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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 September 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 November 1, 1997, there were 14,790,844 shares of the Registrant's Class A
Common Stock, par value $0.01 per share, outstanding, and 27,173,130 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)
<TABLE>
<CAPTION>
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(Amounts in thousands, September 30, December 31,
except per share data) 1997 1996
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<S> <C> <C>
Assets
Current assets:
Cash and equivalents $ 186,946 $ 367,748
Marketable securities 810,075 594,734
Receivables, net 329,608 156,212
Assets held for sale 24,875 -
Prepaid expenses and other 26,666 8,876
Deferred income taxes 121,570 54,745
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Total current assets 1,499,740 1,182,315
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Property, plant and equipment, net 217,170 91,239
Marketable securities - restricted 142,496 35,399
Goodwill and other intangible assets, net 2,713,011 227,422
Other assets 20,443 25,097
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$4,592,860 $1,561,472
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Liabilities and Shareholders' Equity
Current liabilities:
Medical claims and benefits payable $ 701,900 $ 278,800
Accounts payable and accrued liabilities 432,724 162,882
Unearned premium revenue 37,964 256,416
Long-term debt due within one year 150 1,511
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Total current liabilities 1,172,738 699,609
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Long-term debt due after one year 1,061,272 1,370
Deferred income taxes 137,177 -
Other liabilities 49,379 -
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 September 30, 1997
($262,927 aggregate liquidation value) 105 -
Class A common shares, par value $0.01 per share; 100,000
shares authorized; 14,791 and 12,380 issued and
outstanding at September 30, 1997 and December 31, 1996,
respectively 148 124
Class B common shares, par value $0.01 per share; 100,000
shares authorized; 27,154 and 18,922 issued and
outstanding at September 30, 1997 and December 31, 1996,
respectively 272 189
Additional paid-in capital 1,596,534 373,405
Unrealized gains on available-for-sale securities, net of 5,831 3,451
taxes
Retained earnings 569,029 482,933
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Total shareholders' equity 2,171,919 860,102
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$4,592,860 $1,561,472
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</TABLE>
See accompanying notes.
2
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PacifiCare Health Systems, Inc.
Consolidated Statements of Income (unaudited)
<TABLE>
<CAPTION>
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Three months ended
September 30,
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(Amounts in thousands,
except per share data) 1997 1996
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<S> <C> <C>
Revenue:
Commercial premiums $ 1,006,239 $ 491,966
Government premiums (Medicare and Medicaid) 1,382,399 715,413
Other income 12,717 13,714
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Total operating revenue 2,401,355 1,221,093
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Expenses:
Health care services:
Commercial services 867,337 401,761
Government services 1,183,652 615,050
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Total health care services 2,050,989 1,016,811
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Marketing, general and administrative expenses 271,663 150,781
Amortization of goodwill and intangible assets 21,295 2,249
Impairment of goodwill - 58,693
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Operating income 57,408 (7,441)
Interest income 22,196 11,488
Interest expense (18,069) (357)
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Income before income taxes 61,535 3,690
Provision for income taxes 30,767 163
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Net income $ 30,768 $ 3,527
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Weighted average common shares and equivalents
outstanding used to calculate earnings per share 46,180 31,723
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Earnings per share $ 0.67 $ 0.11
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</TABLE>
See accompanying notes.
3
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PacifiCare Health Systems, Inc.
