The Company owns an office building of approximately 200,000 square feet on approximately 9.2 acres of land in Cypress, California which serves as the executive and administrative offices of its California HMO operation. The Company also owns a fifty percent interest in a parcel of undeveloped land of approximately 8.5 acres in Cypress, California. Additionally, the Company owns a child care facility on one acre of land in Cypress, California and an office building on 1.4 acres on land in Tustin, California.
The following selected financial and operating data are derived from the audited financial statements of the Company and its subsidiaries. The selected financial and operating data should be read in conjunction with "
Total operating revenue increased 30 percent or $672 million to $2.9 billion for the year ended September 30, 1994 from $2.2 billion for the same period in the prior year. Enrollment gains in both the government (Medicare and Medicaid) and commercial programs provided an increase in total operating revenue of $451 million, while an additional $77 million was derived from higher premium rates in both programs. In addition, approximately $106 million of the increase in total operating revenue represents the incremental operations of acquisitions described in Note 5 of the Notes to Consolidated Financial Statements. The Company's specialty managed care products and services and its joint venture medical groups contributed the remainder of the increase.
Commercial premiums increased $191 million to $1.2 billion for the year ended September 30, 1994 from $1 billion in the prior year. Excluding the effects of acquisitions described above, membership growth provided 46 percent of the increase in the commercial HMO program. An additional 21 percent of the increase is attributable to higher premium rates, which rose an average of three percent. Commercial HMO premium rates are expected to remain flat or decrease slightly in the next enrollment period due to increasing competitive pressures in the Company's markets. The remainder of the increase in commercial premiums was derived from commercial specialty managed care products and services and joint venture medical groups.
Total health care service expenses as a percent of premium revenue (the "medical loss ratio"; see Item 6. Selected Financial Data, page 13) for the year ended September 30, 1994, have decreased to 83.1 percent from 84.1 percent for the same period in the prior year. The commercial medical loss ratio decreased to 80.5 percent from 82.5 percent while the government medical loss ratio declined slightly to 85.2 percent from 85.6 percent. The Company expects to experience upward pressure on the consolidated medical loss ratio into fiscal 1995. Because the government program has a higher medical loss ratio and continues to grow at a faster rate than the commercial program, a higher consolidated medical loss ratio is expected. In addition, pricing pressures are expected to result in a higher commercial medical loss ratio. The government medical loss ratio is expected to remain flat because premium increases are expected to be offset by enhanced benefits and increased health care costs in new geographic markets.
Commercial net positive reserve adjustments for each of the years ended September 30, 1994 and 1993 totaled $4 million. Government net positive reserve adjustments for year ended September 30, 1994 increased to $5 million compared to $2 million for the same period in the prior year.
Net interest income increased by approximately $3.5 million primarily due to increased cash generated by operations and available for investment purposes offset by interest expense from higher levels of borrowings made throughout the year. Interest expense is expected to increase due to higher levels of borrowings under new credit facilities (see Liquidity and Capital Resources).
For the year ended September 30, 1994, before the cumulative effect of a change in accounting principle, earnings per share increased 34 percent to $3.02 compared to $2.25 for 1993. The increase is primarily related to membership growth derived substantially from the government programs. Decreases in health care service expenses were partially offset by increases in marketing, general and administrative expenses. The results for the years ended September 30, 1994 and 1993 include approximately $0.18 and $0.12, respectively, related to the net positive reserve adjustments previously described. Changes in income tax accounting principles (see Note 9 of the Notes to Consolidated Financial Statements) increased earnings per share by approximately $0.20, resulting in earnings per share of $3.22 for the year ended September 30, 1994.
In the Company's HMOs, enrollment gains in both the commercial and government programs provided an increase in total operating revenue of $345 million while an additional $143 million was derived from higher premium rates for both programs. The government programs contributed 73 percent of the increase in total operating revenue attributable to the Company's HMOs. Approximately $29 million of the increase in operating revenue represents an incremental two months of Health Plan of America's ("HPA") operations because a full year of operations is included in 1993 versus ten months in 1992.
Commercial premiums increased $156 million to $1 billion for the year ended September 30, 1993 from $890 million in the prior year. The effects of the HPA acquisition, described above, and membership growth provided 62 percent of the increase in the commercial program. The rate of commercial membership growth improved slightly over the prior year due to our expansion of the Texas and Oregon operations and continued California growth. Higher premium rates, which rose an average of five percent, contributed 33 percent of the increase. The remaining increase was attributable to specialty managed care products and services revenue.
