<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 1, 1995
REGISTRATION NO. 33-57783
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 1 TO
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
PACIFICARE HEALTH SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
DELAWARE 33-0064895
(State of Incorporation) (I.R.S. Employer
Identification Number)
</TABLE>
5995 PLAZA DRIVE
CYPRESS, CALIFORNIA 90630-5028
(714) 952-1121
(Address, including zip code, and telephone number,
including area code, of registrant's principal executive offices)
ALAN HOOPS
PACIFICARE HEALTH SYSTEMS, INC.
5995 PLAZA DRIVE
CYPRESS, CALIFORNIA 90630-5028
(714) 952-1121
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
------------------------
IT IS REQUESTED THAT COPIES OF COMMUNICATIONS BE SENT TO:
<TABLE>
<S> <C>
RICHARD A. GOLDBERG, ESQ. ERIC H. SCHUNK, ESQ.
Shereff, Friedman, Hoffman & Goodman, Milbank, Tweed, Hadley & McCloy
LLP 601 South Figueroa, 30th Floor
919 Third Avenue Los Angeles, California 90017
New York, New York 10022 (213) 892-4000
(212) 758-9500
</TABLE>
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
AS SOON AS PRACTICABLE AFTER THE EFFECTIVE DATE OF THIS REGISTRATION STATEMENT.
------------------------
If the only securities being registered on this form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box. / /
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, check the following box. / /
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PACIFICARE HEALTH SYSTEMS, INC.
CROSS REFERENCE SHEET
<TABLE>
<CAPTION>
FORM S-3 ITEM NO. AND CAPTION CAPTION OR LOCATION IN PROSPECTUS
- ---------------------------------------------------------------- -----------------------------------------------------
<C> <S> <C>
1. Forepart of the Registration Statement and Outside
Front Cover Page of Prospectus...................... Facing Sheet; Cross Reference Sheet; Outside Front
Cover Page
2. Inside Front and Outside Back Cover Pages of
Prospectus.......................................... Inside Front Cover Page; Available Information;
Outside Back Cover Page
3. Summary Information, Risk Factors and Ratio of
Earnings to Fixed Charges........................... Prospectus Summary; Available Information
4. Use of Proceeds...................................... Prospectus Summary; Use of Proceeds
5. Determination of Offering Price...................... *
6. Dilution............................................. *
7. Selling Security Holders............................. Principal and Selling Stockholder
8. Plan of Distribution................................. Front Cover Page; Underwriting
9. Description of Securities to be Registered........... Front Cover Page; Prospectus Summary; Description of
Capital Stock
10. Interests of Named Experts and Counsel............... Legal Matters; Experts
11. Material Changes..................................... Business -- Acquisitions
12. Incorporation of Certain Documents by Reference...... Incorporation of Certain Documents by Reference
13. Disclosure of Commission Position on Indemnification
for Securities Act Liabilities...................... *
<FN>
- ------------------------
*Not Applicable
</TABLE>
<PAGE>
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there be any sale of these securities
in any State in which such offer, solicitation or sale would be unlawful prior
to registration or qualification under the securities laws of any such State.
<PAGE>
SUBJECT TO COMPLETION
DATED MARCH 1, 1995
4,500,000 SHARES
PACIFICARE HEALTH SYSTEMS, INC.
CLASS B COMMON STOCK
-------------
OF THE 4,500,000 SHARES OF CLASS B COMMON STOCK OFFERED HEREBY (THE "SHARES"),
3,000,000 SHARES ARE BEING OFFERED BY PACIFICARE HEALTH SYSTEMS, INC.
("PACIFICARE" OR THE "COMPANY") AND 1,500,000 SHARES ARE BEING OFFERED BY
UNIHEALTH, INC., A CALIFORNIA NON-PROFIT PUBLIC BENEFIT COMPANY (THE
"SELLING STOCKHOLDER"). SEE "PRINCIPAL AND SELLING STOCKHOLDER." THE
COMPANY WILL NOT RECEIVE ANY OF THE PROCEEDS FROM THE SHARES SOLD
BY THE SELLING STOCKHOLDER.
--------------------
THE CLASS B COMMON STOCK IS QUOTED ON THE NASDAQ NATIONAL MARKET UNDER THE
SYMBOL PHSYB. ON FEBRUARY 28, 1995, THE LAST REPORTED SALE PRICE OF THE
CLASS B COMMON STOCK WAS ____$70.25 PER SHARE. SEE "PRICE
RANGE OF COMMON STOCK."
--------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF
THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
UNDERWRITING PROCEEDS
PRICE TO DISCOUNTS AND PROCEEDS TO TO SELLING
PUBLIC COMMISSIONS(1) COMPANY(2) STOCKHOLDER(2)
<S> <C> <C> <C> <C>
PER SHARE $ $ $ $
TOTAL (3) $ $ $ $
<FN>
(1) THE COMPANY AND THE SELLING STOCKHOLDER HAVE AGREED TO INDEMNIFY THE
SEVERAL UNDERWRITERS AGAINST CERTAIN LIABILITIES, INCLUDING LIABILITIES
UNDER THE SECURITIES ACT OF 1933. SEE "UNDERWRITING."
(2) BEFORE DEDUCTING EXPENSES PAYABLE BY THE COMPANY ESTIMATED AT $ AND
EXPENSES PAYABLE BY THE SELLING STOCKHOLDER ESTIMATED AT $.
(3) THE SELLING STOCKHOLDER HAS GRANTED THE SEVERAL UNDERWRITERS A 30-DAY
OPTION TO PURCHASE UP TO AN ADDITIONAL 675,000 SHARES OF CLASS B COMMON
STOCK TO COVER OVER-ALLOTMENTS, IF ANY. IF ALL SUCH SHARES ARE PURCHASED,
THE TOTAL PRICE TO PUBLIC, UNDERWRITING DISCOUNTS AND COMMISSIONS AND
PROCEEDS TO THE SELLING STOCKHOLDER WILL BE $ , $ AND $ ,
RESPECTIVELY.
</TABLE>
--------------------
THE SHARES ARE OFFERED BY THE SEVERAL UNDERWRITERS NAMED HEREIN WHEN, AS AND
IF RECEIVED AND ACCEPTED BY THEM, SUBJECT TO THEIR RIGHT TO REJECT ORDERS IN
WHOLE OR IN PART AND SUBJECT TO CERTAIN OTHER CONDITIONS. IT IS EXPECTED THAT
DELIVERY OF THE SHARES WILL BE MADE IN NEW YORK, NEW YORK ON OR ABOUT
, 1995.
--------------------
DEAN WITTER REYNOLDS INC.
SALOMON BROTHERS INC
DILLON, READ & CO. INC.
LEHMAN BROTHERS
ROBERTSON, STEPHENS & COMPANY
, 1995.
<PAGE>
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK OF
THE COMPANY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NASDAQ NATIONAL MARKET OR
OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE COMMISSIONER
OF INSURANCE FOR THE STATE OF NORTH CAROLINA NOR HAS THE COMMISSIONER PASSED
UPON THE ACCURACY OR ADEQUACY OF THE PROSPECTUS.
IN CONNECTION WITH THIS OFFERING, CERTAIN UNDERWRITERS MAY ENGAGE IN PASSIVE
MARKET MAKING TRANSACTIONS IN THE COMMON STOCK ON THE NASDAQ NATIONAL MARKET IN
ACCORDANCE WITH RULE 10B-6A UNDER THE SECURITIES EXCHANGE ACT OF 1934. SEE
"UNDERWRITING."
--------------------
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and, in accordance
therewith, files reports, proxy statements, information statements and other
information with the Securities and Exchange Commission (the "Commission"). Such
reports, proxy statements, information statements and other information filed by
the Company can be inspected and copied at the public reference facilities
maintained by the Commission at the principal offices of the Commission, Room
1024, 450 Fifth Street, N.W., Washington, D.C. 20549, and at the Commission's
regional offices located at Suite 1400, Citicorp Center, 500 West Madison
Street, Chicago, Illinois 60661-2511, and at Suite 1300, 7 World Trade Center,
New York, New York 10048. Copies of such material can be obtained from the
Public Reference Section of the Commission at 450 Fifth Street, N.W.,
Washington, D.C. 20549 at prescribed rates.
The Company has filed with the Commission a Registration Statement on Form
S-3 (herein together with all amendments thereto called the "Registration
Statement") under the Securities Act of 1933, as amended (the "Act"), with
respect to the securities offered by this Prospectus. This Prospectus does not
contain all the information set forth or incorporated by reference in the
Registration Statement and the exhibits and schedules relating thereto, certain
portions of which have been omitted as permitted by the rules and regulations of
the Commission. For further information with respect to the Company and the
securities offered by this Prospectus, reference is made to the Registration
Statement and the exhibits and schedules thereto which are on file at the
offices of the Commission and may be obtained upon payment of the fee prescribed
by the Commission, or may be examined without charge at the offices of the
Commission. Statements contained in this Prospectus as to the contents of any
contract or other documents referred to are not necessarily complete, and are
qualified in all respects by such reference.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents previously filed with the Commission are hereby
incorporated by reference into this Prospectus:
1. The Company's Annual Report on Form 10-K for the fiscal year ended
September 30, 1994.
2. The Company's Quarterly Report on Form 10-Q for the quarter ended
December 31, 1994, as amended February 8, 1995.
3. The description of the Class B Common Stock of the Company contained
in its Registration Statement on Form 8-A (File No. 0-14181), dated May 20,
1992.
All documents subsequently filed by the Company pursuant to Sections 13(a),
13(c), 14 or 15(d) of the Exchange Act prior to the termination of this offering
shall be deemed to be incorporated by reference in
2
<PAGE>
this Prospectus and to be a part of this Prospectus from the date of filing
thereof. Any statement contained in a document incorporated by reference herein
shall be deemed to be modified or superseded for purposes of this Prospectus to
the extent that a statement contained herein or in any other subsequently filed
document which also is or is deemed to be incorporated by reference herein
modifies or supersedes such statement. Any such statement so modified or
superseded shall not be deemed, except as so modified or superseded, to
constitute a part of this Prospectus.
The Company hereby undertakes to provide without charge to each person to
whom a copy of this Prospectus has been delivered, on the written or oral
request of any such person, a copy of any or all of the documents referred to
above which have been or may be incorporated in this Prospectus by reference
(other than exhibits). Requests for such copies should be directed to:
PacifiCare Health Systems, Inc., 5995 Plaza Drive, Cypress, California,
90630-5028, Attention: Investor Relations, telephone (714) 952-1121.
Unless the context indicates otherwise, all references herein to
"PacifiCare" or the "Company" refer to PacifiCare Health Systems, Inc., its
subsidiaries and its non-profit predecessor.
Unless the context indicates otherwise, all references herein to "UniHealth"
or the "Selling Stockholder" refer to UniHealth, Inc.
The Company's principal executive offices are located at 5995 Plaza Drive,
Cypress, California, 90630-5028, telephone (714) 952-1121.
