<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 June 30, 1995
----------------------------------------
[ ] 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
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
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No
----- -----
As of July 31, 1995, there were 12,324,558 shares of the Registrant's Class A
Common Stock, par value $0.01 per share, outstanding and 18,518,375 shares of
Class B Common Stock, par value $0.01 per share, outstanding.
1
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Part 1: FINANCIAL INFORMATION
---------------------
Item 1: FINANCIAL STATEMENTS
PACIFICARE HEALTH SYSTEMS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
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JUNE 30, SEPTEMBER 30,
(AMOUNTS IN THOUSANDS, 1995 1994
EXCEPT PER SHARE DATA) (UNAUDITED)
----------------------------------------------------------------------------
<S> <C> <C>
Assets
----------------------------------------------------------------------------
Current assets:
Cash and equivalents $ 280,219 $ 192,609
Marketable securities 507,790 517,999
Receivables, net 108,073 73,976
Prepaid expenses 9,469 8,883
Deferred income taxes 17,302 28,415
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Total current assets 922,853 821,882
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Property, plant and equipment, net 101,654 97,018
Marketable securities - restricted 19,514 15,994
Goodwill and intangible assets 293,086 167,085
Other assets 9,145 3,569
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$ 1,346,252 $ 1,105,548
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Liabilities and Shareholders' Equity
Current liabilities:
Medical claims and benefits payable $ 287,700 $ 302,900
Accounts payable and accrued liabilities 131,203 108,595
Unearned premium revenue 206,109 170,970
Long-term debt due within one year 8,475 8,175
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Total current liabilities 633,487 590,640
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Long-term debt due after one year 12,287 101,137
Minority interest 405 413
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; 12,325 and 12,238
issued at June 30, 1995 and September 30, 1994,
respectively 123 122
Class B common shares, par value $0.01 per share;
60,000 shares authorized; 18,518 and 15,290 issued
at June 30, 1995 and September 30, 1994,
respectively 185 153
Additional paid-in capital 345,983 141,955
Unrealized holding gain on available-for-sale
securities net of tax effect of $3,127 4,991 --
Retained earnings 348,791 271,128
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Total shareholders' equity 700,073 413,358
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$ 1,346,252 $ 1,105,548
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</TABLE>
See accompanying notes.
2
<PAGE>
PACIFICARE HEALTH SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
<TABLE>
<CAPTION>
----------------------------------------------------------------------------
THREE MONTHS ENDED
JUNE 30,
(AMOUNTS IN THOUSANDS, --------------------------
EXCEPT PER SHARE DATA) 1995 1994
----------------------------------------------------------------------------
<S> <C> <C>
Revenue:
Commercial premiums $ 399,919 $ 313,127
Government premiums (Medicare and Medicaid) 568,508 429,997
Other income 12,809 9,135
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Total operating revenue 981,236 752,259
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Expenses:
Health care services:
Medical services 385,446 295,476
Hospital services 329,953 246,074
Other services 96,957 72,400
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Total health care services 812,356 613,950
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Marketing, general and administrative expenses 127,063 98,394
Amortization of intangibles 2,231 890
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Operating income 39,586 39,025
Interest income 12,310 7,047
Interest expense (1,029) (430)
-----------------------------------------------------------------------------
Income before income taxes 50,867 45,642
Provision for income taxes 20,619 18,846
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Net income $ 30,248 $ 26,796
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Weighted average common shares and equivalents
outstanding used to calculate earnings per share 31,313 28,027
----------------------------------------------------------------------------
Earnings per share $ 0.97 $ 0.95
----------------------------------------------------------------------------
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</TABLE>
See accompanying notes.