Government premiums increased $369 million to $1.2 billion for the year ended September 30, 1993 from $785 million in the prior year. Enrollment gains accounted for 75 percent of this increase. Average premium rate increases of nine percent accounted for the remainder of the change.
The medical loss ratio for the year ended September 30, 1993 increased to 84.1 percent from 83.2 percent for the prior year. The health care service expenses for each of the years ended September 30, 1993 and 1992 reflected the impact of net positive reserve adjustments of approximately $6 million comparable to those in 1994 as described above. The commercial medical loss ratio increased to 82.5 percent compared to a ratio of 80.2 percent in 1992 while the government medical loss ratio declined slightly to 85.6 percent from 86.6 percent.
Earnings per share rose 26 percent to $2.25 for the year ended September 30, 1993 compared to $1.78 for 1992. Several factors contributed to the increase in earnings per share. Premium increases and membership growth derived substantially from the government program generated higher operating revenue. A decrease in marketing, general and administrative expenses as a percentage of operating revenue was partially offset by an increase in the consolidated medical loss ratio. The earnings per share for the years ended September 30, 1993 and 1992 included approximately $0.12 and $0.14, respectively, related to net positive reserve adjustments previously described. The results for the year ended September 30, 1993 also included the write-off of net intangible assets which reduced earnings per share by approximately $0.03 (see Note 2d of the Notes to Consolidated Financial Statements).
The Company's working capital as of September 30, 1994 was $231 million, an increase of $68 million from the prior year. The increase is primarily attributable to borrowings of long-term debt of $82 million, discussed below, and increases in cash generated from operations partially offset by acquisitions made with cash. The total purchase price for completed acquisitions described in Note 5 of the Notes to Consolidated Financial Statements is expected to be approximately $108 million, $88 million of which has been paid to date. Completed acquisitions have been financed through the sale of certain of the Company's investments in marketable securities and borrowings under its long term line of credit. The remainder of the purchase price will be paid in calendar year 1995 if certain contingent events occur.
In January, 1994, the Company established a $130 million revolving line of credit with The Chase Manhattan Bank and a syndicate of banks (see Note 6 of the Notes to Consolidated Financial Statements, page 28). The Company is currently negotiating a $250 million revolving line of credit with Bank of America and a syndicate of banks. Most of the
banks in the current syndicate will participate in the new syndicate. The Company anticipates that this new credit line will be in place by December 1994. The Company believes that its current capital resources are adequate to fund its existing HMO operations, the introduction of new products and services and the continued development of its health care-related businesses. The Credit Line enhances the Company's ability to introduce new products and services, expand geographic markets and consummate acquisitions.
In May 1993, the Financial Accounting Standards Board issued SFAS No. 115, "Accounting for Certain Investments in Debt and Equity Securities," which is effective for fiscal years beginning after December 15, 1993. The Company adopted SFAS No. 115 on October 1, 1994. All current, unrestricted investments in debt securities have been designated as "available-for-sale." Marketable securities - restricted have been designated as "held to maturity" and continue to be stated at amortized cost. The cumulative effect of this change in accounting principle in the first quarter of fiscal year 1995 is a decrease to marketable securities of $6.3 million, a decrease to shareholders' equity of $3.8 million and an increase to deferred tax assets of $2.5 million.
b) Marketable Securities. Marketable securities comprise municipal bonds, corporate notes, commercial paper and U.S. Treasury securities. These investments are stated at amortized cost. The market value was $511.7 million and $419.7 million, respectively at September 30, 1994 and 1993. Marketable securities-restricted comprise U. S. Government securities and certificates of deposit held by trustees or state regulatory agencies. These securities are stated at amortized cost which approximates market value.
In May 1993, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 115, "Accounting for Certain Investments in Debt and Equity Securities," which is effective for fiscal years beginning after December 15, 1993. The statement addresses the accounting and reporting for investments in equity and debt securities. The Company adopted SFAS No. 115 on October 1, 1994. All current unrestricted investments have been designated as "available for sale." Marketable securities-restricted have been designated as held to maturity and continue to be stated at amortized cost. The cumulative effect of this change in accounting principle in the first quarter of fiscal year 1995 is a decrease to marketable securities of $6.3 million, a decrease to shareholders' equity of $3.8 million and an increase to deferred tax assets of $2.5 million.