Consolidated Statements of Income (unaudited)
<TABLE>
<CAPTION>
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Nine months ended
September 30,
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(Amounts in thousands,
except per share data) 1997 1996
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<S> <C> <C>
Revenue:
Commercial premiums $ 2,759,127 $ 1,435,756
Government premiums (Medicare and Medicaid) 3,831,597 2,099,301
Other income 35,334 37,924
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Total operating revenue 6,626,058 3,572,981
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Expenses:
Health care services:
Commercial services 2,367,428 1,180,266
Government services 3,280,934 1,797,772
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Total health care services 5,648,362 2,978,038
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Marketing, general and administrative expenses 753,090 443,671
Amortization of goodwill and intangible assets 53,855 6,879
Impairment, disposition and restructuring charges - 75,840
Office of Personnel Management reserve charge - 25,000
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Operating income 170,751 43,553
Interest income 60,249 33,975
Interest expense (46,483) (1,581)
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Income before income taxes 184,517 75,947
Provision for income taxes 92,258 31,973
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Net income $ 92,259 $ 43,974
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Weighted average common shares and equivalents
outstanding used to calculate earnings per share 43,797 31,718
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Earnings per share $ 2.11 $ 1.39
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</TABLE>
See accompanying notes.
4
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PacifiCare Health Systems, Inc.
Consolidated Statements of Cash Flows (unaudited)
<TABLE>
<CAPTION>
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Nine months ended
September 30,
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(Amounts in thousands) 1997 1996
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<S> <C> <C>
Operating activities:
Net income $ 92,259 $ 43,974
Adjustments to reconcile net income to net cash used in
operating activities:
Amortization of goodwill and intangible assets 53,855 6,879
Depreciation and amortization 36,127 17,248
Loss on disposal of property, plant and equipment 4,227 750
Provision for doubtful accounts 2,212 906
Deferred income taxes (2,399) (26,595)
Impairment, disposition and restructuring charges - 75,840
Office of Personnel Management reserve charge - 25,000
Changes in assets and liabilities, net of effects from
acquisitions:
Accounts receivable (17,152) (53,460)
Prepaid expenses and other assets 7,085 (6,797)
Medical claims and benefits payable 4,460 (57,261)
Accounts payable and accrued liabilities (96,614) 1,532
Unearned premium revenue (215,977) (191,085)
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Net cash flows used in operating activities (131,917) (163,069)
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Investing activities:
Acquisitions, net of cash acquired (982,379) (5,357)
Purchase of property, plant and equipment (48,201) (17,131)
Sale (purchase) of marketable securities 38,743 (27,642)
Purchase of marketable securities - restricted (11,982) (8,474)
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Net cash flows used in investing activities (1,003,819) (58,604)
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Financing activities:
Proceeds from long-term borrowing, net of expenses 1,107,783 -
Principal payments on long-term debt (180,821) (3,447)
Capitalization of Talbert (67,000) -
Proceeds from sale of Talbert stock 59,598 -
Proceeds from issuance of common stock 41,537 10,648
Cash dividends paid to preferred shareholders (6,163) -
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Net cash flows provided by financing activities 954,934 7,201
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Net decrease in cash and equivalents (180,802) (214,472)
Beginning cash and equivalents 367,748 357,290
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Ending cash and equivalents $ 186,946 $142,818
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</TABLE>
See accompanying notes.
5
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PacifiCare Health Systems, Inc.
Consolidated Statements of Cash Flows (unaudited)
<TABLE>
<CAPTION>
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Nine months ended
September 30,
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(Amounts in thousands) 1997 1996
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<S> <C> <C>
Supplemental cash flow information
Cash paid during the period for:
Income taxes $ 109,768 $ 70,072
Interest $ 40,710 $ 473
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Supplemental schedule of noncash investing
and financing activities:
Tax benefit realized upon exercise of stock options $ 17,488 $ 6,790
Compensation awarded in Class B Common Stock $ 721 $ 1,172
Leases capitalized - $ 63
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Details of businesses acquired in purchase transactions:
Fair value of assets acquired $ 3,365,674 $ 9,851
Liabilities assumed or created 1,172,910 3,014
Preferred and common consideration 1,163,595 -
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Cash paid 1,029,169 6,837
Cash acquired 46,790 1,480
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Net cash paid for acquisitions $ 982,379 $ 5,357
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Details of unrealized gains (losses) on available-for-sale
securities, net of acquisition:
Increase (decrease) in marketable securities $ 6,581 $ (11,611)
(Increase) decrease in deferred tax liabilities (1,102) 4,470
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Increase (decrease) in shareholders' equity $ 5,479 $ (7,141)
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</TABLE>
See accompanying notes.
