<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K/A
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended September 30, 1995
OR
[ ] 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
- -------------------------------------------------------------------------------
PACIFIC 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
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Class A Common Stock, par value $0.01
Class B Common Stock, par value $0.01
- -------------------------------------------------------------------------------
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
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K [ ].
The aggregate market value of voting stock held by non-affiliates of the
Registrant on November 1, 1995, was approximately $476,352,000.
The number of shares of Class A Common Stock and Class B Common Stock
outstanding at November 1, 1995, was 12,331,408 and 18,551,697, respectively.
DOCUMENTS INCORPORATED BY REFERENCE
DOCUMENT WHERE INCORPORATED
Portions of the Registrant's definitive Proxy Statement
to be filed by January 29, 1996 Part III
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
<TABLE>
<CAPTION>
Page
----
<S> <C>
Consolidated Balance Sheets . . . . . . . . . . . . . . 20
Consolidated Statements of Income . . . . . . . . . . . 21
Consolidated Statements of Shareholders' Equity . . . . 22
Consolidated Statements of Cash Flows . . . . . . . . . 23
Notes to Consolidated Financial Statements. . . . . . . 25
Report of Ernst & Young LLP Independent Auditors. . . . 35
Quarterly Information for Fiscal Years 1995 and 1994
(Unaudited). . . . . . . . . . . . . . . . . . . . . . 36
</TABLE>
19
<PAGE>
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTEMBER 30
(in thousands, except per share data) 1995 1994
- ------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and equivalents $ 279,145 $ 192,609
Marketable securities 532,380 517,999
Receivables, net 112,408 73,976
Prepaid expenses 9,469 8,883
Deferred income taxes 28,207 28,415
- ------------------------------------------------------------------------------------------
Total current assets 961,609 821,882
- ------------------------------------------------------------------------------------------
Property, plant and equipment at cost, net of accumulated
depreciation and amortization 99,276 97,018
Marketable securities - restricted 23,108 15,994
Goodwill and intangible assets 295,794 167,085
Other assets 5,585 3,569
- ------------------------------------------------------------------------------------------
$1,385,372 $1,105,548
- ------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Medical claims and benefits payable:
Medical claims payable $ 192,800 $ 203,900
Incentives payable to participating medical groups 80,600 83,700
Future life and annuity policy benefits 15,000 15,300
- ------------------------------------------------------------------------------------------
Total medical claims and benefits payable 288,400 302,900
- ------------------------------------------------------------------------------------------
Accounts payable 21,699 17,000
Accrued liabilities 74,685 47,110
Accrued compensation and employee benefits 45,415 37,737
Income taxes payable 7,404 6,748
Unearned premium revenue 195,413 170,970
Long-term debt due within one year 7,978 8,175
- ------------------------------------------------------------------------------------------
Total current liabilities 640,994 590,640
- ------------------------------------------------------------------------------------------
Long-term debt due after one year 11,949 101,137
Minority interest 405 413
Commitments and contingencies
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; 12,331 and 12,238 shares issued in 1995
and 1994, respectively 123 122
Class B common shares, par value $0.01 per share; 60,000
shares authorized; 18,551 and 15,290 shares issued in 1995
and 1994, respectively 186 153
Additional paid-in capital 347,548 141,955
Unrealized gain on marketable securities net of taxes 4,944 --
Retained earnings 379,223 271,128
- ------------------------------------------------------------------------------------------
Total shareholders' equity 732,024 413,358
- ------------------------------------------------------------------------------------------
$1,385,372 $1,105,548
- ------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes.
20
<PAGE>
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30
(in thousands, except per share data) 1995 1994 1993
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenue:
Commercial premiums $1,512,080 $1,237,411 $1,046,186
Government premiums 2,170,885 1,618,145 1,153,964
Other income 48,057 37,696 20,923
- ------------------------------------------------------------------------------------------------------------
Total operating revenue 3,731,022 2,893,252 2,221,073
- ------------------------------------------------------------------------------------------------------------
Expenses:
Health care services:
Medical services 1,453,289 1,127,785 867,157
Hospital services 1,264,002 968,605 766,770
Other services 359,844 277,868 216,542
- ------------------------------------------------------------------------------------------------------------
Total health care services 3,077,135 2,374,258 1,850,469
Marketing, general and administrative expenses 498,445 394,620 279,865
Amortization of intangibles 7,199 3,444 3,495
- ------------------------------------------------------------------------------------------------------------
Operating income 148,243 120,930 87,244
Interest income 39,406 28,588 23,459
Interest expense (5,549) (4,050) (2,376)
- ------------------------------------------------------------------------------------------------------------
Income before income taxes and cumulative effect of a
change in accounting principle 182,100 145,468 108,327
Provision for income taxes 74,005 60,875 45,631
- ------------------------------------------------------------------------------------------------------------
Income before cumulative effect of a change in
accounting principle 108,095 84,593 62,696
Cumulative effect on prior years of a change in
accounting principle -- 5,658 --
- ------------------------------------------------------------------------------------------------------------
Net income $ 108,095 $ 90,251 $ 62,696
- ------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------
Weighted average common shares and equivalents
outstanding used to calculate earnings per share 29,864 28,004 27,847
- ------------------------------------------------------------------------------------------------------------
Earnings per share:
Before cumulative effect of a change in accounting
principle $ 3.62 $ 3.02 $ 2.25
Cumulative effect on prior years of a change in
accounting principle -- .20 --
- ------------------------------------------------------------------------------------------------------------
Earnings per share $ 3.62 $ 3.22 $ 2.25
- ------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes.