Property, plant and equipment are depreciated using the straight-line method for financial reporting purposes over estimated useful lives ranging from five to twenty-five years. Leasehold improvements are amortized using the straight-line method over the term of the lease or ten years, whichever is shorter.
f) Premiums and Revenue Recognition. Prepaid health care premiums from the Company's HMOs' enrolled groups are reported as revenue in the month in which enrollees are entitled to receive health care. Premiums received prior to such period are recorded as unearned premium revenue. Approximately 57 percent, 52 percent, and 47 percent of the Company's premium revenue in the years ended September 30, 1994, 1993 and 1992, respectively, were derived from funds received under the Federal Medicare program.
g) Health Care Services. The Company's HMOs arrange for comprehensive health care services to their members principally through capitation, a fixed, monthly payment made without regard to the frequency, extent or nature of the health care services actually furnished. Benefits are provided to enrolled members generally through the Company's contractual relationships with physician groups and hospitals. The Company's contracted providers may, in turn, contract with specialists or referral providers for specific services and are responsible for any related payments to those referral providers.
programs, which are based in part on estimates, are recorded in the period in which the related services are dispensed.
The Company completed several acquisitions during the year ended September 30, 1994. In October 1993, the Company acquired certain assets including approximately 14,000 members from Freedom Plan, Inc. In November 1993, the Company acquired all of the issued and outstanding capital stock of each of California Dental Health Plan, Inc. ("CDHP") and Dental Plan Administrators ("DPA"). CDHP is a licensed provider of prepaid dental and optometric benefits for individuals and groups, and DPA is an affiliated company of CDHP that provides administrative services to CDHP and other companies. In December 1993, the Company acquired all of the issued and outstanding capital stock of Advantage Health Plans, Inc., a Miami-based HMO with approximately 20,000 members. In February 1994, the Company acquired all of the issued and outstanding capital stock of Preferred Health Resources, Inc. ("PHRI"), a Seattle-based corporation. PHRI owns all of the issued and outstanding capital stock of Network Health Plan, Inc., a Seattle-based health care services contractor with approximately 28,000 members, and Network Management Incorporated, an affiliated company that provides administrative services to the health plan and other companies. In September 1994, the Company acquired all of the issued and outstanding capital stock of Pasteur Health Plans, Inc. ("PHP"), Pasteur Delivery Systems, Inc. ("PDS") and Interstate Medical Equipment, Inc. ("IME"). PHP is a Miami-based HMO with approximately 50,000 members. PDS and IME are affiliated companies of PHP that provide medical and administrative services to PHP and other companies.
The total purchase price for these acquisitions is expected to be approximately $108 million. Of the total purchase price, $88 million has been paid to date. The contingent purchase payments for these acquisitions will be paid in 1995 if certain events occur. Based on the fair values of assets acquired and liabilities assumed in connection with these acquisitions, the preliminary estimate of excess purchase price is approximately $91 million. A final allocation of purchase price will be determined when appraisals and other studies are completed and contingent purchase payments are determined. The transactions 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 the excess purchase price is made over a period not to exceed forty years.
Both the debt agreement for $15 million of 8.80 percent privately placed senior debt and the Credit Line include financial covenants requiring a minimum consolidated net worth, a minimum fixed charge coverage ratio and a maximum leverage ratio. Based on the borrowing rates currently available to the Company for loans with similar terms and average maturities, the aggregate fair value of the Credit Line and 8.80 percent privately placed senior debt is approximately $98 million.
Capitalized leases relate to equipment included in the accompanying consolidated balance sheets at a cost of $17,526,000 and $13,257,000 at September 30, 1994 and 1993, respectively. Accumulated amortization related to this equipment totaled $8,188,000 and $3,368,000 at September 30, 1994 and 1993, respectively. These leases require future payments including interest totaling $10,130,000 at September 30, 1994 through the end of the lease terms.
On February 23, 1993, the Board of Directors authorized the purchase of a total of up to 500,000 shares of the Company's Class B Common Stock in the open market subject to market conditions; such shares are to be retired upon purchase. This program was formally terminated by the Board of Directors of the Company on April 28, 1994. Through that date, the Company had purchased and retired 295,700 shares at an average price of $31.29 per share.
