UNITED STATES
(Mark One)
| þ |
QUARTERLY REPORT PURSUANT TO SECTION 13
OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the Quarterly Period Ended September 30, 2003
OR
| o |
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 000-21949
PACIFICARE HEALTH SYSTEMS, INC.
|
Delaware
|
95-4591529 | |
|
(State or Other Jurisdiction of Incorporation or Organization) |
(IRS Employer Identification Number) |
5995 Plaza Drive, Cypress, California 90630-5028
(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 þ No o
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes þ No o
There were approximately 37,976,000 shares of common stock outstanding on October 31, 2003.
PACIFICARE HEALTH SYSTEMS, INC.
FORM 10-Q
INDEX
| Page | ||||||
| PART I. FINANCIAL INFORMATION | ||||||
|
Item 1.
|
Financial Statements | |||||
| Condensed Consolidated Balance Sheets as of September 30, 2003 and December 31, 2002 | 1 | |||||
| Condensed Consolidated Statements of Operations for the three months ended September 30, 2003 and 2002 | 2 | |||||
| Condensed Consolidated Statements of Operations for the nine months ended September 30, 2003 and 2002 | 3 | |||||
| Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2003 and 2002 | 4 | |||||
| Notes to Condensed Consolidated Financial Statements | 6 | |||||
|
Item 2.
|
Management’s Discussion and Analysis of Financial Condition and Results of Operations | 24 | ||||
|
Item 3.
|
Quantitative and Qualitative Disclosures About Market Risk | 45 | ||||
|
Item 4.
|
Controls and Procedures | 46 | ||||
| PART II. OTHER INFORMATION | ||||||
|
Item 1.
|
Legal Proceedings | 47 | ||||
|
Item 2.
|
Changes in Securities/ Recent Sales of Unregistered Securities | 47 | ||||
|
Item 3.
|
Defaults Upon Senior Securities | 47 | ||||
|
Item 4.
|
Submission of Matters to a Vote of Security Holders | 47 | ||||
|
Item 5.
|
Other Information | 47 | ||||
|
Item 6.
|
Exhibits and Reports on Form 8-K | 48 | ||||
| Signatures | 52 | |||||
| Exhibits | 53 | |||||
i
PART I. FINANCIAL INFORMATION
| Item 1: | Financial Statements |
PACIFICARE HEALTH SYSTEMS, INC.
| September 30, | December 31, | |||||||||
| 2003 | 2002 | |||||||||
| (unaudited) | ||||||||||
| ASSETS | ||||||||||
|
Current assets:
|
||||||||||
|
Cash and equivalents
|
$ | 706,859 | $ | 951,689 | ||||||
|
Marketable securities
|
1,335,199 | 1,195,517 | ||||||||
|
Receivables, net
|
290,892 | 289,900 | ||||||||
|
Prepaid expenses and other current assets
|
50,429 | 46,805 | ||||||||
|
Restricted cash collateral for FHP senior notes
|
— | 43,346 | ||||||||
|
Deferred income taxes
|
109,004 | 100,758 | ||||||||
|
Total current assets
|
2,492,383 | 2,628,015 | ||||||||
|
Property, plant and equipment at cost, net
|
146,807 | 161,685 | ||||||||
|
Marketable securities-restricted
|
168,552 | 186,189 | ||||||||
|
Goodwill, net
|
983,104 | 983,104 | ||||||||
|
Intangible assets, net
|
226,539 | 243,016 | ||||||||
|
Other assets
|
76,092 | 49,124 | ||||||||
| $ | 4,093,477 | $ | 4,251,133 | |||||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||||
|
Current liabilities:
|
||||||||||
|
Medical claims and benefits payable
|
$ | 1,038,300 | $ | 1,044,500 | ||||||
|
Accounts payable and accrued liabilities
|
482,850 | 438,642 | ||||||||
|
Unearned premium revenue
|
61,554 | 479,552 | ||||||||
|
Current portion of long-term debt
|
6,232 | 107,235 | ||||||||
|
Total current liabilities
|
1,588,936 | 2,069,929 | ||||||||
|
Long-term debt
|
652,067 | 596,961 | ||||||||
|
Convertible subordinated debentures
|
135,000 | 135,000 | ||||||||
|
Deferred income taxes
|
100,862 | 103,790 | ||||||||
|
Other liabilities
|
24,729 | 17,148 | ||||||||
|
Stockholders’ equity:
|
||||||||||
|
Common stock, $0.01 par value; 200,000 shares
authorized; issued 49,598 in 2003 and 47,709 shares in 2002
|
496 | 477 | ||||||||
|
Unearned compensation
|
(18,578 | ) | (2,000 | ) | ||||||
|
Additional paid-in capital
|
1,625,096 | 1,560,785 | ||||||||
|
Accumulated other comprehensive income
|
23,850 | 21,730 | ||||||||
|
Retained earnings
|
561,627 | 350,369 | ||||||||
|
Treasury stock, at cost; 11,657 shares in 2003
and 11,704 shares in 2002
|
(600,608 | ) | (603,056 | ) | ||||||
|
Total stockholders’ equity
|
1,591,883 | 1,328,305 | ||||||||
| $ | 4,093,477 | $ | 4,251,133 | |||||||
See accompanying notes.
