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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, 1994
---------------------------------------
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _________________ to __________________
____________________________
Commission File Number 0-14181
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PACIFICARE HEALTH SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
Delaware 33-0064895
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification Number)
5995 Plaza Drive, Cypress, California 90630-5028
(Address of principal executive offices, including zip code)
(Registrant's telephone number, including area code) (714) 952-1121
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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 ____
As of July 29, 1994, there were 12,216,333 shares of the Registrant's Class A
Common Stock, par value $0.01 per share, outstanding and 15,241,657 shares of
Class B Common Stock, par value $0.01 per share, outstanding.
1
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Part 1: FINANCIAL INFORMATION
Item 1: FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PacifiCare Health Systems, Inc.
Condensed Consolidated Balance Sheets
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June 30, September 30,
(Amounts in thousands, 1994 1993
except per share data) (Unaudited)
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<S> <C> <C>
Assets
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Current assets:
Cash and equivalents $ 57,988 $ 33,262
Marketable securities 487,131 403,969
Receivables, net 82,481 53,674
Prepaid expenses 7,896 10,648
Deferred income taxes 15,894 13,346
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Total current assets 651,390 514,899
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Property, plant and equipment, net 91,876 79,049
Marketable securities - restricted 15,339 12,964
Goodwill and intangible assets 117,695 79,591
Other assets 1,573 7,143
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$ 877,873 $ 693,646
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Liabilities and Shareholders' Equity
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Current liabilities:
Medical claims and benefits payable $ 294,100 $ 255,000
Accounts payable and accrued liabilities 122,191 85,011
Unearned premium revenue 18,743 8,041
Long-term debt due within one year 8,299 4,066
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Total current liabilities 443,333 352,118
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Long-term debt due after one year 43,958 21,821
Minority interest 413 413
Shareholders' equity:
Preferred shares, par value $1.00 per
share; 10,000 shares authorized; none
issued - -
Class A common shares, par value $0.01
per share; 30,000 shares authorized,
12,216 and 12,133 issued at June 30,
1994 and September 30, 1993,
respectively 122 121
Class B common shares, par value $0.01
per share; 60,000 shares authorized,
15,242 and 15,123 issued at June 30,
1994 and September 30, 1993,
respectively 153 151
Additional paid-in capital 140,980 138,145
Retained earnings 248,914 180,877
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Total shareholders' equity 390,169 319,294
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$ 877,873 $ 693,646
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</TABLE>
See accompanying notes.
2
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<TABLE>
<CAPTION>
PacifiCare Health Systems, Inc.
Consolidated Statements of Income (unaudited)
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(Amounts in thousands, Three months ended
except per share data) June 30,
-----------------------
1994 1993
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<S> <C> <C>
Revenue:
Commercial Premiums $ 313,127 $ 263,012
Government Premiums (Medicare and Medicaid) 429,997 306,906
Other income 9,135 5,794
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Total operating revenue 752,259 575,712
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Expenses:
Health care services:
Medical services 295,476 222,477
Hospital services 246,074 201,184
Other services 72,400 55,610
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Total health care services 613,950 479,271
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Marketing, general and administrative expenses 98,394 67,836
Amortization of intangibles 890 630
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Operating income 39,025 27,975
Interest income 7,047 6,539
Interest expense (430) (622)
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Income before income taxes and cumulative
effect of a change in accounting principle 45,642 33,892
Provision for income taxes 18,846 14,184
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Income before cumulative effect of a change in
accounting principle 26,796 19,708
Cumulative effect on prior years of a change
in accounting principle - -
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Net income $ 26,796 $ 19,708
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Weighted average common shares and equivalents
outstanding used to calculated earnings per
share 28,027 27,948
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Earnings per share:
Before cumulative effect of a change in
accounting principle $ 0.95 $ 0.71
Cumulative effect on prior years of a
change in accounting principle - -
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Earnings per share $ 0.95 $ 0.71
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</TABLE>
See accompanying notes.
3
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<TABLE>
<CAPTION>
PacifiCare Health Systems, Inc.