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS IN CONNECTION WITH THIS OFFERING
OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH OTHER
INFORMATION AND REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY, THE SELLING STOCKHOLDER OR THE UNDERWRITERS. NEITHER
THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY
CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE
AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT THE INFORMATION CONTAINED
HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE. THIS PROSPECTUS DOES
NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY
SECURITIES OTHER THAN THE REGISTERED SECURITIES TO WHICH IT RELATES. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO
BUY SUCH SECURITIES IN ANY CIRCUMSTANCES IN WHICH SUCH OFFER OR SOLICITATION IS
UNLAWFUL.
--------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Available Information..................................................... 2
Incorporation of Certain Documents by Reference........................... 2
Prospectus Summary........................................................ 4
Use of Proceeds........................................................... 7
Capitalization............................................................ 7
Price Range of Common Stock............................................... 8
Dividend Policy........................................................... 8
Selected Consolidated Financial Data...................................... 9
Business.................................................................. 10
Principal and Selling Stockholder......................................... 20
Description of Capital Stock.............................................. 21
Underwriting.............................................................. 22
Legal Matters............................................................. 23
Experts................................................................... 23
</TABLE>
3
<PAGE>
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED
INFORMATION APPEARING ELSEWHERE IN THIS PROSPECTUS AND IN THE DOCUMENTS
INCORPORATED IN THIS PROSPECTUS BY REFERENCE. THE CLASS A AND CLASS B COMMON
STOCK ARE SOMETIMES REFERRED TO COLLECTIVELY IN THIS PROSPECTUS AS THE "COMMON
STOCK." UNLESS OTHERWISE INDICATED, THE INFORMATION IN THIS PROSPECTUS ASSUMES
THE UNDERWRITERS' OVER-ALLOTMENT OPTION IS NOT EXERCISED.
THE COMPANY
PacifiCare-Registered Trademark- is one of the nation's leading managed
health care services companies serving approximately 1.5 million commercial,
Medicare and Medicaid members and is a leader in the management, development and
marketing of diversified health maintenance organization ("HMO") products and
related services. The Company operates HMOs in California, Florida, Oklahoma,
Oregon, Texas and Washington. Through internal growth and strategic
acquisitions, the Company believes it has built a strong competitive position in
California and has expanded operations into new geographic markets.
Since fiscal 1990, the Company has achieved 42 percent compound annual
earnings per share growth and 19 percent compound annual membership growth. The
Company's growth strategy is to solidify its position as one of the leading
managed health care service companies by (i) expanding its Secure Horizons
Medicare programs, (ii) marketing a broader range of managed care products and
services, (iii) capitalizing on its experience in developing long-term
relationships with health care providers and (iv) selectively expanding into new
markets in order to further develop its multi-regional servicing capabilities.
The Company serves more than 1,040,000 commercial HMO members and offers a
comprehensive range of products including HMOs, preferred provider organizations
and point-of-service plans. The Company has historically focused on the larger
employer market, but has recently entered the smaller employer and individual
markets. The Company believes that these markets have lower HMO penetration than
the larger employer market and represent significant growth opportunities. The
Company has enhanced its competitive position by entering into innovative
relationships with health care providers which the Company believes will
facilitate expansion into new and existing geographic markets.
Through its Secure Horizons-Registered Trademark- programs, the Company
operates the largest and one of the fastest growing Medicare risk programs in
the United States (as measured by membership) with approximately 409,000 members
enrolled as of January 31, 1995. The Company believes that its Secure Horizons
programs are attractive to Medicare beneficiaries because these programs provide
a more comprehensive package of benefits than offered under traditional
Medicare, and because these programs substantially reduce the member's
administrative responsibilities. In addition, as of January 31, 1995, the
Company had enrolled more than 33,000 Medicaid eligibles.
The Company believes that its ability to provide a comprehensive range of
products and services through its commercial, Medicare and Medicaid programs,
together with its specialty managed care products and services and its long-term
relationships with health care providers, are the major factors that will enable
the Company to respond effectively to changes and needs in the health care
marketplace and continue to be among the nation's leading managed health care
services companies.
4
<PAGE>
THE OFFERING
<TABLE>
<S> <C>
Class B Common Stock Offered by the Company... 3,000,000 shares
Class B Common Stock Offered by the Selling
Stockholder(1)................................ 1,500,000 shares
Common Stock Outstanding after the Offering
(2):
Class A Common Stock........................ 12,278,783 shares
Class B Common Stock........................ 18,384,092 shares
Rights of Common Stock........................ The Class B Common Stock offered hereby has
no voting rights, other than as required by
Delaware law, and the Class A Common Stock
has one vote per share. The Class A Common
Stock and the Class B Common Stock have
equal rights to cash dividends, if any, and
upon liquidation. See "Dividend Policy" and
"Description of Capital Stock."
Use of Proceeds by the Company................ To repay amounts outstanding under its
credit line, to increase working capital and
for general corporate purposes, including
acquisitions. See "Use of Proceeds."
Nasdaq National Market Symbols:
Class A Common Stock........................ PHSYA
Class B Common Stock........................ PHSYB
<FN>
- ------------------------
(1) Currently, the Selling Stockholder owns 5,909,500 shares of Class A Common
Stock or 48.1 percent of the outstanding Class A Common Stock and 3,160,000
shares of the Class B Common Stock or 20.5 percent of the outstanding Class
B Common Stock. Upon completion of this offering, the Selling Stockholder
will own 5,909,500 shares of the Class A Common Stock or 48.1 percent of
the outstanding Class A Common Stock and 1,660,000 shares of the Class B
Common Stock or 9.0 percent of the outstanding Class B Common Stock. See
"Principal and Selling Stockholder."
(2) Based on the number of shares of Class A and Class B Common Stock
outstanding as of February 16, 1995 and excluding (i) 409,934 shares of the
Class A Common Stock and 1,945,192 shares of the Class B Common Stock
issuable upon the exercise of outstanding stock options, of which options
to purchase 394,109 shares of the Class A Common Stock and 524,662 shares
of the Class B Common Stock are currently exercisable and (ii) 90,000
shares of the Class B Common Stock which certain health care providers are
obligated to purchase over a five year period as a result of an offering of
shares of Class B Common Stock to certain of the Company's health care
providers (the "Provider Offering").
</TABLE>
5
<PAGE>
SUMMARY FINANCIAL INFORMATION
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEARS ENDED SEPTEMBER 30, DECEMBER 31,
------------------------------------------------------------- --------------------
1990 1991 1992 1993 1994 (1) 1993 (1) 1994 (1)
--------- ----------- ----------- ----------- ----------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED INCOME STATEMENT DATA:
Total operating revenue............... $ 975,849 $ 1,242,357 $ 1,686,314 $ 2,221,073 $ 2,893,252 $ 645,748 $ 821,614
Operating income (2).................. 14,388 29,734 60,549 87,244 120,930 20,337 30,866
Income before income taxes and
cumulative effect of a change in
accounting principle................. 29,438 44,521 74,852 108,327 145,468 25,940 34,083
Income before cumulative effect of a
change in accounting principle (3)... 17,638 25,702 43,590 62,696 84,593 14,739 20,057
Earnings per share before cumulative
effect of a change in accounting
principle (3)........................ $ 0.74 $ 1.10 $ 1.78 $ 2.25 $ 3.02 $ 0.53 $ 0.71
Weighted average number of shares of
common stock and equivalents
outstanding.......................... 23,770 23,346 24,509 27,847 28,004 27,813 28,231
OPERATING STATISTICS:
Medical loss ratio (4):
Commercial.......................... 86.0% 84.0% 80.2% 82.5% 80.5% 83.2% 81.7%
Medicare............................ 87.4% 87.1% 86.6% 85.6% 85.2% 85.1% 85.1%
Operating income margin (5)........... 1.5% 2.4% 3.6% 3.9% 4.2% 3.1% 3.8%
Period-end HMO membership:
Commercial.......................... 546 567 742 807 949 830 971
Medicare (6)........................ 127 159 214 290 409 319 434
--------- ----------- ----------- ----------- ----------- --------- ---------
Total............................... 673 726 956 1,097 1,358 1,149 1,405
--------- ----------- ----------- ----------- ----------- --------- ---------
--------- ----------- ----------- ----------- ----------- --------- ---------
</TABLE>
<TABLE>
<CAPTION>
AS ADJUSTED
SEPTEMBER 30, DECEMBER 31, DECEMBER 31,
1994 1994 1994 (7)
------------- ------------ -------------
(IN THOUSANDS)
<S> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Working capital.................................................... $ 231,242 $ 233,565 $ 354,633
Total assets....................................................... 1,105,548 1,158,551 1,279,619
Long-term debt, excluding current maturities....................... 101,137 97,590 14,590
Shareholders' equity............................................... 413,358 429,672 633,740
<FN>
- ------------------------------
(1) Operating results of the Acquisitions (as defined under the caption
"Business -- Acquisitions") are included in the historical operating
results of the Company from the date of acquisition. See "Business --
Acquisitions."
(2) Certain reclassifications have been made to the 1990 and 1991 amounts to
conform to the 1992, 1993 and 1994 presentations.
(3) Net income after cumulative effect of a change in accounting principle was
$90.3 million or $3.22 per share for the year ended September 30, 1994 and
$20.4 million or $0.73 per share for the three months ended December 31,
1993. See "Selected Consolidated Financial Data."
(4) Health care costs as a percentage of premium revenue. Medicare medical loss
ratios include Medicaid premiums and health care costs, which were
immaterial to the resulting ratios.
(5) Operating income as a percentage of total operating revenue.
(6) Includes Medicaid membership which as of September 30, 1993 and 1994 was
1,597 and 22,010, respectively, and as of December 31, 1993 and 1994 was
1,665 and 30,751, respectively.
(7) As adjusted to give effect to (i) the sale by the Company of the Class B
Common Stock being offered at an assumed price of $70.25 per share, less
estimated underwriting discounts and commissions and offering expenses
payable by the Company and (ii) the application of the net proceeds
therefrom. See "Use of Proceeds." Does not give effect to the 1995
Acquisitions (as defined under the caption "Business -- Acquisitions"). See
"Business -- Acquisitions."
</TABLE>
6
<PAGE>
USE OF PROCEEDS
The net proceeds to be received by the Company from the sale of the
3,000,000 shares of Class B Common Stock offered by the Company, at an assumed
offering price of $70.25 per share, after deducting estimated underwriting
discounts and commissions and expenses of the offering payable by the Company,
are approximately $204,000,000. The Company will not receive any of the proceeds
from the sale of shares of Class B Common Stock by the Selling Stockholder.
Approximately $83 million of the net proceeds to the Company of this
offering will be used to repay the amount outstanding under its $250 million
revolving line of credit (the "Credit Line") established with Bank of America
National Trust and Savings Association and a syndicate of banks. The Credit Line
has a five year term ending on November 30, 1999 and may be extended through
November 30, 2001. The Credit Line may be increased at the Company's option
provided certain debt to equity ratios and other financial covenants are
satisfied. Interest is payable at the London Interbank Offered Rate plus a
margin ranging from 29 to 48 basis points. As of February 28, 1995, the interest
rate on amounts outstanding under the Credit Line was 6.34 percent. 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
acquisitions, including certain of the Acquisitions (as defined under the
caption "Business -- Acquisitions") for which the purchase price has not yet
been paid and future acquisitions (for which the Company currently has no
agreements or understandings), the introduction of new products and services,
increased investment in existing operations and expansion of geographic markets.
