<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1995
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[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the transition period from to
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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 Identification Number)
incorporation or organization)
5995 Plaza Drive, Cypress, California 90630-5028
(Address of principal executive offices, including zip code)
(Registrant's telephone number, including area code) (714) 952-1121
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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 April 30, 1995, there were 12,304,558 shares of the Registrant's Class A
Common Stock, par value $0.01 per share, outstanding and 18,410,377 shares of
Class B Common Stock, par value $0.01 per share, outstanding.
<PAGE>
Part 1: FINANCIAL INFORMATION
Item 1: FINANCIAL STATEMENTS
PacifiCare Health Systems, Inc.
Condensed Consolidated Balance Sheets
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<TABLE>
<CAPTION>
March 31, September 30,
(Amounts in thousands, 1995 1994
except per share data) (Unaudited)
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<S> <C> <C>
Assets
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Current assets:
Cash and equivalents $ 213,639 $ 192,609
Marketable securities 622,397 517,999
Receivables, net 87,529 73,976
Prepaid expenses 8,710 8,883
Deferred income taxes 22,778 28,415
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Total current assets 955,053 821,882
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Property, plant and equipment, net 98,700 97,018
Marketable securities - restricted 19,403 15,994
Goodwill and intangible assets 295,044 167,085
Other assets 7,417 3,569
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$1,375,617 $1,105,548
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Liabilities and Shareholders' Equity
Current liabilities:
Medical claims and benefits payable $ 312,400 $ 302,900
Accounts payable and accrued liabilities 114,387 108,595
Acquisition payable 75,000 --
Unearned premium revenue 188,251 170,970
Long-term debt due within one year 8,681 8,175
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Total current liabilities 698,719 590,640
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Long-term debt due after one year 13,403 101,137
Minority interest 413 413
Shareholders' equity:
Preferred shares, par value $1.00 per share;
10,000 shares authorized; none issued -- --
Class A common shares, par value $0.01 per
share; 30,000 shares authorized, 12,305 and
12,238 issued at March 31, 1995 and
September 30, 1994, respectively 123 122
Class B common shares, par value $0.01 per
share; 60,000 shares authorized 18,410 and
15,290 issued at March 31, 1995 and
September 30, 1994, respectively 184 153
Additional paid-in capital 344,192 141,955
Unrealized holding gain on available-for-
sale securities net of tax effect of $52 39 --
Retained earnings 318,544 271,128
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Total shareholders' equity $663,082 $413,358
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$1,375,617 $1,105,548
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</TABLE>
See accompanying notes.
2
<PAGE>
PacifiCare Health Systems, Inc.
Consolidated Statements of Income (unaudited)
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<TABLE>
<CAPTION>
Three months ended
March 31,
(Amounts in thousands ---------------------------------
except per share data) 1995 1994
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<S> <C> <C>
Revenue:
Commercial premiums $ 367,079 $ 311,695
Government premiums (Medicare and Medicaid) 531,661 393,794
Other income 14,026 8,935
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Total operating revenue 912,766 714,424
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Expenses:
Health care services:
Medical services 348,743 282,513
Hospital services 309,775 241,013
Other services 91,331 67,733
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Total health care services 749,849 591,259
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Marketing, general and administrative expenses 124,095 91,517
Amortization of intangibles 1,374 815
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Operating income 37,448 30,833
Interest income 10,604 6,296
Interest expense (2,010) (519)
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Income before income taxes 46,042 36,610
Provision for income taxes 18,683 15,766
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Net income $ 27,359 $ 20,844
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Weighted average common shares and equivalents
outstanding used to calculate earnings per share 28,601 27,991
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Earnings per share $ 0.96 $ 0.75
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</TABLE>
See accompanying notes.
3
<PAGE>
PacifiCare Health Systems, Inc.
Consolidated Statements of Income (unaudited)
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<TABLE>
<CAPTION>
Six months ended
March 31,
(Amounts in thousands,) ----------------------------------
except per share data) 1995 1994
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<S> <C> <C>
Revenue:
Commercial premiums $ 699,517 $ 598,483
Government premiums (Medicare and Medicaid) 1,009,256 742,294
Other income 25,607 19,395
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Total operating revenue 1,734,380 1,360,172
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Expenses:
Health care services:
Medical services 671,227 541,060
Hospital services 589,042 458,304
Other services 165,879 127,157
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Total health care services 1,426,148 1,126,521
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Marketing, general and administrative expenses 237,286 180,899
Amortization of intangibles 2,632 1,581
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Operating income 68,314 51,171
Interest income 15,505 12,385
Interest expense (3,694) (1,005)
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Income before income taxes and cumulative effect of
a change in accounting principle 80,125 62,551
Provision for income taxes 32,709 26,968
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Income before cumulative effect of a change in
accounting principle 47,416 35,583
Cumulative effect on prior years of a change in
accounting principle -- 5,658
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Net income $ 47,416 $ 41,241
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Weighted average common shares and equivalents
outstanding used to calculate earnings per share 28,414 27,885
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Earnings per share:
Before cumulative effect of a change in
accounting principle $ 1.67 $ 1.28
Cumulative effect on prior years of a change
in accounting principle -- 0.20
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Earnings per share $ 1.67 $ 1.48
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</TABLE>
See accompanying notes.