Consolidated Statements of Income (unaudited)
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(Amounts in thousands, Nine months ended
except per share data) June 30,
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1994 1993
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<S> <C> <C>
Revenue:
Commercial Premiums $ 911,610 $ 772,542
Government Premiums (Medicare and Medicaid) 1,172,291 827,350
Other income 28,530 15,702
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Total operating revenue 2,112,431 1,615,594
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Expenses:
Health care services:
Medical services 836,536 627,766
Hospital services 704,378 568,175
Other services 199,557 157,563
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Total health care services 1,740,471 1,353,504
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Marketing, general and administrative expenses 279,293 196,146
Amortization of intangibles 2,471 2,753
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Operating income 90,196 63,191
Interest income 19,432 16,981
Interest expense (1,435) (1,555)
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Income before income taxes and cumulative
effect of a change in accounting principle 108,193 78,617
Provision for income taxes 45,814 33,032
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Income before cumulative effect of a change in
accounting principle 62,379 45,585
Cumulative effect on prior years of a change
in accounting principle 5,658 -
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Net income $ 68,037 $ 45,585
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Weighted average common shares and
equivalents outstanding used to calculated
earnings per share 27,948 27,829
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Earnings per share:
Before cumulative effect of a change in
accounting principle $ 2.23 $ 1.64
Cumulative effect on prior years of a
change in accounting principle 0.20 -
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Earnings per share $ 2.43 $ 1.64
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</TABLE>
See accompanying notes.
4
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<TABLE>
<CAPTION>
PacifiCare Health Systems, Inc.
Consolidated Statements of Cash Flows
(unaudited)
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(Amounts in thousands) Nine months ended
June 30,
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1994 1993
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<S> <C> <C>
Operating activities:
Net income $ 68,037 $ 45,585
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 13,258 8,464
Cumulative effect of a change in
accounting principle (5,658) -
Deferred income taxes 3,110 (85)
Amortization of intangibles 2,471 2,753
Loss on disposal of fixed assets 462 5
Provision for doubtful accounts 126 1,150
Other 35 517
Changes in assets and liabilities, net
of effects from acquisitions:
Accounts receivable (24,390) (19,025)
Prepaid, intangible and other assets 9,415 (1,877)
Medical claims and benefits payable 21,154 49,000
Accounts payable and accrued
liabilities 29,205 17,005
Unearned premium revenue 1,533 2,673
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Net cash flows provided by operating
activities 118,758 106,165
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Investing activities:
Purchase of marketable securities (82,547) (174,377)
Purchase of property, plant and equipment (18,409) (12,258)
Acquisitions, net of cash acquired (15,434) -
Sale (purchase) of marketable securities -
restricted 1,105 (92)
Proceeds from sale of equipment - 14
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Net cash flows used in investing activities (115,285) (186,713)
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Financing activities:
Borrowings under long-term lines of credit 24,600 -
Principal payments on long-term debt (4,050) (2,777)
Proceeds from issuance of common stock 1,780 60,796
Purchase and retirement of common stock (1,077) (3,792)
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Net cash flows provided by financing
activities 21,253 54,227
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Net increase (decrease) in cash and equivalents 24,726 (26,321)
Beginning cash and equivalents 33,262 30,137
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Ending cash and equivalents $ 57,988 $ 3,816
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</TABLE>
See accompanying notes.
5
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<TABLE>
<CAPTION>
PacifiCare Health Systems, Inc.
Consolidated Statements of Cash Flows (unaudited)
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(Amounts in thousands) Nine months ended
June 30,
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1994 1993
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<S> <C> <C>
Supplemental cash flow information
Cash paid during the period for:
Income taxes $ 39,277 $ 20,288
Interest $ 1,249 $ 1,655
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Supplemental schedule of noncash investing
and financing activities:
Leases capitalized $ 3,896 $ 3,153
Tax benefit realized upon exercise of stock
options $ 1,287 $ 3,779
Compensation awarded in Class B Common Stock $ 849 $ -
Capital leases terminated $ 1 $ 45
Conversion of 7.50% subordinated convertible
debentures $ - $ 20
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Details of businesses acquired in purchase
transactions:
Fair value of assets acquired $ 71,256 $ -
Less liabilities assumed or created,
including notes to seller 39,114 -
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Cash paid for acquisitions 32,142 -
Cash acquired in acquisitions 16,708 -
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Net cash paid for acquisitions $ 15,434 $ -
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</TABLE>
See accompanying notes.