Expansion into geographic markets may include states in which the Company
currently does not have a presence. Pending the above-described uses, the net
proceeds will be invested in investment-grade, interest bearing securities.
CAPITALIZATION
The following table sets forth the consolidated capitalization of the
Company as of December 31, 1994 (i) on an actual basis and (ii) as adjusted to
give effect to the sale by the Company of the Class B Common Stock being
offered, at an assumed offering price of $70.25 per share, less estimated
underwriting discounts and commissions and offering expenses payable by the
Company, and the application of the net proceeds therefrom, as described under
"Use of Proceeds."
<TABLE>
<CAPTION>
DECEMBER 31, 1994
--------------------------
ACTUAL AS ADJUSTED(1)
---------- --------------
(IN THOUSANDS)
<S> <C> <C>
Current maturities of long-term debt.................................................. $ 8,275 $ 8,275
---------- --------------
---------- --------------
Long-term debt, excluding current maturities (2)...................................... $ 97,590 $ 14,590
---------- --------------
Shareholders' equity:
Preferred Shares, par value $1.00 per share; 10,000,000 shares authorized;
none issued........................................................................ -- --
Class A Common Shares, par value $0.01 per share; 30,000,000 shares authorized;
12,258,000 shares issued and as adjusted (3)....................................... 123 123
Class B Common Shares, par value $0.01 per share; 60,000,000 shares authorized;
15,335,000 shares issued; and 18,335,000 shares as adjusted (3).................... 153 183
Additional paid-in capital.......................................................... 143,083 347,121
Unrealized holding loss on available-for-sale securities net of
tax effect of $3,314,000........................................................... (4,872) (4,872)
Retained earnings................................................................... 291,185 291,185
---------- --------------
Total shareholders' equity........................................................ 429,672 633,740
---------- --------------
Total capitalization.............................................................. $ 527,262 $ 648,330
---------- --------------
---------- --------------
<FN>
- ------------------------
(1) Does not give effect to the 1995 Acquisitions. See "Business --
Acquisitions."
(2) Long-term debt as of December 31, 1994 included $83 million outstanding
under the Credit Line and $14.6 million of long-term capitalized leases and
other long-term indebtedness.
(3) Excludes 424,634 shares of the Class A Common Stock and 1,975,254 shares of
the Class B Common Stock issuable upon the exercise of outstanding stock
options as of December 31, 1994 and 90,000 shares of Class B Common Stock
to be issued pursuant to the Provider Offering. See Note 2 on page 5 for
information as of a more recent date.
</TABLE>
7
<PAGE>
PRICE RANGE OF COMMON STOCK
The Class A and Class B Common Stock are traded on the Nasdaq National
Market under the symbols PHSYA and PHSYB, respectively. The following tables set
forth, for the indicated periods, the high and low last reported sale prices per
share of the Class A and Class B Common Stock as furnished by Nasdaq.
<TABLE>
<CAPTION>
CLASS A CLASS B
COMMON STOCK COMMON STOCK
---------------- ----------------
FISCAL PERIOD HIGH LOW HIGH LOW
- ----------------------------------------------------------------------------- ------- ------- ------- -------
<S> <C> <C> <C> <C>
1993
First Quarter.............................................................. $51 $38 $44 3/4 $32 1/4
Second Quarter............................................................. 56 3/4 26 49 20 5/8
Third Quarter.............................................................. 44 34 40 28 5/8
Fourth Quarter............................................................. 43 3/4 31 40 3/4 29 1/2
1994
First Quarter.............................................................. 42 1/4 31 41 1/2 29 7/8
Second Quarter............................................................. 57 38 1/4 56 3/8 37 3/4
Third Quarter.............................................................. 59 3/4 47 1/2 59 1/2 47 1/2
Fourth Quarter............................................................. 79 3/16 47 75 46
1995
First Quarter.............................................................. 77 62 73 3/4 62 1/4
Second Quarter (through February 28, 1995)................................. 72 62 72 1/2 62 7/8
</TABLE>
The last reported sale prices of the Class A and Class B Common Stock as
quoted on the Nasdaq National Market on February 28, 1995 were $69.25 and $70.25
per share, respectively. As of February 10, 1995, there were approximately 274
and 249 holders of record of the Class A and Class B Common Stock, respectively.
Based upon information available to it, the Company believes that there are
approximately 21,000 beneficial holders in the aggregate of the Class A and
Class B Common Stock.
DIVIDEND POLICY
The Company has never paid any cash dividends on its Common Stock. The
Company currently anticipates that no cash dividends on its Common Stock will be
declared in the foreseeable future and that all of its earnings will be retained
for the development of the Company's business. Any future dividends would be
conditioned upon, among other things, future earnings, the financial condition
of the Company and regulatory requirements, which may limit the Company's
ability to pay dividends.
8
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The following consolidated income statement data and consolidated balance
sheet data for each of the five years ended September 30, 1994 are derived from
the audited consolidated financial statements of the Company. The following
consolidated income statement data and consolidated balance sheet data for the
three month periods ended December 31, 1994 and 1993 are derived from the
unaudited consolidated financial statements of the Company. The following
summary financial information should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations," found
in the Consolidated Financial Statements and related notes and other financial
information which are incorporated herein by reference.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEARS ENDED SEPTEMBER 30, DECEMBER 31,
-------------------------------------------------------- ------------------
1990 1991 1992 1993 1994 (1) 1993 (1) 1994 (1)
-------- ---------- ---------- ---------- ---------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED INCOME STATEMENT DATA:
Revenue:
Commercial premiums........................... $525,113 $ 657,715 $ 890,330 $1,046,186 $1,237,411 $286,788 $332,438
Medicare premiums (2)......................... 444,552 575,069 784,844 1,153,964 1,618,145 348,500 477,595
Other income.................................. 6,184 9,573 11,140 20,923 37,696 10,460 11,581
-------- ---------- ---------- ---------- ---------- -------- --------
Total operating revenue..................... 975,849 1,242,357 1,686,314 2,221,073 2,893,252 645,748 821,614
Expenses:
Health care services:
Medical services............................ 405,204 503,816 675,607 867,157 1,127,785 258,547 322,484
Hospital services........................... 352,329 440,244 554,532 766,770 968,605 217,292 279,267
Other services.............................. 83,001 109,179 163,506 216,542 277,868 59,424 74,548
-------- ---------- ---------- ---------- ---------- -------- --------
Total health care services................ 840,534 1,053,239 1,393,645 1,850,469 2,374,258 535,263 676,299
Marketing, general and administrative
expenses..................................... 120,581 158,985 229,881 279,865 394,620 89,382 113,191
Amortization of intangibles................... 346 399 2,239 3,495 3,444 766 1,258
-------- ---------- ---------- ---------- ---------- -------- --------
Operating income (3)............................ 14,388 29,734 60,549 87,244 120,930 20,337 30,866
Interest income................................. 13,577 14,960 17,725 23,459 28,588 6,089 4,901
Gain on sale of Austin, Texas operations........ 1,750 -- -- -- -- -- --
Interest expense................................ (277) (173) (3,422) (2,376) (4,050) (486) (1,684)
-------- ---------- ---------- ---------- ---------- -------- --------
Income before income taxes and cumulative effect
of a change in accounting principle............ 29,438 44,521 74,852 108,327 145,468 25,940 34,083
Provision for income taxes...................... 11,800 18,819 31,262 45,631 60,875 11,201 14,026
-------- ---------- ---------- ---------- ---------- -------- --------
Income before cumulative effect of a change in
accounting principle........................... 17,638 25,702 43,590 62,696 84,593 14,739 20,057
Cumulative effect on prior years of a change in
accounting principle........................... -- -- -- -- 5,658 5,658 --
-------- ---------- ---------- ---------- ---------- -------- --------
Net income...................................... $ 17,638 $ 25,702 $ 43,590 $ 62,696 $ 90,251 $ 20,397 $ 20,057
-------- ---------- ---------- ---------- ---------- -------- --------
-------- ---------- ---------- ---------- ---------- -------- --------
Earnings per share:
Before cumulative effect of a change in
accounting principle......................... $ 0.74 $ 1.10 $ 1.78 $ 2.25 $ 3.02 $ 0.53 $ 0.71
Cumulative effect on prior years of a change
in accounting principle...................... -- -- -- -- 0.20 0.20 --
-------- ---------- ---------- ---------- ---------- -------- --------
Earnings per share.............................. $ 0.74 $ 1.10 $ 1.78 $ 2.25 $ 3.22 $ 0.73 $ 0.71
-------- ---------- ---------- ---------- ---------- -------- --------
-------- ---------- ---------- ---------- ---------- -------- --------
Weighted average number of shares of common
stock and equivalents outstanding.............. 23,770 23,346 24,509 27,847 28,004 27,813 28,231
OPERATING STATISTICS:
Medical loss ratio (4):
Commercial.................................... 86.0% 84.0% 80.2% 82.5% 80.5% 83.2% 81.7%
Medicare...................................... 87.4% 87.1% 86.6% 85.6% 85.2% 85.1% 85.1%
Operating income margin (5)..................... 1.5% 2.4% 3.6% 3.9% 4.2% 3.1% 3.8%
Period-end HMO membership:
Commercial.................................... 546 567 742 807 949 830 971
Medicare (6).................................. 127 159 214 290 409 319 434
-------- ---------- ---------- ---------- ---------- -------- --------
Total....................................... 673 726 956 1,097 1,358 1,149 1,405
-------- ---------- ---------- ---------- ---------- -------- --------
-------- ---------- ---------- ---------- ---------- -------- --------
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
-------------------------------------------------- --------------------
1990 1991 1992 1993 1994 1993 1994
-------- -------- -------- -------- ---------- -------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Working capital................................. $ 43,080 $ 21,837 $ 49,550 $162,781 $ 231,242 $151,578 $ 233,565
Total assets.................................... 231,608 322,328 498,082 693,646 1,105,548 891,482 1,158,551
Long-term debt, excluding current maturities.... 305 2,280 18,488 21,821 101,137 21,488 97,590
Shareholders' equity............................ 74,550 99,678 198,884 319,294 413,358 340,516 429,672
<FN>
- ----------------------------------
(1) Operating results of the Acquisitions are included in the historical
operating results of the Company from the date of acquisition. See
"Business -- Acquisitions."
(2) Medicare premiums include premiums from the Company's Medicaid programs,
which premiums were immaterial in amount.
(3) Certain reclassifications have been made to the 1990 and 1991 amounts to
conform to the 1992, 1993 and 1994 presentations.
(4) Health care costs as a percentage of premium revenue. Medicare medical loss
ratios include Medicaid premiums and health care costs, which were
immaterial to the resulting ratios.