4
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PacifiCare Health Systems, Inc.
Consolidated Statements of Cash Flows (unaudited)
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<TABLE>
<CAPTION>
(Amounts in thousands) Six months ended
March 31,
--------------------------------
1995 1994
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<S> <C> <C>
Operating activities:
Net income $ 47,416 $ 41,241
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 10,059 8,639
Cumulative effect of a change in accounting
principle -- (5,658)
Deferred income taxes 5,585 1,971
Amortization of intangibles 2,632 1,581
Provision for doubtful accounts 1,187 177
Loss on disposal of fixed assets 73 176
Other 113 26
Changes in assets and liabilities, net of
effects from acquisitions:
Accounts receivable (11,905) 6,116
Prepaid, intangible and other assets (3,597) 7,578
Medical claims and benefits payable 9,184 59,795
Accounts payable and accrued liabilities 5,389 15,298
Unearned premium revenue 17,281 116,641
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Net cash flows provided by operating activities 83,417 253,581
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Investing activities:
Purchase of marketable securities (104,307) (79,878)
Acquisitions, net of cash acquired (54,454) (13,720)
Purchase of property, plant and equipment (10,640) (13,708)
Purchase of marketable securities - restricted (3,409) (742)
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Net cash flows used in investing activities (172,810) (108,048)
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Financing activities:
Proceeds from issuance of common stock 199,404 1,257
Principal payments on long-term debt (172,316) (2,449)
Borrowings under long-term lines of credit 83,335 21,500
Purchase and retirement of common stock -- (1,077)
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Net cash flows provided by financing
activities 110,423 19,231
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Net increase in cash and equivalents 21,030 164,764
Beginning cash and equivalents 192,609 33,262
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Ending cash and equivalents $ 213,639 $ 198,026
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</TABLE>
See accompanying notes.
5
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PacifiCare Health Systems, Inc.
Consolidated Statements of Cash Flows (unaudited)
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<TABLE>
<CAPTION>
(Amounts in thousands) Six months ended
March 31,
--------------------------------
1995 1994
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<S> <C> <C>
Supplemental cash flow information
Cash paid during the period for:
Income taxes $ 26,882 $ 23,528
Interest $ 2,236 $ 640
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Supplemental schedule of noncash investing
and financing activities:
Tax benefit realized upon exercise of stock
options $ 1,840 $ 858
Compensation awarded in Class B Common Stock $ 1,024 $ 849
Leases capitalized $ 392 $ 3,903
Capital leases terminated $ -- $ 1
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Details of unrealized holding gain on available-
for-sale securities:
Increase in marketable securities $ 91 $ --
Increase in deferred income taxes $ 52 $ --
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Increase in shareholders' equity $ 39 $ --
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Details of businesses acquired in purchase
transactions:
Fair value of assets acquired $ 134,710 $ 67,645
Less liabilities assumed or created, including
acquisition payable 79,831 37,217
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Cash paid for acquisitions 54,879 30,428
Cash acquired in acquisitions 425 16,708
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Net cash paid for acquisitions $ 54,454 $ 13,720
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</TABLE>
See accompanying notes.
6
<PAGE>
PACIFICARE HEALTH SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1995
(unaudited)
NOTE 1 - BASIS OF PRESENTATION
The interim condensed consolidated financial statements included herein
have been prepared by PacifiCare Health Systems, Inc. (the "Company") without
audit, pursuant to the rules and regulations of the Securities and Exchange
Commission (the "SEC"). Certain information and footnote disclosures, normally
included in the financial statements prepared in accordance with generally
accepted accounting principles, have been condensed or omitted pursuant to such
SEC rules and regulations; nevertheless, the management of the Company believes
that the disclosures herein are adequate to make the information presented not
misleading. It is suggested that these condensed consolidated financial
statements be read in conjunction with the consolidated financial statements and
notes thereto included in the Company's most recent Annual Report on Form 10-K,
filed with the SEC in November 1994. In the opinion of management, all
adjustments, consisting only of normal recurring adjustments necessary to
present fairly the consolidated financial position of the Company with respect
to the interim condensed consolidated financial statements, and the consolidated
results of its operations and its cash flows for the interim periods then ended,
have been included. The results of operations for the interim periods are not
necessarily indicative of the results for the full year.
