904 shares "ABSTAINED" from voting. The votes "FOR" represents approximately 72% of all shares outstanding and entitled to vote and 97% of all shares voted. PROPOSAL TO APPROVE PERFORMANCE OBJECTIVES TO, AND MAXIMUM AWARDS UNDER THE COMPANY'S AMENDED MANAGEMENT INCENTIVE COMPENSATION PLAN, AS AMENDED. This proposal sought the approval of performance objectives in addition to increases in earnings per share for the Amended Management Incentive Compensation Plan, as amended (the "MICP"). The additional performance objective was general and administrative costs as a percentage of revenue. In addition, the shareholders were requested to approve the maximum award of $1,000,000 which an Executive Officer may receive pursuant to any award under the MICP. The votes of holders of 8,846,841 shares were cast "FOR" the Proposal to Approve Performance Objectives To and Maximum Awards Under the Company's Amended Management Incentive Compensation Plan, as Amended, the votes of holders of 55,838 shares were cast "AGAINST" and the holders of 216,355 shares "ABSTAINED" from voting. The votes "FOR" represents approximately 72% of all shares outstanding and entitled to vote and 97% of all shares voted. 16 Item 5: Other Information None Item 6: Exhibits and Reports on Form 8-K (a) EXHIBIT INDEX Exhibit 11A Computation of Net Income per Share of Common Stock - Primary Exhibit 11B Computation of Net Income per Share of Common Stock - Fully Diluted Exhibit 27 Financial Data Schedules (b) No reports on Form 8-K were filed during the quarter for which this report is filed. 17 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: By: /s/ Alan Hoops ------------------------- ----------------------------- Alan Hoops President and Chief Executive Officer Date: By: /s/ Wayne Lowell ------------------------- ----------------------------- Wayne Lowell Executive Vice President and Chief Financial Officer 18 EX-11.A 2 EXHIBIT 11-A Exhibit 11A PacifiCare Health Systems, Inc. Computation of Net Income per Share of Common Stock - Primary (Dollars and shares in thousands, except per share amounts)
Three months ended Six months ended March 31, March 31, 1995 1994 1995 1994 - ----------------------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------------------- Shares outstanding at the beginning of the period 27,594 27,317 27,528 27,256 Weighted average of shares issued during the period in connection with a public offering, compensation awarded in stock and exercise of stock options 359 30 220 71 Shares repurchased (weighted) - - - (31) Dilutive shares issuable, net of shares assumed to have been purchased (at the average market price) for treasury with assumed proceeds from: Contingent exercise of stock options 645 644 663 589 Registered equity purchase contracts 3 - 3 - - ----------------------------------------------------------------------------------------------------------------------- Total shares - primary 28,601 27,991 28,414 27,885 - ----------------------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------------------- Income before cumulative effect of a change in accounting principle $ 27,359 $ 20,844 $ 47,416 $ 35,583 Cumulative effect on prior years of a change in accounting principle - - - 5,658 - ----------------------------------------------------------------------------------------------------------------------- Net income $ 27,359 $ 20,844 $ 47,416 $41,241 - ----------------------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------------------- Primary earnings per share: Earnings before cumulative effect of a change in accounting principle $ 0.96 $ 0.75 $ 1.67 $ 1.28 Cumulative effect on prior years of a change in accounting principle - - - 0.20 - ----------------------------------------------------------------------------------------------------------------------- Earnings per share $ 0.96 $ 0.75 $ 1.67 $ 1.48 - ----------------------------------------------------------------------------------------------------------------------- - -----------------------------------------------------------------------------------------------------------------------
EX-11.B 3 EXHIBIT 11B Exhibit 11B PacifiCare Health Systems, Inc. Computation of Net Income per Share of Common Stock - Fully Diluted (Dollars and shares in thousands, except per share amounts)
Three months ended Six months ended March 31, March 31, --------------------------------------------------------------- 1995 1994 1995 1994 - ----------------------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------------------- Shares outstanding at the beginning of the period 27,594 27,317 27,528 27,256 Weighted average of shares issued during the period as a result of a public offering, compensation awarded in stock and exercise of stock options 359 30 220 71 Shares repurchased (weighted) - - - (31) Dilutive shares issuable, net of shares assumed to have been purchased (at the higher of average or ending market price) for treasury with assumed proceeds from: Contingent exercise of stock options 685 645 696 639 Registered equity purchase contracts 6 - 7 - - ----------------------------------------------------------------------------------------------------------------------- Total shares - fully diluted 28,644 27,992 28,451 27,935 - ----------------------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------------------- Income before cumulative effect of a change in accounting principle $ 27,359 $ 20,844 $ 47,416 $ 35,583 Cumulative effect on prior years of a change in accounting principle - - - 5,658 - ----------------------------------------------------------------------------------------------------------------------- Net income $ 27,359 $ 20,844 $ 47,416 $ 41,241 - ----------------------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------------------- Fully diluted earnings per share: Earnings before cumulative effect of a change in accounting principle $ 0.96 $ 0.75 $ 1.67 $ 1.28 Cumulative effect on prior years of a change in accounting principle - - - 0.20 - ----------------------------------------------------------------------------------------------------------------------- Earnings per share $ 0.96 $ 0.75 $ 1.67 $ 1.48 - ----------------------------------------------------------------------------------------------------------------------- - -----------------------------------------------------------------------------------------------------------------------
EX-27 4 FINANCIAL DATA SCHEDULE
5 1,000 3-MOS SEP-30-1995 OCT-01-1994 SEP-30-1995 213,639 622,397 87,860 331 0 955,053 161,073 62,373 1,375,617 698,719 13,403 307 0 0 663,082 1,375,617 0 912,766 0 798,849 0 1,097 2,010 46,042 18,683 27,359 0 0 0 27,359 0.96 0.96
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