(5) Operating income as a percentage of total operating revenue.
(6) Includes Medicaid membership which as of September 30, 1993 and 1994 was
1,597 and 22,010, respectively, and as of December 31, 1993 and 1994 was
1,665 and 30,751, respectively.
</TABLE>
9
<PAGE>
BUSINESS
PacifiCare-Registered Trademark- is one of the nation's leading managed
health care services companies, serving approximately 1.5 million commercial,
Medicare and Medicaid members, and is a leader in the management, development
and marketing of diversified health maintenance organization ("HMO") products
and related services. The Company operates HMOs in California, Florida,
Oklahoma, Oregon, Texas and Washington. Through internal growth and strategic
acquisitions, the Company believes it has built a strong competitive position in
California and has expanded operations into new geographic markets. The Company
has historically focused on the larger employer market, but recently has entered
the smaller employer and individual markets, which the Company believes
represent significant growth opportunities. Since fiscal 1990, the Company has
achieved 42 percent compound annual earnings per share growth and 19 percent
compound annual membership growth.
GROWTH STRATEGY
The Company's growth strategy is to solidify its position as one of the
leading managed health care services companies by (i) expanding its Secure
Horizons Medicare programs, (ii) marketing a broader range of managed care
products and services, (iii) capitalizing on its experience in developing
long-term relationships with health care providers and (iv) selectively
expanding into new markets in order to further develop its multi-regional
servicing capabilities.
SECURE HORIZONS MEDICARE PROGRAMS. Through its Secure Horizons
programs, PacifiCare operates the largest and one of the fastest growing
Medicare risk programs in the United States (as measured by membership). The
Company believes the Medicare market offers significant growth opportunities
since only approximately seven percent of the country's Medicare
beneficiaries are enrolled in at-risk HMO programs such as those offered by
the Company. The Company will seek to continue its rapid growth in the
Medicare risk arena by entering into new geographic markets with its Secure
Horizons programs. In markets where the Company does not currently operate a
commercial HMO, it has the ability to develop Medicare risk programs through
licensing or other arrangements. See "-- Products and Services -- Specialty
Managed Care Products and Services -- Secure Horizons USA, Inc."
COMPREHENSIVE RANGE OF PRODUCTS AND SERVICES. The Company offers a
comprehensive range of products and services, including traditional HMOs,
preferred provider organizations ("PPOs") and point-of-service plans ("POS
plans"), as well as specialty managed care products and services such as
prescription pharmacy benefit management, dental and vision care and
behavioral health care services. The Company intends to leverage its ability
to offer a comprehensive range of products and services by targeting new
geographic markets and market segments where it has not historically
focused, such as the smaller employer and individual markets.
PROVIDER RELATIONSHIPS. The Company has enhanced its competitive
position by entering into innovative relationships with health care
providers which the Company believes will facilitate expansion into new and
existing geographic markets. For example, the Company has entered into
provider service contracts, with terms up to 10 years, which pay providers a
percentage of premium revenue. The Company believes that percentage of
premium arrangements with providers lessen the risk associated with changes
in government reimbursement policies and competitive pricing pressures. The
Company has been able to customize its contractual arrangements with health
care providers to recognize the unique needs of each market. In addition,
the Company has recently completed an equity offering to certain providers
aimed at developing more strategic and long-term alliances.
ENTRY INTO NEW MARKETS. During the last 18 months, the Company has
entered into new markets, including South Florida, Houston and Dallas,
Texas, Washington and Central California. The Company has been successful in
building its membership through expansion of its existing HMOs into
additional geographic markets within the same state. For example, in Texas,
the Company utilized its existing HMO in San Antonio to establish HMOs in
Houston and Dallas which currently service approximately 20,600 and 1,400
members, respectively. The Company plans to enhance its presence in the
Central California and Washington markets through its agreements to acquire
(i) ValuCare, a Fresno-based
10
<PAGE>
HMO with approximately 61,000 members and (ii) Pacific Health Plans, a
Washington-based HMO with approximately 33,000 members. See "--
Acquisitions." The Company believes it can continue to expand its membership
through selective acquisitions and by establishing HMOs in new markets. The
strategy of growth through acquisitions will be enhanced commencing in
December 1995 when, for the first time, the Company will have the ability to
use the pooling-of-interests method of accounting in connection with
stock-for-stock acquisitions.
PRODUCTS AND SERVICES
The Company's total HMO membership has grown from 615,317 at January 31,
1990 to 1,483,346 at January 31, 1995, a 19 percent compound annual growth rate.
The following table provides a breakdown of the Company's membership at January
31, 1995.
<TABLE>
<CAPTION>
PERCENT
COMMERCIAL MEDICARE(1) COMBINED OF TOTAL
---------- ----------- --------- --------
<S> <C> <C> <C> <C>
California....................................................... 689,733 322,817 1,012,550 68.3%
Florida.......................................................... 56,466 11,636 68,102 4.6
Oklahoma......................................................... 111,671 12,913 124,584 8.4
Oregon........................................................... 81,047 37,717 118,764 8.0
Texas............................................................ 65,296 39,343 104,639 7.0
Washington....................................................... 37,211 17,496 54,707 3.7
---------- ----------- --------- --------
Total Membership................................................. 1,041,424 441,922 1,483,346 100.0%
---------- ----------- --------- --------
---------- ----------- --------- --------
- ------------------------
(1) Includes Medicaid membership of 11,437 in California, 11,636 in Florida and 9,974 in Oregon.
</TABLE>
COMMERCIAL HMO OPERATIONS
The Company's commercial HMO membership has grown from 506,280 at January
31, 1990 to 1,041,424 at January 31, 1995, a 16 percent compound annual growth
rate. Commercial members generally join the Company's HMOs through an employer,
which typically offers employees a selection of indemnity insurance and managed
health care plans, pays for all or part of the monthly costs thereof and makes
payroll deductions for any costs payable by the employee.
The Company has historically focused on the larger employer market, but has
recently entered the smaller employer and individual markets. The Company
believes that these markets have lower HMO penetration levels than the larger
employer market and represent significant growth opportunities. The Company has
also developed PPOs and POS plans, which combine the features of an HMO (a
defined provider network providing care to members with reduced deductibles and
co-payments) with the features of a traditional indemnity insurance product (the
option to use any physician, with higher deductibles and co-payments). In
addition, the Company also offers specialty managed care products and services,
such as prescription pharmacy benefit management, dental and vision care and
behavioral health care services.
SECURE HORIZONS PROGRAMS
Through its Secure Horizons programs, the Company operates the largest and
one of the fastest growing Medicare risk programs in the United States (as
measured by membership). The Company's Medicare membership has grown from
109,037 at January 31, 1990 to 408,875 at January 31, 1995, a 30 percent
compound annual growth rate. The Company has provided health care services to
Medicare beneficiaries through its Secure Horizons programs pursuant to annual
contracts with the Health Care Financing Administration ("HCFA") since 1985.
The Company believes that its Secure Horizons programs are attractive to
Medicare beneficiaries because these programs provide a more comprehensive
package of benefits than offered under traditional Medicare, and because these
programs substantially reduce the member's administrative responsibilities.
Members in the Secure Horizons programs are enrolled on an individual basis and
may disenroll upon 30 days' notice. The Company believes that its Secure
Horizons programs have one of the lowest disenrollment rates relative to other
Medicare risk plans.
11
<PAGE>
In response to employers' needs to provide cost-effective health care
coverage for their retired employees who may not yet be eligible for Medicare
benefits, the Company developed the Secure Horizons retiree product. The retiree
product provides the Company with access to individuals who, once familiar with
the Company's services and delivery system, may enroll in Secure Horizons
programs after they become eligible for Medicare benefits. The premium rate
structure and provider networks for this product are similar to the Company's
Secure Horizons programs. This product takes advantage of the expertise the
Company has developed in its Secure Horizons Medicare risk programs.
Because the use of health care services by Medicare recipients generally
exceeds the use of services by those who are under the age of 65, the Company's
Medicare contracts provide for substantially larger revenue per member than do
the Company's non-Medicare plans. Premium revenue for each Secure Horizons
member is generally more than three times that of a commercial member,
reflecting, in part, the higher medical and administrative costs of serving a
Medicare member. As a result, although members in the Secure Horizons programs
represented approximately 28 percent of the Company's membership at December 31,
1994, they accounted for approximately 57 percent of the consolidated premium
revenue and a greater percentage of the Company's profits for the three-month
period ended December 31, 1994.
MEDICAID HMO OPERATIONS
Since 1993, the Company has arranged for health care services to Medicaid
eligibles through its HMO subsidiaries pursuant to annual contracts with the
Department of Health and Human Services ("HHS"). The Company's Medicaid
membership has grown from 1,597 at September 30, 1993 to 33,047 at January 31,
1995. Currently, the Company arranges for the provision of health care services
to Medicaid eligibles in California, Florida and Oregon and anticipates
enrolling Medicaid eligibles in other geographic markets. The Company receives a
premium for each Medicaid member comparable to that of a commercial member. The
Company believes that its programs are attractive to Medicaid eligibles because
these programs provide access to quality health care providers, continuity of
medical care and an introduction into mainstream managed care. The Company's
Medicaid contracts with HHS are subject to annual renewal.
SPECIALTY MANAGED CARE PRODUCTS AND SERVICES
In addition to its HMO operations, the Company provides a wide range of
specialty managed care products and services. These products and services are
offered to HMOs, insurers, employers, governmental entities, providers and PPOs
through various affiliated operations of the Company.
SECURE HORIZONS-REGISTERED TRADEMARK- USA, INC. ("SHUSA") was formed in
March 1993 to take advantage of the Company's expertise in the Medicare risk
area. SHUSA is authorized to license the use of the Secure Horizons service
mark, trade name and systems, in exchange for license fees, to qualified
HMOs that want to engage in Medicare risk contracting. SHUSA provides
consulting, marketing, provider contracting, administrative services and
other various services in support of the operation of a Medicare risk
program by such HMOs. SHUSA is reimbursed for its expenses and receives a
percentage of the revenue derived from each program in the form of license
fees. SHUSA may also enter into joint ventures related to Medicare risk
contracting. In September 1993, SHUSA formed an alliance with Tufts
Associated Health Maintenance Organization, Inc. ("Tufts"). Through this
alliance, Tufts operates Secure Horizons, Tufts Health Plan for Seniors,
under a license from and with the assistance of SHUSA. As of October 1,
1994, Tufts began enrolling Medicare beneficiaries in Secure Horizons, Tufts
Health Plan for Seniors in the Boston area and, as of February 1, 1995, had
approximately 7,100 members. The Company believes Secure Horizons, Tufts
Health Plan for Seniors will be ultimately offered throughout Massachusetts
and other parts of New England.
PACIFICARE LIFE AND HEALTH INSURANCE COMPANY-SM- ("PLHIC"), formerly
Columbia General Life Insurance Company, offers employer groups managed
health care insurance products which have been integrated with the Company's
existing HMO products to form multi-option health benefits programs. PLHIC
is a health and life insurance company licensed to operate in 37 states
including California, Florida, Oklahoma, Oregon and Texas.