6
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PACIFICARE HEALTH SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1994
(unaudited)
NOTE 1 - BASIS OF PRESENTATION
The interim condensed consolidated financial statements included herein
have been prepared by PacifiCare Health Systems, Inc. (the "Company") without
audit, pursuant to the rules and regulations of the Securities and Exchange
Commission (the "SEC"). Certain information and footnote disclosures, normally
included in the financial statements prepared in accordance with generally
accepted accounting principles, have been condensed or omitted pursuant to such
SEC rules and regulations; nevertheless, the management of the Company believes
that the disclosures herein are adequate to make the information presented not
misleading. It is suggested that these condensed consolidated financial
statements be read in conjunction with the consolidated financial statements and
notes thereto included in the Company's most recent Annual Report on Form 10-K,
filed with the SEC in December 1993. In the opinion of management, all
adjustments, consisting only of normal recurring adjustments necessary to
present fairly the consolidated financial position of the Company with respect
to the interim condensed consolidated financial statements, and the consolidated
results of its operations and its cash flows for the interim periods then ended,
have been included. The results of operations for the interim periods are not
necessarily indicative of the results for the full year.
NOTE 2 - ACQUISITIONS
In June 1994, the Company entered into an agreement to acquire all of the
issued and outstanding capital stock of Pasteur Health Plans, Inc. ("PHP"),
Pasteur Delivery Systems, Inc. ("PDS") and Interstate Medical Equipment, Inc.
("IME"). PHP is a Miami-based health maintenance organization ("HMO") with
approximately 50,000 members. PDS and IME are affiliated companies of PHP that
provide medical and administrative services to PHP and other companies. These
acquisitions which are subject to, among other things, various regulatory
approvals are expected to close in the fourth quarter.
The Company completed several acquisitions during the nine months ended
June 30, 1994. In October 1993, the Company acquired certain assets including
approximately 14,000 members from Freedom Plan, Inc. ("Freedom"). In November
1993, the Company acquired all of the issued and outstanding capital stock of
each of California Dental Health Plan, Inc. ("CDHP") and Dental Plan
Administrators ("DPA"). CDHP is a licensed provider of prepaid dental and
optometric benefits for individuals and groups, and DPA is an affiliated company
of CDHP that provides administrative services to CDHP and other companies. In
December 1993, the Company acquired all of the issued and outstanding capital
stock of Advantage Health Plans, Inc. ("Advantage"), a Miami-based HMO with
approximately 20,000 members. In February 1994, the Company acquired all of
the issued and outstanding capital stock of Preferred Health Resources, Inc.
("PHRI"), a Seattle-based corporation. PHRI owns all of the issued and
outstanding capital stock of Network Health Plan, Inc., a Seattle-based health
care services contractor with approximately 28,000 members, and Network
Management Incorporated, an affiliated company that provides administrative
services to the health plan and other companies.
7
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The total purchase price for the completed and pending acquisitions is
expected to be approximately $103 million. Of the total purchase price, $32
million has been paid to date. The Company expects to use borrowings under its
long term line of credit to finance the initial payment for the pending
acquisition. The contingent purchase payments for both pending and completed
acquisitions will be paid in 1994 and 1995 if certain events occur. Based on
the fair values of assets acquired and liabilities assumed for completed
acquisitions, the preliminary estimate of excess purchase price is approximately
$40 million. A final allocation of purchase price will be determined when
appraisals and other studies are completed. The transactions have been
accounted for as purchases and the operating results of each completed
acquisition are included in the consolidated financial statements from the date
of purchase. Amortization of the excess purchase price is made over a period
not to exceed forty years.
