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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K/A
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): February 14, 1997
PACIFICARE HEALTH SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
Delaware 000-21949 95-4591529
(State or other jurisdiction of (Commission (IRS Employer
incorporation or organization) File Number) Identification Number)
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
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ITEM 2. ACQUISITION OR DISPOSITION OF ASSETS.
On February 14, 1997, pursuant to an Amended and Restated Agreement and
Plan of Reorganization dated as of November 11, 1996 (the "Reorganization
Agreement"), among PacifiCare Health Systems, Inc., formerly named N-T Holdings,
Inc., a Delaware corporation ("PacifiCare Holding" or the "Company"), PacifiCare
Operations, Inc., formerly named PacifiCare Health Systems, Inc., a Delaware
corporation ("PacifiCare"), FHP International Corporation, a Delaware
corporation ("FHP"), Neptune Merger Corp., a Delaware corporation and wholly
owned subsidiary of PacifiCare Holding ("PacifiCare Merger Sub"), and Tree
Acquisition Corp., a Delaware corporation and a wholly owned subsidiary of
PacifiCare Holding ("FHP Merger Sub"), PacifiCare Merger Sub merged with and
into PacifiCare (the "PacifiCare Merger") and FHP Merger Sub merged with and
into FHP (the "FHP Merger"). The PacifiCare Merger and the FHP Merger shall
together be referred to herein as the "Mergers." The purpose of the Mergers
was, among other things, to provide for an acquisition transaction involving
PacifiCare and FHP.
The Mergers became effective at the time of filing of Certificates of
Merger with the Delaware Secretary of State on February 14, 1997 (the "Effective
Time"). At the Effective Time: (a) FHP Merger Sub and PacifiCare Merger Sub
ceased to exist; (b) FHP, as the surviving corporation in the FHP Merger, and
PacifiCare, as the surviving corporation in the PacifiCare Merger, became wholly
owned subsidiaries of PacifiCare Holding; and (c) the name of PacifiCare Holding
was changed from "N-T Holdings, Inc." to "PacifiCare Health Systems, Inc.,"
while the name of PacifiCare was changed from "PacifiCare Health Systems, Inc."
to "PacifiCare Operations, Inc."
Additionally, at the Effective Time, pursuant to Section 1.5 of the
Reorganization Agreement, the following share conversions took place: (a) each
outstanding share of the Class A Common Stock, par value $0.01 per share, of
PacifiCare (the "PacifiCare Class A Common Stock") was exchanged for one share
of the Class A Common Stock, par value $0.01 per share, of PacifiCare Holding
(the "PacifiCare Holding Class A Common"); (b) each outstanding share of the
Class B Common Stock, par value $0.01 per share, of PacifiCare (the "PacifiCare
Class B Common Stock") was exchanged for one share of the Class B Common Stock,
par value $0.01 per share, of PacifiCare Holding (the "PacifiCare Holding Class
B Common"); (c) each outstanding share of the Common Stock, par value $0.05 per
share, of FHP (the "FHP Common Stock") was exchanged for $17.50 in cash, 0.056
shares of PacifiCare Holding Class A Common and 0.176 shares of PacifiCare
Holding Class B Common; and (d) each outstanding share of the Series A
Cumulative Convertible Preferred Stock, par value $0.05 per share, of FHP (the
"FHP Preferred Stock") was exchanged for $14.113 in cash and one-half of one
share of Series A Cumulative Convertible Preferred Stock, par value $0.01 per
share, of PacifiCare Holding (the "PacifiCare Holding Series A Preferred").
Further, as soon after the Effective Time as legally permitted, former holders
of FHP Common Stock and of FHP Preferred Stock will receive rights (the "Talbert
Rights") to acquire common stock of Talbert Medical Management Holdings
Corporation ("TMMHC" or "Talbert"). Present expectations are that the offering
of the Talbert Rights (the "Talbert Rights Offering") will commence in April
1997, shortly after the Talbert S-1 (as defined herein) becomes effective.
