<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 1995
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _________________ to ____________________________
____________________________
Commission File Number 0-14181
PACIFICARE HEALTH SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
Delaware 33-0064895
(State or other jurisdiction of (IRS Employer Identification Number)
incorporation or organization)
5995 Plaza Drive, Cypress, California 90630-5028
(Address of principal executive offices, including zip code)
(Registrant's telephone number, including area code) (714) 952-1121
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
___ ___
As of February 1, 1996, there were 12,358,508 shares of the Registrant's Class A
Common Stock, par value $0.01 per share, outstanding and 18,641,878 shares of
Class B Common Stock, par value $0.01 per share, outstanding.
1
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Part 1: FINANCIAL INFORMATION
Item 1: FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PacifiCare Health Systems, Inc.
Condensed Consolidated Balance Sheets
- ----------------------------------------------------------------------------------------------------------------
December 31, September 30,
(Amounts in thousands, 1995 1995
except per share data) (Unaudited)
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- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Assets
- ----------------------------------------------------------------------------------------------------------------
Current assets:
Cash and equivalents $ 357,290 $ 279,145
Marketable securities 541,017 532,380
Receivables, net 114,826 112,408
Prepaid expenses 8,463 9,469
Deferred income taxes 25,229 28,207
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Total current assets 1,046,825 961,609
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Property, plant and equipment, net 99,292 99,276
Marketable securities - restricted 23,932 23,108
Goodwill and intangible assets 293,575 295,794
Other assets 4,832 5,585
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$ 1,468,456 $ 1,385,372
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- ----------------------------------------------------------------------------------------------------------------
Liabilities and Shareholders' Equity
Current liabilities:
Medical claims and benefits payable $ 324,400 $ 288,400
Accounts payable and accrued liabilities 146,659 149,203
Unearned premium revenue 214,342 195,413
Long-term debt due within one year 3,806 7,978
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Total current liabilities 689,207 640,994
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Long-term debt due after one year 11,063 11,949
Minority interest 405 405
Shareholders' equity:
Preferred shares, par value $1.00 per share; 10,000 shares
authorized; none issued -- --
Class A common shares, par value $0.01 per share; 30,000
shares authorized; 12,359 and 12,331 issued at
December 31, 1995 and September 30, 1995, respectively 124 123
Class B common shares, par value $0.01 per share; 60,000
shares authorized; 18,628 and 18,551 issued at
December 31, 1995 and September 30, 1995, respectively 186 186
Additional paid-in capital 351,835 347,548
Unrealized gains on available-for-sale securities, net of taxes 8,434 4,944
Retained earnings 407,202 379,223
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Total shareholders' equity 767,781 732,024
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$ 1,468,456 $ 1,385,372
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</TABLE>
See accompanying notes.
2
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<TABLE>
<CAPTION>
PacifiCare Health Systems, Inc.
Consolidated Statements of Income (unaudited)
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Three months ended
December 31,
(Amounts in thousands, ---------------------------------
except per share data) 1995 1994
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<S> <C> <C>
Revenue:
Commercial premiums $ 431,074 $ 332,438
Government premiums (Medicare and Medicaid) 621,397 477,595
Other income 11,853 11,581
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Total operating revenue 1,064,324 821,614
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Expenses:
Health care services:
Medical services 422,333 322,484
Hospital services 370,696 279,267
Other services 101,680 74,548
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Total health care services 894,709 676,299
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Marketing, general and administrative expenses 132,257 113,191
Amortization of intangibles 2,274 1,258
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Operating income 35,084 30,866
Interest income 12,262 4,901
Interest expense (513) (1,684)
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Income before income taxes 46,833 34,083
Provision for income taxes 18,854 14,026
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Net income $ 27,979 $ 20,057
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Weighted average common shares and equivalents
outstanding used to calculate earnings per share 31,648 28,231
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Earnings per share $ 0.88 $ 0.71
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</TABLE>
See accompanying notes.
3
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<TABLE>
<CAPTION>
PacifiCare Health Systems, Inc.