The following table summarizes the unaudited pro forma consolidated results
of the Company as though the completed acquisitions occurred at the beginning of
the periods presented giving effect to the interest income foregone, the costs
associated with the integration of the operations into those of the Company and
the amortization of the excess of the purchase price over the fair value of the
assets acquired. The unaudited pro forma information is not necessarily
indicative of the actual consolidated results of operations that would have
occurred had the completed acquisitions occurred at the beginning of the period
and is not intended to be indicative of results which may occur in the future.
<TABLE>
<CAPTION>
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(Unaudited) Three months ended Nine months ended
(Amounts in thousands, June 30, June 30,
except per share amounts) --------------------- ------------------
1994 1993 1994 1993
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<S> <C> <C> <C> <C>
Premium revenue $ 743,124 $ 609,834 $ 2,128,233 $ 1,714,894
Total operating revenue $ 752,259 $ 617,150 $ 2,158,769 $ 1,734,925
Pretax income $ 45,642 $ 32,770 $ 106,447 $ 76,868
Net income (1) $ 26,796 $ 19,054 $ 67,036 $ 44,919
Earnings per share (1) $ 0.95 $ 0.68 $ 2.40 $ 1.61
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<FN>
(1) The unaudited pro forma income before cumulative effect of a change in
accounting principle for the nine months ended June 30, 1994 was
$61.3 million or $2.20 per share. The unaudited pro forma cumulative
effect on prior years of a change in accounting principle for the nine
months ended June 30, 1994 is $5.7 million or $0.20 per share (see Note 3
of the Note to Condensed Consolidated Financial Statements).
</TABLE>
NOTE 3 - INCOME TAXES
In October 1993, the Company adopted Statement of Financial Accounting
Standards No. 109 ("SFAS No. 109"), ACCOUNTING FOR INCOME TAXES. SFAS No. 109
is an asset and liability approach that requires the recognition of deferred tax
assets and liabilities for the expected future tax consequences of events that
have been recognized in the Company's financial statements or tax returns. In
estimating future tax consequences, SFAS No. 109 generally considers all
expected future events other than enactments of changes in the tax law or rates.
Previously, the Company used the SFAS No. 96 asset and liability approach that
gave no recognition to future events other than the recovery of assets and
settlement of liabilities at their carrying amounts.
8
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As permitted by SFAS No. 109, the Company has elected not to restate the
financial statements of any prior years. The effect of the change on pretax
income from continuing operations for the three and nine months ended June 30,
1994 was not material; however, the cumulative effect of the change recorded in
the first quarter increased net income by $5,658,000 or approximately $0.20 per
share.
NOTE 4 - LONG-TERM DEBT
In January 1994, the Company established with The Chase Manhattan Bank
("Chase") and a syndicate of banks, a $130 million revolving line of credit (the
"Credit Line"). The Company has and will continue to borrow under the Credit
Line (see Note 2 of the Notes to Condensed Consolidated Financial Statements)
during a one-year period commencing January 1994, after which time any amount
outstanding will be converted into a two year term loan. Interest will be paid
over the three year period at a rate per annum equal to the London Interbank
Offered Rate plus a spread ranging from 0.3125 percent to 0.6250 percent or the
prime rate. As a condition to providing the Credit Line, Chase is requiring
that the Company use its good faith efforts to obtain guarantees from some of
its HMOs and certain other subsidiaries. These subsidiaries will guarantee the
Credit Line to the extent permitted by regulatory authorities. At June 30,
1994, advances under the Credit Line were $25 million. These advances have been
classified as long-term debt because of the Credit Line's conversion feature.
NOTE 5 - SHAREHOLDERS' EQUITY
On December 13, 1993, UniHealth America ("UniHealth"), the Company's
largest shareholder, completed a public offering of 575,000 shares of the
Company's Class A Common Stock, par value $0.01 per share (the "Class A Common
Stock"). The Company did not receive any of the proceeds of this offering.
Subsequent to the offering, UniHealth's ownership of Class A Common Stock was
reduced to less than 50 percent.