6
<PAGE>
PACIFICARE HEALTH SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 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 nearly 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 fiscal 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, 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, FHP International Corporation ("FHP") was acquired
by the Company (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 2,339,402 shares of Class A Common
Stock, 7,352,965 shares of Class B Common Stock and 10,517,044 shares of
Series A Preferred and paid approximately $1.0 billion in cash to holders of
FHP common and preferred stock (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 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 received 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
7
<PAGE>
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 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.
<TABLE>
<CAPTION>
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Three Months Ended Nine months Ended
(Unaudited) September 30 September 30
(Amounts in thousands, -------------------------------------------------------------
except per share amounts) 1996 1997 1996
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<S> <C> <C> <C>
Total operating revenue $2,307,216 $7,178,938 $6,787,999
Pretax income $ 77,973 $ 175,799 $ 151,920
Net income $ 42,999 $ 78,780 $ 69,066
Earnings per share $ 0.95 $ 1.71 $ 1.52
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</TABLE>
In September 1997, the Company received the various state and federal
regulatory approvals necessary to sell the outstanding stock of its FHP of
Illinois subsidiary to Principal Health Care, Inc., a subsidiary of The
Principal Financial Group. At the time of the close of the transaction on
October 1, 1997, FHP of Illinois had approximately 49,000 commercial members
and 5,000 Medicare members.
In May 1997, the Company signed a definitive agreement to sell all of
the outstanding stock of its FHP of New Mexico 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 Horizons -Registered Trademark-
tradename. 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
58,000 commercial and Medicare members. Closing of the transaction is subject
to state regulatory approval and customary closing conditions.
For financial reporting purposes, the assets and liabilities
attributable to the pending FHP of New Mexico disposition and the disposition
of FHP 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 September 30, 1997 as assets held for sale.
Because management presently expects the disposition of FHP of New Mexico to
occur within one year, such assets have
8
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been classified as current. Net losses from February 14, 1997 through
September 30, 1997 from the FHP assets held for sale totaled approximately
$16 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 nine months ended September 30, 1997. The pro
forma financial information has not been adjusted for these dispositions due
to immateriality.
NOTE 3 - LONG-TERM DEBT
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. Through September 30, 1997, the
Company has repaid $160 million of its borrowings under the credit facility,
resulting in $960 million outstanding. The credit facility has mandatory
step-down payments 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, except for $350
million of the outstanding balance which is covered by interest-rate swap
agreements. The average fixed interest rate paid by the Company on the
existing swap agreements is approximately six percent. The terms of the
credit facility contain various covenants usual for financing of this type,
including a minimum net worth requirement, a minimum fixed charge requirement
and leverage ratios. At September 30, 1997, the Company was in compliance
with all such covenants. On February 14, 1997, the Company assumed $100
million in senior notes of FHP which carry an interest rate of seven percent,
are payable semiannually and mature on September 15, 2003.
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 PacifiCare 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").
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
9
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aggregate or $0.086 per share. In June 1997 and again in September 1997, the
Company paid $0.25 per share or $2.6 million in dividends to preferred
shareholders of record as of May 30, and August 31, 1997, respectively.
Unpaid cumulative dividends earned were $0.4 million on the 10,517,044 Series
A Preferred shares outstanding at September 30, 1997.
On or after June 17, 1998, the 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 the 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 - IMPAIRMENT, DISPOSITION AND RESTRUCTURING CHARGES
The Company recognized pretax charges for the nine months ended
September 30, 1996 totaling $100.8 million ($62.0 million or $1.96 loss per
share, net of tax) including a reserve for potential government claims (see
Note 6 -"Contingencies"), impairment of long-lived assets and certain
dispositions and restructuring charges as discussed below.