21
<PAGE>
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30, 1995, 1994 AND 1993
UNREALIZED
CLASS A COMMON SHARES CLASS B COMMON SHARES ADDITIONAL GAIN ON
--------------------- --------------------- PAID-IN MARKETABLE RETAINED
(in thousands) OUTSTANDING AMOUNT OUTSTANDING AMOUNT CAPITAL SECURITIES EARNINGS TOTAL
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balances at September 30, 1992 11,946 $119 13,671 $137 $ 80,447 $ -- $118,181 $198,884
- ---------------------------------------------------------------------------------------------------------------------------------
Issuance of 1,600 shares of
common stock in connection
with public offering -- -- 1,600 16 59,276 -- -- 59,292
Issuance of common stock upon
exercise of stock options 186 2 112 1 1,536 -- -- 1,539
Issuance of common stock upon
conversion of convertible
debentures 1 -- 1 -- 20 -- -- 20
Tax benefit realized upon
exercise of stock options -- -- -- -- 5,038 -- -- 5,038
Purchase and retirement of
common stock -- -- (261) (3) (8,172) -- -- (8,175)
Net income -- -- -- -- -- -- 62,696 62,696
- ---------------------------------------------------------------------------------------------------------------------------------
Balances at September 30, 1993 12,133 121 15,123 151 138,145 -- 180,877 319,294
- ---------------------------------------------------------------------------------------------------------------------------------
Issuance of common stock upon
exercise of stock options 105 1 181 2 2,323 -- -- 2,326
Issuance of common stock
under incentive plan -- -- 21 -- 849 -- -- 849
Tax benefit realized upon
exercise of stock options -- -- -- -- 1,715 -- -- 1,715
Purchase and retirement of
common stock -- -- (35) -- (1,077) -- -- (1,077)
Net income -- -- -- -- -- -- 90,251 90,251
- ---------------------------------------------------------------------------------------------------------------------------------
Balances at September 30, 1994 12,238 122 15,290 153 141,955 -- 271,128 413,358
- ---------------------------------------------------------------------------------------------------------------------------------
Issuance of 3,000 shares of
common stock in connection
with public offering -- -- 3,000 30 197,602 -- -- 197,632
Issuance of common stock upon
exercise of stock options 93 1 245 3 3,284 -- -- 3,288
Issuance of common stock
under incentive plan -- -- 16 -- 1,024 -- -- 1,024
Tax benefit realized upon
exercise of stock options -- -- -- -- 3,683 -- -- 3,683
Cumulative effect of a change
in accounting principle, net
of taxes of $2,474 -- -- -- -- -- (3,808) -- (3,808)
Change in unrealized gains
(losses), net of taxes of $5,516 -- -- -- -- -- 8,752 -- 8,752
Net income -- -- -- -- -- -- 108,095 108,095
- ---------------------------------------------------------------------------------------------------------------------------------
Balances at September 30, 1995 12,331 $123 18,551 $186 $347,548 $4,944 $379,223 $732,024
- ---------------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes.
22
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30
(in thousands) 1995 1994 1993
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Operating activities:
Net income $ 108,095 $ 90,251 $62,696
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization 21,436 17,913 11,916
Amortization of intangibles 7,199 3,444 3,495
Loss on disposal of property, plant and equipment 2,033 642 1,337
Deferred income taxes (2,834) (9,411) 1,275
Provision for doubtful accounts 530 532 1,650
Cumulative effect of a change in accounting principle -- (5,658) --
Other 114 45 (407)
Changes in assets and liabilities net of effects from
acquisitions:
Accounts receivable (27,458) (15,607) (16,433)
Prepaid and other assets (2,489) 9,774 (5,715)
Medical claims and benefits payable (19,093) 29,043 47,000
Accounts payable (153) (5,819) 1,768
Accrued liabilities 27,575 8,336 18,736
Accrued compensation and employee benefits 7,678 9,249 994
Income taxes payable 656 2,372 4,428
Unearned premium revenue 23,934 153,387 2,378
- ------------------------------------------------------------------------------------------------
Net cash flows provided by operating activities 147,223 288,493 135,118
- ------------------------------------------------------------------------------------------------
Investing activities:
Acquisitions, net of cash acquired (134,971) (69,589) --
Purchase of property, plant and equipment (25,035) (24,979) (19,577)
Purchase of marketable securities (6,395) (113,415) (161,971)
Purchase) sale of marketable securities -- restricted (7,114) 450 (206)
Proceeds from sale of property, plant and equipment 3,056 -- 32
- ------------------------------------------------------------------------------------------------
Net cash flows used in investing activities (170,459) (207,533) (181,722)
- ------------------------------------------------------------------------------------------------
Financing activities:
Proceeds from issuance of common stock 200,920 2,326 60,831
Principal payments on long-term debt (174,483) (5,212) (2,927)
Proceeds from borrowings of long-term debt 83,335 82,350 --
Purchase and retirement of common stock -- (1,077) (8,175)
- ------------------------------------------------------------------------------------------------
Net cash flows provided by financing activities 109,772 78,387 49,729
- ------------------------------------------------------------------------------------------------
Net increase in cash and equivalents 86,536 159,347 3,125
Beginning cash and equivalents 192,609 33,262 30,137
- ------------------------------------------------------------------------------------------------
Ending cash and equivalents $ 279,145 $ 192,609 $33,262
- ------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes.