3
<PAGE>
PACIFICARE HEALTH SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
<TABLE>
<CAPTION>
----------------------------------------------------------------------------
NINE MONTHS ENDED
JUNE 30,
(AMOUNTS IN THOUSANDS, --------------------------
EXCEPT PER SHARE DATA) 1995 1994
----------------------------------------------------------------------------
<S> <C> <C>
Revenue:
Commercial premiums $ 1,099,436 $ 911,610
Government premiums (Medicare and Medicaid) 1,577,764 1,172,291
Other income 38,416 28,530
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Total operating revenue 2,715,616 2,112,431
----------------------------------------------------------------------------
Expenses:
Health care services:
Medical services 1,056,673 836,536
Hospital services 918,995 704,378
Other services 262,836 199,557
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Total health care services 2,238,504 1,740,471
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Marketing, general and administrative expenses 364,349 279,293
Amortization of intangibles 4,863 2,471
----------------------------------------------------------------------------
Operating income 107,900 90,196
Interest income 27,815 19,432
Interest expense (4,723) (1,435)
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Income before income taxes and cumulative effect
of a change in accounting principle 130,992 108,193
Provision for income taxes 53,328 45,814
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Income before cumulative effect of a change in
accounting principle 77,664 62,379
Cumulative effect on prior years of a change in
accounting principle -- 5,658
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Net income $ 77,664 $ 68,037
----------------------------------------------------------------------------
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Weighted average common shares and equivalents
outstanding used to calculate earnings per share 29,378 27,948
----------------------------------------------------------------------------
Earnings per share:
Before cumulative effect of a change in
accounting principle $ 2.64 $ 2.23
Cumulative effect on prior years of a change in
accounting principle -- 0.20
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Earnings per share $ 2.64 $ 2.43
----------------------------------------------------------------------------
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</TABLE>
See accompanying notes.
4
<PAGE>
PACIFICARE HEALTH SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
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NINE MONTHS ENDED
JUNE 30,
--------------------------
(AMOUNTS IN THOUSANDS) 1995 1994
----------------------------------------------------------------------------
<S> <C> <C>
Operating activities:
Net income $ 77,664 $ 68,037
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 15,415 13,258
Cumulative effect of a change in accounting
principle -- (5,658)
Deferred income taxes 7,986 3,110
Amortization of intangibles 4,863 2,471
Provision for doubtful accounts 392 126
Loss on disposal of fixed assets 198 462
Other 111 35
Changes in assets and liabilities, net of
effects from acquisitions:
Accounts receivable (22,498) (24,390)
Prepaid, intangible and other assets (6,048) 9,415
Medical claims and benefits payable (19,716) 21,154
Accounts payable and accrued liabilities 22,238 29,205
Unearned premium revenue 34,630 1,533
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Net cash flows provided by operating activities 115,235 118,758
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Investing activities:
Sale (purchase) of marketable securities 18,327 (82,547)
Purchase of property, plant and equipment (16,670) (18,409)
Acquisitions, net of cash acquired (135,440) (15,434)
Sale (purchase) of marketable
securities - restricted (3,520) 1,105
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Net cash flows used in investing activities (137,303) (115,285)
----------------------------------------------------------------------------
Financing activities:
Borrowings under long-term lines of credit 83,335 24,600
Principal payments on long-term debt (173,644) (4,050)
Proceeds from issuance of common stock 199,987 1,780
Purchase and retirement of common stock -- (1,077)
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Net cash flows provided by financing activities 109,678 21,253
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Net increase in cash and equivalents 87,610 24,726
Beginning cash and equivalents 192,609 33,262
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Ending cash and equivalents $ 280,219 $ 57,988
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</TABLE>
See accompanying notes.
5
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PACIFICARE HEALTH SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
----------------------------------------------------------------------------
(AMOUNTS IN THOUSANDS) NINE MONTHS ENDED
JUNE 30,
--------------------------
1995 1994
----------------------------------------------------------------------------
<S> <C> <C>
Supplemental cash flow information
Cash paid during the period for:
Income taxes $ 42,417 $ 39,277
Interest $ 2,534 $ 1,249
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Supplemental schedule of noncash investing
and financing activities:
Tax benefit realized upon exercise of stock
options $ 3,047 $ 1,287
Compensation awarded in Class B Common Stock $ 1,024 $ 849
Leases capitalized $ 392 $ 3,896
Capital leases terminated $ -- $ 1
----------------------------------------------------------------------------
Details of unrealized holding loss on
available-for-sale securities:
Increase in marketable securities $ 8,118 $ --
Decrease in deferred taxes 3,127 --
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Increase in shareholders' equity $ 4,991 $ --
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Details of businesses acquired in purchase
transactions:
Fair value of assets acquired $ 147,730 $ 71,256
Less liabilities assumed or created, including
notes to seller 10,714 39,114
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Cash paid for acquisitions 137,016 32,142
Cash acquired in acquisitions 1,576 16,708
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Net cash paid for acquisitions $ 135,440 $ 15,434
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</TABLE>
See accompanying notes.