Consolidated Statements of Cash Flows (unaudited)
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Three months ended
December 31,
---------------------------------
(Amounts in thousands) 1995 1994
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<S> <C> <C>
Operating activities:
Net income $ 27,979 $ 20,057
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 5,701 4,912
Amortization of intangibles 2,274 1,258
Provision for doubtful accounts 93 90
Deferred income taxes 812 2,466
Loss on disposal of fixed assets -- 32
Changes in assets and liabilities, net of effects from acquisitions:
Accounts receivable (2,511) 167
Prepaid, intangible and other assets 1,759 (3,315)
Medical claims and benefits payable 36,000 6,200
Accounts payable and accrued liabilities (959) 16,380
Unearned premium revenue 18,929 15,858
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Net cash flows provided by operating activities 90,077 64,105
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Investing activities:
Purchase of property, plant and equipment (5,597) (5,980)
Purchase of marketable securities (2,981) (22,922)
Purchase of marketable securities - restricted (824) (578)
Acquisitions, net of cash acquired (46) (5,553)
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Net cash flows used in investing activities (9,448) (35,033)
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Financing activities:
Principal payments on long-term debt (5,178) (87,292)
Proceeds from issuance of common stock 2,694 699
Borrowings under long-term lines of credit -- 83,502
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Net cash flows used in financing activities (2,484) (3,091)
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Net increase in cash and equivalents 78,145 25,981
Beginning cash and equivalents 279,145 192,609
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Ending cash and equivalents $ 357,290 $ 218,590
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</TABLE>
See accompanying notes.
4
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<TABLE>
<CAPTION>
PacifiCare Health Systems, Inc.
Consolidated Statements of Cash Flows (unaudited)
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Three months ended
December 31,
---------------------------------
(Amounts in thousands) 1995 1994
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<S> <C> <C>
Supplemental cash flow information:
Cash paid during the period for:
Income taxes $ 4,020 $ 569
Interest $ 757 $ 2,054
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Supplemental schedule of noncash investing
and financing activities:
Tax benefit realized upon exercise of stock options $ 1,594 $ 429
Leases capitalized $ 120 $ 343
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Details of unrealized gains on available-for-sale
securities:
Increase in marketable securities $ 5,656 $ 8,186
Decrease in deferred taxes 2,166 3,314
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Increase in shareholders' equity $ 3,490 $ 4,872
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Details of businesses acquired in purchase transactions:
Fair value of assets acquired $ 55 $ 7,680
Less liabilities assumed or created, including
notes to seller 9 2,127
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Cash paid for acquisitions 46 5,553
Cash acquired in acquisitions -- --
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Net cash paid for acquisitions $ 46 $ 5,553
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</TABLE>
See accompanying notes.
5
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PACIFICARE HEALTH SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1995
(unaudited)
NOTE 1 - BASIS OF PRESENTATION
The interim condensed consolidated financial statements included herein
have been prepared by PacifiCare Health Systems, Inc. (the "Company") without
audit, pursuant to the rules and regulations of the Securities and Exchange
Commission (the "SEC"). Certain information and footnote disclosures, normally
included in the financial statements prepared in accordance with generally
accepted accounting principles, have been condensed or omitted pursuant to such
SEC rules and regulations; nevertheless, the management of the Company believes
that the disclosures herein are adequate to make the information presented not
misleading. It is suggested that these condensed consolidated financial
statements be read in conjunction with the consolidated financial statements and
notes thereto included in the Company's most recent Annual Report on Form 10-K,
filed with the SEC in November 1995. In the opinion of management, all
adjustments, consisting only of normal recurring adjustments necessary to
present fairly the consolidated financial position of the Company with respect
to the interim condensed consolidated financial statements, and the consolidated
results of its operations and its cash flows for the interim periods then ended,
have been included. The results of operations for the interim periods are not
necessarily indicative of the results for the full year.
NOTE 2 - ACQUISITIONS
During fiscal year 1995, the Company made the following acquisitions (the
"Acquisitions"): (i) Preferred Solutions, a San Jose-based pharmacy benefit
management company, in January 1995; (ii) ValuCare, a Fresno-based health
maintenance organization ("HMO"), with approximately 67,000 members in March
1995; and (iii) the membership of Pacific Health Plans, a Washington-based HMO,
with approximately 33,000 members in March 1995.
The total purchase price for the Acquisitions, including contingent
purchase payments, is expected to be approximately $122 million. Based on the
fair values of the assets and liabilities of the acquired companies, the
preliminary estimate of excess purchase price is approximately $121 million. A
final allocation of purchase price will be determined when appraisals and other
studies are completed and contingent purchase payments are determined. The
Acquisitions have been accounted for as purchases and the operating results of
each completed acquisition are included in the consolidated financial statements
from the date of purchase. Amortization of excess purchase price is made over a
period not to exceed forty years.
The following table summarizes the unaudited pro forma consolidated results
of the Company as though the Acquisitions had occurred at the beginning of the
periods presented giving effect to the interest income foregone, the costs
associated with the integration of the operations into those of the Company and
the amortization of the excess of the purchase price over the fair value of the
assets acquired. The unaudited pro forma information is not necessarily
indicative of the actual consolidated results of operations that would have
occurred had the Acquisitions occurred at the beginning of the period and is not
intended to be indicative of results which may occur in the future.