23
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30
(in thousands) 1995 1994 1993
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Supplemental cash flow information
Cash paid during the year for:
Income taxes $ 61,166 $ 66,510 $40,295
Interest $ 2,685 $ 2,466 $ 1,865
- ------------------------------------------------------------------------------------------------
Supplemental schedule of noncash investing and
financing activities:
Tax benefit realized upon exercise of stock options $ 3,683 $ 1,715 $ 5,038
Compensation awarded in Class B Common Stock $ 1,024 849 $ --
Leases capitalized $ 392 $ 4,063 $ 8,658
Capital leases terminated $ -- $ 1 $ 45
Conversion of 7.50% subordinated convertible debentures $ -- $ -- $ 20
- ------------------------------------------------------------------------------------------------
Details of unrealized gain on marketable securities:
Marketable securities $ 7,986 $ -- $ --
Deferred taxes $ 3,042 $ -- $ --
- ------------------------------------------------------------------------------------------------
Increase in shareholders' equity $ 4,944 $ -- $ --
- ------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------
Details of businesses acquired in purchase transactions:
Fair value of assets acquired $ 152,456 $ 130,323 $ --
Less liabilities assumed or created, including
notes to seller 15,909 42,587 --
- ------------------------------------------------------------------------------------------------
Cash paid for acquisitions 136,547 87,736 --
Cash acquired in acquisitions 1,576 18,147 --
- ------------------------------------------------------------------------------------------------
Net cash paid for in acquisitions $ 134,971 $ 69,589 $ --
- ------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes.
24
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. THE REPORTING ENTITY
a) Organization and Operations. PacifiCare Health Systems, Inc. (the
"Company") owns and operates federally qualified health maintenance
organizations ("HMOs"), which arrange health care services principally for a
predetermined, prepaid periodic fee to enrolled subscriber groups through
independent health care organizations under contract. The Company also offers
certain specialty products and services to group purchasers and to other managed
care organizations and their beneficiaries, including pharmacy benefit
management, life and health insurance, behavioral health, Medicare risk
management services and vision services, coordination of managed care products
for multi-region employers, military health care management, workers'
compensation managed care and health promotion. UniHealth, a California non-
profit public benefit corporation owned approximately 48 percent and two percent
of the Company's outstanding shares of Class A and Class B Common Stock,
respectively, at September 30, 1995.
b) Basis of Presentation. The accompanying consolidated financial
statements include the accounts of the Company and all significant subsidiaries
which are more than 50 percent owned and controlled. All significant
intercompany transactions and balances have been eliminated in consolidation.
2. SIGNIFICANT ACCOUNTING POLICIES
a) Cash and Equivalents. Cash and equivalents are defined as cash, money
market funds and certificates of deposit with a maturity of three months or
less.
b) Marketable Securities. As of October 1, 1994, the Company adopted
Statement of Financial Accounting Standards ("SFAS") No. 115, "Accounting for
Certain Investments in Debt and Equity Securities." In connection with the
adoption of SFAS No. 115, the Company determined that all marketable
securities (which are comprised of municipal bonds, corporate notes,
commercial paper and U.S. Treasury securities) held as of that date are
available for sale. Accordingly, such securities are carried at fair value
and unrealized gains or losses, net of applicable income taxes, are recorded
in shareholders' equity. The Company also determined that these marketable
securities are available for use in current operations and, accordingly,
classified such securities as current assets without regard to the
securities' contractual maturity dates. Prior to the adoption of SFAS No.
115, the Company carried marketable securities at cost, unless there was a
permanent impairment of value. The adoption of SFAS No. 115 had no effect on
net income, but decreased marketable securities as of October 1, 1994 by $6.3
million, decreased shareholders' equity by $3.8 million and increased
deferred tax assets by $2.5 million.
The Company is required by state regulatory agencies to set aside funds for
the protection of their plan members in accordance with the laws of the various
states in which they operate. Such funds are included in marketable securities-
restricted (which are comprised of U.S. government securities and certificates
of deposit held by trustees or state regulatory agencies). The Company
determined that all marketable securities-restricted are held-to-maturity since
the Company has the intent and ability to hold the securities to maturity.