6
<PAGE>
PACIFICARE HEALTH SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 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 June 30, 1995, the net unrealized gains increased
current marketable securities by approximately $8.1 million and increased
shareholders' equity by $5.0 million, net of deferred income taxes of $3.1
million.
NOTE 3 - ACQUISITIONS
---------------------
a) 1995 Acquisitions. During fiscal year 1995, the Company has 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-based health maintenance organization ("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.
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
7
<PAGE>
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 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 $222 million. Of the
total purchase price, $221 million has been paid to date. This amount
includes approximately $11 million in contingent payments made in fiscal
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 $223 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 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.
<TABLE>
<CAPTION>
----------------------------------------------------------------------------
THREE MONTHS ENDED NINE MONTHS ENDED
(UNAUDITED) JUNE 30, JUNE 30,
(AMOUNTS IN THOUSANDS, --------------------------------------------------
EXCEPT PER SHARE AMOUNTS) 1995 1994 1995 1994
----------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Premium revenue $ 1,003,260 $ 785,611 $ 2,781,700 $ 2,255,915
Total operating revenue $ 1,017,022 $ 796,076 $ 2,822,046 $ 2,290,440
Pretax income $ 48,261 $ 40,455 $ 124,320 $ 96,104
Net income (1) $ 28,483 $ 23,350 $ 73,044 $ 59,652
Earnings per share (1) $ 0.91 $ 0.83 $ 2.49 $ 2.13
----------------------------------------------------------------------------
<FN>
(1) The unaudited pro forma income before cumulative effect of a change in
accounting principle for the nine months ended June 30, 1994 was $54 million
or $1.93 per share. The unaudited pro forma cumulative effect on prior years
of a change in accounting principle for the nine months ended June 30, 1994
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 $5.7 million 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 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.
8
<PAGE>
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 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 syndicated $130 million credit line with The Chase Manhattan
Bank, N.A. 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. Upon completion of this
offering, UniHealth owned 48 percent and five percent of the outstanding
Class A Common Stock (as defined herein) and Class B Common Stock,
respectively.
The Company received net proceeds of approximately $199 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 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 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, 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.
9
<PAGE>
Part I: FINANCIAL INFORMATION
Item 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following table presents membership data by region and by consumer type
as of the dates indicated.
<TABLE>
<CAPTION>
AT JUNE 30, 1995 AT JUNE 30, 1994
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GOVERNMENT GOVERNMENT
(MEDICARE & (MEDICARE &
MEMBERSHIP DATA COMMERCIAL MEDICAID) TOTAL COMMERCIAL MEDICAID) TOTAL
--------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
California 785,661 360,385 1,146,046 610,270 272,403 882,673
Florida 54,699 10,919 65,618 8,070 10,740 18,810
Oklahoma 111,481 15,351 126,832 111,522 11,182 122,704
Oregon 88,144 42,161 130,305 55,132 36,821 91,953
Texas 69,768 44,931 114,699 60,931 33,963 94,894
Washington 66,024 32,847 98,871 27,997 16,283 44,280
--------------------------------------------------------------------------------------
Total membership 1,175,777 506,594 1,682,371 873,922 381,392 1,255,314
--------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
OPERATING STATISTICS JUNE 30, JUNE 30,
-------------------------------------
1995 1994 1995 1994
----------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Medical loss ratio (health care
services as a percent of
premium revenue) 83.9% 82.6% 83.6% 83.5%
Marketing, general and administrative
expenses as a percent of operating
revenue 12.9% 13.1% 13.4% 13.2%
Operating income as a percent of
operating revenue 4.0% 5.2% 4.0% 4.3%
----------------------------------------------------------------------------
----------------------------------------------------------------------------
</TABLE>
Results of Operations
---------------------
Three and Nine Months Ended June 30, 1995
Compared to the
Three and Nine Months Ended June 30, 1994
Total operating revenue increased 30 percent to $981 million for the
three months ended June 30, 1995 from $752 million for the same period in the
prior year. Growth in both the government (Medicare and Medicaid) and
commercial programs provided an increase in total operating revenue of $187
million. Premium rates in both programs did not change significantly as
compared to the same period in the prior year. In addition, approximately
$46 million of the increase in total operating revenue represents the
incremental operations included in the quarter ended June 30, 1995 of the
Acquisitions described in Note 3 of the Notes to Condensed Consolidated
Financial Statements.