NOTE 2 - MARKETABLE SECURITIES
On October 1, 1994, the Company adopted Financial Accounting Standards
Board Statement of Financial Accounting Standard ("SFAS") No. 115, "Accounting
for Certain Investments in Debt and Equity Securities." This statement
addresses the accounting and reporting for investments in equity and debt
securities. All current unrestricted investments have been designated as
"available for sale" and their carrying values have been adjusted to fair market
value. Marketable securities-restricted have been designated as held to
maturity and continue to be stated at amortized cost. The cumulative effect of
adopting SFAS No. 115 on October 1, 1994 was a decrease to marketable securities
of $6.3 million, a decrease to shareholders' equity of $3.8 million and an
increase to deferred tax assets of $2.5 million. At March 31, 1995, the net
unrealized gains increased current marketable securities by approximately
$91,000 and increased stockholders' equity by $39,000 (net of deferred income
taxes of $52,000).
NOTE 3 - ACQUISITIONS
a) 1995 Acquisitions. In January 1995, Prescription Solutions, the
Company's pharmacy benefit management company, acquired Preferred Solutions, a
San Jose-based pharmacy benefit management company (the "Preferred Solutions
Acquisition"). On March 31, 1995, the Company acquired ValuCare, a Fresno based
health maintenance organization ("HMO") with approximately 67,000 members
located in central California (the "ValuCare Acquisition") and membership of
Pacific Health Plans, an HMO located in Washington with approximately 33,000
members (the "PHP Acquisition"). The Preferred Solutions Acquisition, the
ValuCare Acquisition and the PHP Acquisition collectively shall be referred to
herein as the "1995 Acquisitions." The membership and results of operations for
the March 31, 1995 acquisitions will be reflected in the Company's financial
statements beginning April 1, 1995.
7
<PAGE>
b) 1994 Acquisitions. During fiscal 1994, the Company made the following
acquisitions (the "1994 Acquisitions"): (i) Freedom Plan, Inc., a Santa Barbara,
California-based HMO, with approximately 14,000 members in October 1993; (ii)
California Dental Health Plan, Inc., a southern California-based dental HMO and
its affiliate, Dental Plan Administrators, a third party administrator, in
November 1993; (iii) Advantage Health Plans, Inc., a southern Florida-based HMO,
with approximately 20,000 members in December 1993; (iv) Network Health Plan,
Inc., a Washington-based health care service contractor, with approximately
28,000 members in February 1994; and (v) Pasteur Health Plans, Inc., a southern
Florida-based HMO, with approximately 50,000 members in September 1994. The
1994 and the 1995 Acquisitions shall together be referred to herein as the
"Acquisitions" and the companies acquired or to be acquired through the
Acquisitions shall be referred to as the "Acquired Companies."
The total purchase price for the Acquisitions, including contingent
purchase payments, is expected to be approximately $220 million. Of the total
purchase price, $218 million was paid or accrued at March 31, 1995. This amount
includes approximately $6 million in contingent payments made in fiscal 1995.
The acquisition payable of $75 million at March 31, 1995 was paid on April 3,
1995. The remaining contingent purchase payments for the Acquisitions will be
paid in 1995 and 1996 if certain events occur. Based on the fair values of the
assets and liabilities of the Acquired Companies, the preliminary estimate of
excess purchase price is approximately $226 million. A final allocation of
purchase price will be determined when appraisals and other studies are
completed and contingent purchase payments are determined. The Acquisitions
have been accounted for as purchases and the operating results of each completed
acquisition are included in the consolidated financial statements from the date
of purchase. Amortization of excess purchase price is made over a period not to
exceed forty years.
The following table summarizes the unaudited pro forma consolidated results
of the Company as though the Acquisitions occurred at the beginning of the
periods presented giving effect to the interest income foregone, the costs
associated with the integration of the operations into those of the Company and
the amortization of the excess of the purchase price over the fair value of the
assets acquired. The unaudited pro forma information is not necessarily
indicative of the actual consolidated results of operations that would have
occurred had the Acquisitions occurred at the beginning of the period and is not
intended to be indicative of results which may occur in the future.