Held-to-maturity securities continue to be stated at amortized cost, adjusted
for amortization of premiums and accretion of discounts to maturity, and are
classified as noncurrent assets.
c) Property, Plant and Equipment. Property, plant and equipment are
recorded at cost; replacements and major improvements are capitalized, while
repairs and maintenance are charged to expense as incurred. Upon sale or
retirement of property, plant and equipment, the costs and related accumulated
depreciation are eliminated from the accounts. Any resulting gains and losses
are included in the determination of net income. Property, plant and equipment
are depreciated using the straight-line method for financial reporting purposes
over estimated useful lives ranging from five to twenty-five years. Leasehold
improvements are amortized using the straight-line method over the term of the
lease or ten years, whichever is shorter.
d) Goodwill and Intangible Assets. Goodwill and intangible assets represent
principally the unamortized excess of the cost of acquiring subsidiary companies
over the fair values of such companies' net tangible assets at the dates of
acquisition. Goodwill and intangible assets are amortized on a straight-line
basis over periods not exceeding forty years. Net intangible assets totaling
$0.8 million were written off in 1993, reducing earnings per
25
<PAGE>
share by approximately $0.03. These assets, which were related to the Company's
life and health insurance subsidiary, were determined to have no continuing
value. As of September 30, 1995 and 1994, accumulated amortization totaled
$16.0 and $8.8 million, respectively.
In March 1995, the FASB issued SFAS No. 121, "Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to be Disposed Of," which
requires impairment losses to be recorded on long-lived assets used in
operations when indicators of impairment are present and the undiscounted cash
flows estimated to be generated by those assets are less than the assets'
carrying amount. The statement also addresses the accounting for long-lived
assets that are expected to be disposed of. The Company will adopt SFAS No. 121
on October 1, 1996 and, based on current circumstances, does not believe the
effect of the adoption will be material.
e) Software Costs. Direct costs associated with the development of computer
software are expensed as incurred. These costs totaled $12.1 million, $9.6
million and $7.0 million in 1995, 1994 and 1993, respectively.
f) Premiums and Revenue Recognition. Prepaid health care premiums from the
Company's HMOs' enrolled groups are reported as revenue in the month in which
enrollees are entitled to receive health care. Premiums received prior to such
period are recorded as unearned premium revenue. Funds received under the
federal Medicare programs accounted for approximately 57 percent of the
Company's premium revenue for each of the years ended September 30, 1995 and
1994 and 52 percent for the year ended September 30, 1993.
g) Health Care Services. The Company's HMOs arrange for comprehensive
health care services to their members principally through capitation, a fixed,
monthly payment made without regard to the frequency, extent or nature of the
health care services actually furnished. Benefits are provided to enrolled
members generally through the Company's contractual relationships with physician
groups and hospitals. The Company's contracted providers may, in turn, contract
with specialists or referral providers for specific services and are responsible
for any related payments to those referral providers.
The Company's HMOs have various programs that provide incentives to
participating medical groups through the use of risk-sharing agreements and
other programs. Payments are made to medical groups based on their performance
in controlling health care costs while providing quality health care. Expenses
related to these programs, which are based in part on estimates, are recorded in
the period in which the related services are dispensed.
The cost of health care provided is accrued in the period it is dispensed to
the enrolled members, based in part on estimates for hospital services and other
health care costs which have been incurred but not yet reported. The Company
has also recorded reserves, based in part on estimates, to indemnify its members
against potential referral claims related to insolvent medical groups. The
Company's HMOs have stop-loss insurance to cover unusually high costs of care
when incurred beyond a predetermined annual amount per enrollee.
h) Utilization Review and Case Management Services. The Company's HMOs
conduct utilization review and case management programs to ensure that their
providers deliver a consistent quality of care to members. The utilization
review program essentially provides patients with second opinions, while the
case management program assigns nurses to complicated, high-risk or chronic
cases to evaluate and recommend treatment options to the patient and provider.
The costs associated with providing these medical services are recorded in
general and administrative expenses and totaled $14.6 million, $10.9 million and
$8.9 million for the fiscal years ended September 30, 1995, 1994 and 1993,
respectively.
i) Earnings Per Share. Earnings per share are computed on the weighted
average number of common shares outstanding each year. Outstanding stock
options are common stock equivalents and are included in earnings per share
computations.
j) Taxes Based on Premiums and Income. Certain states in which the Company
does business require the remittance of excise, per capita or premium taxes
based upon a specified rate for enrolled members or a percentage of billed
premiums. Such taxes may be levied in lieu of a state income tax. These
amounts are recorded in general and administrative expenses and totaled $4.3
million, $4.0 million and $3.3 million for the fiscal years ended
September 30, 1995, 1994 and 1993.
26
<PAGE>
As of October 1, 1993, the Company adopted SFAS No. 109, "Accounting for
Income Taxes" and recorded a benefit for the cumulative effect prior to October
1, 1993 of the change in accounting principle of $5.7 million or approximately
$0.20 per share.
