0000912057-95-006135.txt : 19950810 0000912057-95-006135.hdr.sgml : 19950810 ACCESSION NUMBER: 0000912057-95-006135 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19950630 FILED AS OF DATE: 19950809 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: 95560072 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 June 30, 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 July 31, 1995, there were 12,324,558 shares of the Registrant's Class A Common Stock, par value $0.01 per share, outstanding and 18,518,375 shares of Class B Common Stock, par value $0.01 per share, outstanding. 1 Part 1: FINANCIAL INFORMATION --------------------- Item 1: FINANCIAL STATEMENTS PACIFICARE HEALTH SYSTEMS, INC. CONDENSED CONSOLIDATED BALANCE SHEETS
---------------------------------------------------------------------------- JUNE 30, SEPTEMBER 30, (AMOUNTS IN THOUSANDS, 1995 1994 EXCEPT PER SHARE DATA) (UNAUDITED) ---------------------------------------------------------------------------- Assets ---------------------------------------------------------------------------- Current assets: Cash and equivalents $ 280,219 $ 192,609 Marketable securities 507,790 517,999 Receivables, net 108,073 73,976 Prepaid expenses 9,469 8,883 Deferred income taxes 17,302 28,415 ---------------------------------------------------------------------------- Total current assets 922,853 821,882 ---------------------------------------------------------------------------- Property, plant and equipment, net 101,654 97,018 Marketable securities - restricted 19,514 15,994 Goodwill and intangible assets 293,086 167,085 Other assets 9,145 3,569 ---------------------------------------------------------------------------- $ 1,346,252 $ 1,105,548 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- Liabilities and Shareholders' Equity Current liabilities: Medical claims and benefits payable $ 287,700 $ 302,900 Accounts payable and accrued liabilities 131,203 108,595 Unearned premium revenue 206,109 170,970 Long-term debt due within one year 8,475 8,175 ---------------------------------------------------------------------------- Total current liabilities 633,487 590,640 ---------------------------------------------------------------------------- Long-term debt due after one year 12,287 101,137 Minority interest 405 413 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; 12,325 and 12,238 issued at June 30, 1995 and September 30, 1994, respectively 123 122 Class B common shares, par value $0.01 per share; 60,000 shares authorized; 18,518 and 15,290 issued at June 30, 1995 and September 30, 1994, respectively 185 153 Additional paid-in capital 345,983 141,955 Unrealized holding gain on available-for-sale securities net of tax effect of $3,127 4,991 -- Retained earnings 348,791 271,128 ---------------------------------------------------------------------------- Total shareholders' equity 700,073 413,358 ---------------------------------------------------------------------------- $ 1,346,252 $ 1,105,548 ---------------------------------------------------------------------------- ----------------------------------------------------------------------------
See accompanying notes. 2 PACIFICARE HEALTH SYSTEMS, INC. CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
---------------------------------------------------------------------------- THREE MONTHS ENDED JUNE 30, (AMOUNTS IN THOUSANDS, -------------------------- EXCEPT PER SHARE DATA) 1995 1994 ---------------------------------------------------------------------------- Revenue: Commercial premiums $ 399,919 $ 313,127 Government premiums (Medicare and Medicaid) 568,508 429,997 Other income 12,809 9,135 ---------------------------------------------------------------------------- Total operating revenue 981,236 752,259 ---------------------------------------------------------------------------- Expenses: Health care services: Medical services 385,446 295,476 Hospital services 329,953 246,074 Other services 96,957 72,400 ---------------------------------------------------------------------------- Total health care services 812,356 613,950 ---------------------------------------------------------------------------- Marketing, general and administrative expenses 127,063 98,394 Amortization of intangibles 2,231 890 ---------------------------------------------------------------------------- Operating income 39,586 39,025 Interest income 12,310 7,047 Interest expense (1,029) (430) ----------------------------------------------------------------------------- Income before income taxes 50,867 45,642 Provision for income taxes 20,619 18,846 ---------------------------------------------------------------------------- Net income $ 30,248 $ 26,796 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- Weighted average common shares and equivalents outstanding used to calculate earnings per share 31,313 28,027 ---------------------------------------------------------------------------- Earnings per share $ 0.97 $ 0.95 ---------------------------------------------------------------------------- ----------------------------------------------------------------------------