<TABLE>
<CAPTION>
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Three months ended Six months ended
(Unaudited) March 31, March 31,
(Amounts in thousands, -------------------------------------------------
except per share amounts) 1995 1994 1995 1994
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<S> <C> <C> <C> <C>
Premium revenue $ 933,573 $ 761,812 $ 1,778,440 $ 1,470,303
Total operating revenue $ 948,552 $ 772,780 $ 1,805,333 $ 1,494,364
Pretax income $ 43,436 $ 30,837 $ 75,635 $ 53,963
Net income(1) $ 25,594 $ 17,016 $ 44,318 $ 35,298
Earnings per share(1) $ 0.89 $ 0.61 $ 1.56 $ 1.27
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<FN>
1 The unaudited pro forma income before cumulative effect of a change in
accounting principle for the six months ended March 31, 1994 was $29.6
million or $1.06 per share. The unaudited pro forma cumulative effect on
prior years of a change in accounting principle for the six months ended
March 31, 1994 was $5.7 million or $0.20 per share (see Note 4 of the Notes
to Condensed Consolidated Financial Statements).
</TABLE>
NOTE 4 - INCOME TAXES
As of October 1, 1993, the Company adopted SFAS No. 109, "Accounting for
Income Taxes," and recorded a benefit for the cumulative effect prior to October
1, 1993 of the change in accounting principle of $5,658,000 or approximately
$0.20 per share. SFAS No. 109 is an asset and liability approach that requires
the recognition of deferred tax assets and liabilities for the expected future
tax consequences of
8
<PAGE>
events that have been recognized in the Company's financial statements or tax
returns. In estimating future tax consequences, SFAS No. 109 generally
considers all expected future events other than enactments of changes in the tax
law or rates. Previously, the Company used the SFAS No. 96, asset and liability
approach that gave no recognition to future events other than the recovery of
assets and settlement of liabilities at their carrying amounts. As permitted by
SFAS No. 109, the Company elected not to restate the financial statements of
prior years.
NOTE 5 - LONG-TERM DEBT
In November 1994, the Company established a $250 million revolving line of
credit with Bank of America National Trust and Saving Association and a
syndicate of banks (the "BofA Credit Line"). The BofA Credit Line was
established to replace the syndicated $130 million credit line with The Chase
Manhattan Bank, N.A. (the "Chase Credit Line"). The BofA Credit Line has a five
year term with interest payable at a rate per annum equal to the London
Interbank Offered Rate plus a margin. The BofA Credit Line is subject to, among
other things, certain financial covenants, including a fixed charge ratio and a
leverage ratio. The BofA Credit Line may be extended beyond its five year term
but not beyond November 30, 2001. In November 1994, the Company borrowed $83
million under the BofA Credit Line to pay the balance owed on the Chase Credit
Line. The amount borrowed under the BofA Credit Line was repaid in March 1995
from the proceeds of the sale of Class B Common Stock (see Note 6 -
"Shareholders' Equity").
NOTE 6 - SHAREHOLDERS' EQUITY
As of March 29, 1995, the Company completed a public offering of 5,175,000
shares of its Class B Common Stock, par value $0.01 per share (the "Class B
Common Stock"), of which 3,000,000 shares were issued and sold by the Company
and 2,175,000 shares were sold by UniHealth, the Company's largest shareholder.
The sale of 4,500,000 shares of the Class B Common Stock closed on March 23,
1995 with the sale of the additional 675,000 shares of the Class B Common Stock
occurring on March 29, 1995 pursuant to the exercise of the underwriters'
over-allotment option.
The net proceeds received by the Company from the sale of the 3,000,000
shares of Class B Common Stock were approximately $199 million after deducting
the estimated underwriting discounts and commissions and expenses of the
offering payable by the Company. The Company did not receive any of the
proceeds from the sale of shares of Class B Common Stock by UniHealth. The
Company used approximately $186 million of the net proceeds to repay the amount
outstanding under its BofA Credit Line and to replenish working capital used to
pay for certain of the Acquisitions (see Note 3 - "Acquisitions"). The
remaining net proceeds of the offering will be used by the Company to increase
working capital and for general corporate purposes. Such purposes may include
future acquisitions, the introduction of new products and services, increased
investment in existing operations and expansion of geographic markets. Pending
the above described uses, the net proceeds will be invested in investment-grade,
interest bearing securities.
In December 1994, the Company completed a public offering of 90,000 shares
of its Class B Common Stock to certain physician groups ("the groups") which
currently contract with the Company. Each group has entered into an irrevocable
obligation to purchase a fixed number of shares of the Class B Common Stock at
$64.88 per share payable over a five year period beginning May 1, 1996.
9
<PAGE>
On December 13, 1993, UniHealth completed a public offering of 575,000
shares of the Company's Class A Common Stock, par value $0.01 per share (the
"Class A Common Stock"). The Company did not receive any of the proceeds from
this offering.
NOTE 7 - CONTINGENCIES
The Company is involved in legal actions in the normal course of business,
some of which seek substantial monetary damages, including claims for punitive
damages which are not covered by insurance. After review, including
consultation with counsel, management believes any ultimate liability in excess
of amounts accrued which could arise from the actions would not materially
affect the Company's consolidated financial position or results of operations.