3. MARKETABLE SECURITIES
The following table summarizes marketable securities as of September 30,
1995:
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED
(amounts in thousands) COST GAINS LOSSES FAIR VALUE
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Marketable securities:
U.S. Government and agency $120,756 $3,396 $ (63) $124,089
State and state agency 107,483 1,454 (237) 108,700
Municipal and local agency 117,221 3,140 - 120,361
Corporate debt and other securities 178,934 1,498 (1,202) 179,230
- ----------------------------------------------------------------------------------------------------------
Total marketable securities 524,394 9,488 (1,502) 532,380
- ----------------------------------------------------------------------------------------------------------
Marketable securities - restricted:
U.S. Government and agency 5,595 11 - 5,606
Corporate debt and other securities 17,513 - - 17,513
- ----------------------------------------------------------------------------------------------------------
Total marketable securities - restricted 23,108 11 - 23,119
- ----------------------------------------------------------------------------------------------------------
Total marketable securities $547,502 $9,499 $(1,502) $555,499
- ----------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------
</TABLE>
As of September 30, 1995, the contractual maturities of the Company's
marketable securities were as follows:
<TABLE>
<CAPTION>
MARKETABLE SECURITIES-
MARKETABLE SECURITIES RESTRICTED
AMORTIZED AMORTIZED
(amounts in thousands) COST FAIR VALUE COST FAIR VALUE
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Due in one year or less $118,332 $118,011 $21,655 $21,661
Due after one year through five years 259,938 261,575 1,453 1,458
Due after five years through ten years 120,301 126,120 - -
Due after ten years 25,823 26,674 - -
- ------------------------------------------------------------------------------------------------
$524,394 $532,380 $23,108 $23,119
- ------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------
</TABLE>
During the year ended September 30, 1995, proceeds from sales and maturities
of marketable securities were $2.7 billion, resulting in gross realized gains of
$6.0 million and realized losses of $6.8 million. Realized gains and losses are
included in investment income under the specific identification method.
27
<PAGE>
4. PROPERTY, PLANT AND EQUIPMENT
The following table summarizes the components of property, plant and
equipment:
<TABLE>
<CAPTION>
SEPTEMBER 30
(in thousands) 1995 1994
- --------------------------------------------------------------------------
<S> <C> <C>
Land $12,060 $14,533
Buildings and improvements 33,994 30,087
Furniture, fixtures and equipment 91,304 74,148
Leasehold improvements 15,620 10,509
Capital leases 18,357 17,526
Construction in progress 1,082 2,717
- --------------------------------------------------------------------------
172,417 149,520
Less accumulated depreciation and amortization 73,141 52,502
- --------------------------------------------------------------------------
Net property, plant and equipment $ 99,276 $ 97,018
- --------------------------------------------------------------------------
- --------------------------------------------------------------------------
</TABLE>
5. ACQUISITIONS
The Company completed several acquisitions in the years ended September 30,
1995 and 1994. During fiscal 1995, the Company made the following acquisitions
(the "1995 Acquisitions"): (i) Preferred Solutions, a San Jose-based pharmacy
benefit management company, in January 1995; (ii) ValuCare, a Fresno,
California-based HMO with approximately 67,000 members in March 1995; and (iii)
the membership of Pacific Health Plans, a Washington-based HMO, with
approximately 33,000 members in March 1995.
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 August 1994. The 1994 and the 1995
Acquisitions shall together be referred to herein as the "Acquisitions" and the
companies acquired through the Acquisitions shall be referred to as the
"Acquired Companies."
The total purchase price for the Acquisitions, including contingent purchase
payments, was approximately $220.0 million. Based on the fair values of the
assets and liabilities of the Acquired Companies, the preliminary estimate of
excess purchase price is approximately $220.4 million. A final allocation of
purchase price will be determined when appraisals and other studies are
completed. 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.
The following table summarizes the unaudited pro forma consolidated results
of the Company as though the Acquisitions had occurred at the beginning of the
periods presented giving effect to the interest income foregone, the costs
associated with the integration of the operations into those of the Company and
the amortization of the excess of the purchase price over the fair value of the
assets acquired. The unaudited pro forma information is not necessarily
indicative of the actual consolidated results of operations that would have
occurred had the Acquisitions occurred at the beginning of the period and is not
intended to be indicative of results which may occur in the future.
28
<PAGE>
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30
(Unaudited)
(Amounts in thousands, except per share amounts) 1995 1994
- ----------------------------------------------------------------------------------------
<S> <C> <C>
Premium revenue $3,752,959 $3,067,329
Total operating revenue $3,801,684 $3,112,121
Pretax income $177,925 $ 129,334
Net income (1) $105,100 $ 78,862
Earnings per share (1) $ 3.52 $ 2.82
- ----------------------------------------------------------------------------------------
</TABLE>
(1) The unaudited pro forma income before cumulative effect of a change in
accounting principle for the year ended September 30, 1994 was $73.2
million or $2.62 per share. The unaudited pro forma cumulative effect
on prior years of a change in accounting principle for the year ended
September 30, 1994 is $5.7 million or $0.20 per share (see Note 2j of the
Notes to Consolidated Financial Statements).
6. LONG-TERM DEBT
Long-term debt consists of the following components:
<TABLE>
<CAPTION>
SEPTEMBER 30
(in thousands) 1995 1994
- ------------------------------------------------------------------------------------------------------
<S> <C> <C>
8.80% privately placed senior debt, due in annual installments of
$3,750 through November 1997 $11,250 $ 15,000
Capitalized lease obligations 5,655 9,745
Revolving line of credit - 82,350
Other long-term debt 3,022 2,217
- ------------------------------------------------------------------------------------------------------
19,927 109,312
Less amounts due within one year 7,978 8,175
- ------------------------------------------------------------------------------------------------------
Long-term debt due after one year $11,949 $101,137
- ------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------
</TABLE>
In November 1994, the Company established a $250.0 million revolving line
of credit with Bank of America National Trust and Saving Association and a
syndicate of banks (the "B of A Credit Line"). The B of A 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 B of A Credit Line is subject to,
among other things, certain financial covenants, including a fixed charge ratio
and a leverage ratio. The B of A Credit Line may be extended beyond its five
year term but not beyond November 30, 2001. In November 1994, the Company
borrowed $82.3 million under the B of A Credit Line to pay the balance owed on
the syndicated $130.0 million credit line with The Chase Manhattan Bank, N.A.