10
<PAGE>
Total operating revenue increased 29 percent to $2.7 billion for the nine
months ended June 30, 1995 from $2.1 billion for the same period in the prior
year. Enrollment growth in both the commercial and government programs,
offset slightly by decreases in commercial premium rates, provided an
increase in total operating revenue of $472 million. In addition,
approximately $105 million of the increase in total operating revenue
represents the incremental operations included in the nine months ended June
30, 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 nine months ended June 30, 1995, commercial HMO
premiums increased $91 million to $378 million and $177 million to $1.0
billion, 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 two percent for the nine months ended June 30, 1995, 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 $139 million to $569 million and $405 million to
$1.6 billion for the three and nine months ended June 30, 1995, respectively.
The majority of the increase in both periods is due to enrollment gains in
the Secure Horizons programs. Premium rate increases for Medicare risk
programs, including the Company's Secure Horizons program, beginning January
1, 1996 are expected to be higher than the rate of commercial premium
increases received in the current year.
Total health care service expenses as a percent of premium revenue (the
"medical loss ratio") for the quarter ended June 30, 1995, have increased to
83.9 percent from 82.6 percent for the same period in the prior year. The
commercial medical loss ratio increased to 83.6 percent from 80.2 percent
while the government medical loss ratio decreased to 84.1 percent from 84.4
percent for the same period in the prior year. For the nine months ended
June 30, 1995, the consolidated medical loss ratio of 83.6 percent
represented a slight increase compared to a ratio of 83.5 percent for the
same period in the prior year. The commercial medical loss ratio increased
to 82.2 percent from 80.5 percent while the government medical loss ratio
decreased to 84.6 percent from 85.9 percent for the same period in the prior
year.
The health care service expenses for the three and nine months ended June
30, 1994, reflect the impact of approximately $9 million of net positive
reserve adjustments. These net positive reserve adjustments result primarily
from the periodic reconciliation of amounts reserved for physician incentive
programs. While the Company periodically makes adjustments to these
estimated expenses based on actual calculations and changed expectations
there were no significant net positive reserve adjustments recorded for the
three and nine months ended June 30, 1995.
The increase in the commercial medical loss ratio for the three and nine
months ended June 30, 1995 is primarily attributable to the impact of the
Company's acquisitions in the Florida and Washington markets where the plans
acquired in such markets have higher commercial loss ratios. In addition,
the commercial medical loss ratio for the three months ended June 30, 1994
included net positive reserve adjustments of $4 million referred to above.
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 fiscal year
ended September 30, 1995 as compared to the prior fiscal year.
The decrease in the medical loss ratio for the government programs for
the three and nine months ended June, 1995, respectively, as compared to the
same period of the prior year, is primarily related to more cost effective
physician and hospital contracts. The government medical loss ratio is
expected to increase because enhanced benefits may be provided to enrollees
to remain strategically competitive.
11
<PAGE>
Marketing, general and administrative expenses increased $29 million to
$127 million for the three months ended June 30, 1995 from $98 million for
the same period in 1994. As a percentage of operating revenue, marketing,
general and administrative expenses decreased to 12.9 percent from 13.1
percent. This decrease results from $2 million of expenses made in the
quarter ended June 30, 1994 related to the write off of obsolete equipment
and the development of a national brand marketing image. For the nine months
ended June 30, 1995, marketing, general and administrative expenses totaled
$364 million, an increase of $85 million over the same period in the prior
year. As a percentage of total operating revenue, marketing, general and
administrative expenses increased slightly to 13.4 percent from 13.2 percent
for the same period in 1994. The year over year increase is 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
nine months ended June 30, 1995 and higher than the prior year's results as
efficiencies in mature market process improvements are offset by investments
in the new markets discussed above.