12
<PAGE>
PRESCRIPTION SOLUTIONS was established in May 1993 to offer pharmacy
benefit management services. Clients of Prescription Solutions have access
to a pharmacy provider network that features independent and chain
pharmacies, as well as a variety of cost and quality management
capabilities. In January 1995, Prescription Solutions acquired Preferred
Solutions, a San Jose-based pharmacy benefit management company. The
acquisition of Preferred Solutions enables Prescription Solutions to provide
fully integrated services, including mail order distribution, an extensive
network of retail pharmacies, claims processing and sophisticated drug
utilization reporting. In addition, the Company believes this acquisition
makes Prescription Solutions one of the industry's 10 largest pharmacy
benefit management companies covering approximately 3.5 million total lives.
LIFELINK-SM-, INC. ("LIFELINK"), a licensed specialized health care
service plan, provides behavioral health care services, including chemical
dependency benefit programs, in California directly to corporate customers
and indirectly through the Company's California HMO to its commercial
members. Outside of California, PacifiCare Behavioral Health, Inc. contracts
with various HMOs, insurers and employers to manage their respective mental
health and chemical dependency benefit programs.
Other specialty products and services offered by the Company through various
affiliated operations include (i) dental and vision care through California
Dental Health Plan, Inc., (ii) coordination of managed care products for
multi-region employers through Covantage, Inc., (iii) military health care
management through PacifiCare-Registered Trademark- Military Health Systems,
Inc., (iv) workers' compensation managed care through COMPREMIER-SM-, Inc. and
(v) health promotion through PacifiCare Wellness Company.
The Company believes that its wide range of specialty managed care products
and services complements its core HMO business and, given increasing market
demand for greater choice and flexibility in the design of health care products
and funding arrangements, will contribute to the Company's competitive position
in the health care services marketplace.
HEALTH CARE PROVIDER RELATIONSHIPS AND CONTROL OF HEALTH CARE COSTS
The Company manages health care costs primarily by entering into contractual
arrangements with health care providers and by sharing the risk of certain
health care costs with the Company's contracting physicians or physician groups
and hospitals. For the three-month period ended December 31, 1994, fixed fee
capitated payments to providers represented 56 percent and 70 percent of total
health care costs for the commercial and Medicare programs, respectively.
The Company contracts for hospital services under a variety of arrangements
including per diem, percentage of premium or per-member-per-month capitation,
discounted fee-for-service, flat fee and fee-for-service arrangements. The loss
of contracts with certain physician groups and with certain hospitals could have
a material adverse effect on the Company's HMO operations.
The Company's ability to expand is dependent, in part, on competitive
premium pricing and its ability to secure cost effective contracts with
additional physicians or to ensure that existing physician groups expand their
operations to accommodate the Company's new HMO membership. Achieving such
objectives with respect to competitive premium pricing and physician contracts
is becoming difficult due to increasing competition.
The Company's profitability is dependent, in part, on its ability to
maintain effective control over health care costs while providing members with
quality care. Factors such as health care reform, levels of utilization of
health care services, new technologies, hospital costs, major epidemics, and
numerous other external influences may affect the ability of HMOs to control
health care costs.
GOVERNMENT REGULATION
The Company's HMOs are licensed and subject to periodic examination by
governmental agencies and are subject to state and federal statutes and
regulations which extensively regulate the activities and licensing of HMOs. As
a result of the continued escalation of health care costs and the inability of
many individuals to obtain health care insurance, numerous proposals relating to
health care reform have been, and additional proposals may be, introduced in the
United States Congress and the legislatures of the states in which the
13
<PAGE>
Company operates or may seek to operate. The Company cannot predict what effect,
if any, such proposals would have on the Company if and when enacted. Although
the Company believes that it would benefit from proposals encouraging the use of
managed health care, there can be no assurance that the enactment of any of such
reforms would not adversely affect the operations, profitability or business
prospects of the Company.
The Company's Secure Horizons programs provide services pursuant to
contracts with HCFA and are subject to regulation by HCFA and certain state
agencies. As a result of HCFA's regulations governing the Company's Medicare
fixed-fee-per-member programs, the Company's premiums are determined through
formulas established by HCFA for the Company's Medicare contracts in a
particular region. If these premiums are reduced, or if premium rate increases
in a particular region are lower than the rate of increase in health care
service expenses for the Company's Secure Horizons members in such region, the
Company's operations, profitability or business prospects could be affected. The
Company has mitigated this risk by paying approximately 70 percent of the health
care service expenses for the Secure Horizons programs on a percentage of
premium basis, and believes that any slowdown in the rate of premium growth may
be offset by the effect of proposals encouraging managed health care for
Medicare beneficiaries. The Secure Horizons programs are subject to certain
risks relative to commercial programs, such as higher comparative medical costs,
higher levels of utilization and higher marketing and advertising costs
associated with selling to individuals rather than to groups.
The Company's Medicare contracts are automatically renewed every 12 months
unless the Company or HCFA elects either not to renew or to terminate them.
These contracts (a "risk contract") are also subject to periodic unilateral
revisions by HCFA based on certain demographic information relating to the
Medicare population and the cost of providing health care in a particular
geographic area. HCFA may unilaterally terminate the Company's Medicare
contracts if the Company fails to continue to meet compliance and eligibility
standards. Unilateral termination or failure to renew could have a material
adverse effect on the Company.
The Company's Secure Horizons programs are not permitted, under federal
regulations, to account for more than one-half of the Company's total HMO
members in each of the Company's non-contiguous geographic state markets. This
limitation may constrain the Company's rate of growth in markets where the
Company is able to add Medicare members at a faster rate than commercial
members.
ACQUISITIONS
Consistent with its stated growth strategy, the Company has entered into a
number of acquisitions, which together (i) strengthen the Company's position in
markets in which it currently operates, (ii) expand the Company's comprehensive
range of products and services and (iii) enable the Company to participate in
the consolidation trend of the HMO industry.
1995 ACQUISITIONS
In January 1995, Prescription Solutions, the Company's pharmacy benefit
management company, acquired Preferred Solutions, a San Jose-based pharmacy
benefit management company (the "Preferred Solutions Acquisition"). Also in
January 1995, the Company entered into a definitive agreement to acquire
ValuCare, a Fresno-based HMO with approximately 61,000 members located in
Central California (the "ValuCare Acquisition"). The ValuCare Acquisition is
subject to, among other things, various regulatory approvals and is expected to
close by April 1995. See "-- Growth Strategy -- Entry Into New Markets."
On February 28, 1995, the Company entered into a definitive agreement to
acquire Pacific Health Plans, an HMO located in Washington with approximately
33,000 members (the "PHP Acquisition"). Upon completion, the PHP Acquisition
will increase enrollment in Washington to more than 87,000 members. The PHP
Acquisition, which is subject to federal and state regulatory approvals, is
expected to close by June 1995. See "-- Growth Strategy -- Entry Into New
Markets." The Preferred Solutions Acquisition, the
14
<PAGE>
ValuCare Acquisition and the PHP Acquisition collectively shall be referred to
herein as the "1995 Acquisitions." The total purchase price of the 1995
Acquisitions is expected to be approximately $119 million, including contingent
payments. See "-- Pro Forma Condensed Consolidated Financial Statements
(Unaudited)."
1994 ACQUISITIONS
During fiscal 1994, the Company made the following acquisitions (the "1994
Acquisitions"): (i) Freedom Plan, Inc., a Santa Barbara, California-based HMO,
with approximately 14,000 members in October 1993; (ii) California Dental Health
Plan, Inc., a southern California-based dental HMO and its affiliate Dental Plan
Administrators, a third party administrator, in November 1993; (iii) Advantage
Health Plans, Inc., a Southern Florida-based HMO, with approximately 20,000
members in December 1993; (iv) Network Health Plan, Inc., a Washington-based
health care service contractor, with approximately 28,000 members in February
1994; and (v) Pasteur Health Plans, Inc., a Southern Florida-based HMO, with
approximately 50,000 members in September 1994. The total purchase price of the
1994 Acquisitions is expected to be approximately $99 million, (including
contingent payments) of which $94 million has been paid to date. See "-- Pro
Forma Condensed Consolidated Financial Statements (Unaudited)." The 1994 and the
1995 Acquisitions shall together be referred to herein as the "Acquisitions" and
the companies acquired or to be acquired through the Acquisitions shall be
referred to as the "Acquired Companies."
PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
The accompanying pro forma condensed consolidated financial statements have
been prepared by the Company based on certain pro forma adjustments to the
historical financial statements of the Company, which are incorporated in this
Prospectus by reference. The Company's historical financial statements have been
prepared in accordance with generally accepted accounting principles.
The pro forma adjustments presented are shown for comparative purposes only
and should not be considered to reflect the actual results of operations of the
combined companies had the Acquisitions taken place at the beginning of each pro
forma period. The pro forma information is not intended to be indicative of
results which may occur in the future. The Acquisitions have been or will be
accounted for as purchases and the operating results of each completed
acquisition are included in the Company's historical financial statements from
the date of purchase. These unaudited pro forma statements should be read in
conjunction with the Company's historical financial statements and related
notes, which are incorporated in this Prospectus by reference.
The Company believes it will achieve synergies from the integration of the
Acquisitions by eliminating redundant administrative costs and using its greater
purchasing power to achieve lower health care and general and administrative
costs. The anticipated impact of such synergies has not been reflected in the
pro forma condensed consolidated statements of income.
The accompanying pro forma condensed consolidated balance sheet as of
December 31, 1994 has been prepared to give pro forma effect to the 1995
Acquisitions as if they had occurred on December 31, 1994. The accompanying pro
forma condensed consolidated statements of income for the three months ended
December 31, 1994 and the year ended September 30, 1994, have been prepared to
give pro forma effect to the Acquisitions as if they had occurred on October 1,
1993.
15
<PAGE>
PACIFICARE HEALTH SYSTEMS, INC.
PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET (UNAUDITED)
DECEMBER 31, 1994
<TABLE>
<CAPTION>
ACQUIRED PRO FORMA PRO FORMA
THE COMPANY COMPANIES ADJUSTMENTS RESULTS
----------- --------- ---------------- ----------
<S> <C> <C> <C> <C>
(IN THOUSANDS)
-----------------------------------------------------
ASSETS
Current assets:
Cash and equivalents............................ $ 218,590 $ 357 $ (18,250)(a) $ 200,697
Marketable securities........................... 532,735 532,735
Receivables, net................................ 73,720 2,321 76,041
Prepaid expenses................................ 10,133 62 10,195
Deferred income taxes........................... 29,263 29,263
----------- --------- -------- ----------
Total current assets.......................... 864,441 2,740 (18,250) 848,931
----------- --------- -------- ----------
Property, plant and equipment, net................ 98,397 947 99,344
Marketable securities - restricted................ 16,572 16,572
Goodwill and intangible assets.................... 173,507 119,823(a) 293,330
Other assets...................................... 5,634 71 5,705
----------- --------- -------- ----------
$1,158,551 $ 3,758 $ 101,573 $1,263,882
----------- --------- -------- ----------
----------- --------- -------- ----------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Medical claims and benefits payable............. $ 309,100 $ $ $ 309,100
Accounts payable and accrued liabilities........ 126,673 2,079 128,752
Unearned premium revenue........................ 186,828 88 186,916
Current maturities of long-term debt............ 8,275 187 8,462
----------- --------- -------- ----------
Total current liabilities..................... 630,876 2,354 633,230
----------- --------- -------- ----------
Long-term debt, excluding current maturities...... 97,590 1,977 101,000(a) 200,567
Minority interest................................. 413 413
Shareholders' equity:
Preferred shares................................