1
PACIFICARE HEALTH SYSTEMS, INC.
| Three Months Ended | ||||||||||
| September 30, | ||||||||||
| 2003 | 2002 | |||||||||
|
Revenue:
|
||||||||||
|
Commercial
|
$ | 1,264,072 | $ | 1,201,617 | ||||||
|
Senior
|
1,334,318 | 1,452,814 | ||||||||
|
Specialty and other
|
127,577 | 104,492 | ||||||||
|
Net investment income
|
16,200 | 20,822 | ||||||||
|
Total operating revenue
|
2,742,167 | 2,779,745 | ||||||||
|
Expenses:
|
||||||||||
|
Health care services and other:
|
||||||||||
|
Commercial
|
1,056,512 | 1,052,143 | ||||||||
|
Senior
|
1,130,124 | 1,231,019 | ||||||||
|
Specialty and other
|
66,019 | 41,883 | ||||||||
|
Total health care services and other
|
2,252,655 | 2,325,045 | ||||||||
|
Selling, general and administrative expenses
|
364,257 | 364,705 | ||||||||
|
Operating income
|
125,255 | 89,995 | ||||||||
|
Interest expense
|
(16,924 | ) | (20,205 | ) | ||||||
|
Income before income taxes
|
108,331 | 69,790 | ||||||||
|
Provision for income taxes
|
40,841 | 26,031 | ||||||||
|
Net income
|
$ | 67,490 | $ | 43,759 | ||||||
|
Basic earnings per share
|
$ | 1.83 | $ | 1.23 | ||||||
|
Diluted earnings per share
|
$ | 1.72 | $ | 1.20 | ||||||
See accompanying notes.
2
PACIFICARE HEALTH SYSTEMS, INC.
| Nine Months Ended | ||||||||||
| September 30, | ||||||||||
| 2003 | 2002 | |||||||||
|
Revenue:
|
||||||||||
|
Commercial
|
$ | 3,733,378 | $ | 3,584,003 | ||||||
|
Senior
|
4,059,687 | 4,478,589 | ||||||||
|
Specialty and other
|
363,912 | 307,458 | ||||||||
|
Net investment income
|
55,019 | 42,506 | ||||||||
|
Total operating revenue
|
8,211,996 | 8,412,556 | ||||||||
|
Expenses:
|
||||||||||
|
Health care services and other:
|
||||||||||
|
Commercial
|
3,156,147 | 3,148,404 | ||||||||
|
Senior
|
3,427,000 | 3,917,067 | ||||||||
|
Specialty and other
|
191,767 | 127,925 | ||||||||
|
Total health care services and other
|
6,774,914 | 7,193,396 | ||||||||
|
Selling, general and administrative expenses
|
1,041,100 | 995,348 | ||||||||
|
Impairment, disposition, restructuring, Office of
Personnel Management and other charges (credits), net
|
— | 5,485 | ||||||||
|
Operating income
|
395,982 | 218,327 | ||||||||
|
Interest expense
|
(56,884 | ) | (55,351 | ) | ||||||
|
Income before income taxes
|
339,098 | 162,976 | ||||||||
|
Provision for income taxes
|
127,840 | 60,790 | ||||||||
|
Income before cumulative effect of a change in
accounting principle
|
211,258 | 102,186 | ||||||||
|
Cumulative effect of a change in accounting
principle
|
— | (897,000 | ) | |||||||
|
Net income (loss)
|
$ | 211,258 | $ | (794,814 | ) | |||||
|
Basic earnings (loss) per share:
|
||||||||||
|
Income before cumulative effect of a change in
accounting principle
|
$ | 5.79 | $ | 2.91 | ||||||
|
Cumulative effect of a change in accounting
principle
|
— | (25.57 | ) | |||||||
|
Basic earnings (loss) per share
|
$ | 5.79 | $ | (22.66 | ) | |||||
|
Diluted earnings (loss) per share:
|
||||||||||
|
Income before cumulative effect of a change in
accounting principle
|
$ | 5.52 | $ | 2.91 | ||||||
|
Cumulative effect of a change in accounting
principle
|
— | (25.57 | ) | |||||||
|
Diluted earnings (loss) per share
|
$ | 5.52 | $ | (22.66 | ) | |||||
See accompanying notes.