Net income increased 13% to $30 million for the quarter ended June 30,
1995 compared to same period in the prior year. Earnings per share ("EPS")
of $0.97 was only two percent higher than the prior year quarter because the
public offering completed in March 1995 increased the weighted average number
of shares outstanding (see Note 6 of the Notes to Condensed Consolidated
Financial Statements). For the quarter ended June 30, 1994, net income was
$27 million or $0.95 per share, which included the combined effect of net
positive reserve adjustments and certain additional overhead expenses equal
to approximately $0.14 per share. Excluding the effect of these adjustments,
earnings for the quarter ended June 30, 1994 were $0.81 per share. For the
nine months ended June 30, 1995, EPS increased 18 percent to $2.64. This
increase is primarily attributable to membership growth derived substantially
from the government programs and a lower government medical loss ratio. For
the nine months ended June 30, 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 $2.43. The results for the three and nine months ended June 30,
1994 included approximately $0.18 related to the net positive reserve
adjustments previously described. EPS for the three and nine months ended
June 30, 1994 were reduced by approximately $0.04 related to costs in
marketing, general and administrative expenses discussed above.
The Company's ability to expand is affected by increasing competition
among HMOs in the Company's service areas, particularly California. Certain
large employer groups and other purchasers of healthcare services continue to
demand minimal premium rate increases or reductions in premium rates. In
addition, securing cost effective contracts with additional physicians is
becoming difficult due to increasing competition among HMOs for physician
contracts. The Company's profitability depends, in part, on its ability to
maintain effective control over health care costs while providing members
with quality care. 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.
Liquidity and Capital Resources
-------------------------------
The Company's working capital as of June 30, 1995 was $289 million, an
increase of $58 million from September 30, 1994. The increase in working
capital is primarily attributable to increases in cash and accounts
receivable offset by increases in accounts payable and accrued liabilities
and unearned premium revenue resulting from growth in operations. Medical
claims and benefits payable has decreased from September 30, 1994, reflecting
shifting membership, primarily in the Secure Horizons program, to capitated
arrangements, coupled with improvements in claims processing. For the nine
months ended June 30, 1995, payments for physician and hospital capitation
represented approximately 73% of total health care costs for the government
program, an increase of five percent over the comparable prior period.
Redesigned work processes and electronic data interface technologies
12
<PAGE>
have resulted in more efficient and prompt payment of claims. While the
expedited claims payment process is expected to reduce interest income, these
operating efficiencies enhance the Company's ability to comply with certain
HMO regulations.
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 Company
received net proceeds of approximately $199 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 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.
13
<PAGE>
Part II. OTHER INFORMATION
Item 1: Legal Proceedings
None
Item 2: Changes in Securities
None
Item 3: Defaults Upon Senior Securities
None
Item 4: Submission of Matters to a Vote of Security Holders
None
Item 5: Other Information
None
Item 6: Exhibits and Reports
a) Exhibit Index
Exhibit 11A Computation of Net Income per Share of Common
Stock - Primary
Exhibit 11B Computation of Net Income per Share of Common
Stock - Fully Diluted
Exhibit 27 Financial Data Schedules
b) No reports on Form 8K were filed during the quarter for which
this report is filed.
14
<PAGE>
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PACIFICARE HEALTH SYSTEMS, INC.
-------------------------------
(Registrant)
Date: August 9, 1995 By: /s/ Alan Hoops
---------------------------- ----------------------------
Alan Hoops
President and Chief
Executive Officer
Date: August 9, 1995 By: /s/ Wayne Lowell
---------------------------- ----------------------------
Wayne Lowell
Executive Vice President and
Chief Financial Officer
15
<PAGE>
Exhibit 11A
PacifiCare Health Systems, Inc.