The principles determining the conversion of shares pursuant to the
effectuation of the Mergers are set forth in the subsection entitled "Merger
Consideration" in the section entitled "The Mergers and Related Transactions"
of the prospectus included in the Registration Statement on Form S-4 (No.
333-16271), as amended, filed by PacifiCare Holding with the Securities and
Exchange Commission on November 26, 1996 pursuant to Rule 424(b)(3)
promulgated under the Securities Act of 1933 (the "Prospectus"). Such
information set forth in such subsection is incorporated herein by reference.
An explanation of the Talbert Rights and the Talbert Rights Offering is set
forth in the section entitled "The Offering" of the prospectus included in
the Registration Statement on Form S-1 (No. 333-17679), as amended, most
recently filed by
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TMMHC on April 4, 1997 (the "Talbert S-1"). Such information set forth in such
section is incorporated herein by reference.
To finance the Mergers, PacifiCare Holding entered into a credit agreement
(the "Credit Facility") with Bank of America National Trust and Savings
Association as agent, and a syndicate of financial institutions, as set forth in
the subsection of the Prospectus entitled "Financing of FHP Merger
Consideration" of the section entitled "The Mergers and Related Transactions" of
the Prospectus. Such information set forth in such subsection is incorporated
herein by reference. Total funds borrowed under the Credit Facility at the
Effective Time were $1.12 billion.
The number of shares of PacifiCare Holding Class A Common, PacifiCare
Holding Class B Common and PacifiCare Holding Series A Preferred issued in the
FHP Merger was approximately 2,337,000, 7,346,000, and 10,517,000, respectively.
The aggregate amount of cash paid to former holders of FHP Common Stock and FHP
Preferred Stock in the FHP Merger was approximately $1.027 billion (the "Cash
Consideration"). The number of shares of PacifiCare Holding Class A Common and
PacifiCare Holding Class B Common issued in the PacifiCare Merger was
approximately 12,385,000 and 18,931,000, respectively.
The Mergers are intended to be tax-free transactions under the Internal
Revenue Code of 1986, as amended, and will be accounted for as a purchase. A
copy of the press release announcing the consummation of the Mergers is set
forth in the Company's Current Report on Form 8-K filed on February 21, 1997,
and incorporated herein by reference.
On February 21, 1997, the Company sold the outstanding stock of its wholly
owned subsidiary, PacifiCare of Florida, Inc. ("PCFL"), to Total Health Choice,
Inc. a newly formed Florida subsidiary of Total Health Care, Inc. (the "PCFL
Disposition"). The sales price, which approximated the net book value of PCFL,
totaled $8.9 million. As of December 31, 1996, PCFL served approximately
35,000 commercial and Medicaid members. The terms of the sale agreement
included a put option whereby in the event that Total Health Choice, Inc. does
not obtain state regulatory approvals to operate in Florida by January 31, 1998,
Total Health Choice, Inc. shall have the option to require the Company to
repurchase PCFL for $5.9 million. Further information regarding the PCFL
Disposition is set forth in the Company's Current Report on Form 8-K filed on
March 10, 1997, and is incorporated herein by reference.
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS.
(a) Financial Statements of Business Acquired.
1. Consolidated financial statements for PacifiCare Health Systems,
Inc.
a. Audited consolidated financial statements for each of the
years in the three year period ended September 30, 1996,
incorporated herein by reference to PacifiCare Health
Systems, Inc.'s Annual Report on Form 10-K/A filed on
January 17, 1997.
b. Unaudited condensed consolidated financial statements for
the three month periods ended December 31, 1996 and 1995,
incorporated herein by reference to PacifiCare Health
Systems, Inc.'s Transition Report on Form 10-Q/A filed on
February 28, 1997.