On February 23, 1993, the Board of Directors authorized the purchase of up
to 500,000 shares of the Company's Class B Common Stock, par value $0.01 per
share (the "Class B Common Stock"), in the open market subject to market
conditions; such shares are to be retired upon purchase. As of June 30, 1994,
the Company had purchased and retired 295,700 shares of Class B Common Stock at
an average price of $31.29 per share. There were 35,000 shares purchased in the
nine months ending June 30, 1994. This program was formally terminated by the
Board of Directors of the Company on April 28, 1994.
In November 1992, the Company completed a public offering of 3,200,000
shares of Class B Common Stock, of which 1,600,000 shares were sold by the
Company and 1,600,000 shares were sold by UniHealth. The net proceeds received
by the Company from the sale of the 1,600,000 shares of Class B Common Stock
offered by the Company were approximately $59 million after deducting
underwriting discounts, commissions, and expenses of the offering.
9
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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. After review, including
consultation with counsel, management believes any ultimate liability in excess
of amounts accrued which could arise from the actions would not materially
affect the Company's consolidated financial position or results of operations.
10
<PAGE>
Part I: FINANCIAL INFORMATION
Item 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following table presents membership data by region and by consumer type as
of the dates indicated.
<TABLE>
<CAPTION>
AT JUNE 30, 1994 AT JUNE 30, 1993
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Government Government
MEMBERSHIP (Medicare & (Medicare &
DATA Commercial Medicaid) Total Commercial Medicaid) Total
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<S> <C> <C> <C> <C> <C> <C>
California 610,270 272,403 882,673 563,153 215,088 778,241
Florida 8,070 10,740 18,810 - - -
Oklahoma 111,522 11,182 122,704 107,547 8,037 115,584
Oregon 55,132 36,821 91,953 52,213 26,524 78,737
Texas 60,931 33,963 94,894 53,656 19,486 73,142
Washington 27,997 16,283 44,280 13,013 - 13,013
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Total
membership 873,922 381,392 1,255,314 789,582 269,135 1,058,717
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</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
OPERATING STATISTICS JUNE 30, JUNE 30,
--------------------------------------------
1994 1993 1994 1993
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<S> <C> <C> <C> <C>
Medical loss ratio (health care
services as a percent of premium
revenue) 82.6% 84.1% 83.5% 84.6%
Marketing, general and administrative
expenses as a percent of operating
revenue 13.1% 11.8% 13.2% 12.1%
Operating income as a percent of
operating revenue 5.2% 4.9% 4.3% 3.9%
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</TABLE>
RESULTS OF OPERATIONS
Three and Nine months Ended June 30, 1994
Compared to the
Three and Nine months Ended June 30, 1993
Total operating revenue increased 31 percent to $752 million for the three
months ended June 30, 1994 from $576 million for the same period in the prior
year. Enrollment gains in both the government (Medicare and Medicaid) and
commercial programs provided an increase in total operating revenue of $115
million, while an additional $16 million was derived from higher premium rates
in both programs. In addition, approximately $37 million of the increase in
total operating revenue represents the incremental operations included in the
quarter ended June 30, 1994 of acquisitions described in Note 2 of the Notes to
Condensed Consolidated Financial Statements. The Company's specialty managed
care products and services and its joint venture medical groups contributed the
remainder of the increase.
11
<PAGE>
Total operating revenue increased 31 percent to $2.1 billion for the nine
months ended June 30, 1994 from $1.6 billion for the same period in the prior
year. Enrollment gains in both the commercial and government programs provided
an increase in total operating revenue of $330 million, while an additional $74
million was derived from higher premium rates in both programs. In addition,
approximately $66 million of the increase in total operating revenue represents
the incremental operations included in the nine months ended June 30, 1994 of
acquisitions described above. The Company's specialty managed care products and
services and its joint venture medical groups contributed the remainder of the
increase.