10
<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 MARCH 31, 1995 AT MARCH 31, 1994
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Medicare & Medicare &
Medicaid Medicaid
MEMBERSHIP DATA Commercial (Government) Total Commercial (Government) Total
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<S> <C> <C> <C> <C> <C> <C>
California 705,009 337,880 1,042,889 609,525 256,194 865,719
Florida 55,995 11,650 67,645 8,025 12,500 20,525
Oklahoma 112,107 14,332 126,439 111,669 10,520 122,189
Oregon 84,675 39,175 123,850 52,452 33,046 85,498
Texas 65,982 41,112 107,094 59,691 30,688 90,379
Washington 38,828 19,155 57,983 27,502 15,008 42,510
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Total membership 1,062,596 463,304 1,525,900 868,864 357,956 1,226,820
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</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
OPERATING STATISTICS MARCH 31, MARCH 31,
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1995 1994 1995 1994
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<S> <C> <C> <C> <C>
Medical loss ratio (health care services as a
percent of premium revenue) 83.4% 83.8% 83.5% 84.0%
Marketing, general and administrative
expense as a percent of operating revenue 13.6% 12.8% 13.7% 13.3%
Operating income as a percent of operating
revenue 4.1% 4.3% 3.9% 3.8%
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</TABLE>
RESULTS OF OPERATIONS
Three and Six Months Ended March 31, 1995
Compared to the
Three and Six Months Ended March 31, 1994
Total operating revenue increased 28 percent to $913 million for the three
months ended March 31, 1995 from $714 million for the same period in the prior
year. Growth in both the government (Medicare and Medicaid) and commercial
programs, a result of enrollment gains offset slightly by decreases in premium
rates, provided an increase in total operating revenue of $165 million. In
addition, approximately $25 million of the increase in total operating revenue
represents the incremental operations included in the quarter ended March 31,
1995 of the Acquisitions described in Note 3 of the Notes to Condensed
Consolidated Financial
11
<PAGE>
Statements. The Company's specialty managed care products and services and its
joint venture medical groups contributed the remainder of the increase.
Total operating revenue increased 28 percent to $1.73 billion for the six
months ended March 31, 1995 from $1.36 billion for the same period in the prior
year. Growth in both the commercial and government programs, a result of
enrollment gains, offset slightly by decreases in commercial premium rates,
provided an increase in total operating revenue of $296 million. In addition,
approximately $66 million of the increase in total operating revenue represents
the incremental operations included in the six months ended March 31, 1995 of
the Acquisitions. The Company's specialty managed care products and services
and its joint venture medical groups contributed the remainder of the increase.
For the three and six months ended March 31, 1995, commercial HMO premiums
increased $52 million to $346 million and $96 million to $662 million,
respectively, as compared to the same periods in the prior year. Excluding the
effects of the Acquisitions, membership growth provided the increase in the
commercial HMO program. Because of increased competition in the Company's
markets, overall commercial HMO premium rates decreased an average of three
percent and one percent for the three and six months ended March 31, 1995,
respectively, primarily in California and Oregon. The Company expects
commercial HMO premium rates to remain flat or decrease for the remainder of
fiscal 1995.
Government premiums rose $138 million to $532 million and $267 million to
$1 billion for the three and six months ended March 31, 1995, respectively.
Enrollment gains predominately in the Secure Horizons programs contributed
approximately 88 percent of this increase in both periods.
Total health care service expenses as a percent of premium revenue (the
"medical loss ratio") for the quarter ended March 31, 1995, have decreased to
83.4 percent from 83.8 percent for the same period in the prior year. The
commercial medical loss ratio increased to 81.1 percent from 78.2 percent while
the government medical loss ratio decreased to 85.0 percent from 88.3 percent.
For the six months ended March 31, 1995, the consolidated medical loss ratio of
83.5 percent decreased compared to a ratio of 84.0 percent for the same period
in the prior year. The commercial medical loss ratio increased to 81.4 percent
from 80.6 percent while the government medical loss ratio decreased to 84.9
percent from 86.8 percent for the same period in the prior year.
The increase in the commercial medical loss ratio for the three and six
months ended March 31, 1995 is primarily attributable to the impact of the
Company's acquisitions in the Florida and Washington markets which have higher
commercial loss ratios. Because the Company's provider contracting approach has
not been fully integrated in the recently acquired markets of Florida and
Washington, the Company expects a higher commercial medical loss ratio for the
year ended September 30, 1995 compared to the prior year.