Computation of Net Income per Share of Common Stock -
Primary
(Dollars and shares in thousands, except per share amounts)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
JUNE 30, JUNE 30,
------------------ -----------------
1995 1994 1995 1994
----------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Shares outstanding at the beginning
of the period 30,714 27,346 27,528 27,256
Weighted average number of shares
issued during the period in
connection with a public offering,
compensation awarded in stock and
exercise of stock options 37 34 1,221 116
Shares repurchased (weighted) -- -- -- (32)
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 562 647 627 608
Registered equity purchase contracts -- -- 2 --
----------------------------------------------------------------------------
Total shares - primary 31,313 28,027 29,378 27,948
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Income before cumulative effect of a
change in accounting principle $ 30,248 $ 26,796 $ 77,664 $ 62,379
Cumulative effect on prior years of a
change in accounting principle -- -- -- 5,658
----------------------------------------------------------------------------
Net income $ 30,248 $ 26,796 $ 77,664 $ 68,037
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Primary earnings per share:
Earnings before cumulative effect
of a change in accounting
principle $ 0.97 $ 0.95 $ 2.64 $ 2.23
Cumulative effect on prior years
of a change in accounting
principle -- -- -- 0.20
----------------------------------------------------------------------------
Earnings per share $ 0.97 $ 0.95 $ 2.64 $ 2.43
----------------------------------------------------------------------------
----------------------------------------------------------------------------
</TABLE>
16
<PAGE>
Exhibit 11B
PacifiCare Health Systems, Inc.
Computation of Net Income per Share of Common Stock -
Fully Diluted
(Dollars and shares in thousands, except per share amounts)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
JUNE 30, JUNE 30,
------------------ -----------------
1995 1994 1995 1994
----------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Shares outstanding at the beginning
of the period 30,714 27,346 27,528 27,256
Weighted average number of shares
issued during the period as a result
of a public offering, compensation
awarded in stock and exercise of
stock options 37 34 1,221 116
Shares repurchased (weighted) -- -- -- (32)
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 562 647 627 635
Registered equity purchase contracts -- -- 2 --
----------------------------------------------------------------------------
Total shares - fully diluted 31,313 28,027 29,378 27,975
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Income before cumulative effect of a
change in accounting principle $ 30,248 $ 26,796 $ 77,664 $ 62,379
Cumulative effect on prior years of
a change in accounting principle -- -- -- 5,658
----------------------------------------------------------------------------
Net income $ 30,248 $ 26,796 $ 77,664 $ 68,037
----------------------------------------------------------------------------
Fully diluted earnings per share:
Earnings before cumulative effect
of a change in accounting
principle $ 0.97 $ 0.95 $ 2.64 $ 2.23
Cumulative effect on prior years
of a change in accounting
principle -- -- -- 0.20
----------------------------------------------------------------------------
Earnings per share $ 0.97 $ 0.95 $ 2.64 $ 2.43
----------------------------------------------------------------------------
----------------------------------------------------------------------------
</TABLE>
17
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-30-1995
<PERIOD-END> SEP-30-1995
<CASH> 280,219
<SECURITIES> 507,790
<RECEIVABLES> 108,763
<ALLOWANCES> 690
<INVENTORY> 0
<CURRENT-ASSETS> 922,853
<PP&E> 169,324
<DEPRECIATION> 67,670
<TOTAL-ASSETS> 1,346,252
<CURRENT-LIABILITIES> 633,487
<BONDS> 12,287
<COMMON> 308
0
0
<OTHER-SE> 699,765
<TOTAL-LIABILITY-AND-EQUITY> 1,346,252
<SALES> 0
<TOTAL-REVENUES> 981,236
<CGS> 0
<TOTAL-COSTS> 812,356
<OTHER-EXPENSES> 0
<LOSS-PROVISION> (795)
<INTEREST-EXPENSE> 1,029
<INCOME-PRETAX> 50,867
<INCOME-TAX> 20,619
<INCOME-CONTINUING> 30,248
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 30,248
<EPS-PRIMARY> 0.97
<EPS-DILUTED> 0.97
</TABLE>