Class A common shares........................... 123 6,115 (6,115)(a) 123
Class B common shares........................... 153 153
Additional paid-in capital...................... 143,083 143,083
Unrealized holding loss on available-for-sale
securities net of tax effect of $3,314......... (4,872 ) (4,872)
Retained earnings............................... 291,185 (6,688 ) 6,688(a) 291,185
----------- --------- -------- ----------
Total shareholders' equity.................... 429,672 (573 ) 573 429,672
----------- --------- -------- ----------
$1,158,551 $ 3,758 $ 101,573 $1,263,882
----------- --------- -------- ----------
----------- --------- -------- ----------
</TABLE>
16
<PAGE>
PACIFICARE HEALTH SYSTEMS, INC.
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF INCOME (UNAUDITED)
FOR THE THREE MONTHS ENDED DECEMBER 31, 1994
<TABLE>
<CAPTION>
ACQUIRED PRO FORMA PRO FORMA
THE COMPANY COMPANIES ADJUSTMENTS RESULTS
----------- -------- ----------- ---------
<S> <C> <C> <C> <C>
(IN THOUSANDS, EXCEPT PER SHARE DATA)
-----------------------------------------------
Revenue:
Premiums........................................ $ 810,033 $35,915 $ $845,948
Other income.................................... 11,581 887 12,468
----------- -------- ----------- ---------
Total operating revenue....................... 821,614 36,802 858,416
----------- -------- ----------- ---------
Expenses:
Health care services............................ 676,299 29,779 706,078
Marketing, general and administrative
expenses........................................ 113,191 8,206 500(b) 121,897
Amortization of intangibles..................... 1,258 1,235(c) 2,493
----------- -------- ----------- ---------
Operating income (loss)........................... 30,866 (1,183 ) (1,735) 27,948
Interest income................................... 4,901 214 (182)(d) 4,933
Interest expense.................................. (1,684 ) (143 ) (1,417)(e) (3,244 )
----------- -------- ----------- ---------
Income before income taxes........................ 34,083 (1,112 ) (3,334) 29,637
Provision for income taxes........................ 14,026 (439 ) (1,141)(f) 12,446
----------- -------- ----------- ---------
Net income (loss)................................. $ 20,057 $ (673 ) $(2,193) $ 17,191
----------- -------- ----------- ---------
----------- -------- ----------- ---------
Weighted average number of shares of common stock
and equivalents outstanding ..................... 28,231 28,231 28,231 28,231
----------- -------- ----------- ---------
Earnings per share................................ $ 0.71 $ (0.02 ) $ (0.08) $ 0.61
----------- -------- ----------- ---------
----------- -------- ----------- ---------
</TABLE>
17
<PAGE>
PACIFICARE HEALTH SYSTEMS, INC.
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF INCOME (UNAUDITED)
FOR THE YEAR ENDED SEPTEMBER 30, 1994
<TABLE>
<CAPTION>
THE ACQUIRED PRO FORMA PRO FORMA
COMPANY COMPANIES ADJUSTMENTS RESULTS
---------- -------- ------------ ---------
<S> <C> <C> <C> <C>
(IN THOUSANDS, EXCEPT PER SHARE DATA)
------------------------------------------------
Revenue:
Premiums........................................ $2,855,556 $211,799 $ (25)(g) $3,067,330
Other income.................................... 37,696 7,387 (291)(h) 44,792
---------- -------- ------------ ---------
Total operating revenue....................... 2,893,252 219,186 (316) 3,112,122
---------- -------- ------------ ---------
Expenses:
Health care services............................ 2,374,258 171,237 (21)(g) 2,545,474
Marketing, general and administrative expenses.. 394,620 40,864 5,038(b) 440,522
Amortization of intangibles..................... 3,444 6,536(c) 9,980
---------- -------- ------------ ---------
Operating income.................................. 120,930 7,085 (11,869) 116,146
Interest income................................... 28,588 691 (1,693)(d) 27,586
Interest expense.................................. (4,050 ) (877 ) (7,642)(e) (12,569)
---------- -------- ------------ ---------
Income before income taxes and cumulative effect
of a change in accounting principle.............. 145,468 6,899 (21,204) 131,163
Provision for income taxes........................ 60,875 2,763 (7,042)(f) 56,596
---------- -------- ------------ ---------
Income before cumulative effect of a change in
accounting principle............................. 84,593 4,136 (14,162) 74,567
Cumulative effect on prior years of a change in
accounting principle............................. 5,658 5,658
---------- -------- ------------ ---------
Net income........................................ $ 90,251 $ 4,136 $(14,162) $ 80,225
---------- -------- ------------ ---------
---------- -------- ------------ ---------
Weighted average number of shares of common stock
and equivalents outstanding...................... 28,004 28,004 28,004 28,004
---------- -------- ------------ ---------
Earnings per share:
Before cumulative effect of a change in
accounting principle........................... $ 3.02 $ 0.15 $ (0.51) $ 2.66
Cumulative effect on prior years of a change in
accounting principle........................... 0.20 -- -- 0.20
---------- -------- ------------ ---------
Earnings per share................................ $ 3.22 $ 0.15 $ (0.51) $ 2.86
---------- -------- ------------ ---------
---------- -------- ------------ ---------
</TABLE>
18
<PAGE>
PACIFICARE HEALTH SYSTEMS, INC.
NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
THREE MONTHS ENDED DECEMBER 31, 1994
YEAR ENDED SEPTEMBER 30, 1994
Pro forma Condensed Consolidated Balance Sheet as of December 31, 1994:
(a) The total consideration for the 1995 Acquisitions is expected to be
approximately $119 million, of which $18 million was paid in cash and the
remaining $101 million is assumed to be financed using borrowings under the
Credit Line. Under purchase accounting, the assets and liabilities of the
Acquired Companies are required to be adjusted to estimated fair market
values. For the purpose of preparing pro forma condensed financial
statements, the entire excess of the cost of the 1995 Acquisitions over the
book value of the net assets to be acquired has been allocated to goodwill
and intangible assets as of the assumed acquisition date (December 31,
1994).
Pro forma Condensed Consolidated Statements of Income for the three months
ended December 31, 1994 and year ended September 30, 1994:
(b) Assumes that marketing, general and administrative expenses for the three
months ended December 31, 1994 totaling approximately $500,000 and the year
ended September 30, 1994 totaling approximately $5,333,000, are incurred in
connection with the integration of the Acquisitions. The amount incurred for
integration for the year ended September 30, 1994 is partially offset by a
reduction in marketing, general and administrative expenses of $295,000
related to footnotes (g) and (h) below. The Company believes it will achieve
synergies from the integration of the Acquisitions by eliminating redundant
administrative costs and using its greater purchasing power to achieve lower
health care and general and administrative costs. The anticipated impact of
such synergies has not been reflected in the pro forma condensed
consolidated statements of income.
(c) Under purchase accounting, the assets and liabilities of the Acquired
Companies are required to be adjusted to estimated fair values. For the
purpose of preparing the pro forma financial statements, goodwill was
determined based on the excess of the cost over the fair market values of
the net assets acquired or to be acquired for the Acquisitions. This entry
represents the amortization of goodwill and intangible assets from the
beginning of each pro forma period on a straight line basis over periods
from five to forty years as if the Acquisitions were completed on October 1,
1993.
(d) This entry represents the reduction of interest income from the beginning of
each pro forma period through the earlier of the acquisition date or the end
of the pro forma period assuming cash payments for the 1995 Acquisitions of
$18 million were made on October 1, 1994 and for the 1994 Acquisitions of
$50 million were made on October 1, 1993. The interest income is assumed to
be earned at an average rate of four percent for the three months ended
December 31, 1994 and six percent for the year ended September 30, 1994.
(e) Certain acquisitions are assumed to be funded using borrowings under the
Credit Line at weighted average interest rates of approximately six percent
for the three months ended December 31, 1994 and five percent for the year
ended September 30, 1994. This entry represents additional interest expense
incurred for the three months ended December 31, 1994 and the year ended
September 30, 1994, as if the Acquisitions were completed on October 1,
1993.
(f) This entry represents the tax effect of the pro forma adjustments, excluding
non-deductible goodwill amortization, at the statutory rate in effect during
the three months ended December 31, 1994 and year ended September 30, 1994.
(g) This entry represents the reduction in premium revenue and health care
services expense related to employee health coverage provided by the Company
to the Acquired Companies.
(h) This entry represents the elimination of administrative fees paid by the
Company to certain Acquired Companies and recognized as other income by such
Acquired Companies prior to acquisition.
19
<PAGE>
PRINCIPAL AND SELLING STOCKHOLDER
Of the 4,500,000 shares of the Class B Common Stock being offered, 1,500,000
shares of the Class B Common Stock are being sold by the Selling Stockholder.
The following table sets forth, as of the date hereof and as adjusted to reflect
the sale of the shares being offered, certain information regarding the
ownership of the Class A and Class B Common Stock by the Selling Stockholder:
<TABLE>
<CAPTION>
BENEFICIAL
OWNERSHIP PRIOR TO BENEFICIAL OWNERSHIP
CLASS OF OFFERING AFTER OFFERING
COMMON ------------------ ----------------------
STOCKHOLDER STOCK NUMBER PERCENT NUMBER PERCENT
- ------------------------------ -------- --------- ------- ------------ -------
<S> <C> <C> <C> <C> <C>
UniHealth, Inc. A 5,909,500 48.1% 5,909,500 48.1 %
4100 West Alameda Avenue B 3,160,000 20.5% 1,660,000(1) 9.0 %
Burbank, California 91505
<FN>
- ------------------------
(1) If the Underwriters' over-allotment option is exercised in full, the
Selling Stockholder will own 985,000 shares of the Class B Common Stock or
5.4 percent of the outstanding Class B Common Stock after completion of the
offering.
</TABLE>
Currently, the Selling Stockholder owns 5,909,500 shares of the Class A
Common Stock, or 48.1 percent of all such shares outstanding, and 3,160,000
shares of the Class B Common Stock, or 20.5 percent of all such shares
outstanding. Combined, the Selling Stockholder owns 32.8 percent of the total
shares outstanding of the Company. Upon completion of this offering of the Class
B Common Stock, the Selling Stockholder will own 5,909,500 shares of the Class A
Common Stock, or 48.1 percent of all such shares outstanding, and 1,660,000
shares of the Class B Common Stock, or 9.0 percent of all such shares
outstanding. Combined, the Selling Stockholder will own 24.7 percent of the
total shares outstanding of the Company.