In September 1996, the Company recognized a $58.7 million ($34.1 million
or $1.08 per share, net of tax) charge for the impairment of goodwill
associated with its Florida operations. PacifiCare of Florida ("PCFL") was
established in 1994 through the acquisition of two health plans which
resulted in more than $62.1 million of goodwill recognized in purchase
accounting. The business strategy for PCFL profitability was based on
launching the Company's Secure Horizons program in Florida. In response to
the FHP Acquisition, considerable amounts of resources were needed to
integrate FHP's operations with those of the Company. Consequently, the
Company decided to withdraw its application to sell Medicare risk products in
Florida in September 1996 and sold its PCFL operations in February 1997 (see
Note 2-"Acquisitions and Dispositions").
The pretax disposition and restructuring charges recognized in June 1996
included the sale of Pasteur 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.
10
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The Company set aside reserves in June 1996 in anticipation of
negotiations relating to potential governmental claims for contracts with the
United States Office of Personnel Management ("OPM"). Operating results for
the nine months ended September 30, 1996 included 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 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 and assuming the
conversion of the Series A Preferred, both of 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 Stock, Class B Common Stock 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 fiscal 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 September 30, 1997 At September 30, 1996
Government Government
(Medicare & (Medicare &
MEMBERSHIP DATA (1) Commercial Medicaid) Total Commercial Medicaid) Total
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<S> <C> <C> <C> <C> <C> <C>
Arizona 107,046 88,671 195,717 - - -
California 1,673,909 622,849 2,296,758 962,409 411,492 1,373,901
Colorado 281,543 51,688 333,231 - - -
Florida - - - 38,455 2,627 41,082
Guam 42,730 - 42,730 - - -
Nevada 40,713 23,910 64,623 - - -
Ohio 54,331 12,191 66,522 - - -
Oklahoma 110,256 26,133 136,389 117,279 22,636 139,915
Oregon 117,594 40,897 158,491 112,736 45,433 158,169
Texas 131,364 69,331 200,695 113,063 60,692 173,755
Utah 159,096 27,018 186,114 - - -
Washington 95,525 56,923 152,448 90,533 53,351 143,884
- -----------------------------------------------------------------------------------------------------------------------------
Total membership (1) 2,814,107 1,019,611 3,833,718 1,434,475 596,231 2,030,706
- -----------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Three months ended Nine months ended
OPERATING STATISTICS September 30, September 30,
----------------------------------------------------------------------
1997 1996 (2) 1997 1996 (2)
- -----------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Medical loss ratio (health care services as a
percent of premium revenue)
Consolidated 85.9% 84.2% 85.7% 84.2%
Commercial 86.2% 81.7% 85.8% 82.2%
Government (Medicare and Medicaid) 85.6% 86.0% 85.6% 85.6%
Marketing, general and administrative expenses as a
percent of operating revenue 11.3% 12.3% 11.4% 12.4%
Operating income as a percent of operating revenue (2) 2.4% (0.6)% 2.6% 1.2%
Effective tax rate (2) 50.0% 4.4% 50.0% 42.1%
- -----------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) The membership table does not include the members of Illinois and New
Mexico since these companies are being sold and are classified as net
assets held for sale (see Note 2 of the Notes to the Condensed Consolidated
Financial Statements). As of September 30, 1997, Illinois had 49,000
commercial and 5,000 Medicare members; New Mexico had 40,000 commercial and
18,000 Medicare members.
(2) The 1996 results include $100.8 million of pretax charges ($62.0 million or
$1.96 per share, net of tax) and $58.7 million of pretax charges ($34.1
million or $1.08 per share, net of tax) for the nine months and three
months, respectively for the impairment of long-lived assets, potential
government claims, dispositions and certain restructuring charges.