For the three and nine months ended June 30, 1994, commercial HMO premiums
increased $48 million to $297 million and $127 million to $863 million,
respectively, as compared to the same periods in the prior year. Excluding the
effects of acquisitions described above, membership growth provided the majority
of the increase in the commercial HMO program. Premium rate increases for the
three and nine month periods ended June 30, 1994 averaging three and four
percent, respectively, also contributed to the increase. Commercial HMO premium
rates are expected to remain flat or decrease slightly in the next enrollment
period due to increasing competitive pressures in the Company's markets. The
remainder of the increase in commercial premiums was derived from commercial
specialty managed care products and services and joint venture medical groups.
Government premiums rose $123 million to $430 million and $345 million to
$1.2 billion for the three and nine months ended June 30, 1994. Enrollment
gains predominately in the Secure Horizons program contributed 78 percent of
this increase in both periods. Premium rate increases for Medicare risk
programs, including the Company's Secure Horizons program, beginning January 1,
1995 are expected to be comparable to or slightly higher than rates received in
the current year.
Total health care service expenses as a percent of premium revenue (the
"medical loss ratio") for the quarter ended June 30, 1994, have decreased to
82.6 percent from 84.1 percent for the same period in the prior year. The
commercial medical loss ratio decreased to 80.2 percent from 82.3 percent while
the government medical loss ratio decreased to 84.4 percent from 85.6 percent.
For the nine months ended June 30, 1994, the consolidated medical loss ratio of
83.5 percent decreased compared to a ratio of 84.6 percent for the same period
in the prior year. The commercial medical loss ratio decreased to 80.5 percent
from 82.7 percent while the government medical loss decreased to 85.9 percent as
compared to 86.4 percent for the same period in the prior year.
The health care service expenses for the three and nine month periods ended
June 30, 1994 and 1993, reflect the impact of net positive reserve adjustments
of approximately $9 million and $5 million, respectively. These net positive
reserve adjustments result primarily from the periodic reconciliation of amounts
reserved for physician incentive programs and revised estimates for hospital
services and other health care costs which have been incurred but not yet
reported. The Company periodically makes adjustments to these estimated
expenses based on actual calculations and changed expectations. The $4 million
increase in net positive reserve adjustments is primarily attributable to
increases in members served under hospital capitation arrangements and improved
contracting.
Commercial net positive reserve adjustments for the three and nine months
ended June 30, 1994 increased to $4 million from $3 million for the same period
in the prior year. Government net positive reserve adjustments for the three
and nine months ended June 30, 1994 increased to $5 million compared to $2
million for the same period in the prior year.
12
<PAGE>
The decrease in the commercial medical loss ratio for the three and nine
months ended June 30, 1994 is primarily attributable to lower inpatient hospital
costs. This decrease was partially offset by higher hospital capitation costs
and physician payments. Changes in contractual relationships with providers
have increased hospital capitation costs. The addition of dental products and
other recent acquisitions (see Note 2 of the Notes to Condensed Consolidated
Financial Statements) have increased physician payments.
The decrease in the medical loss ratio for the government program for the
three and nine months ended June 30, 1994 as compared to the same period of the
prior year is primarily related to lower hospital expenses and increases in net
positive reserve adjustments described above.
Marketing, general and administrative expenses ("MG&A") increased $30
million to $98 million for the three months ended June 30, 1994 from $68 million
for the same period in 1993. As a percentage of operating revenue, marketing,
general and administrative expenses increased to 13.1 percent from 11.8 percent.
For the nine months ended June 30, 1994, marketing, general and administrative
expenses totaled $279 million, an increase of $83 million over the same period
in the prior year. As a percentage of total operating revenue, marketing,
general, and administrative expenses increased to 13.2 percent from 12.1 percent
for the same period in 1993. These increases are primarily attributable to
higher costs related to developing markets, products and services in new as well
as established geographic areas, incremental expenses to integrate acquisitions
and depreciation related to the upgrading of the Company's management
information systems. MG&A in the current period also include investments for
the development of a national brand marketing image and the write off of
obsolete equipment. These costs totaled approximately $2 million.
Earnings per share ("EPS") rose 34 percent to $0.95 for the quarter ended
June 30, 1994, compared to $0.71 for the comparable quarter in the prior year.