The decrease in the medical loss ratio for the government programs for the
three and six months ended March 31, 1995, respectively, as compared to the same
period of the prior year, is primarily related to decreases in outpatient
surgery expenses and payment to physicians as a result of more cost effective
contracts. The government medical loss ratio for the remainder of the year is
expected to remain consistent with the ratio for the six months ended March 31,
1995
The Company has historically made adjustments to health care service
expenses in the quarter ended June 30 to reflect the impact of net positive
reserve adjustments resulting primarily from the periodic reconciliation of
amounts reserved for physician incentive programs. Based on estimates made as
of March 31, 1995, the Company does not anticipate that the actual net positive
reserve adjustments for the year ended September 30, 1995 will be as significant
as amounts recorded in prior years.
12
<PAGE>
Marketing, general and administrative expenses increased $32 million to
$124 million for the three months ended March 31, 1995 from $92 million for the
same period in 1994. As a percentage of operating revenue, marketing, general
and administrative expenses increased to 13.6 percent from 12.8 percent. For
the six months ended March 31, 1995, marketing, general and administrative
expenses totaled $237 million, an increase of $56 million over the same period
in the prior year. As a percentage of total operating revenue, marketing,
general, and administrative expenses increased slightly to 13.7 percent from
13.3 percent for the same period in 1994. These increases are primarily
attributable to higher costs in developing markets including Florida, Washington
and Houston and Dallas, Texas. Marketing, general and administrative expenses
determined as a percentage of operating revenue for the balance of fiscal 1995
are expected to be comparable to the rate for the six months ended March 31,
1995 and above the prior year's results as efficiencies in mature market process
improvements are offset by investment in the new markets discussed above.
Earnings per share ("EPS") rose 28 percent to $0.96 for the quarter ended
March 31, 1995, compared to $0.75 for the comparable quarter in the prior year.
For the six months ended March 31, 1995, before the cumulative effect of a
change in accounting principle, EPS increased 30 percent to $1.67. These
increases are primarily attributable to membership growth derived substantially
from the government programs and a lower government medical loss ratio. For the
six months ended March 31, 1994, changes in income tax accounting principles
(see Note 4 of the Notes to Condensed Consolidated Financial Statements)
increased EPS by approximately $0.20, resulting in earnings per share of $1.48.
The Company's ability to expand depends, in part, on competitive premium
pricing and its ability to secure cost-effective contracts with additional
physicians or to ensure that existing physician groups expand their operations
to accommodate the Company's new HMO membership. Achieving such objectives is
becoming difficult due to increasing competition among HMOs for physician
contracts. In addition, the Company's profitability depends, in part, on its
ability to maintain effective control over health care costs while providing
members with quality care. Factors such as health care reform, levels of
utilization of health care services, new technologies, hospital costs, major
epidemics, and numerous other external influences may affect the Company's
operating results. Accordingly, past financial performance is not necessarily a
reliable indicator of future performance, and investors should not use
historical records to anticipate results or future period trends.
13
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
The Company's working capital as of March 31, 1995 was $256 million, an
increase of $25 million from September 30, 1994. The increase is primarily
attributable to an increase in marketable securities of $104 million resulting
from the investment of the net proceeds from the public offering completed in
March 1995 (see discussion below), offset by an increase in current liabilities
of $75 million related to the purchase of ValuCare.
As of March 29, 1995, the Company completed a public offering of 5,175,000
shares of its Class B Common Stock, of which 3,000,000 shares were sold by the
Company and 2,175,000 shares were sold by UniHealth. The net proceeds received
by the Company from the sale of the 3,000,000 shares of Class B Common Stock
were approximately $199 million after deducting the estimated underwriting
discounts and commissions and expenses of the offering payable by the Company.
The Company used approximately $186 million of the net proceeds to repay the
amount outstanding under the BofA Credit Line (See Note 5 - "Long Term Debt")
and to replenish working capital used to pay for certain of the Acquisitions
(see Note 3 - "Acquisitions"). The remaining net proceeds of this offering will
be used by the Company to increase working capital and for general corporate
purposes. Such purposes may include future acquisitions, the introduction of
new products and services, increased investments in existing operations and
expansion of geographic markets. Pending the above described uses, the net
proceeds will be invested in investment grade, interest bearing securities.
14
<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
The Annual Meeting of Shareholders (the "Annual Meeting") of PacifiCare Health
Systems, Inc. (the "Company") was held on March 1, 1995 at the Company's
corporate office in Cypress, California. The following matters were addressed at
the meeting:
ELECTION OF DIRECTORS
David Carpenter, David Reed, Lloyd Ross and Jean Bixby Smith were duly elected
to the Board of Directors at the Annual Meeting. Terry Hartshorn, Alan Hoops,
Gary L. Leary and Warren Pinkert II are directors whose terms of office
continued after the Annual Meeting.
The votes of holders of 9,980,005 shares were cast "FOR" the election of the
four directors of the Company, the votes of holders of 578 shares were cast
"AGAINST" and the holders of 23,006 shares "ABSTAINED" from voting. The votes
"FOR" represents approximately 81% of all shares outstanding and entitled to
vote and 99% of all shares voted.