See accompanying notes. 3 PACIFICARE HEALTH SYSTEMS, INC. CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
---------------------------------------------------------------------------- NINE MONTHS ENDED JUNE 30, (AMOUNTS IN THOUSANDS, -------------------------- EXCEPT PER SHARE DATA) 1995 1994 ---------------------------------------------------------------------------- Revenue: Commercial premiums $ 1,099,436 $ 911,610 Government premiums (Medicare and Medicaid) 1,577,764 1,172,291 Other income 38,416 28,530 ---------------------------------------------------------------------------- Total operating revenue 2,715,616 2,112,431 ---------------------------------------------------------------------------- Expenses: Health care services: Medical services 1,056,673 836,536 Hospital services 918,995 704,378 Other services 262,836 199,557 ---------------------------------------------------------------------------- Total health care services 2,238,504 1,740,471 ---------------------------------------------------------------------------- Marketing, general and administrative expenses 364,349 279,293 Amortization of intangibles 4,863 2,471 ---------------------------------------------------------------------------- Operating income 107,900 90,196 Interest income 27,815 19,432 Interest expense (4,723) (1,435) ---------------------------------------------------------------------------- Income before income taxes and cumulative effect of a change in accounting principle 130,992 108,193 Provision for income taxes 53,328 45,814 ---------------------------------------------------------------------------- Income before cumulative effect of a change in accounting principle 77,664 62,379 Cumulative effect on prior years of a change in accounting principle -- 5,658 ---------------------------------------------------------------------------- Net income $ 77,664 $ 68,037 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- Weighted average common shares and equivalents outstanding used to calculate earnings per share 29,378 27,948 ---------------------------------------------------------------------------- Earnings per share: Before cumulative effect of a change in accounting principle $ 2.64 $ 2.23 Cumulative effect on prior years of a change in accounting principle -- 0.20 ---------------------------------------------------------------------------- Earnings per share $ 2.64 $ 2.43 ---------------------------------------------------------------------------- ----------------------------------------------------------------------------
See accompanying notes. 4 PACIFICARE HEALTH SYSTEMS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
---------------------------------------------------------------------------- NINE MONTHS ENDED JUNE 30, -------------------------- (AMOUNTS IN THOUSANDS) 1995 1994 ---------------------------------------------------------------------------- Operating activities: Net income $ 77,664 $ 68,037 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 15,415 13,258 Cumulative effect of a change in accounting principle -- (5,658) Deferred income taxes 7,986 3,110 Amortization of intangibles 4,863 2,471 Provision for doubtful accounts 392 126 Loss on disposal of fixed assets 198 462 Other 111 35 Changes in assets and liabilities, net of effects from acquisitions: Accounts receivable (22,498) (24,390) Prepaid, intangible and other assets (6,048) 9,415 Medical claims and benefits payable (19,716) 21,154 Accounts payable and accrued liabilities 22,238 29,205 Unearned premium revenue 34,630 1,533 ---------------------------------------------------------------------------- Net cash flows provided by operating activities 115,235 118,758 ---------------------------------------------------------------------------- Investing activities: Sale (purchase) of marketable securities 18,327 (82,547) Purchase of property, plant and equipment (16,670) (18,409) Acquisitions, net of cash acquired (135,440) (15,434) Sale (purchase) of marketable securities - restricted (3,520) 1,105 ---------------------------------------------------------------------------- Net cash flows used in investing activities (137,303) (115,285) ---------------------------------------------------------------------------- Financing activities: Borrowings under long-term lines of credit 83,335 24,600 Principal payments on long-term debt (173,644) (4,050) Proceeds from issuance of common stock 199,987 1,780 Purchase and retirement of common stock -- (1,077) ---------------------------------------------------------------------------- Net cash flows provided by financing activities 109,678 21,253 ---------------------------------------------------------------------------- Net increase in cash and equivalents 87,610 24,726 Beginning cash and equivalents 192,609 33,262 ---------------------------------------------------------------------------- Ending cash and equivalents $ 280,219 $ 57,988 ---------------------------------------------------------------------------- ----------------------------------------------------------------------------
See accompanying notes. 5 PACIFICARE HEALTH SYSTEMS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