For the nine months ended June 30, 1994, before the cumulative effect of a
change in accounting principle, earnings per share increased 36 percent to
$2.23. These increases are primarily related to membership growth derived
substantially from the government program. Decreases in health care service
expenses were partially offset by increases in MG&A. The results for three and
nine months ended June 30, 1994 and 1993 include approximately $0.18 and $0.10,
respectively, related to the net positive reserve adjustments previously
described. EPS for the three and nine months ended June 30, 1994 were reduced
by approximately $0.04 related to costs in MG&A discussed above. Changes in
income tax accounting principles (see Note 3 of the Notes to Condensed
Consolidated Financial Statements) increased earnings per share by approximately
$0.20, resulting in earnings per share of $2.43 for the nine month period ended
June 30, 1994.
The Company's ability to expand is dependent, in part, on competitive
premium pricing and its ability to secure cost-effective contracts with
additional physicians or to ensure that existing physician groups expand their
operations to accommodate the Company's new HMO membership. Achieving such
objectives with physicians is becoming difficult due to increasing competition.
In addition, the Company's profitability is dependent, in part, on its ability
to maintain effective control over health care costs while providing members
with quality care. Factors such as health care reform, utilization, new
technologies, hospital costs, major epidemics, and numerous other external
influences may affect the Company's operating results. Accordingly, past
financial performance is not necessarily a reliable indicator of future
performance, and investors should not use historical records to anticipate
results or future period trends.
13
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
The Company's working capital as of June 30, 1994 was $208 million, an
increase of $45 million from September 30, 1993. The increase is primarily
attributable to borrowings of long-term debt of $25 million, discussed below,
and increases in cash generated from operations partially offset by acquisitions
made with cash. The total purchase price for completed and pending acquisitions
described in Note 2 of the Notes to Condensed Consolidated Financial Statements
is expected to be approximately $103 million, $32 million of which has been paid
to date. The completed acquisitions have been financed through the sale of
certain of the Company's investments in marketable securities and borrowings
under its long term line of credit. The remainder of the purchase price will be
paid in 1994 and 1995 if certain contingent events occur.
Cash generated from operations increased by $13 million for the nine months
ended June 30, 1994 as compared to the same period in the prior year. The
majority of this change is the result of an increase of $22 million in net
income offset by changes in assets and liabilities.
The decrease in the purchase of marketable securities by the Company is
related to the investment of $15 million of cash, net of cash acquired, in the
current year for the acquisitions discussed above. In addition, the prior year
includes the investment of $59 million of offering proceeds received in October
1992. The Company made capital expenditures of $22 million for the nine months
ended June 30, 1994, primarily for computer equipment. These purchases were
financed in part by borrowings under capital leases. The Company anticipates
that the level of capital expenditures will increase in fiscal year 1995 to
support the redesign of information systems.
In January 1994, the Company established with Chase and a syndicate of
banks, a $130 million revolving line of credit (see Note 4 of the Notes to
Condensed Consolidated Financial Statements). The Company believes that its
current capital resources are adequate to fund its existing HMO operations, the
introduction of new products and services and the continued development of its
health care-related businesses. The Company will borrow from the credit line to
finance the acquisition of PHP (see Note 2 of the Notes to Condensed
Consolidated Financial Statements). The establishment of the Credit Line
enhances the Company's ability to introduce new products and services, expand
geographic markets and consummate acquisitions.
In May 1993, the Financial Accounting Standards Board issued SFAS No. 115,
"Accounting for Certain Investments in Debt and Equity Securities," which is
effective for fiscal years beginning after December 15, 1993. If the Company
had adopted SFAS No. 115 for the fiscal year ended September 30, 1993, all
current, unrestricted investments in debt and equity securities would have been
designated as "available-for-sale," and the Company estimates the cumulative
effect of the change in accounting principle would have been an increase to
marketable securities of $16 million, an increase to shareholders' equity of $9
million and an increase to deferred tax liabilities of $7 million. The Company
will be required to comply with SFAS No. 115 for the fiscal year ending
September 30, 1995 and does not plan to adopt its provisions earlier. No
assurance can be made that the actual cumulative effect of the change, when
adopted, will be comparable to the amount estimated above.