12
<PAGE>
Three and Nine Months Ended September 30, 1997
Compared to the
Three and Nine Months Ended September 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 nine months ended September 30, 1997, total operating
revenue increased 97 percent and 85 percent, respectively, as compared to the
same periods in the prior year. For the three months ended September 30,
1997, approximately 88 percent of the increase in HMO revenue was due to the
FHP Acquisition. Enrollment and premium rate increases contributed 11
percent of the increase. FHP contributed 86 percent of the increase for the
nine months ended September 30 1997, while enrollment gains in the HMOs'
commercial and government programs, as well as increases in premium rates,
contributed approximately 13 percent of the increase. The Company's specialty
managed care products and services contributed the remainder of the increase
in operating revenue. Total HMO membership increased 89 percent to
approximately 3.8 million members at September 30, 1997, from approximately
2.0 million members at September 30, 1996, due primarily to the FHP
Acquisition.
Commercial premiums increased 105 percent for the three months ended
September 30, 1997 with 93 percent of the total increase related to the FHP
Acquisition. For the nine months ended September 30, 1997, commercial
premiums increased 92 percent, with the FHP Acquisition contributing 91
percent of the total increase. Enrollment gains in the commercial programs,
net of acquisition membership, accounted for five percent and seven percent
of the increase in commercial premiums for the three and nine months ended
September 30, 1997, respectively. At September 30, 1997, the Company
experienced a decrease in the rate of membership growth compared to the prior
period. This decrease reflects the sale of the Florida commercial membership
and the Company's more disciplined product pricing. FHP commercial members
totaled approximately 1.3 million or 46 percent of the Company's total
commercial members. Commercial premium rates have remained relatively flat.
Government premiums rose 93 percent for the three months ended September
30, 1997 with 84 percent of the total increase related to the FHP
Acquisition. For the nine months ended September 30, 1997, FHP's government
programs added 82 percent of the total overall increase of 83 percent in
government premiums as compared to the same period in the prior year. On
January 1, 1997, the Company received average premium rate increases from
HCFA averaging over six percent. Average government premium per member rates
also increased as a result of the Company's exit of its Medicaid lines of
business in Florida and Oregon which have lower average premiums per member.
These increases were offset slightly by reductions in member paid
supplemental premiums in several of the Company's markets. The combined
increases in the average per member premium rates contributed an additional
11 percent and 13 percent for the three and nine months ended September 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 five percent of the increase in government premiums
for both the three and nine months ended September 30, 1997. At
13
<PAGE>
September 30, 1997, FHP government members totaled approximately 401,000 or
39 percent of the Company's total government members.
The increased consolidated medical loss ratio during 1997 is
attributable to higher health care costs in the commercial and Medicare lines
of business in a number of the Company's markets. The commercial medical
loss ratio increased for both the three and nine months ended September 30,
1997 as compared to the same periods in the prior year. The increase
includes higher cost FHP provider contracts, increased non- capitated
physician costs and increased prescription drug costs for the three and nine
months ended September 30, 1997. The medical loss ratio for the nine months
ended September 30, 1997 also includes increased out of area emergency room
costs. In addition, in June 1997 the Company recorded a pretax charge of
$14 million ($7 million or $0.15 per share, net of tax) which was caused by a
computer system conversion which had temporarily reduced timely visibility
and recognition of prior claims costs.
The government programs' medical loss ratio for the three months ended
September 30, 1997 decreased slightly as compared to the same period in the
prior year mainly because of FHP's lower cost provider contracts and the wind
down of the higher loss ratio Medicaid business. These decreases were
partially offset by enhanced prescription drug benefits provided to enrollees
combined with lower member paid supplemental premiums. The government
medical loss ratio for the nine months ended September 30, 1997 was
consistent with the same period of the prior year as lower cost FHP contracts
offset increased prescription drug costs.