The amount outstanding under the B of A Credit Line was repaid in March 1995
from the proceeds of the sale of the Company's Class B Common Stock, par value
$0.01 per share (the "Class B Common Stock") (see Note 7 - "Shareholders'
Equity").
As of September 30, 1995, the maturities of long-term debt for the years
following 1995 are as follows:
<TABLE>
<CAPTION>
YEARS ENDING SEPTEMBER 30
(in thousands)
- -----------------------------------------------------------------------------
<S> <C>
1996 $7,978
1997 6,264
1998 4,112
1999 111
2000 32
Thereafter 1,430
- -----------------------------------------------------------------------------
$19,927
- -----------------------------------------------------------------------------
- -----------------------------------------------------------------------------
</TABLE>
29
<PAGE>
Capitalized leases relate to equipment included in the accompanying
consolidated balance sheets at a cost of $18.4 million and $17.5 million at
September 30, 1995 and 1994, respectively. Accumulated amortization related to
this equipment totaled $12.8 million and $8.2 million at September 30, 1995 and
1994, respectively. These leases require future payments including interest
totaling $8.4 million at September 30, 1995 through the end of the lease terms.
7. SHAREHOLDERS' EQUITY
The authorized capital stock of the Company consists of 30 million shares of
the Class A Common Stock, par value $0.01 per share (the "Class A Common
Stock"), 60 million shares of the Class B Common Stock and 10 million shares of
Preferred Stock, par value $1.00 per share (the "Preferred Stock"). As of
November 1, 1995, there were 12,331,408 shares of the Class A Common Stock
outstanding, 18,551,697 of the Class B Common Stock outstanding and no shares of
Preferred Stock outstanding. Holders of the Class A Common Stock have one vote
per share while holders of the Class B Common Stock have no voting rights other
than as required by Delaware law. Holders of the Class A Common Stock and
Class B Common Stock are entitled to equal per share cash and stock dividends,
if any, distributions upon liquidation of the Company and consideration in a
merger or consolidation of the Company.
In March 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 issued and sold by the
Company and 2,175,000 shares were sold by UniHealth. 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 Company received net proceeds of approximately $197.6 million from the
sale of the 3,000,000 shares of Class B Common Stock after deducting
underwriting discounts and commissions and expenses of the offering payable by
the Company. The Company did not receive any of the proceeds from the sale of
shares of Class B Common Stock by UniHealth. The Company used approximately
$186.0 million of the net proceeds to repay the amount outstanding under its B
of A Credit Line and to replenish working capital used to pay for certain of the
Acquisitions (see Note 5 - "Acquisitions").
In December 1994, the Company completed a public offering of 90,000 shares of
its Class B Common Stock to certain physician groups which currently contract
with the Company. Each group has entered into an irrevocable obligation to
purchase a fixed number of shares of the Class B Common Stock over a five year
period beginning May 1, 1996 at $64.88 per share.
On December 13, 1993, UniHealth completed a public offering of 575,000 shares
of the Company's Class A Common Stock. The Company did not receive any of the
proceeds from this offering.
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 were approximately $59 million after deducting underwriting discounts
and commissions, and expenses of the offering.
8. TRANSACTIONS WITH RELATED PARTIES
The Company purchased health care services from hospitals owned and managed
by UniHealth totaling $70.6 million, $61.5 million and $55.5 million for the
years ended September 30, 1995, 1994 and 1993, respectively. Under the terms of
a management arrangement with UniHealth, the Company paid $0.7 million, $0.8
million and $1.2 million for management fees, payroll processing services and
other services in the years ended September 30, 1995, 1994 and 1993,
respectively.
UniHealth purchased health care coverage from the Company in the amounts of
$12.0 million, $10.0 million and $7.3 million for the years ended September 30,
1995, 1994 and 1993, respectively. Amounts receivable from UniHealth were $0.9
million and $1.0 million at September 30, 1995 and 1994, respectively.
30
<PAGE>
Joseph S. Konowiecki, the secretary and general counsel of the Company, is
the sole shareholder of Joseph S. Konowiecki, Inc., a California professional
corporation, which is a partner of the law firm of Konowiecki & Rank. The
Company purchased legal services from Konowiecki & Rank in the amounts of $3.2
million, $3.1 million and $2.3 million for the years ended September 30, 1995,
1994 and 1993, respectively. The amount payable to Konowiecki & Rank was $0.2
million at September 30, 1995 and 1994.