The Selling Stockholder is a California non-profit public benefit
corporation which is the parent corporation of an integrated health care
delivery system consisting of 10 non-profit medical centers and various
for-profit health care companies, including one company in the HMO business. The
Selling Stockholder's HMO, which is not federally qualified, and certain of its
operations compete with the Company in California.
The Company purchases health care services from hospitals owned and managed
by the Selling Stockholder on terms the Company believes are at least as
favorable to the Company as would be available from unaffiliated third parties.
In addition, the Company pays a management fee to the Selling Stockholder for
certain services, including certain consulting services, pays a fee to the
Selling Stockholder for payroll processing and reimburses the Selling
Stockholder for the Company's share of joint insurance purchasing. The Company
anticipates paying fees to, and purchasing services from, the Selling
Stockholder in the future. Future transactions between the Company and the
Selling Stockholder will be on terms no less favorable than could be obtained
from unaffiliated third parties.
Terry Hartshorn, President and Chief Executive Officer, director and
Executive Committee member of the Selling Stockholder, is the Chairman of the
Board of PacifiCare. Gary L. Leary, Executive Vice President, Chief Operating
Officer, General Counsel and Secretary, director and member of the Executive
Committee of the Selling Stockholder, David R. Carpenter, director, Chairman of
the Board and Chairman of the Executive Committee of the Selling Stockholder,
and Jean Bixby Smith, a director of the Selling Stockholder, are directors of
the Company.
In connection with the current offering, the Selling Stockholder and the
Company have agreed to contribute to certain liabilities, including liabilities
under the Act, in amounts proportionate to the proceeds received by the Selling
Stockholder and the Company and in certain circumstances to indemnify the other
against certain liabilities, including liabilities under the Act. The Selling
Stockholder's liability to the Company under such agreement is limited to the
proceeds received by the Selling Stockholder in this offering.
20
<PAGE>
DESCRIPTION OF CAPITAL STOCK
The authorized capital stock of the Company consists of 30 million shares of
the Class A Common Stock, par value $0.01 per share, 60 million shares of the
Class B Common Stock, par value $0.01 per share, and 10 million shares of
Preferred Stock, par value $1.00 per share (the "Preferred Stock"). As of
February 16, 1995, there were 12,278,783 shares of the Class A Common Stock
outstanding, 15,384,092 shares of the Class B Common Stock outstanding and no
shares of Preferred Stock outstanding.
The Class A Common Stock and the Class B Common Stock are more fully
described in the Company's Registration Statement on Form 8-A (File No 0-14181),
dated May 20, 1992, incorporated in this Prospectus by reference. The comparison
of the Class A Common Stock and the Class B Common Stock set forth below is
qualified in its entirety by reference thereto.
COMPARISON OF CLASS A COMMON STOCK AND CLASS B COMMON STOCK
VOTING. 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 the Delaware General Corporation Law.
DIVIDENDS, OTHER DISTRIBUTIONS AND MERGERS OR CONSOLIDATIONS. Holders of
the Class A Common Stock and Class B Common Stock are entitled to equal per
share cash dividends, if any, distributions upon liquidation of the Company and
consideration in a merger or consolidation of the Company (whether or not the
Company is the surviving corporation). Holders of the Class A Common Stock and
Class B Common Stock are entitled to equal per share stock dividends and stock
splits, if any, except that if stock dividends in shares of Class A Common Stock
are made to holders of Class A Common Stock, holders of Class B Common Stock may
receive, on a share-for-share basis, shares of Class B Common Stock.
CLASS B PROTECTION. Certain provisions of the Company's Certificate of
Incorporation, as amended (the "Certificate of Incorporation"), suspend the
voting rights of any person or group that acquires a beneficial interest of 10
percent or more of the then outstanding shares of the Class A Common Stock
(excluding the number of shares beneficially owned by such person or group prior
to the reclassification in 1992 of the Certificate of Incorporation, dividing
the Company's common stock into the Class A Common Stock and the Class B Common
Stock, other than upon issuance or sale by the Company, by operation of law, by
will or the laws of descent or distribution, by gift or by foreclosure of a bona
fide loan), unless such person or group (a "Significant Shareholder") then owns
an equal or greater percentage of all outstanding shares of the Class B Common
Stock acquired after the date of reclassification or acquires additional shares
of the Class B Common Stock. These provisions will also be triggered if any
Significant Shareholder acquires the next higher integral multiple of five
percent (e.g., 15%, 20%, 25%, etc.) of the outstanding Class A Common Stock
after the date of the reclassification of the Certificate of Incorporation
(other than upon issuance or sale by the Company, by operation of law, by will
or the laws of descent or distribution, by gift or by foreclosure of a bona fide
loan).
PREEMPTIVE RIGHTS. The Class A and Class B Common Stock do not carry any
preemptive rights enabling a holder to subscribe for or receive shares of any
class of stock of the Company or any other securities convertible into shares of
any class of stock of the Company.
21
<PAGE>
UNDERWRITING
The underwriters named below (the "Underwriters"), for whom Dean Witter
Reynolds Inc., Salomon Brothers Inc, Dillon, Read & Co. Inc., Lehman Brothers
Inc. and Robertson, Stephens & Company, L.P. are acting as Representatives (the
"Representatives"), have severally agreed, subject to the terms and conditions
set forth in the Underwriting Agreement by and among the Company, the Selling
Stockholder and the Underwriters (the "Underwriting Agreement"), to purchase
from the Company and the Selling Stockholder, and the Company and the Selling
Stockholder have agreed to sell to the Underwriters, the number of shares of
Class B Common Stock set forth opposite their names below:
<TABLE>
<CAPTION>
NUMBER
UNDERWRITERS OF SHARES
- ---------------------------------------------------------------------- ---------
<S> <C>
Dean Witter Reynolds Inc..............................................
Salomon Brothers Inc..................................................
Dillon, Read & Co. Inc................................................
Lehman Brothers Inc...................................................
Robertson, Stephens & Company, L.P....................................
---------
Total............................................................. 4,500,000
---------
---------
</TABLE>
The Underwriters are obligated to purchase all of the Shares offered hereby
if any are purchased.
The Representatives have advised the Company that the Underwriters propose
to offer the Shares to the public at the offering price set forth on the cover
page of this Prospectus and to certain securities dealers at such price less a
concession not in excess of $ per share and that the Underwriters and
such dealers may reallow a concession not in excess of $ per share of
sales to other dealers, including the Underwriters. After the Shares are
released for sale to the public, the public offering price and concessions and
discounts may be changed by the Underwriters.
The Company and the Selling Stockholder have agreed to indemnify the
Underwriters against certain liabilities, including liabilities under the Act,
or to contribute to payments which the Underwriters may be required to make in
respect thereof.
The Selling Stockholder and the Company have agreed that they will not sell,
contract to sell or otherwise dispose of any shares of the Class A or the Class
B Common Stock for a period of 90 days after the effective date of this
offering, except for the shares of the Class B Common Stock offered hereby, the
issuance of shares by the Company pursuant to employee stock options and the
issuance of shares or options by the Company pursuant to employee benefit, stock
option and compensation plans of the Company, without the prior written consent
of Dean Witter Reynolds Inc. The officers and directors of the Company and of
the Selling Stockholder have not individually entered into any such agreements.
The Selling Stockholder has granted to the Underwriters an option,
exercisable within 30 days from the date of this Prospectus, to purchase up to
an additional 675,000 shares of the Class B Common Stock at the same price per
share as the 4,500,000 shares of the Class B Common Stock offered hereby, less
underwriting
22
<PAGE>
discounts and commissions. The Underwriters may exercise the option only for the
purpose of covering over-allotments, if any, made in connection with the
distribution of the shares of the Class B Common Stock to the public.
Pursuant to regulations promulgated by the Securities and Exchange
Commission, market makers in the Common Stock who are underwriters and
prospective underwriters ("Passive Market Makers") may, subject to certain
limitations, make bids for or purchases of Common Stock until the earlier of the
time of commencement (the "Commencement Date") of offers or sales of the Common
Stock contemplated by this Prospectus or the time at which a stabilizing bid for
such Common Stock is made. In general, on and after the date two business days
prior to the Commencement Date (i) such market maker's net daily purchase of the
Common Stock may not exceed 30% of its average daily trading volume in such
Common Stock for the two full consecutive calendar months immediately preceding
the filing date of the registration statement of which this Prospectus forms a
part, (ii) such market maker may not effect transactions in, or display bids
for, the Common Stock at a price that exceeds the highest bid for the Common
Stock by persons who are not Passive Market Makers, and (iii) bids made by
Passive Market Makers must be identified as such.
LEGAL MATTERS
The validity of the Class B Common Stock offered hereby will be passed upon
for the Company by Shereff, Friedman, Hoffman & Goodman, LLP, New York, New
York, and for the Underwriters by Milbank, Tweed, Hadley & McCloy, Los Angeles,
California. Certain legal matters related to the offering will be passed upon
for the Selling Stockholder by O'Melveny & Myers, Los Angeles, California.
EXPERTS
The Consolidated Financial Statements of the Company included in the
Company's Annual Report (Form 10-K) for the year ended September 30, 1994 have
been audited by Ernst & Young LLP, independent auditors, as set forth in their
report thereon included therein and incorporated herein by reference. Such
consolidated financial statements are incorporated herein by reference in
reliance upon such report given upon the authority of such firm as experts in
accounting and auditing.
23
<PAGE>
PACIFICARE HEALTH
SYSTEMS, INC.
4,500,000 SHARES
CLASS B COMMON STOCK
PROSPECTUS
DEAN WITTER REYNOLDS INC.
SALOMON BROTHERS INC
DILLON, READ & CO. INC.
LEHMAN BROTHERS
ROBERTSON, STEPHENS & COMPANY
, 1995
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
<TABLE>
<S> <C>
Securities and Exchange Commission Registration Fee............... $ 124,468
NASD Fee.......................................................... 30,500
NASDAQ Fee........................................................ 17,500
Printing and Engraving............................................ 90,000
Legal Fees and Expenses (other than Blue Sky)..................... 200,000
Blue Sky Fees and Expenses........................................ 20,000
Accounting Fees and Expenses...................................... 40,000
Transfer Agent Fees............................................... 600
Travel and Miscellaneous.......................................... 46,932
---------
Total........................................................... $ 570,000
---------
---------
</TABLE>
All of the above items except the registration fee, the NASD fee and the
NASDAQ fee are estimated.