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2. Consolidated financial statements for FHP International
Corporation.
a. Audited consolidated financial statements for each of the
years in the three year period ended June 30, 1996,
incorporated herein by reference to FHP International
Corporation's Annual Report on Form 10-K filed on
September 30, 1996.
b. Unaudited condensed consolidated financial statements for
the three month periods ended December 31, 1996 and 1995,
incorporated herein by reference to FHP International
Corporation's Quarterly Report on Form 10-Q filed on
February 14, 1997.
3. The following is N-T Holdings, Inc.'s unaudited consolidated
balance sheet and related notes as of December 31, 1996:
N-T HOLDINGS, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1996
(Dollars in thousands, except per share data)
ASSETS
Cash $ 3
Deferred stock offering costs 16,390
---------
$ 16,393
---------
---------
LIABILITIES AND SHAREHOLDER'S EQUITY
Payable to PacifiCare Health Systems, Inc. $ 16,392
Shareholder's equity:
Common stock, par value $0.001 per share;
1,000 shares authorized; 200 shares issued -
Additional paid-in capital 1
---------
Total shareholder's equity 1
---------
$ 16,393
---------
---------
See Notes to Unaudited Consolidated Balance Sheet.
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N-T HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1996
(1) BACKGROUND OF ORGANIZATION. PacifiCare Holding was incorporated on August
2, 1996 to effect the transactions contemplated by the Reorganization Agreement.
PacifiCare Holding did not conduct any business or activity other than forming
two wholly owned subsidiaries to effect the Mergers and making various required
regulatory filings.
(2) SHAREHOLDER'S EQUITY. The initial authorized capital stock of PacifiCare
Holding consisted of 1,000 shares of Common Stock, par value $0.001 per share.
Two hundred shares were issued and outstanding as of December 31, 1996.
Immediately prior to the Effective Time, PacifiCare Holding's Certificate of
Incorporation was amended to increase the total number of authorized shares of
capital stock to 100,000,000 shares of PacifiCare Holding Class A Common,
100,000,000 shares of PacifiCare Holding Class B Common, and 40,000,000 shares
of PacifiCare Holding Preferred Stock, par value $0.01 per share.
(3) SUBSEQUENT EVENT - FHP MERGER. On February 14, 1997, PacifiCare Holding
consummated the acquisition of FHP through the FHP Merger and the PacifiCare
Merger. As a result of the Mergers, holders of FHP Common Stock received $17.50
in cash and a mix of PacifiCare Holding Class A Common and PacifiCare Holding
Class B Common determined by a formula set forth in the Reorganization
Agreement. Holders of FHP Preferred Stock received one-half of one share of
PacifiCare Holding Series A Preferred and $14.113 in cash. Further, as soon
after the consummation of the FHP Merger as is legally permitted, former holders
of FHP Common Stock and FHP Preferred Stock will receive rights to acquire the
common stock of Talbert. Each outstanding share of PacifiCare Class A Common
Stock and PacifiCare Class B Common Stock was converted into one share of
PacifiCare Holding Class A Common and PacifiCare Holding Class B Common,
respectively. All issued shares of the capital stock of PacifiCare Holding
immediately prior to the Effective Time were canceled upon completion of the
Mergers.
PacifiCare Holding financed the Cash Consideration totaling approximately
$1.027 billion through borrowings under the Credit Facility.
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ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS (continued).
(b) Pro Forma Financial Information
UNAUDITED PRO FORMA FINANCIAL INFORMATION
The following Unaudited Pro Forma Condensed Consolidated Statements of
Income of PacifiCare Holding for the fiscal year ended September 30, 1996 and
three months ended December 31, 1996 present results for PacifiCare Holding as
if the Mergers, PCFL Disposition and the capitalization to effect the Talbert
Rights Offering (the "Talbert Capitalization") had occurred on October 1, 1995
and 1996, respectively. The accompanying Unaudited Pro Forma Condensed
Consolidated Balance Sheet for PacifiCare Holding as of December 31, 1996 gives
effect to the Mergers, PCFL Disposition and Talbert Capitalization as if they
had occurred on December 31, 1996.