---------------------------------------------------------------------------- (AMOUNTS IN THOUSANDS) NINE MONTHS ENDED JUNE 30, -------------------------- 1995 1994 ---------------------------------------------------------------------------- Supplemental cash flow information Cash paid during the period for: Income taxes $ 42,417 $ 39,277 Interest $ 2,534 $ 1,249 ---------------------------------------------------------------------------- Supplemental schedule of noncash investing and financing activities: Tax benefit realized upon exercise of stock options $ 3,047 $ 1,287 Compensation awarded in Class B Common Stock $ 1,024 $ 849 Leases capitalized $ 392 $ 3,896 Capital leases terminated $ -- $ 1 ---------------------------------------------------------------------------- Details of unrealized holding loss on available-for-sale securities: Increase in marketable securities $ 8,118 $ -- Decrease in deferred taxes 3,127 -- ---------------------------------------------------------------------------- Increase in shareholders' equity $ 4,991 $ -- ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- Details of businesses acquired in purchase transactions: Fair value of assets acquired $ 147,730 $ 71,256 Less liabilities assumed or created, including notes to seller 10,714 39,114 ---------------------------------------------------------------------------- Cash paid for acquisitions 137,016 32,142 Cash acquired in acquisitions 1,576 16,708 ---------------------------------------------------------------------------- Net cash paid for acquisitions $ 135,440 $ 15,434 ---------------------------------------------------------------------------- ----------------------------------------------------------------------------
See accompanying notes. 6 PACIFICARE HEALTH SYSTEMS, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS June 30, 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 June 30, 1995, the net unrealized gains increased current marketable securities by approximately $8.1 million and increased shareholders' equity by $5.0 million, net of deferred income taxes of $3.1 million. NOTE 3 - ACQUISITIONS --------------------- a) 1995 Acquisitions. During fiscal year 1995, the Company has made the following acquisitions (the "1995 Acquisitions"): (i) Preferred Solutions, a San Jose-based pharmacy benefit management company, in January 1995; (ii) ValuCare, a Fresno-based health maintenance organization ("HMO"), with approximately 67,000 members in March 1995; and (iii) the membership of Pacific Health Plans, a Washington-based HMO, with approximately 33,000 members in March 1995. 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 7 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 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 $222 million. Of the total purchase price, $221 million has been paid to date. This amount includes approximately $11 million in contingent payments made in fiscal 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 $223 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 had 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 NINE MONTHS ENDED (UNAUDITED) JUNE 30, JUNE 30, (AMOUNTS IN THOUSANDS, -------------------------------------------------- EXCEPT PER SHARE AMOUNTS) 1995 1994 1995 1994 ---------------------------------------------------------------------------- Premium revenue $ 1,003,260 $ 785,611 $ 2,781,700 $ 2,255,915 Total operating revenue $ 1,017,022 $ 796,076 $ 2,822,046 $ 2,290,440 Pretax income $ 48,261 $ 40,455 $ 124,320 $ 96,104 Net income (1) $ 28,483 $ 23,350 $ 73,044 $ 59,652 Earnings per share (1) $ 0.91 $ 0.83 $ 2.49 $ 2.13 ---------------------------------------------------------------------------- (1) The unaudited pro forma income before cumulative effect of a change in accounting principle for the nine months ended June 30, 1994 was $54 million or $1.93 per share. The unaudited pro forma cumulative effect on prior years of a change in accounting principle for the nine months ended June 30, 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 $5.7 million or approximately $0.20 per share. SFAS No. 109 is an asset and liability approach that requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been recognized in the Company's financial statements or tax returns. In estimating future tax consequences, SFAS No. 109 generally considers all expected future events other than enactments of changes in the tax law or rates. Previously, the Company used the SFAS No. 96, asset and liability approach that gave no recognition to future events other than the recovery of assets and settlement of liabilities at their carrying amounts. As permitted by SFAS No. 109, the Company elected not to restate the financial statements of prior years. 8 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 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 syndicated $130 million credit line with The Chase Manhattan Bank, N.A. 