6
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<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
(Unaudited)
(Amounts in thousands, Three months ended
except per share amounts) December 31, 1994
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<S> <C>
Premium revenue $ 845,193
Total operating revenue $ 857,108
Pretax income $ 31,295
Net income $ 18,157
Earnings per share $ 0.64
- --------------------------------------------------------------------------------
</TABLE>
NOTE 3 - LONG-TERM DEBT
In November 1994, the Company established a $250 million revolving line of
credit with Bank of America National Trust and Savings Association and a
syndicate of banks (the "B of A Credit Line"). Interest on the B of A Credit
Line is payable at a rate per annum equal to the London Interbank Offered Rate
plus a margin. The B of A Credit Line is subject to, among other things,
certain financial covenants, including a fixed charge ratio and a leverage
ratio. The term of the B of A Credit Line has been extended to
November 30, 2000. In November 1994, the Company borrowed $83 million under the
B of A Credit Line to pay the balance owed on the syndicated $130 million credit
line with The Chase Manhattan Bank, N.A. The amount borrowed under the B of A
Credit Line was repaid in March 1995 from the proceeds of the sale of Class B
Common Stock (see Note 4 - "Shareholders' Equity").
NOTE 4 - SHAREHOLDERS' EQUITY
As of March 29, 1995, the Company completed a public offering of 5,175,000
shares of its Class B Common Stock, par value $0.01 per share (the "Class B
Common Stock"), of which 3,000,000 shares were issued and sold by the Company
and 2,175,000 shares were sold by UniHealth, the largest holder of the Company's
Class A Common Stock, par value $0.01 per share. The sale of 4,500,000 shares
of the Class B Common Stock closed on March 23, 1995 with the sale of the
additional 675,000 shares of the Class B Common Stock occurring on
March 29, 1995 pursuant to the exercise of the underwriters' over-allotment
option.
The Company received net proceeds of approximately $197.6 million from the
sale of the 3,000,000 shares of Class B Common Stock after deducting
underwriting discounts and commissions and expenses of the offering payable by
the Company. The Company did not receive any of the proceeds from the sale of
shares of Class B Common Stock by UniHealth. The Company used approximately
$186.0 million of the net proceeds to repay the amount outstanding under its B
of A Credit Line and to replenish working capital used to pay for certain of the
Acquisitions (see Note 2 - "Acquisitions").
In December 1994, the Company completed a public offering of 90,000 shares
of its Class B Common Stock to certain physician groups which currently contract
with the Company. Each group has entered into an irrevocable obligation to
purchase a fixed number of shares of the Class B Common Stock over a five year
period beginning May 1, 1996 at $64.88 per share.
NOTE 5 - CONTINGENCIES
The Company is involved in legal actions in the normal course of business,
some of which seek substantial monetary damages, including claims for punitive
damages which are not covered by insurance. After review, including
consultation with counsel, management believes any ultimate liability in excess
of amounts accrued which could arise from the actions would not materially
affect the Company's consolidated financial position, results of operations or
cash flows.
7
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Part I: FINANCIAL INFORMATION
Item 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following table presents membership data by region and by consumer type as
of the dates indicated.
<TABLE>
<CAPTION>
AT DECEMBER 31, 1995 AT DECEMBER 31, 1994
- ------------------------------------------------------------------------------------------------------------------------------------
Government Government
(Medicare & (Medicare &
MEMBERSHIP DATA Commercial Medicaid) Total Commercial Medicaid) Total
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
California 842,427 393,283 1,235,710 638,090 313,960 952,050
Florida 53,452 8,307 61,759 56,768 11,549 68,317
Oklahoma 106,462 19,949 126,411 112,963 12,590 125,553
Oregon 96,913 44,406 141,319 67,105 40,639 107,744
Texas 86,662 52,485 139,147 62,419 38,557 100,976
Washington 71,779 40,307 112,086 33,274 17,047 50,321
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Total membership 1,257,695 558,737 1,816,432 970,619 434,342 1,404,961
- -------------------------------------------------------------------------------------------------------------
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</TABLE>
<TABLE>
<CAPTION>
Three months ended
OPERATING STATISTICS December 31,
------------------------------------------
1995 1994
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<S> <C> <C>
Medical loss ratio (health care services as a
percent of premium revenue) 85.0% 83.5%
Marketing, general and administrative expenses
as a percent of operating revenue 12.4% 13.8%
Operating income as a percent of operating revenue 3.3% 3.8%
- -------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------
</TABLE>
RESULTS OF OPERATIONS
Three Months Ended December 31, 1995
Compared to the
Three Months Ended December 31, 1994
Total operating revenue increased 30 percent to $1.1 billion for the three
months ended December 31, 1995 from $822 million for the same period in the
prior year. Enrollment growth in both the commercial and government programs,
offset slightly by decreases in commercial premium rates, provided an increase
in total operating revenue of $195 million. Membership growth is expected to
continue in both the commercial and government programs. However, fewer
acquisitions, increased competition for members and expected Medicaid
disenrollment in California and Florida, combined with a larger membership base
are expected to cause the rate of membership growth to decline from the rates
experienced in both programs in 1995. In addition, approximately $39.0 million
of the increase in total operating revenue represents the incremental operations
included in the three months ended December 31, 1995 of the Acquisitions
described in Note 2 of the Notes to the Condensed Consolidated Financial
Statements. The
8
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Company's specialty managed care products and services and its joint venture
medical groups contributed the remainder of the increase in operating revenue.