The FHP Merger will be accounted for under the purchase method of
accounting. Accordingly, the amount of the consideration paid in the FHP Merger
will be allocated to assets acquired and liabilities assumed based on their
estimated fair values. The excess of such consideration over the estimated fair
value of such assets and liabilities has been preliminarily allocated to certain
identifiable intangible assets and goodwill. The purchase price allocation may
be adjusted upon completion of the final valuations of FHP's assets and
liabilities; the effect of any such adjustment is not expected to be
significant. The PacifiCare Merger will be treated as a reorganization with no
change in the recorded amount of PacifiCare's assets and liabilities. The
Unaudited Pro Forma Condensed Consolidated Financial Statements do not give
effect to any synergies which may be realized as a result of the Mergers.
Additionally, except as indicated in the notes thereto, the Unaudited Pro Forma
Condensed Consolidated Financial Statements do not reflect any nonrecurring
restructuring charges that may be incurred as a result of the integration of
FHP. The amount of such charges cannot be reasonably determined at this time.
The Unaudited Pro Forma Condensed Consolidated Financial Statements are
provided for informational purposes only and do not purport to present the
combined financial position or results of operations of PacifiCare and FHP had
the Mergers, PCFL Disposition and Talbert Capitalization assumed therein
occurred on the dates specified, nor are they necessarily indicative of the
results of operations that may be expected in the future.
On February 27, 1997, PacifiCare Holding's board of directors approved a
change in its fiscal year end to December 31. Prior to that date, PacifiCare
reported its financial information on the basis of a September 30 fiscal year.
Prior to the consummation of the FHP Merger, FHP reported its financial
information on the basis of a June 30 fiscal year. The Unaudited Pro Forma
Condensed Consolidated Financial Statements for the fiscal year ended
September 30, 1996 include PacifiCare's historical results of operations for the
fiscal year ended September 30, 1996 and FHP's historical results of operations
for the fiscal year ended June 30, 1996. The Unaudited Pro Forma Condensed
Consolidated Financial Statements for the three months ended December 31, 1996
include the historical results of operations of PacifiCare and FHP for the three
months ended December 31, 1996. The Unaudited Pro Forma Condensed Consolidated
Financial Statements include the historical balance sheet of PacifiCare and FHP
as of December 31, 1996.
The Cash Consideration portion of the purchase price for the FHP Merger was
derived by using the actual number of FHP shares outstanding immediately prior
to the Effective Time. The stock consideration portion of the purchase price
was based on the actual number of PacifiCare Holding capital shares issued in
conjunction with the FHP Merger and average closing market prices of PacifiCare
Common Stock over a
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reasonable period of time before and after the final shareholder approval date
of the FHP Merger on December 31, 1996.
The Unaudited Pro Forma Condensed Consolidated Financial Statements should
be read in conjunction with such historical financial statements, and the notes
thereto, which are included in or incorporated by reference in this Form 8-K/A.