14
<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
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
b) No other reports on Form 8K were filed during the quarter for
which this report is filed.
15
<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 3, 1994 By: /s/ Alan Hoops
------------------------------ ----------------------------
Alan Hoops
President and Chief
Executive Officer
Date: August 3, 1994 By: /s/ Wayne Lowell
------------------------------ ----------------------------
Wayne Lowell
Executive Vice President and
Chief Financial Officer
16
<PAGE>
Exhibit 11.A
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
June 30, June 30,
------------------------------------------------
1994 1993 1994 1993
- - --------------------------------------------------------------------------------
- - --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Shares outstanding at the
beginning of the period 27,346 27,332 27,256 25,618
Weighted average of shares
issued during the period
as a result of a public
offering, compensation
awarded in stock and
exercise of stock options 34 25 116 1,626
Shares repurchased (weighted) - - (32) (55)
Dilutive shares contingently
issuable upon exercise of
stock options, net of
shares assumed to have
been purchased (at the
average market price) for
treasury with assumed
proceeds from exercise of
stock options 647 591 608 640
- - --------------------------------------------------------------------------------
Total shares - primary 28,027 27,948 27,948 27,829
- - --------------------------------------------------------------------------------
- - --------------------------------------------------------------------------------
Income before cumulative
effect of a change in
accounting principle $ 26,796 $ 19,708 $ 62,379 $ 45,585
Cumulative effect on prior
years of a change in
accounting principle - - 5,658 -
- - --------------------------------------------------------------------------------
Net income $ 26,796 $ 19,708 $ 68,037 $ 45,585
- - --------------------------------------------------------------------------------
- - --------------------------------------------------------------------------------
Primary earnings per share:
Earnings before cumulative
effect of a change in
accounting principle $ 0.95 $ 0.71 $ 2.23 $ 1.64
Cumulative effect on
prior years of a change
in accounting principle - - 0.20 -
- - --------------------------------------------------------------------------------
Earnings per share $ 0.95 $ 0.71 $ 2.43 $ 1.64
- - --------------------------------------------------------------------------------
- - --------------------------------------------------------------------------------
</TABLE>
<PAGE>
Exhibit 11.B
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
June 30, June 30,
-------------------------------------------------
1994 1993 1994 1993
- - --------------------------------------------------------------------------------
- - --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Shares outstanding at the
beginning of the period 27,346 27,332 27,256 25,618
Weighted average of shares
issued during the period
as a result of a public
offering, compensation
awarded in stock and
exercise of stock options 34 25 116 1,626
Shares repurchased (weighted) - - (32) (55)
Dilutive shares contingently
issuable upon exercise of
stock options, net of
shares assumed to have
been purchased (at the
higher of average or
ending market price) for
treasury with assumed
proceeds from exercise of
stock options 647 591 635 641
- - --------------------------------------------------------------------------------
Total shares - fully diluted 28,027 27,948 27,975 27,830
- - --------------------------------------------------------------------------------
- - --------------------------------------------------------------------------------
Income before cumulative
effect of a change in
accounting principle $ 26,796 $ 19,708 $ 62,379 $ 45,585
Cumulative effect on prior
years of a change in
accounting principle - - 5,658 -
- - --------------------------------------------------------------------------------
Net income $ 26,796 $ 19,708 $ 68,037 $ 45,585
- - --------------------------------------------------------------------------------
- - --------------------------------------------------------------------------------
Fully diluted earnings per
share:
Earnings before cumulative
effect of a change in
accounting principle $ 0.95 $ 0.71 $ 2.23 $ 1.64
Cumulative effect on prior
years of a change in
accounting principle - - 0.20 -
- - --------------------------------------------------------------------------------
Earnings per share $ 0.95 $ 0.71 $ 2.43 $ 1.64
- - --------------------------------------------------------------------------------
- - --------------------------------------------------------------------------------
</TABLE>