3
PACIFICARE HEALTH SYSTEMS, INC.
| Nine Months Ended | ||||||||||||
| September 30, | ||||||||||||
| 2003 | 2002 | |||||||||||
|
Operating activities:
|
||||||||||||
|
Net income (loss)
|
$ | 211,258 | $ | (794,814 | ) | |||||||
|
Adjustments to reconcile net income
(loss) to net cash flows used in operating activities:
|
||||||||||||
|
Depreciation and amortization
|
34,465 | 38,083 | ||||||||||
|
Loss (gain) on disposal of property, plant
and equipment
|
18,345 | (1,737 | ) | |||||||||
|
Amortization of intangible assets
|
16,477 | 17,721 | ||||||||||
|
Stock-based compensation expense
|
13,135 | 466 | ||||||||||
|
Deferred income taxes
|
(12,119 | ) | 30,572 | |||||||||
|
Tax benefit realized for stock option exercises
|
7,708 | 289 | ||||||||||
|
Amortization of capitalized loan fees
|
6,376 | 6,623 | ||||||||||
|
Amortization of notes receivable from sale of
fixed assets
|
(4,188 | ) | (2,291 | ) | ||||||||
|
Provision for doubtful accounts
|
3,479 | 15,863 | ||||||||||
|
Employee benefit plan contributions in treasury
stock
|
1,363 | 9,586 | ||||||||||
|
Amortization of discount on 10 3/4% senior
notes
|
327 | 109 | ||||||||||
|
Cumulative effect of a change in accounting
principle
|
— | 897,000 | ||||||||||
|
Marketable and other securities impairment for
other than temporary declines in value
|
— | 12,543 | ||||||||||
|
Impairment, disposition, restructuring, Office of
Personnel Management and other credits, net
|
— | 5,485 | ||||||||||
|
Adjustment to cash received in purchase
transaction
|
— | 17 | ||||||||||
|
Changes in assets and liabilities:
|
||||||||||||
|
Receivables, net
|
(283 | ) | 45,235 | |||||||||
|
Prepaid expenses and other assets
|
(29,923 | ) | (14,536 | ) | ||||||||
|
Medical claims and benefits payable
|
(6,200 | ) | (34,600 | ) | ||||||||
|
Accounts payable and accrued liabilities:
|
||||||||||||
|
Payments for Office of Personnel Management
settlement, net of amounts received
|
(10,000 | ) | (54,123 | ) | ||||||||
|
Other changes in accounts payable and accrued
liabilities
|
66,817 | 101,733 | ||||||||||
|
Unearned premium revenue
|
(417,998 | ) | (486,871 | ) | ||||||||
|
Net cash flows used in operating activities
|
(100,961 | ) | (207,647 | ) | ||||||||
|
Investing activities:
|
||||||||||||
|
Purchase of marketable securities, net
|
(136,617 | ) | (79,128 | ) | ||||||||
|
Purchase of property, plant and equipment
|
(37,047 | ) | (42,978 | ) | ||||||||
|
Sale (purchase) of marketable
securities-restricted
|
17,637 | (75,661 | ) | |||||||||
|
Proceeds from the sale of property, plant and
equipment
|
21 | 12,412 | ||||||||||
|
Net cash flows used in investing activities
|
(156,006 | ) | (185,355 | ) | ||||||||
Table continued on next page.
See accompanying notes.
4
PACIFICARE HEALTH SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
| Nine Months Ended | |||||||||||
| September 30, | |||||||||||
| 2003 | 2002 | ||||||||||
|
Financing activities:
|
|||||||||||
|
Principal payments on senior credit facility
|
$ | (150,585 | ) | $ | (491,784 | ) | |||||
|
Proceeds from senior credit facility
|
150,000 | — | |||||||||
|
Principal payments on FHP senior notes
|
(43,250 | ) | (41,750 | ) | |||||||
|
Use of restricted cash collateral for payment of
FHP senior notes
|
43,250 | — | |||||||||
|
Proceeds from issuance of common stock
|
22,966 | 2,683 | |||||||||
|
Loan fees
|
(6,949 | ||||||||||