PROPOSAL TO APPROVE THE SECOND AMENDED AND RESTATED 1989 STOCK OPTION PLAN FOR
OFFICERS AND KEY EMPLOYEES OF PACIFICARE HEALTH SYSTEMS, INC.
This proposal sought shareholder approval of the Second Amended and Restated
1989 Stock Option Plan for Officers and Key Employees of PacifiCare Health
Systems, Inc. (the "Amended Employee Plan"). The Amended Employee Plan
supersedes the existing Amended 1989 Stock Option Plan for Officers and Key
Employees of PacifiCare Health Systems, Inc. and provides: (i) that "Stock
Payments" include both grants of shares of Class B Common Stock in lieu of cash
compensation other than based salary and grants of shares of Class B Common
Stock to employees as an incentive to employment with the Company: (ii) for the
inclusion of consultants to the persons eligible to participate in the Amended
Employee Plan; (iii) an increase in the limit on the number of options and stock
appreciation rights available for grant to any participant of the Amended
Employee Plan from 100,000 shares to 200,000 shares during any fiscal year; and
(iv) an increase of the limit on the aggregate number of shares of the Company's
common stock which may be subject to awards granted during any fiscal year
beginning with October 1994 from one and one-half percent of the aggregate
outstanding shares of the Class A and Class B Common Stock of the Company as of
the last day of the previous fiscal year to two percent of the aggregate
outstanding shares of the Class A and Class B Common Stock of the Company as of
the last day of the previous fiscal year.
15
<PAGE>
The votes of holders of 8,783,217 shares were cast "FOR" the Proposal to Approve
the Second Amended and Restated 1989 Stock Option Plan for Officers and Key
Employees of PacifiCare Health Systems, Inc., the votes of holders of 228,822
shares were cast "AGAINST" and the holders of 144,063 shares "ABSTAINED" from
voting. The votes "FOR" represents approximately 72% of all shares outstanding
and entitled to vote and 96% of all shares voted.
PROPOSAL TO APPROVE PERFORMANCE OBJECTIVES TO, AND MAXIMUM AWARDS UNDER THE
COMPANY'S AMENDED LONG-TERM PERFORMANCE INCENTIVE PLAN, AS AMENDED.
This proposal sought the approval of changes in the performance objectives for
the Amended Long-Term Performance Incentive Plan, as amended (the "LTPIP"), from
increases in return on equity and increases in revenue of non-core business to
earnings per share. In addition, the shareholders were requested to approve the
maximum award of $1,000,000 which an Executive Officer (as defined in section
3(b) -7 of the Securities and Exchange Act of 1934 as amended) may receive
pursuant to any award under the LTPIP.
The votes of holders of 8,847,721 shares were cast "FOR" the Proposal to Approve
Performance Objectives To, and Maximum Awards Under the Company's Amended
Long-Term Performance Incentive Plan, as Amended, the votes of holders of
216,409 shares were cast "AGAINST" and the holders of 54,904 shares "ABSTAINED"
from voting. The votes "FOR" represents approximately 72% of all shares
outstanding and entitled to vote and 97% of all shares voted.
PROPOSAL TO APPROVE PERFORMANCE OBJECTIVES TO, AND MAXIMUM AWARDS UNDER THE
COMPANY'S AMENDED MANAGEMENT INCENTIVE COMPENSATION PLAN, AS AMENDED.
This proposal sought the approval of performance objectives in addition to
increases in earnings per share for the Amended Management Incentive
Compensation Plan, as amended (the "MICP"). The additional performance
objective was general and administrative costs as a percentage of revenue. In
addition, the shareholders were requested to approve the maximum award of
$1,000,000 which an Executive Officer may receive pursuant to any award under
the MICP.
The votes of holders of 8,846,841 shares were cast "FOR" the Proposal to Approve
Performance Objectives To and Maximum Awards Under the Company's Amended
Management Incentive Compensation Plan, as Amended, the votes of holders of
55,838 shares were cast "AGAINST" and the holders of 216,355 shares "ABSTAINED"
from voting. The votes "FOR" represents approximately 72% of all shares
outstanding and entitled to vote and 97% of all shares voted.
16
<PAGE>
Item 5: Other Information
None
Item 6: Exhibits and Reports on Form 8-K
(a) EXHIBIT INDEX
Exhibit 11A Computation of Net Income per Share of
Common Stock - Primary
Exhibit 11B Computation of Net Income per Share of
Common Stock - Fully Diluted
Exhibit 27 Financial Data Schedules
(b) No reports on Form 8-K were filed during the quarter for which
this report is filed.