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PACIFICARE HOLDING
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF INCOME
FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 1996
(In thousands, except per share data)
<TABLE>
<CAPTION>
Less Plus
Pro Forma PCFL Plus Pro Forma PacifiCare
PacifiCare Disposition PacifiCare, as FHP FHP Merger Holding, as
Historical Adjustments Adjusted Historical Adjustments Adjusted
----------- -------------- -------------- ------------ ------------ -----------
(1) (4)
<S> <C> <C> <C> <C> <C> <C>
Total operating revenue $ 4,637,305 $ 59,715 $ 4,577,590 $ 4,179,284 $ - $ 8,756,874
Expenses:
Health care services 3,872,747 60,755 3,811,992 3,530,928 (125,340)(5) 7,217,580
Marketing, general and
administrative expenses 575,928 19,869 556,059 478,549 125,340 (5) 1,159,948
Impairment, disposition
and restructuring charges 75,840 67,986 7,854 9,659 - 17,513
Office of Personnel Management
reserve charge 25,000 - 25,000 45,000 - 70,000
Amortization of goodwill and
intangible assets 9,153 1,163 7,990 32,064 29,630 (6) 69,684
----------- --------- ----------- ----------- ---------- -----------
Operating income (loss) 78,637 (90,058) 168,695 83,084 (29,630) 222,149
Interest income 46,237 2,231 (3) 44,006 36,174 - 80,180
Interest expense (2,094) (3) (2,091) (21,141) (68,340)(7) (91,572)
----------- --------- ----------- ----------- ---------- -----------
Income (loss) before income taxes 122,780 (87,830) 210,610 98,117 (97,970) 210,757
Provision (benefit) for income taxes 50,827 (32,600)(2) 83,427 53,964 (32,852)(8) 104,539
----------- --------- ----------- ----------- ---------- -----------
Net income (loss) 71,953 (55,230) 127,183 44,153 (65,118) 106,218
Preferred stock dividends - - - 26,425 (26,425)(9) -
----------- --------- ----------- ----------- ---------- -----------
Net income (loss) attributable
to common stock $ 71,953 $ (55,230) $ 127,183 $ 17,728 $ (38,693) $ 106,218
----------- --------- ----------- ----------- ---------- -----------
----------- --------- ----------- ----------- ---------- -----------
Weighted average common shares
and equivalents outstanding used
to calculate earnings per share 31,671 31,671 41,524 45,520(10)
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Earnings per share $ 2.27 $ 4.02 $ 0.43 $ 2.33
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
</TABLE>
See Notes to Unaudited Pro Forma Condensed Consolidated Financial Statements.
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PACIFICARE HOLDING
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF INCOME
FOR THE THREE MONTHS ENDED DECEMBER 31, 1996
(In thousands, except per share data)
<TABLE>
<CAPTION>
Less Plus
Pro Forma PCFL Plus Pro Forma PacifiCare
PacifiCare Disposition PacifiCare, as FHP FHP Merger Holding, as
Historical Adjustments Adjusted Historical Adjustments Adjusted
----------- -------------- -------------- ------------ ------------ -----------
(1) (4)
<S> <C> <C> <C> <C> <C> <C>
Total operating revenue $ 1,234,875 $ 9,124 $ 1,225,751 $ 1,108,343 $ - $ 2,334,094
Expenses:
Health care services 1,039,345 6,612 1,032,733 938,838 (31,242)(5) 1,940,329
Marketing, general and
administrative expenses 153,135 2,777 150,358 122,337 31,242 (5) 303,937
Amortization of goodwill and
intangible assets 1,861 - 1,861 7,624 7,800 (6) 17,285
----------- --------- ----------- ----------- ---------- -----------
Operating income (loss) 40,534 (265) 40,799 39,544 (7,800) 72,543
Interest income 12,652 688 (3) 11,964 9,152 - 21,116
Interest expense (350) - (350) (2,451) (17,085)(7) (19,886)
----------- --------- ----------- ----------- ---------- -----------
Income (loss) before income taxes 52,836 423 52,413 46,245 (24,885) 73,773
Provision (benefit) for income taxes 21,079 170 (2) 20,909 21,272 (8,213)(8) 33,968
----------- --------- ----------- ----------- ---------- -----------
Net income (loss) 31,757 253 31,504 24,973 (16,672) 39,805
Preferred stock dividends - - - 6,575 (6,575)(9) -
----------- --------- ----------- ----------- ---------- -----------
Net income (loss) attributable to
common stock $ 31,757 $ 253 $ 31,504 $ 18,398 $ (10,097) $ 39,805
----------- --------- ----------- ----------- ---------- -----------
----------- --------- ----------- ----------- ---------- -----------
Weighted average common shares
and equivalents outstanding used
to calculate earnings per share 31,800 31,800 42,268 45,649 (10)
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Primary earnings per share $ 1.00 $ 0.99 $ 0.44 $ 0.87
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Fully diluted weighted average
common shares and equivalents
outstanding used to calculate
earnings per share 59,293 45,651 (10)
----------- -----------
----------- -----------
Fully diluted earnings per share $ 0.42 $ 0.87
----------- -----------
----------- -----------
</TABLE>
See Notes to Unaudited Pro Forma Condensed Consolidated Financial Statements.