As a percentage of operating revenue, marketing, general and
administrative expenses for both the three and nine months ended September
30, 1997 decreased one percent as compared to the same periods in the prior
year. The decrease reflects reduced or eliminated FHP marketing, continued
administrative savings, including lower than expected staffing and greater
than expected efficiencies resulting from the integration of the FHP
administrative operations and information systems.
The Company recognized pretax charges for the nine months ended
September 30, 1996 totaling $100.8 million ($62.0 million or $1.96 loss per
share, net of tax), including a reserve for potential government claims with
OPM for multiple contract years, the impairment of long-lived assets, the
disposition of PDS, and certain restructuring charges. See Notes 5 and 6 of
the Notes to the Condensed Consolidated Financial Statements.
Interest income, net of interest expense, declined approximately $19
million for the nine months ended September 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 rate for the nine months ended
September 30, 1997 was 50 percent reflecting increases of goodwill expense
from the same period in the prior year.
Net income increased $27 million to $31 million for the three months
ended September 30, 1997 compared to $4 million in the same period of the
prior year. For the nine months ended September 30, 1997, net income
increased $48 million to $92 million compared to $44 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 $0.67 increased $0.56 from the
prior year's quarterly earnings per share of $0.11. For the nine months
ended September 30, 1997, earnings per share increased 52 percent to $2.11
from $1.39 for the same period in the prior year.
The Class A Common Stock, Class B Common Stock 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
14
<PAGE>
between fiscal 1997 quarters. Due to the 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 $35 million from December 31, 1996, to $997 million at September
30, 1997, due primarily to the FHP Acquisition. Cash flows provided by
operations, excluding the impact of the January 1997 advance Medicare payment
from HCFA, were $84 million and are primarily attributable to results of
operations.
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. Through September 1997, the Company
repaid $160 million of its borrowings under the credit facility, resulting in
$960 million outstanding under the credit facility as of September 30, 1997.
For a more complete description of the Company's credit facility, see Note
3 of the Notes to the Condensed Consolidated Financial Statements.
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 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 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, Utah and Washington may result in net membership
attrition. Combined with continued increases in competition, the Company
expects to see a slow-down in membership growth and probable declines in
commercial membership in some markets. This trend is expected to continue in
1998, with potential commercial membership losses in the first quarter as the
Company implements price increases in conjunction with open enrollment. The
government programs will be impacted by the exit from the Medicaid line of
business. The rate of increase in government membership is expected to
decline in 1998 as compared to 1997 as competition increases and the Company
continues the migration of FHP senior members into the Company's
15
<PAGE>
benefit structures and the combined provider network.
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 issues related to the integration of the Company and FHP
in retaining FHP's members as the Company combines the PacifiCare and FHP
health plans, exit of the Medicaid line of business, sale of certain managed
care operations, failure to obtain new customers or to retain existing
customers, effect of premium increases, reductions in workforce by existing
customers, adverse publicity and news coverage, inability to carry out
marketing and sales plans, or the loss of key executives or key employees.
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, Nevada and Washington and recontracting with providers in
Oregon 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. The negotiation of provider
contracts, generally as of January 1, may be impacted by adverse state and
federal legislation and regulation discussed below. Failure to secure cost
effective contracts may result in a loss in membership or a higher medical
loss ratio.
COMMERCIAL MEDICAL LOSS RATIO. The commercial medical loss ratio for
the year ended December 31, 1997 is expected to remain higher than the
results for the fiscal year ended September 30, 1996. The commercial medical
loss ratio has historically increased in the December quarter. This increase
is expected to be offset by improvements realized as the Company continues
renegotiation of provider contracts and implementation of price increases.
The Company expects an improved commercial medical loss ratio in 1998.
Higher premium rates are expected for 1998 employer contract renewals which
should result in the elimination of some high medical loss ratio membership.
The Company expects employer groups with higher medical loss ratios or their
employees to choose lower cost alternative health care. Additionally, the
Company's continued renegotiation of provider contracts, including acquired
FHP contracts, and implementation of capitated contracts should reduce the
medical loss ratio. These improvements are expected to be slightly offset by
increased prescription drug costs.