For the three months ended December 31, 1995, commercial premiums increased
$99 million or 30 percent to $431 million from $332 million for the same period
in the prior year. Commercial HMO membership increased approximately 287,000 or
30 percent to 1,258,000 members due to continued growth in California, Oregon,
Texas and Washington. The increase in membership includes the effects of
100,000 members acquired in California and Washington in fiscal year 1995.
Commercial HMO membership growth provided $59 million of the increase, more than
offsetting nominal premium rate decreases occurring primarily in Texas and
Washington. The effects of the acquisitions described above contributed $33
million. The commercial specialty managed care products and services and joint
venture medical groups provided the remainder of the increase in commercial
premiums. The Company expects the 1996 membership growth rate to be lower than
1995 because more competitors are offering consumers more choices with pricing
consistent with 1995 rates.
Government premiums rose $143 million or 30 percent to $621 million for the
three months ended December 31, 1995 from $478 million in the same period of
fiscal year 1995. Enrollment gains, primarily in the Medicare programs,
accounted for $133 million or 93 percent of the increase. The remainder of the
premium increase is attributable to incremental acquisitions and premium rate
increases averaging one percent. Effective January 1, 1996, the Company
received an average premium rate increase of approximately 5.6 percent from the
Health Care Financing Administration ("HCFA") for the areas in which the Company
operates its Medicare programs. HCFA rate increases will likely be offset by
reductions in member paid supplemental premiums.
Total health care service expenses as a percent of premium revenue (the
"medical loss ratio") for the quarter ended December 31, 1995, increased to 85.0
percent from 83.5 percent for the same period in the prior year. The commercial
medical loss ratio increased to 85.8 percent from 81.7 percent while the
government medical loss ratio decreased slightly to 84.4 percent from 84.8
percent for the same period in the prior year.
The increase in the commercial medical loss ratio is primarily due to
increased HMO health care costs combined with increased costs in the Company's
specialty managed care products and services, primarily preferred provider
organization ("PPO") and point of service ("POS") indemnity products. Compared
to the same period in the prior year, the commercial line of business is
experiencing higher prescription drug and physician capitation costs. In
addition, the Company's emphasis on PPO and POS products has resulted in a
change in estimate for reserves related to prior periods which increased the
commercial medical loss ratio. Consistent with historical trends, the
commercial medical loss ratio may decrease slightly in the second quarter. In
addition, the commercial medical loss ratio is expected to decrease over the
remainder of fiscal 1996 compared to December 31, 1995 results through lower
costs from new provider contracts effective January 1, 1996. However, the
fiscal 1996 commercial medical loss ratio is expected to be higher than the 82.5
percent experienced in 1995 as the Company augments its traditional HMO products
with other managed care options, including PPO and POS products.
The decrease in the medical loss ratio for the government programs for the
three months ended December 31, 1995, as compared to the same period of the
prior year, is primarily related to more cost effective physician and hospital
contracts. The medical loss ratio for the government programs is expected to
increase in the second quarter because lower member supplemental premiums and
enhanced benefits provided to enrollees to remain competitive will likely offset
January 1, 1996 HCFA premium rate increases. The fiscal 1996 medical loss ratio
for the government programs is expected to be comparable to or slightly higher
than the prior year rate.
Marketing, general and administrative expenses increased $19 million or 17
percent to $132 million for the three months ended December 31, 1995 from $113
million for the same period in 1994. As a percentage of operating revenue,
marketing, general and administrative expenses decreased to 12.4 percent from
13.8 percent for the same period in the prior year. Future marketing, general
and administrative expenses as a percentage of
9
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operating income are expected to increase over the remainder of fiscal year 1996
but for the entire year be slightly less than the prior year as a result of
productivity gains and benefits derived from economies of scale. The Company
will be transitioning staffing in several regions in anticipation of regional
customer service centers. This is expected to result in incremental costs but
provide long-term efficiencies.
Net income increased 39 percent to $28 million for the quarter ended
December 31, 1995 compared to $20 million in the same period in the prior year.