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PACIFICARE HOLDING
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1996
(In thousands)
<TABLE>
<CAPTION>
Pro Forma PCFL Pro Forma PacifiCare
PacifiCare Disposition PacifiCare, as FHP FHP Merger Holding, as
Historical Adjustments Adjusted Historical Adjustments Adjusted
----------- -------------- -------------- ------------ ------------ -----------
(3) (4)
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and equivalents $ 367,748 $ 8,537 $ 376,285 $ 297,815 $ 6,656 (14) $ 680,756
Marketable securities 594,734 - 594,734 226,598 - 821,332
Receivables, net 156,212 (3,161) 153,051 165,367 59,598 (17) 378,016
Prepaid expenses and other
current assets 8,876 (631) 8,245 27,488 - 35,733
Deferred income taxes 54,745 - 54,745 49,165 - 103,910
----------- --------- ----------- ----------- ---------- ----------
Total current assets 1,182,315 4,745 1,187,060 766,433 66,254 2,019,747
----------- --------- ----------- ----------- ---------- ----------
Property, plant and equipment, net 91,239 (3,860) 87,379 231,764 (29,000)(11) 290,143
Assets held for sale - - - 15,752 - 15,752
Long-term investments - - - 49,985 - 49,985
Marketable securities - restricted 35,399 (2,472) 32,927 96,650 - 129,577
Goodwill and intangible assets 227,422 - 227,422 1,013,510 1,240,184 (12) 2,481,116
Other assets 25,097 (37) 25,060 36,731 - 61,791
----------- --------- ----------- ----------- ---------- ----------
$ 1,561,472 $ (1,624) $ 1,559,848 $ 2,210,825 $1,277,438 $5,048,111
----------- --------- ----------- ----------- ---------- ----------
----------- --------- ----------- ----------- ---------- ----------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Medical claims and benefits
payable $ 278,800 $ (1,678) $ 277,122 $ 388,565 $ - $ 665,687
Accounts payable and accrued
liabilities 162,882 957 163,839 186,660 105,300 (13) 455,799
Unearned premium revenue 256,416 (903) 255,513 207,930 - 463,443
Long-term debt due within one year 1,511 - 1,511 19,104 - 20,615
----------- --------- ----------- ----------- ---------- ----------
Total current liabilities 699,609 (1,624) 697,985 802,259 105,300 1,605,544
----------- --------- ----------- ----------- ---------- ----------
Long-term debt due after one year 1,370 - 1,370 100,195 1,100,924 (14) 1,202,489
Deferred income taxes - - - - 129,110 (15) 129,110
Other liabilities - - - 88,596 - 88,596
Minority interest 391 - 391 - - 391
Shareholders' equity:
Preferred shares - - - 1,052 (947)(16) 105
Common shares 313 - 313 2,078 (1,982)(16) 409
Additional paid-in capital 373,405 - 373,405 953,756 207,922 (16) 1,535,083
Unrealized holding gain (loss) on
available-for-sale securities,
net of taxes 3,451 - 3,451 (844) 844 (12) 3,451
Retained earnings 482,933 - 482,933 263,733 (263,733)(12) 482,933
----------- --------- ----------- ----------- ---------- ----------
Total shareholders' equity 860,102 - 860,102 1,219,775 (57,896) 2,021,981
----------- --------- ----------- ----------- ---------- ----------
$ 1,561,472 $ (1,624) $ 1,559,848 $ 2,210,825 $1,277,438 $5,048,111
----------- --------- ----------- ----------- ---------- ----------
----------- --------- ----------- ----------- ---------- ----------
</TABLE>
See Notes to Unaudited Pro Forma Condensed Consolidated Financial Statements.