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The indemnification of officers and directors of the Company is governed by
Section 145 of the General Corporation Law of the State of Delaware (the
"DGCL"). Among other things, the DGCL permits indemnification of a director,
officer, employee or agent in civil, criminal, administrative or investigative
actions, suits or proceedings (other than an action by or in the right of the
corporation) to which such person is a party or is threatened to be made a party
by reason of the fact of such relationship with the corporation or the fact that
such person is or was serving in a similar capacity with another entity at the
request of the corporation against expenses (including attorneys' fees),
judgments, fines and amounts paid in settlement actually and reasonably incurred
by him if such person acted in good faith and in a manner he reasonably believed
to be in or not opposed to the best interests of the corporation, and, with
respect to any criminal action or proceeding, if he had no reasonable cause to
believe his conduct was unlawful. Indemnification in a suit by or in the right
of the corporation is permitted if such person acted in good faith and in a
manner he reasonably believed to be in or not opposed to the best interests of
the corporation, but no indemnification may be made in such suit to any person
adjudged to be liable to the corporation unless and only to the extent that the
Delaware Court of Chancery or the court in which the action was brought
determines that despite the adjudication of liability, such person is under all
circumstances, fairly and reasonably entitled to indemnity for such expenses
which such court shall deem proper. Under the DGCL, to the extent that a
director, officer, employee or agent is successful, on the merits or otherwise,
in the defense of any action, suit or proceeding or any claim, issue or matter
therein (whether or not the suit is brought by or in the right of the
corporation), he shall be indemnified against expenses (including attorneys'
fees) actually and reasonably incurred by him. In all cases in which
indemnification is permitted (unless ordered by a court), it may be made by the
corporation only as authorized in the specific case upon a determination that
the applicable standard of conduct has been met by the party to be indemnified.
The determination must be made by a majority vote of a quorum consisting of the
directors who were not parties to the action or, if such a quorum is not
obtainable, or even if obtainable, if a quorum of disinterested directors so
directs, by independent legal counsel in a written opinion, or by the
stockholders. The statute authorizes the corporation to pay expenses incurred by
an officer or director in advance of a final disposition of a proceeding upon
receipt of an undertaking, by or on behalf of the person to whom the advance
will be made, to repay the advances if it shall ultimately be determined that he
was not entitled to indemnification. The DGCL provides that indemnification and
advances of expenses permitted thereunder are not to be exclusive of any rights
to which those seeking indemnification or advancement of expenses may be
entitled under any by-law, agreement, vote of stockholders or disinterested
directors, or otherwise. The DGCL also authorizes the corporation to purchase
and maintain liability insurance on behalf of its directors, officers, employees
and agents regardless of whether the corporation would have the statutory power
to indemnify such persons against the liabilities insured.
II-1
<PAGE>
The By-Laws of the Company (the "By-Laws") provide, in effect, that, to the
extent and under the circumstances described above, the Company shall indemnify
any person who was or is a party or is threatened to be made a party to any
action, suit or proceeding of the type described above by reason of the fact
that he is or was a director, officer, employee or agent of the Company or is or
was serving at the request of the Company as a director, officer, employee or
agent of another corporation, partnership, joint venture, trust or other
enterprise. The By-Laws also permit the Company to purchase insurance on behalf
of such persons against any liability whether or not the Company would have
power to indemnify him against such liability pursuant to the By-Laws. The
By-Laws further provide that the termination of any action, suit or proceeding
by judgment, order, settlement, conviction, or upon a plea of nolo contendere or
its equivalent, shall not, of itself, create a presumption that such person did
not act in good faith and in a manner which he reasonably believed to be in or
not opposed to the best interests of the Company, and, with respect to any
criminal action or proceeding, had reasonable cause to believe that his conduct
was unlawful. In addition, indemnification provided by the By-Laws is deemed not
to be exclusive of any other rights to which those indemnified may be entitled,
both as to action in his official capacity and as to action in another capacity
while holding such office, and shall continue as to a person who has ceased to
be a director, officer, employee or agent and shall inure to the benefit of the
heirs, executors and administrators of such person.
The Certificate of Incorporation of the Company, as amended (the
"Certificate"), provides that no director shall be personally liable to the
Company or any stockholder for monetary damages for breach of fiduciary duty as
a director, except for any matter in respect of which such director shall be
liable under Section 174 of the DGCL or any amendment thereto or successor
provision thereto or shall be liable by reason that, in addition to any and all
other requirements for such liability, he (i) shall have breached his duty of
loyalty to the Company or its stockholders, (ii) shall not have acted in good
faith or, in failing to act, shall not have acted in good faith, (iii) shall
have acted in a manner involving intentional misconduct or a knowing violation
of law or, in failing to act, shall have acted in a manner involving intentional
misconduct or a knowing violation of law, or (iv) shall have derived an improper
personal benefit. The Certificate further provides that no amendment or repeal
of the rights herein referenced, nor the adoption of any provision of the
Certificate inconsistent therewith, shall eliminate or reduce the effect of such
rights in respect of any matter occurring or any cause of action, suit or claim
that, but for the existence of such rights, would accrue or arise, prior to such
amendment, repeal or adoption of an inconsistent provision.
The Company maintains a directors, officers and trustees liability and
company reimbursement insurance policy which, among other things, provides for
(i) payment on behalf of any of the Company's past, present or future directors,
officers, trustees, employees, volunteers or any members of the Company's staff,
faculty or any duly constituted committee of the Insured Entity (as defined in
the policy) and other Insured Persons (as defined in the policy) against loss
(as defined in the policy) stemming from actual or alleged acts or omissions
committed by Insured Persons in their capacity as such, or while serving as
director or trustee of any other non-profit entities at the express written
direction of the Insured Entity, and (ii) payment on behalf of the Insured
Entity against such loss for which the Insured Entity has paid as
indemnification to or on behalf of the Insured Person. The policy does not cover
loss from claims made against Insured Persons arising from, among other things,
specified categories of misconduct, including a claim against an Insured Person
brought about or contributed to in fact (1) by any dishonest or fraudulent act
or omission or any willful violation of any statute, rule of law or by any
Insured (defined to include the Insured Entity and any Insured Person) or (2) by
any Insured gaining any profit, remuneration or advantage to which such Insured
was not entitled.
Reference is made to the Underwriting Agreement filed as Exhibit 1.1 hereto
for information regarding indemnification of officers and directors in
connection with this offering.
In connection with the current offering, the Selling Stockholder and the
Company have agreed to contribute to certain liabilities including liabilities
under the Act in amounts proportionate to the proceeds received by the Selling
Stockholder and the Company and in certain circumstances to indemnify the other
against certain liabilities, including liabilities under the Act. The Selling
Stockholder's liability to the Company under such agreement is limited to the
proceeds received by the Selling Stockholder in this offering.
II-2
<PAGE>
ITEM 16. EXHIBITS
(a) Exhibits
<TABLE>
<C> <S>
1.1 Form of Underwriting Agreement*
5.1 Opinion of Shereff, Friedman, Hoffman & Goodman, LLP*
10.1 Contribution and Indemnification Agreement, dated as of , 1995 between
PacifiCare Health Systems, Inc. and UniHealth, Inc.*
23.1 Consent of Ernst & Young LLP
23.2 Consent of Shereff, Friedman, Hoffman & Goodman, LLP (included in Exhibit 5.1)
24.2 Power of Attorney*
<FN>
- ------------------------
* Previously filed
</TABLE>
ITEM 17. UNDERTAKINGS
The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
registrant's annual report pursuant to Section 13(a) or Section 15(d) of the
Securities Exchange Act of 1934 (and, where applicable, each filing of an
employee benefit plan's annual report pursuant to Section 15(d) of the
Securities Exchange Act of 1934) that is incorporated by reference in the
registration statement shall be deemed to be a new registration statement
relating to securities offered therein, and the offering of such securities at
that time shall be deemed to be the initial bona fide offering thereof.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the registrant of expenses incurred
or paid by a director, officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus filed as part
of this registration statement in reliance upon Rule 430A and contained in a
form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4)
or 497(h) under the Securities Act of 1933 shall be deemed to be part of
this registration statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
II-3
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this Amendment No. 1 to the Registration Statement to be signed
on its behalf by the undersigned, thereunto duly authorized in the City of
Cypress, State of California, on this 1st day of March, 1995.
PACIFICARE HEALTH SYSTEMS, INC.
By: /s/ ALAN R. HOOPS
-----------------------------------
Alan R. Hoops
President and Chief Executive
Officer
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS AMENDMENT
NO. 1 TO THE REGISTRATION STATEMENT HAS BEEN SIGNED BELOW BY THE FOLLOWING
PERSONS IN THE CAPACITIES AND ON THE DATES INDICATED.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------------------------------ -------------------------------------- -----------------
<C> <S> <C>
/s/ TERRY O. HARTSHORN
------------------------------------------- Chairman of the Board March 1, 1995
Terry O. Hartshorn
/s/ ALAN R. HOOPS Director, President and Chief
------------------------------------------- Executive Officer March 1, 1995
Alan R. Hoops (Principal Executive Officer)
Executive Vice President, Chief
/s/ WAYNE B. LOWELL Administrative Officer and Chief
------------------------------------------- Financial Officer (Principal March 1, 1995
Wayne B. Lowell Financial Officer)
/s/ FRED B. RYDER Senior Vice President and Corporate
------------------------------------------- Controller March 1, 1995
Fred V. Ryder (Principal Accounting Officer)
------------------------------------------- Director March , 1995
David R. Carpenter
/s/ GARY L. LEARY
------------------------------------------- Director March 1, 1995
Gary L. Leary
</TABLE>
II-4
<PAGE>
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------------------------------ -------------------------------------- -----------------
<C> <S> <C>
/s/ DAVID A. REED
------------------------------------------- Director March 1, 1995
David A. Reed
/s/ WARREN E. PINCKERT II
------------------------------------------- Director March 1, 1995
Warren E. Pinckert II
/s/ LLOYD ROSS
------------------------------------------- Director March 1, 1995
Lloyd Ross
/s/ JEAN BIXBY SMITH
------------------------------------------- Director March 1, 1995
Jean Bixby Smith
</TABLE>
II-5
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NO. DESCRIPTION PAGE
- ----------- -------------------------------------------------------------------------------------------- -------------
<C> <S> <C>
1.1 Form of Underwriting Agreement*
5.1 Opinion of Shereff, Friedman, Hoffman & Goodman, LLP*
10.1 Contribution and Indemnification Agreement, dated as of , 1995, between
PacifiCare Health Systems, Inc. and UniHealth, Inc.*
23.1 Consent of Ernst & Young LLP
23.2 Consent of Shereff, Friedman, Hoffman & Goodman, LLP (included in Exhibit 5.1)
24.1 Power of Attorney*
<FN>
- ------------------------
* Previously filed
</TABLE>
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" in
Amendment No. 1 to the Registration Statement (Form S-3) and related Prospectus
of PacifiCare Health Systems, Inc. for the registration of 4,500,000 shares of
its Class B Common Stock and to the incorporation by reference therein of our
report dated November 11, 1994, with respect to the consolidated financial
statements and schedules of PacifiCare Health Systems, Inc. included in its
Annual Report (Form 10-K) for the year ended September 30, 1994, filed with the
Securities and Exchange Commission.
ERNST & YOUNG LLP
Los Angeles, California
March 1, 1995