GOVERNMENT MEDICAL LOSS RATIO. For the year ended December 31, 1997,
the government medical loss ratio is expected to remain slightly higher than
the prior fiscal year. In 1998 the government medical loss ratio is expected
to remain consistent with that of 1997. The Company has received notice from
HCFA that it will be receiving premium rate increases ranging from 2.3
percent in the Company's largest markets to 6.2 percent in smaller markets
resulting in overall weighted average premium rate increases of approximately
2.6 percent. Competitive pressures in the Medicare market may require
enhanced benefits. The implementation of Medicare reform provisions which
curtail program spending and allow the entry of new forms of competitor plans
could further increase pressures. The 1998 HCFA rate increases and lower FHP
government medical loss ratio are expected to be offset by these competitive
pressures.
The commercial and medical loss ratio expectations discussed above could
be affected by various uncertainties, including increases in medical and
prescription drug costs which have been escalating faster than premium
increases in recent years, 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, the commercial and
government medical loss ratio expectations for the HMOs acquired in the FHP
Acquisition could be impacted by the conversion to PacifiCare computer
systems over the next eighteen months which may result in reduced timely
visibility of actual claims costs.
16
<PAGE>
MARKETING, GENERAL AND ADMINISTRATIVE SUPPORT INVESTMENTS. As a
percentage of operating revenue, marketing, general and administrative
expenses are expected to increase for the three months ended December 31,
1997 as compared to the quarter ended September 30, 1997. The Company
expects increased costs for the continued integration of the operations of
FHP as well as increased marketing costs associated with the Company's
January open enrollment. Marketing, general and administrative expenses as a
percentage of operating revenue in 1997 are expected to remain lower than
fiscal year 1996.
In 1998 marketing, general and administrative expenses as a percentage
of operating revenue are expected to remain flat or decrease slightly from
1997. The Company expects to experience additional costs associated with the
integration of FHP largely related to upgrading and converting information
systems to maintain and enhance the Company's competitive edge in information
technology. These additional costs are expected to be mostly offset as the
Company realizes a full year of synergies as a result of the FHP transaction.
The Company is in the process of upgrading its current systems to
address and recognize the year 2000. These upgrades have been partially
completed through September 1997 and are expected to be fully completed by
year end 1998. Implementation costs are expensed as incurred and are not
expected to have a material impact on the Company's consolidated financial
position, results of operations or cash flows.
OFFICE OF PERSONNEL MANAGEMENT CONTINGENCIES. 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 (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 because the Company is subject to greater
operating leverage due to its higher levels of indebtedness as a result of
the FHP Acquisition. The credit facility has mandatory step-down payments
beginning January 1, 1999. Additionally, 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, which may from time to time, impact the amount of
funds that may be paid by subsidiaries to the Company. Additionally, from
time to time, the Company advances funds, in the form of a loan or capital
contribution, to its subsidiaries to assist them in satisfying federal or
state financial requirements. If a federal or state regulator has concerns
about the financial position of subsidiary, as a result of losses being
incurred by such subsidiary, a regulator may impose additional financial
requirements on the subsidiary which may require additional funding from 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 FHP Acquisition in February, the PacifiCare and
FHP California health plans were operating separately until the DOC approved
the Company's proposal for combining them under one operating system and one
license. With DOC approval, PacifiCare of California merged FHP's California
operations into its own, including changing the name of FHP's products to
PacifiCare
17
<PAGE>
and Secure Horizons. To date, operations in Arizona, Nevada, Colorado and
Utah already have been renamed PacifiCare and Secure Horizons while the
former FHP of Texas has merged into PacifiCare of Texas.
The Company's success is significantly impacted by federal and state
legislation and regulation, including Medicare legislation. Almost 60
percent of the Company's revenue and an even greater percentage of its
profit, comes from its government programs, the majority of which is Medicare
risk business. 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, many of which are effective in 1998) 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; and consolidation of operations or other efforts to
integrate FHP.