17
<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: By: /s/ Alan Hoops
------------------------- -----------------------------
Alan Hoops
President and Chief
Executive Officer
Date: By: /s/ Wayne Lowell
------------------------- -----------------------------
Wayne Lowell
Executive Vice President and
Chief Financial Officer
18
<PAGE>
Exhibit 11A
PacifiCare Health Systems, Inc.
Computation of Net Income per Share of Common Stock -
Primary
(Dollars and shares in thousands, except per share amounts)
<TABLE>
<CAPTION>
Three months ended Six months ended
March 31, March 31,
1995 1994 1995 1994
- -----------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Shares outstanding at the beginning of
the period 27,594 27,317 27,528 27,256
Weighted average of shares issued during
the period in connection with a public
offering, compensation awarded in stock
and exercise of stock options 359 30 220 71
Shares repurchased (weighted) - - - (31)
Dilutive shares issuable, net of shares
assumed to have been purchased (at the
average market price) for treasury with
assumed proceeds from:
Contingent exercise of stock options 645 644 663 589
Registered equity purchase contracts 3 - 3 -
- -----------------------------------------------------------------------------------------------------------------------
Total shares - primary 28,601 27,991 28,414 27,885
- -----------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------
Income before cumulative effect of a change
in accounting principle $ 27,359 $ 20,844 $ 47,416 $ 35,583
Cumulative effect on prior years of a change
in accounting principle - - - 5,658
- -----------------------------------------------------------------------------------------------------------------------
Net income $ 27,359 $ 20,844 $ 47,416 $41,241
- -----------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------
Primary earnings per share:
Earnings before cumulative effect of
a change in accounting principle $ 0.96 $ 0.75 $ 1.67 $ 1.28
Cumulative effect on prior years of a change
in accounting principle - - - 0.20
- -----------------------------------------------------------------------------------------------------------------------
Earnings per share $ 0.96 $ 0.75 $ 1.67 $ 1.48
- -----------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
Exhibit 11B
PacifiCare Health Systems, Inc.
Computation of Net Income per Share of Common Stock -
Fully Diluted
(Dollars and shares in thousands, except per share amounts)
<TABLE>
<CAPTION>
Three months ended Six months ended
March 31, March 31,
---------------------------------------------------------------
1995 1994 1995 1994
- -----------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Shares outstanding at the beginning of the period 27,594 27,317 27,528 27,256
Weighted average of shares issued during the period
as a result of a public offering, compensation
awarded in stock and exercise of stock options 359 30 220 71
Shares repurchased (weighted)
- - - (31)
Dilutive shares issuable, net of shares assumed to
have been purchased (at the higher of average or
ending market price) for treasury with assumed
proceeds from:
Contingent exercise of stock options 685 645 696 639
Registered equity purchase contracts 6 - 7 -
- -----------------------------------------------------------------------------------------------------------------------
Total shares - fully diluted 28,644 27,992 28,451 27,935
- -----------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------
Income before cumulative effect of a change in
accounting principle $ 27,359 $ 20,844 $ 47,416 $ 35,583
Cumulative effect on prior years of a change in
accounting principle - - - 5,658
- -----------------------------------------------------------------------------------------------------------------------
Net income $ 27,359 $ 20,844 $ 47,416 $ 41,241
- -----------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------
Fully diluted earnings per share:
Earnings before cumulative effect of a change
in accounting principle $ 0.96 $ 0.75 $ 1.67 $ 1.28
Cumulative effect on prior years of a change in
accounting principle - - - 0.20
- -----------------------------------------------------------------------------------------------------------------------
Earnings per share $ 0.96 $ 0.75 $ 1.67 $ 1.48
- -----------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-30-1995
<PERIOD-START> OCT-01-1994
<PERIOD-END> SEP-30-1995
<CASH> 213,639
<SECURITIES> 622,397
<RECEIVABLES> 87,860
<ALLOWANCES> 331
<INVENTORY> 0
<CURRENT-ASSETS> 955,053
<PP&E> 161,073
<DEPRECIATION> 62,373
<TOTAL-ASSETS> 1,375,617
<CURRENT-LIABILITIES> 698,719
<BONDS> 13,403
<COMMON> 307
0
0
<OTHER-SE> 663,082
<TOTAL-LIABILITY-AND-EQUITY> 1,375,617
<SALES> 0
<TOTAL-REVENUES> 912,766
<CGS> 0
<TOTAL-COSTS> 798,849
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 1,097
<INTEREST-EXPENSE> 2,010
<INCOME-PRETAX> 46,042
<INCOME-TAX> 18,683
<INCOME-CONTINUING> 27,359
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 27,359
<EPS-PRIMARY> 0.96
<EPS-DILUTED> 0.96
</TABLE>