9. INCOME TAXES
Deferred income taxes reflect the net effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components
of the Company's deferred tax assets and liabilities are as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30
(IN THOUSANDS) 1995 1994
- --------------------------------------------------------------------------------
<S> <C> <C>
Deferred tax assets:
Accrued health care costs $15,147 $ 8,363
Accrued compensation 8,682 9,574
Accrued expenses 4,761 5,644
State franchise taxes 3,121 2,758
Capital leases 708 2,974
Depreciation 693 --
Other assets 485 1,434
- --------------------------------------------------------------------------------
Total deferred tax assets 33,597 30,747
Deferred tax liabilities:
Unrealized gain on marketable securities (3,042) --
Prepaid expense (1,445) --
Other liabilities (903) (741)
Depreciation -- (1,591)
- --------------------------------------------------------------------------------
Net deferred tax assets $28,207 $28,415
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
</TABLE>
The provision for income taxes for the years ended September 30, 1995,
1994 and 1993, consists of the following components:
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30
(in thousands) 1995 1994 1993
<S> <C> <C> <C>
Current:
Federal $62,912 $58,036 $35,324
State 13,927 12,250 9,032
- ---------------------------------------------------------------------------------------
Total current 76,839 70,286 44,356
Deferred:
Federal (2,444) (9,349) 1,275
State (390) (62) --
- ---------------------------------------------------------------------------------------
Total deferred (2,834) (9,411) 1,275
- ---------------------------------------------------------------------------------------
Provision for income taxes $74,005 $60,875 $45,631
- ---------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------
</TABLE>
31
<PAGE>
The following table summarizes significant differences between the
provision for income taxes and the amount computed by applying the statutory
federal income tax rates to income before income taxes:
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30
(in thousands) 1995 1994 1993
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Computed expected provision 35.0% 35.0% 34.8%
State taxes, net of federal benefit 4.9 5.4 5.4
Tax exempt interest (2.2) (1.9) (1.7)
Amortization of intangibles 1.1 0.7 1.0
Changes in unrecognized deferred tax benefits 0.2 (0.3) 2.2
Other, net 1.6 2.9 0.4
- --------------------------------------------------------------------------------
Provision for income taxes 40.6% 41.8% 42.1%
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
</TABLE>
The Company and its subsidiaries file a consolidated Federal income tax
return. The Company also files a combined California franchise tax return
with its subsidiaries.
Prior to the change in accounting principle, the sources of deferred tax
items and the corresponding tax effects during the year ended September 30, 1993
were as follows:
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30
(in thousands) 1993
- --------------------------------------------------------------------------------
<S> <C>
Depreciation $ 2,803
Medical claims and benefits payable 1,482
Performance incentives 942
State franchise taxes (141)
Capital leases (2,322)
Other, net (1,489)
- --------------------------------------------------------------------------------
$ 1,275
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
</TABLE>
10. EMPLOYEE BENEFIT PLANS
a) Savings and Profit-Sharing Plan. The Company has an employee profit-
sharing plan (the "Plan") covering substantially all full-time employees, which
provides for annual contributions by the Company of two percent of the annual
compensation of employees and additional amounts determined by the Board of
Directors which are generally based upon a percentage of pretax income.
Employees may defer up to twelve percent of their annual compensation under the
Plan, with the Company matching one-half of the deferred amount, up to a maximum
of three percent of annual compensation. Amounts charged to expense applicable
to the Plan were $14.3 million, $10.3 million and $7.8 million for the years
ended September 30, 1995, 1994 and 1993, respectively.
b) Stock Option Plans. The Company has granted stock options for employees
and Directors under various plans including the Stock Option Plan for Executive
and Key Employees, as amended (the "1985 Plan"), the Second Amended and
Restated 1989 Stock Option Plan for Officers and Key Employees, as amended (the
"1989 Employee Plan"), the 1989 Non-Officer Directors Stock Option Plan (the
"1989 Director Plan") and the 1992 Non-Officer Directors Stock Option Plan (the
"1992 Director Plan").
Grants under the 1985 Plan and 1989 Director Plan were suspended. The total
number of shares of common stock which may be granted as incentive stock
options, non-qualified stock options ("NQSOs"), stock appreciation rights
("SARs") and stock payments under the 1989 Employee Plan is approximately
653,500. Options may be granted for a term of up to ten years at a price not
less than 100 percent of the fair market value of the common stock at the time
of grant.
The 1992 Director Plan provides for a maximum of 140,000 shares of Class B
Common Stock issuable upon the exercise of NQSOs granted to eligible non-officer
Directors of the Company. Non-officer Directors of the Company who are not
eligible to receive options under the 1989 Employee Plan are eligible to receive
NQS0s under the 1992 Director Plan.