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. Upon completion of this offering, UniHealth owned 48 percent and five percent of the outstanding Class A Common Stock (as defined herein) and Class B Common Stock, respectively. The Company received net proceeds of approximately $199 million from the sale of the 3,000,000 shares of Class B Common Stock after deducting 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 over a five year period beginning May 1, 1996 at $64.88 per share. 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. 9 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 JUNE 30, 1995 AT JUNE 30, 1994 -------------------------------------------------------------------------------------- GOVERNMENT GOVERNMENT (MEDICARE & (MEDICARE & MEMBERSHIP DATA COMMERCIAL MEDICAID) TOTAL COMMERCIAL MEDICAID) TOTAL -------------------------------------------------------------------------------------- California 785,661 360,385 1,146,046 610,270 272,403 882,673 Florida 54,699 10,919 65,618 8,070 10,740 18,810 Oklahoma 111,481 15,351 126,832 111,522 11,182 122,704 Oregon 88,144 42,161 130,305 55,132 36,821 91,953 Texas 69,768 44,931 114,699 60,931 33,963 94,894 Washington 66,024 32,847 98,871 27,997 16,283 44,280 -------------------------------------------------------------------------------------- Total membership 1,175,777 506,594 1,682,371 873,922 381,392 1,255,314 -------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------
THREE MONTHS ENDED NINE MONTHS ENDED OPERATING STATISTICS JUNE 30, JUNE 30, ------------------------------------- 1995 1994 1995 1994 ---------------------------------------------------------------------------- Medical loss ratio (health care services as a percent of premium revenue) 83.9% 82.6% 83.6% 83.5% Marketing, general and administrative expenses as a percent of operating revenue 12.9% 13.1% 13.4% 13.2% Operating income as a percent of operating revenue 4.0% 5.2% 4.0% 4.3% ---------------------------------------------------------------------------- ----------------------------------------------------------------------------
Results of Operations --------------------- Three and Nine Months Ended June 30, 1995 Compared to the Three and Nine Months Ended June 30, 1994 Total operating revenue increased 30 percent to $981 million for the three months ended June 30, 1995 from $752 million for the same period in the prior year. Growth in both the government (Medicare and Medicaid) and commercial programs provided an increase in total operating revenue of $187 million. Premium rates in both programs did not change significantly as compared to the same period in the prior year. In addition, approximately $46 million of the increase in total operating revenue represents the incremental operations included in the quarter ended June 30, 1995 of the Acquisitions described in Note 3 of the Notes to Condensed Consolidated Financial Statements. 10 Total operating revenue increased 29 percent to $2.7 billion for the nine months ended June 30, 1995 from $2.1 billion for the same period in the prior year. Enrollment growth in both the commercial and government programs, offset slightly by decreases in commercial premium rates, provided an increase in total operating revenue of $472 million. In addition, approximately $105 million of the increase in total operating revenue represents the incremental operations included in the nine months ended June 30, 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 nine months ended June 30, 1995, commercial HMO premiums increased $91 million to $378 million and $177 million to $1.0 billion, 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 two percent for the nine months ended June 30, 1995, 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 $139 million to $569 million and $405 million to $1.6 billion for the three and nine months ended June 30, 1995, respectively. The majority of the increase in both periods is due to enrollment gains in the Secure Horizons programs. Premium rate increases for Medicare risk programs, including the Company's Secure Horizons program, beginning January 1, 1996 are expected to be higher than the rate of commercial premium increases received in the current year. Total health care service expenses as a percent of premium revenue (the "medical loss ratio") for the quarter ended June 30, 1995, have increased to 83.9 percent from 82.6 percent for the same period in the prior year. The commercial medical loss ratio increased to 83.6 percent from 80.2 percent while the government medical loss ratio decreased to 84.1 percent from 84.4 percent for the same period in the prior year. For the nine months ended June 30, 1995, the consolidated medical loss ratio of 83.6 percent represented a slight increase compared to a ratio of 83.5 percent for the same period in the prior year. The commercial medical loss ratio increased to 82.2 percent from 80.5 percent while the government medical loss ratio decreased to 84.6 percent from 85.9 percent for the same period in the prior year. The health care service expenses for the three and nine months ended June 30, 1994, reflect the impact of approximately $9 million of net positive reserve adjustments. These net positive reserve adjustments result primarily from the periodic reconciliation of amounts reserved for physician incentive programs. While the Company periodically makes adjustments to these estimated expenses based on actual calculations and changed expectations there were no significant net positive reserve adjustments recorded for the three and nine months ended June 30, 1995. The increase in the commercial medical loss ratio for the three and nine months ended June 30, 1995 is primarily attributable to the impact of the Company's acquisitions in the Florida and Washington markets where the plans acquired in such markets have higher commercial loss ratios. In addition, the commercial medical loss ratio for the three months ended June 30, 1994 included net positive reserve adjustments of $4 million referred to above. 