Earnings per share ("EPS") of $0.88 was 24 percent higher than the prior year's
quarterly EPS of $0.71. This increase reflects membership growth derived
substantially from the government programs and a lower government medical loss
ratio and was offset by the impact of the public offering in March 1995 which
increased the weighted average number of shares outstanding (See Note 4 of the
Notes to Condensed Consolidated Financial Statements).
The Company's ability to expand is affected by increasing competition not
only in product choices but also in the number of competitors in the Company's
service areas. Certain large employer groups and other purchasers of health
care services continue to demand minimal premium rate increases or reductions in
premium rates while limiting the number of choices offered to employees. In
addition, securing cost effective contracts with additional physicians is
becoming difficult due to increasing competition among HMOs for physician
contracts. The Company's profitability depends, in part, on its ability to
maintain effective control over health care costs while providing members with
quality care. Factors such as health care reform, levels of utilization of
health care services, new technologies, hospital costs, major epidemics, and
numerous other external influences may affect the Company's operating results.
The Company's expectations for the future described above are based on current
information and evaluation of external influences. Changes in any one factor
could materially impact the Company's expectations related to premium rates,
benefits offered, membership growth, the medical loss ratio and as a result,
profitability. Accordingly, past financial performance is not necessarily a
reliable indicator of future performance, and investors should not use
historical performance to anticipate results or future period trends.
LIQUIDITY AND CAPITAL RESOURCES
The Company's working capital as of December 31, 1995 was $358 million, an
increase of $37 million from September 30, 1995. The increase in working
capital is primarily attributable to results of operations. Cash generated from
operations increased by $26 million for the quarter ended December 31, 1995 as
compared to the same period in the prior year. This is the result of increases
in medical claims and benefits payable and unearned premium revenue as well as
net income.
The $30 million increase in medical claims and benefits payable is
primarily attributable to higher estimated claims. The increase in unearned
premium revenue occurred because the payment of $191 million for Medicare
premiums for January 1996 received from HCFA in December 1995 was $24 million
higher than a similar payment received in December 1994, primarily as a result
of membership growth.
The Company believes that its current capital resources, which includes the
$250 million line of credit with Bank of America National Trust and Savings
Association ("B of A"), are adequate to fund existing HMO operations, the
introduction of new products and services and the continued development of its
health care related businesses (see Note 3 - "Long-Term Debt" for a summary of
the terms of the B of A Credit Line).
In March 1996, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
Of," which requires impairment losses to be recorded on long-lived assets used
in operations when indicators of impairment are present and the undiscounted
cash flows estimated to be generated by those assets are less than the assets'
carrying amount. The statement also addresses the accounting for long-lived
assets that are expected to be disposed of. The Company will adopt SFAS No. 121
on October 1, 1996 and, based on current circumstances, does not believe the
effect of the adoption will be material.
10
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In October 1995, the FASB issued SFAS No. 123, "Accounting for Stock-Based
Compensation," which provides an alternative to Accounting Principles Board
("APB") Opinion No. 25, "Accounting for Stock Issued to Employees." SFAS No.
123 encourages, but does not require recognition of compensation expense for
grants of stock, stock options and other equity instruments to employees based
on the fair value. The statement also allows companies to continue to measure
compensation cost using the intrinsic value method of accounting prescribed by
APB Opinion No. 25. While recognition for employee stock-based compensation is
not mandatory, SFAS No. 123 requires companies that choose not to adopt the new
fair value accounting rules to disclose pro forma net income and earnings per
share under the new method. The Company intends to continue with the intrinsic
value based method prescribed by APB Opinion No. 25 and make proforma
disclosures of net income and EPS, as if the fair value based method of
accounting defined in SFAS No. 123 had been applied beginning on October 1,
1997.
11
<PAGE>
Part II. OTHER INFORMATION
Item 1: Legal Proceedings
None
Item 2: Changes in Securities
None
Item 3: Defaults Upon Senior Securities
None
Item 4: Submission of Matters to a Vote of Security Holders
None
Item 5: Other Information
None
Item 6: Exhibits and Reports
a) Exhibit Index
Exhibit 10.1 First Amendment, dated as of November
29, 1995, to the Credit Agreement, dated as of
November 30, 1994, among PacifiCare Health Systems,
Inc., the financial institutions named therein, The
Chase Manhattan Bank, N.A. and Citicorp USA, N.A., as
co-agents and Bank of America National Trust and
Savings Association, as administrative agent.
Exhibit 10.2 First Amendment, dated as of November
20, 1995, to the Second Amended and Restated 1989
Stock Option Plan for Officers and Key Employees of
PacifiCare Health Systems, Inc.
Exhibit 11A Computation of Net Income per Share
of Common Stock - Primary
Exhibit 11B Computation of Net Income per Share
of Common Stock - Fully Diluted
Exhibit 27 Financial Data Schedules
b) No reports on Form 8K were filed during the quarter for
which this report is filed.