In November 1992, the Company completed a public offering of 3,200,000 shares of Class B Common Stock, of which 1,600,000 shares were sold by the Company and 1,600,000 shares were sold by UniHealth. The net proceeds received by the Company from the sale of the 1,600,000 shares of Class B Common Stock offered by the Company were approximately $59 million after deducting underwriting discounts and commissions, and expenses of the offering
In July 1992, the Company completed a public offering of 3,450,000 shares of Class B Common Stock, of which 1,725,000 shares were sold by the Company and 1,725,000 shares were sold by UniHealth. The net proceeds received by the Company from the sale of the 1,725,000 shares of Class B Common Stock offered by the Company were approximately $38 million after deducting underwriting discounts and commissions and expenses of the offering.
In connection with the Reclassification Amendment, the Company declared a stock dividend to holders of record of the Class A Common Stock on June 5, 1992, payable on June 10, 1992, consisting of one share of Class B Common Stock for each share of Class A Common Stock then outstanding. The stock dividend had the same effect on the total number of shares of common stock and equivalents outstanding as a two-for-one stock split. All earnings per share calculations, as well as share and per share data, have been adjusted to reflect the stock split on a retroactive basis.
UniHealth purchased health care coverage from the Company in the amounts of $10,050,000, $7,312,000 and $6,169,000 for the years ended September 30, 1994, 1993 and 1992, respectively. Amounts receivable from UniHealth were $1,000,000 and $729,000 at September 30, 1994 and 1993, respectively.
Prior to the change in accounting principle, the sources of differed tax items and the corresponding tax effects during the fiscal years ended September 30, 1993 and 1992 were as follows:
a) Savings and Profit-Sharing Plan. The Company has an employee profit- sharing plan covering substantially all full-time employees, which provides for annual contributions by the Company of two percent of the annual compensation of employees and additional amounts determined by the Board of Directors which are generally
b) Stock Option Plans. The Company has granted stock options for employees and Directors under various plans including the Stock Option Plan for Executive and Key Employees, as amended (the "1985 Plan"), the Amended and Restated 1989 Stock Option Plan for Officers and Key Employees, as amended (the "1989 Employee Plan"), the 1989 Non-Officer Directors Stock Option Plan (the "1989 Director Plan") and the 1992 Non-Officer Directors Stock Option Plan (the "1992 Director Plan").
committee may adjust individual awards to reflect an overall evaluation of performance. For fiscal years ended September 30, 1994, 1993 and 1992, the incentive compensation expense for this program was $2,500,000, $1,854,000 and $3,600,000, respectively.
The Company also has an annual incentive compensation program. All Executive Officers of the Company or any subsidiary of the Company are eligible to participate and any officer or full-time employee of the Company or any subsidiary of the Company, determined by the Committee to have a direct, significant and measurable impact on the attainment of the Company's or subsidiary's annual growth and profitability objectives is eligible to participate. Within these parameters, the Committee has total discretion over which participants are eligible to receive awards. Incentive compensation is based on the achievement of objectives established by the Committee and approved by the shareholders of the Company. Performance objectives are based on earnings per share. The Committee may make additional awards to participants who are determined by the Committee to have positively impacted directly on the attainment of the performance objectives established by the Committee. Amounts charged to expense for such programs were $7,048,000, $2,229,000 and $7,400,000 for the years ended September 30, 1994, 1993 and 1992, respectively.
a) Lease Commitments. The Company leases office space under various non- cancelable operating leases. Rental expense for the years ended September 30, 1994, 1993 and 1992 totaled $10,170,000, $8,140,000 and $7,269,000, respectively. Future minimum lease payments under operating leases at September 30, 1994 are as follows:
b) Employment Agreements. The Company has entered into an employment agreement with the Chairman, the President of the Company and four other officers. The agreements contain provisions that would entitle each to receive severance benefits which are payable if employment is terminated for various reasons, including termination following a change of ownership or control of the Company as defined by the agreements. The maximum contingent liability for severance payments that the Company would be required to make under the employment agreements (excluding amounts which may be payable under incentive plans and the value of certain benefits) would be approximately $3,400,000 at September 30, 1994.
Financial instruments which potentially subject the Company to concentrations of credit risk consist primarily of short-term investments in marketable securities and commercial premiums receivable. The Company's short-term investments in marketable securities are managed by professional investment managers within guidelines established by the Board of Directors, which, as a matter of policy, limit the amounts which may be invested in any one issuer. Concentrations of credit risk with respect to commercial premiums receivable are limited due to the large number of employer groups comprising the Company's customer base. As of September 30, 1994, the Company had no significant concentrations of credit risk.
As discussed in Note 2 to the Consolidated Financial Statements, as of October 1, 1993 the Company changed its method of accounting for income taxes.