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