12
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PACIFICARE HEALTH SYSTEMS, INC.
(Registrant)
Date: February 12, 1996 By: /s/ Alan Hoops
--------------------------- ----------------------------
Alan Hoops
President,
Chief Executive Officer
and Director
Date: February 12, 1996 By: /s/ Wayne Lowell
--------------------------- ----------------------------
Wayne Lowell
Executive Vice President,
Chief Administrative Officer
and Chief Financial Officer
13
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EXHIBIT 10.1
FIRST AMENDMENT TO
CREDIT AGREEMENT
This FIRST AMENDMENT TO CREDIT AGREEMENT ( "First Amendment") is entered
into as of November 29, 1995 by and among PACIFICARE HEALTH SYSTEMS, INC., a
Delaware corporation (the "Company"), each of the banks party hereto (the
"Banks"), BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION, as
administrative agent for the Banks (the "Agent"), and THE CHASE MANHATTAN BANK,
N.A. AND CITICORP USA, INC. as co-agents (the "co-agents"), and amends that
certain Credit Agreement dated as of November 30, 1994 among the Company, the
Banks, the Agent and the Co-Agents (the "Agreement"),
RECITAL
The Company has requested that the Maturity Date be extended for one year
and that, in view of the fact that it is no longer a Bank, all references to
NationsBank of Texas, N.A. as Co-Agent be deleted, and the Banks, the Agent and
the Co-Agents are willing to agree to the foregoing on the terms and conditions
set forth herein.
NOW, THEREFORE, in consideration of the premises and other good and
valuable consideration, the parties to the Agreement agree as follows:
1. TERMS . All terms used herein shall have the same meaning as in the
Agreement unless otherwise defined herein. All references to the Agreement shall
mean the Agreement as hereby amended.
2. AMENDATORY PROVISION TO AGREEMENT. The parties hereto agree that the
Agreement is amended as follows:
2.1 Section 1.l of the Agreement is amended by amending and restating the
definition of "Maturity Date" as follows:
"MATURITY DATE" shall mean November 30, 2000 unless extended pursuant
to Section 2.11 hereof."
2.2 All references to NationsBank of Texas, N.A., in the Agreement as
being a Co-Agent are deleted.
3. REPRESENTATIONS AND WARRANTIES. The Company hereby represents and
warrants to the Agent and the Banks that:
<PAGE>
3.1 AUTHORITY. The Company has all necessary power and has taken all
corporate action necessary to make this First Amendment, the Agreement, and all
other Loan Documents, the valid and enforceable obligations they purport to be.
3.2 NO LEGAL OBSTACLE TO AGREEMENT. Neither the execution of this First
Amendment, the making by the Company of any borrowings under the Agreement, nor
the performance of the Agreement has constituted or resulted in or will
constitute or result in a breach of the provisions of any contract to which the
Company or any of its Subsidiaries are a party, or the violation of any law,
judgment, decree or governmental order, rule or regulation applicable to the
Company or any of its Subsidiaries, or result in the creation under any
agreement or instrument of any security interest, lien, charge, or encumbrance
upon any of the assets of the Company or any of its Subsidiaries.
3.3 INCORPORATION OF CERTAIN REPRESENTATIONS. The representations and
warranties set forth in Section 7 of the Agreement are true and correct on and
as of the date hereof as though made on and as of the date hereof.
3.4 DEFAULT. No Default or Event of Default under the Agreement has
occurred and is continuing.
4. CONDITIONS EFFECTIVENESS. The effectiveness of this First Amendment
shall be subject to the compliance by the Company with its agreements herein
contained, and to the delivery of the following to the Agent:
4.1 CORPORATE RESOLUTION. A copy of a resolution or resolutions passed by
the Board of Directors of the Company, certified by the Secretary or an
Assistant Secretary of the company as being in full force and effect as of the
date of this First Amendment authorizing the execution, delivery and performance
of this First Amendment.
4.2 AUTHORIZED SIGNATORIES. A certificate, signed by the Secretary or an
Assistant Secretary of the Company and dated as of the date of this First
Amendment as to the incumbency of the person or persons authorized to execute
and deliver this First Amendment.
4.3 OTHER EVIDENCE. Such other evidence with respect to the Company or
any other person as the Agent or any Bank may reasonably request to establish
the consummation of the transactions contemplated hereby, the taking of all
corporate action in connection with this First Amendment and the Agreement and
the compliance with the conditions set forth herein.
- 2 -
<PAGE>
5. MISCELLANEOUS.
5.1 EFFECTIVENESS OF THE AGREEMENT. Except as hereby expressly amended,
the Agreement shall remain in full force and effect, and is hereby ratified and
confirmed in all respects.