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 fiscal year ended September 30, 1995 as compared to the prior fiscal year. The decrease in the medical loss ratio for the government programs for the three and nine months ended June, 1995, respectively, as compared to the same period of the prior year, is primarily related to more cost effective physician and hospital contracts. The government medical loss ratio is expected to increase because enhanced benefits may be provided to enrollees to remain strategically competitive. 11 Marketing, general and administrative expenses increased $29 million to $127 million for the three months ended June 30, 1995 from $98 million for the same period in 1994. As a percentage of operating revenue, marketing, general and administrative expenses decreased to 12.9 percent from 13.1 percent. This decrease results from $2 million of expenses made in the quarter ended June 30, 1994 related to the write off of obsolete equipment and the development of a national brand marketing image. For the nine months ended June 30, 1995, marketing, general and administrative expenses totaled $364 million, an increase of $85 million over the same period in the prior year. As a percentage of total operating revenue, marketing, general and administrative expenses increased slightly to 13.4 percent from 13.2 percent for the same period in 1994. The year over year increase is 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 nine months ended June 30, 1995 and higher than the prior year's results as efficiencies in mature market process improvements are offset by investments in the new markets discussed above. Net income increased 13% to $30 million for the quarter ended June 30, 1995 compared to same period in the prior year. Earnings per share ("EPS") of $0.97 was only two percent higher than the prior year quarter because the public offering completed in March 1995 increased the weighted average number of shares outstanding (see Note 6 of the Notes to Condensed Consolidated Financial Statements). For the quarter ended June 30, 1994, net income was $27 million or $0.95 per share, which included the combined effect of net positive reserve adjustments and certain additional overhead expenses equal to approximately $0.14 per share. Excluding the effect of these adjustments, earnings for the quarter ended June 30, 1994 were $0.81 per share. For the nine months ended June 30, 1995, EPS increased 18 percent to $2.64. This increase is primarily attributable to membership growth derived substantially from the government programs and a lower government medical loss ratio. For the nine months ended June 30, 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 $2.43. The results for the three and nine months ended June 30, 1994 included approximately $0.18 related to the net positive reserve adjustments previously described. EPS for the three and nine months ended June 30, 1994 were reduced by approximately $0.04 related to costs in marketing, general and administrative expenses discussed above. The Company's ability to expand is affected by increasing competition among HMOs in the Company's service areas, particularly California. Certain large employer groups and other purchasers of healthcare services continue to demand minimal premium rate increases or reductions in premium rates. In addition, securing cost effective contracts with additional physicians is becoming difficult due to increasing competition among HMOs for physician contracts. The Company's profitability depends, in part, on its ability to maintain effective control over health care costs while providing members with quality care. 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. Liquidity and Capital Resources ------------------------------- The Company's working capital as of June 30, 1995 was $289 million, an increase of $58 million from September 30, 1994. The increase in working capital is primarily attributable to increases in cash and accounts receivable offset by increases in accounts payable and accrued liabilities and unearned premium revenue resulting from growth in operations. Medical claims and benefits payable has decreased from September 30, 1994, reflecting shifting membership, primarily in the Secure Horizons program, to capitated arrangements, coupled with improvements in claims processing. For the nine months ended June 30, 1995, payments for physician and hospital capitation represented approximately 73% of total health care costs for the government program, an increase of five percent over the comparable prior period. Redesigned work processes and electronic data interface technologies 12 have resulted in more efficient and prompt payment of claims. While the expedited claims payment process is expected to reduce interest income, these operating efficiencies enhance the Company's ability to comply with certain HMO regulations. 