Recently adopted federal legislation, among other things, repeals the
requirement that at least half of a Medicare health plan's enrollment be
drawn from commercial contracts (the "50/50 Rule") beginning January 1, 1999,
and gives the Department of Health and Human Services broad authority to
waive the 50/50 Rule for certain plans beginning January 1, 1998. The
Company is analyzing the impact that this legislation will have on its
operations and although the Company believes it will benefit from this
legislation, at this time it is too early to predict what effect, if any,
this legislation will have on the Company.
18
<PAGE>
PART II. OTHER INFORMATION
<TABLE>
<S> <C>
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) There were no reports on Form 8-K filed by the Registrant or its
subsidiaries during the quarter ended September 30, 1997.
</TABLE>
19
<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: November 12, 1997 By: /s/ Alan R. Hoops
-------------------- --------------------------------
Alan R. Hoops
President,
Chief Executive Officer
and Director
Date: November 12, 1997 By: /s/ Wayne B. Lowell
-------------------- ---------------------------------
Wayne B. Lowell
Executive Vice President,
Chief Administrative Officer and
Chief Financial Officer
20
<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 Nine months ended
September 30, September 30,
-------------------- --------------------
1997 1996 1997 1996
- ----------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net income $30,768 $3,527 $92,259 $43,974
- ----------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------
Shares outstanding at the beginning of
the period 41,886 31,183 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 - - 8,095 -
Exercise of stock options 18 46 639 162
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 321 494 459 569
Assumed conversion of Series A
Cumulative Convertible Preferred
Stock on date of issuance 3,955 - 3,303 -
- ----------------------------------------------------------------------------------
Total shares - primary 46,180 31,723 43,797 31,718
- ----------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------
Primary earnings per share $0.67 $0.11 $2.11 $1.39
- ----------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------
</TABLE>
21
<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 Nine months ended
September 30, September 30,
---------------------------------------
1997 1996 1997 1996
- ---------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net income $30,768 $3,527 $92,259 $43,974
- ---------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------
Shares outstanding at the beginning of
the period 41,886 31,183 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 - - 8,095 -
Exercise of stock options 18 46 639 162
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 321 581 459 611
Assumed conversion of Series A
Cumulative Convertible Preferred
Stock on date of issuance 3,955 - 3,303 -
- ---------------------------------------------------------------------------------
Total shares - fully diluted 46,180 31,810 43,797 31,760
- ---------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------
Fully diluted earnings per share $0.67 $0.11 $2.11 $1.38
- ---------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------
</TABLE>
22
<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 September 30, 1997, and
related consolidated statement of income for the nine months ended September 30,
1997, and is qualified in its entirety by reference to such financial
statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 186,946
<SECURITIES> 810,075
<RECEIVABLES> 343,100
<ALLOWANCES> 13,492
<INVENTORY> 0
<CURRENT-ASSETS> 1,499,740
<PP&E> 333,347
<DEPRECIATION> 116,177
<TOTAL-ASSETS> 4,592,860
<CURRENT-LIABILITIES> 1,172,738
<BONDS> 0
0
105
<COMMON> 420
<OTHER-SE> 2,171,394
<TOTAL-LIABILITY-AND-EQUITY> 4,592,860
<SALES> 0
<TOTAL-REVENUES> 6,626,058
<CGS> 0
<TOTAL-COSTS> 5,648,362
<OTHER-EXPENSES> 804,733
<LOSS-PROVISION> 2,212
<INTEREST-EXPENSE> 46,483
<INCOME-PRETAX> 184,517
<INCOME-TAX> 92,258
<INCOME-CONTINUING> 92,259
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 92,259
<EPS-PRIMARY> 2.11
<EPS-DILUTED> 2.11
</TABLE>