5.2 NO WAIVER. This First Amendment is specific in time and in intent and
does not constitute, nor should it be construed as, a waiver of any right, power
or privilege under the Loan Documents, or under any agreement, contract,
indenture, document or instrument mentioned in the Loan Documents; nor does it
preclude any exercise thereof or the exercise of any other right, power or
privilege, nor shall any future waiver of any right, power, privilege or default
hereunder, or under any agreement, contract, indenture, document or instrument
mentioned in the Loan Documents, constitute a waiver of any other default of the
same or of any other term or provision.
5.3 COUNTERPARTS. This First Amendment may be executed in any number of
counterparts and all of such counterparts taken together shall be deemed to
constitute one and the same instrument. This First Amendment shall not become
effective until signed by the Company, the Agent and all Banks, whether the same
or counterparts, and the same shall have been delivered to the Agent.
5.4 JURISDICTION. This First Amendment, and any instrument or agreement
required hereunder, shall be governed by and construed under the laws of the
State of California.
IN WITNESS WHEREOF, the parties have caused this First Amendment to be
executed and delivered as of the date first set forth above.
PACIFICARE HEALTH SYSTEMS, INC.
By:______________________________
Name:____________________________
Title:___________________________
BANK OF AMERICA NATIONAL TRUST
AND SAVINGS ASSOCIATION, as Agent
By:______________________________
Vice President
(Signatures continue)
- 3 -
<PAGE>
BANKS
BANK OF AMERICA NATIONAL TRUST
AND SAVINGS ASSOCIATION, as Bank
By:______________________________
Vice President
THE CHASE MANHATTAN BANK, N.A.,
as a Co-Agent and as a Bank
By:______________________________
Title:___________________________
CITICORP USA, INC., as a Co-Agent
and as a Bank
By:______________________________
Title:___________________________
COOPERATIEVE CENTRALE RAINFEISEN-
BOERENLEENBANK B.A., "RABOBANK
NEDERLAND", NEW YORK BRANCH
By:______________________________
Title:___________________________
By:______________________________
Title:___________________________
- 4 -
<PAGE>
THE DAI-ICHI KANGYO BANK, LTD.
LOS ANGELES AGENCY
By:______________________________
Title:___________________________
FIRST INTERSTATE BANK OF
CALIFORNIA
By:______________________________
Title:___________________________
THE FIRST NATIONAL BANK OF
CHICAGO
By:______________________________
Title:___________________________
MELLON BANK, N.A.
By:______________________________
Title:___________________________
SANWA BANK CALIFORNIA
By:______________________________
Title:___________________________
- 5 -
<PAGE>
EXHIBIT 10.2
FIRST AMENDMENT TO
SECOND AMENDED AND RESTATED
1989 STOCK OPTION PLAN FOR
OFFICERS AND KEY EMPLOYEES OF
PACIFICARE HEALTH SYSTEMS, INC.
This First Amendment, dated as of November 20, 1995 (the "Amendment"), to
the Second Amended and Restated 1989 Stock Option Plan for Officers and Key
Employees of PacifiCare Health Systems, Inc. (the "1989 Plan") hereby amends the
1989 Plan as follows:
1. Section 4.2(b) shall be deleted and replaced with the following:
Subject to the provisions of Section 2.2, 4.2(a) , 4.2(c) and 8.2, Options
shall become exercisable at such times and in such installments (which may
be cumulative) as the Committee shall provide in the terms of each
individual Option; provided, however, that by a resolution adopted after an
Option is granted the Committee may in its absolute discretion, on such
terms and conditions as it may determine to be appropriate and subject to
Sections 4.2(a) and 4.2(c) accelerate the time at which such Option or any
portion thereof may be exercised.