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 Company received net proceeds of approximately $199 million from the sale of the 3,000,000 shares of Class B Common Stock after deducting 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. 13 Part II. OTHER INFORMATION Item 1: Legal Proceedings None Item 2: Changes in Securities None Item 3: Defaults Upon Senior Securities None Item 4: Submission of Matters to a Vote of Security Holders None Item 5: Other Information None Item 6: Exhibits and Reports a) Exhibit Index Exhibit 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 8K were filed during the quarter for which this report is filed. 14 SIGNATURES ---------- Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. PACIFICARE HEALTH SYSTEMS, INC. ------------------------------- (Registrant) Date: August 9, 1995 By: /s/ Alan Hoops ---------------------------- ---------------------------- Alan Hoops President and Chief Executive Officer Date: August 9, 1995 By: /s/ Wayne Lowell ---------------------------- ---------------------------- Wayne Lowell Executive Vice President and Chief Financial Officer 15 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 NINE MONTHS ENDED JUNE 30, JUNE 30, ------------------ ----------------- 1995 1994 1995 1994 ---------------------------------------------------------------------------- Shares outstanding at the beginning of the period 30,714 27,346 27,528 27,256 Weighted average number of shares issued during the period in connection with a public offering, compensation awarded in stock and exercise of stock options 37 34 1,221 116 Shares repurchased (weighted) -- -- -- (32) 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 562 647 627 608 Registered equity purchase contracts -- -- 2 -- ---------------------------------------------------------------------------- Total shares - primary 31,313 28,027 29,378 27,948 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- Income before cumulative effect of a change in accounting principle $ 30,248 $ 26,796 $ 77,664 $ 62,379 Cumulative effect on prior years of a change in accounting principle -- -- -- 5,658 ---------------------------------------------------------------------------- Net income $ 30,248 $ 26,796 $ 77,664 $ 68,037 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- Primary earnings per share: Earnings before cumulative effect of a change in accounting principle $ 0.97 $ 0.95 $ 2.64 $ 2.23 Cumulative effect on prior years of a change in accounting principle -- -- -- 0.20 ---------------------------------------------------------------------------- Earnings per share $ 0.97 $ 0.95 $ 2.64 $ 2.43 ---------------------------------------------------------------------------- ----------------------------------------------------------------------------
16 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 NINE MONTHS ENDED JUNE 30, JUNE 30, ------------------ ----------------- 1995 1994 1995 1994 ---------------------------------------------------------------------------- Shares outstanding at the beginning of the period 30,714 27,346 27,528 27,256 Weighted average number of shares issued during the period as a result of a public offering, compensation awarded in stock and exercise of stock options 37 34 1,221 116 Shares repurchased (weighted) -- -- -- (32) 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 562 647 627 635 Registered equity purchase contracts -- -- 2 -- ---------------------------------------------------------------------------- Total shares - fully diluted 31,313 28,027 29,378 27,975 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- Income before cumulative effect of a change in accounting principle $ 30,248 $ 26,796 $ 77,664 $ 62,379 Cumulative effect on prior years of a change in accounting principle -- -- -- 5,658 ---------------------------------------------------------------------------- Net income $ 30,248 $ 26,796 $ 77,664 $ 68,037 ---------------------------------------------------------------------------- Fully diluted earnings per share: Earnings before cumulative effect of a change in accounting principle $ 0.97 $ 0.95 $ 2.64 $ 2.23 Cumulative effect on prior years of a change in accounting principle -- -- -- 0.20 ---------------------------------------------------------------------------- Earnings per share $ 0.97 $ 0.95 $ 2.64 $ 2.43 ---------------------------------------------------------------------------- ----------------------------------------------------------------------------
17 EX-27 2 FINANCIAL DATA SCHEDULE
5 1,000 3-MOS SEP-30-1995 SEP-30-1995 280,219 507,790 108,763 690 0 922,853 169,324 67,670 1,346,252 633,487 12,287 308 0 0 699,765 1,346,252 0 981,236 0 812,356 0 (795) 1,029 50,867 20,619 30,248 0 0 0 30,248 0.97 0.97