32
<PAGE>
The following table summarizes the activity in NQSOs under the 1985 Plan, the
1989 Employee Plan, the 1989 Director Plan and the 1992 Director Plan for the
years ended September 30, 1995 and 1994:
<TABLE>
<CAPTION>
NON-QUALIFIED STOCK OPTIONS
- -------------------------------------------------------------------------------------------------------------------
YEARS ENDED SEPTEMBER 30, CLASS A CLASS B
1995 AND 1994 STOCK EXERCISE PRICE STOCK EXERCISE PRICE
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
OUTSTANDING AT SEPTEMBER 30, 1993 560,059 $ 1.63 - $19.75 922,089 $ 1.63 - $44.75
Granted -- $ -- - $ -- 588,400 $37.75 - $53.75
Exercised 104,649 $ 1.63 - $17.25 180,645 $ 1.63 - $40.25
Canceled 4,126 $17.25 - $17.25 25,005 $17.25 - $40.50
- -------------------------------------------------------------------------------------------------------------------
OUTSTANDING AT SEPTEMBER 30, 1994 451,284 $ 1.63 - $19.75 1,304,839 $ 1.63 - $53.75
Granted -- $ -- - $ -- 743,700 $65.56 - $66.75
Exercised 93,375 $ 1.63 - $19.75 245,233 $ 1.63 - $53.75
Canceled 825 $17.25 - $19.75 110,995 $17.25 - $66.75
- -------------------------------------------------------------------------------------------------------------------
OUTSTANDING AT SEPTEMBER 30, 1995 357,084 $ 1.63 - $19.75 1,692,311 $ 1.63 - $66.75
- -------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
At September 30, 1995, approximately 2,049,575 shares were reserved for
issuance upon the exercise of outstanding options. As of that date, options
were exercisable for 342,984 shares of Class A Common Stock at exercise prices
of $1.63 - $19.75 per share and 394,289 shares of Class B Common Stock at
exercise prices of $1.63 - $66.75. No SARs have been awarded under the 1989
Employee Plan.
c) Performance Incentive Programs. The Company has a long-term performance
incentive program, under which all executive officers of the Company and certain
officers and key employees of the Company and its subsidiaries are eligible to
participate. Incentive compensation is based on the achievement of objectives
established by the Compensation Committee (the "Committee") of the Board of
Directors and approved by the shareholders of the Company. For fiscal years
ended September 30, 1995, 1994 and 1993, the incentive compensation expense for
this program was $3.0 million, $2.5 million and $1.9 million, respectively.
The Company also has an annual incentive compensation program. All executive
officers of the Company or any subsidiary of the Company are eligible to
participate and any officer or full-time employee of the Company or any
subsidiary of the Company, determined by the Committee to have a direct,
significant and measurable impact on the attainment of the Company's or
subsidiary's annual growth and profitability objectives is eligible to
participate. Amounts charged to expense for the annual compensation program
were $2.7 million, $7.0 million and $2.2 million for the years ended September
30, 1995, 1994 and 1993, respectively.
11. COMMITMENTS AND CONTINGENCIES
a) Lease Commitments. The Company leases office space and equipment under
various non-cancelable operating leases. Rental expense for the years ended
September 30, 1995, 1994 and 1993 totaled $18.3 million, $10.2 million and $8.1
million, respectively. Future minimum lease payments under operating leases at
September 30, 1995 are as follows:
<TABLE>
<CAPTION>
YEARS ENDING SEPTEMBER 30
(in thousands)
- ------------------------------------------------------------------------------
<S> <C>
1996 $20,658
1997 17,275
1998 10,359
1999 5,706
2000 4,159
Thereafter 5,169
- ------------------------------------------------------------------------------
$63,326
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
</TABLE>
33
<PAGE>
b) Employment Agreements. The Company has entered into employment
agreements with the President of the Company and certain other executive
officers. The agreements contain provisions that would entitle each to receive
severance benefits which are payable if employment is terminated for various
reasons, including termination following a change of ownership or control of the
Company as defined by the agreements. The maximum contingent liability for
severance payments that the Company would be required to make under the
employment agreements (excluding amounts which may be payable under incentive
plans and the value of certain benefits) would be approximately $7.4 million at
September 30, 1995.
c) Litigation. 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, results of
operations or cash flows.
12. INTEREST RATE SWAP AGREEMENTS
The Company has entered into interest rate swaps to reduce the impact of
changes in interest rates on a portion of its investments in marketable
securities. Interest rate swaps are contractual agreements between the Company
and third parties to exchange floating interest rate payments periodically over
the life of the agreements without the exchange of the underlying principal
amounts ("notional amounts"). At September 30, 1995, the total notional amount
of such agreements with off-balance sheet risk was $150.0 million. At September
30, 1995, the fair value of such agreements, representing the estimated amount
the Company would receive to terminate the agreement based on current interest
rates, was not significant.
13. CONCENTRATIONS OF CREDIT RISK
Financial instruments which potentially subject the Company to concentrations
of credit risk consist primarily of investments in marketable securities,
interest rate swap agreements and commercial premiums receivable. The Company's
short-term investments in marketable securities are managed by professional
investment managers within guidelines established by the Board of Directors,
which, as a matter of policy, limit the amounts which may be invested in any one
issuer. Concentrations of credit risk with respect to commercial premiums
receivable are limited due to the large number of employer groups comprising the
Company's customer base. The interest rate swap agreements contain an element
of risk that the counter parties may be unable to meet the terms of the
agreement. However, the Company minimizes such risk exposure for interest rate
swap agreements by limiting the counterparties to major financial institutions.
As of September 30, 1995, in Management's opinion, the Company had no
significant concentrations of credit risk.
34
<PAGE>
SIGNATURES
Pursuant to the requirements of the Section 12 of the Securities Exchange
Act of 1934, the Registrant has duly caused this Amendment 1 to the 10-K dated
November 22, 1995 to be signed on its behalf by the undersigned, thereunto duly
authorized.
PACIFICARE HEALTH SYSTEMS, INC.
Date: December 5, 1995 By /s/ ALAN HOOPS
----------------------------------------
Alan Hoops, President
and Chief Executive Officer
35