2. Section 8.2 shall be deleted and replaced with the following:
Section 8.2 - Merger, Consolidation, Acquisition, Liquidation or
Dissolution
a. Notwithstanding anything to the contrary in Section 4.2(a), Section
4.2(b) or any vesting provisions of any Award, any Award outstanding under the
Plan which has been held for at least six months shall become exercisable
immediately upon the effective date of a "Change of Control." As used in this
Section 8.2, the term "Change of Control" shall mean the occurrence of any of
the following: (i) a business combination effectuated through the merger or
consolidation of the Company with or into another entity where the Company is
not the Surviving Organization; (ii) any business combination effectuated
through the merger or consolidation of the Company with or into another entity
where the Company is the Surviving Organization and such business combination
occurred with an entity whose market capitalization prior to the transaction was
greater than 50 percent of the Company's market capitalization prior to the
transaction; (iii) the sale in a transaction or series of transactions of all or
substantially all of the Company's assets; (iv) any "person" or "group" (within
the meaning of Sections 13(d)and 14(d) of the Act) other than UniHealth, a
California non-profit public benefit corporation ("UniHealth"), acquires
beneficial ownership (within the meaning of Rule 13d-3 of the Act), directly or
indirectly, of 20 percent or more of the voting common stock of the Company and
the beneficial ownership of the voting common stock of the Company owned by
UniHealth at that date is less than or equal to the beneficial ownership
interest of voting securities attributable to such other person or group; (v) a
dissolution or liquidation of the Company; or (vi) the Company ceases to be
subject to the reporting
- 1 -
<PAGE>
requirements of the Act as a result of a "going private transaction" (within the
meaning of the Act). For purposes hereof, "Surviving Organization" shall mean
any entity where the majority of the members of such entity's board of directors
are persons who were members of the Company's board of directors prior to the
merger, consolidation or other business combination and the senior management of
the surviving entity includes all of the individuals who were the Company's
executive management (the Company's chief executive officer and those
individuals who report directly to the Company's chief executive officer) prior
to the merger, consolidation or other business combination and such individuals
are in at least comparable positions with such entity.
b. The Committee may make such determinations and interpretations and
adopt such rules and conditions as it, in its absolute discretion, deems
appropriate in connection with a Change in Control and acceleration of
exercisability. All such determinations and interpretations by the Committee
shall be conclusive.
c. Each Participant shall receive at least 10 days' notice prior to the
effective date of the Change of Control that their Awards will be exercisable
upon the effective date of the Change of Control and the officers of the Company
shall make adequate provisions to permit all Participants to exercise their
Awards as of the effective date of the Change of Control.
- 2 -
<PAGE>
Exhibit 11A
PacifiCare Health Systems, Inc.
Computation of Net Income per Share of Common Stock -
Primary
(Dollars and shares in thousands, except per share amounts)
<TABLE>
<CAPTION>
Three months ended
December 31,
---------------------------------
1995 1994
- ----------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Shares outstanding at the beginning of the period 30,945 27,528
Weighted average number of shares issued during the period in
connection with compensation awarded in stock and exercise of
stock options 39 20
Dilutive shares issuable, net of shares assumed to have been
purchased (at the average market price) for treasury with
assumed proceeds from:
Contingent exercise of stock options 600 682
Registered equity purchase contracts 64 1
- ----------------------------------------------------------------------------------------------------------------
Total shares - primary 31,648 28,231
- ----------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------
Net income $ 27,979 $ 20,057
- ----------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------
Primary earnings per share $ 0.88 $ 0.71
- ----------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
14
<PAGE>
Exhibit 11B
PacifiCare Health Systems, Inc.
Computation of Net Income per Share of Common Stock -
Fully Diluted
(Dollars and shares in thousands, except per share amounts)
<TABLE>
<CAPTION>
Three months ended
December 31,
---------------------------------
1995 1994
- ----------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Shares outstanding at the beginning of the period 30,945 27,528
Weighted average number of shares issued during the period as a
result of compensation awarded in stock and exercise of stock
options 39 20
Dilutive shares issuable, net of shares assumed to have been
purchased (at the higher of average or ending market price) for
treasury with assumed proceeds from:
Contingent exercise of stock options 688 682
Registered equity purchase contracts 15 1
- ----------------------------------------------------------------------------------------------------------------
Total shares - fully diluted 31,687 28,231
- ----------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------
Net income $ 27,979 $ 20,057
- ----------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------
Fully diluted earnings per share $ 0.88 $ 0.71
- ----------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
15
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-30-1996
<PERIOD-START> OCT-01-1995
<PERIOD-END> DEC-31-1995
<CASH> 357,290
<SECURITIES> 541,017
<RECEIVABLES> 115,672
<ALLOWANCES> 845
<INVENTORY> 0
<CURRENT-ASSETS> 1,046,825
<PP&E> 178,074
<DEPRECIATION> 78,782
<TOTAL-ASSETS> 1,468,456
<CURRENT-LIABILITIES> 689,207
<BONDS> 11,063
0
0
<COMMON> 310
<OTHER-SE> 767,471
<TOTAL-LIABILITY-AND-EQUITY> 1,468,456
<SALES> 0
<TOTAL-REVENUES> 1,064,324
<CGS> 0
<TOTAL-COSTS> 894,709
<OTHER-EXPENSES> 0
<LOSS-PROVISION> (93)
<INTEREST-EXPENSE> (513)
<INCOME-PRETAX> 46,833
<INCOME-TAX> 18,854
<INCOME-CONTINUING> 27,979
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 27,979
<EPS-PRIMARY> 0.88
<EPS-DILUTED> 0.88
</TABLE>