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PACIFICARE HOLDING
NOTES TO UNAUDITED PRO FORMA CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
PRO FORMA ADJUSTMENTS RELATED TO THE PCFL DISPOSITION
(1) PCFL DISPOSITION. Pro forma adjustments to remove the historical operating
results of PCFL and to reflect an increase in marketing, general and
administrative expenses for corporate allocations included in PCFL's results of
operations that are expected to remain after the PCFL Disposition. During the
fiscal year ended September 30, 1996, PacifiCare recognized a charge for the
impairment of goodwill, the disposition of Pasteur Delivery Systems and
restructuring charges associated with its PCFL operations totaling $68.0 million
($42.4 million or $1.34 per share, net of tax).
(2) INCOME TAXES. Pro forma adjustment to reflect the tax effects of the PCFL
Disposition and related non-deductible goodwill amortization at the statutory
rates in effect during the fiscal year ended September 30, 1996 and the three
months ended December 31, 1996.
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Fiscal Year Ended Three Months Ended
(In thousands) September 30, 1996 December 31, 1996
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
PCFL (loss) income before income taxes $ (87,830) $ 423
Non-deductible goodwill amortization 6,734 -
- --------------------------------------------------------------------------------
(81,096) 423
Statutory tax rate 40.2% 40.2%
- --------------------------------------------------------------------------------
Pro forma income tax (benefit) provision
adjustment $ (32,600) $ 170
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(3) SALES PRICE. Pro forma adjustments to record the assets acquired and
liabilities assumed by Total Health Choice, Inc., and cash received by
PacifiCare for the sale of PCFL. The terms of the sale agreement included a put
option whereby in the event that Total Health Choice, Inc. does not obtain state
regulatory approvals to operate in Florida by January 31, 1998, Total Health
Choice, Inc. shall have the option to require the Company to repurchase PCFL for
$5.9 million. The Company, therefore, will defer the gain of approximately $1.9
million on the sale of PCFL until such regulatory approvals are obtained. No
pro forma adjustments have been made to reflect interest income for the fiscal
year ended September 30, 1996, or the three months ended December 31, 1996, on
the net proceeds from the PCFL Disposition, because the amounts are not
material.
PRO FORMA INCOME STATEMENT ADJUSTMENTS RELATED TO THE MERGERS
(4) FHP MERGER. Pro forma adjustments to reflect the FHP Merger. The
Unaudited Pro Forma Condensed Consolidated Financial Statements do not reflect
any nonrecurring charges that may be incurred as a result of the integration of
FHP.
(5) HEALTH CARE ADMINISTRATION EXPENSES. Pro forma adjustment to reclassify
certain health care administration expenses. PacifiCare Holding classifies
such costs as administrative expenses, while FHP classified such costs as
health care services expense.
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(6) AMORTIZATION OF INTANGIBLES. Pro forma adjustment to reflect amortization
of approximately $2.2 billion of the excess of the purchase price of the FHP
Merger over the estimated fair value of the net assets acquired using a range of
estimated useful lives for identifiable intangible assets of 20 to 40 years and
a 40-year useful life for goodwill, resulting in a 36 year average useful life
assuming first year amortization of $61.7 million; see Note (12).
(7) INTEREST EXPENSE. Pro forma adjustment to reflect additional interest
expense on actual borrowings under the Credit Facility to finance the Cash
Consideration, the Talbert Capitalization (see Note (17)) and certain
transactions associated with the Mergers at the weighted average interest rate
of approximately 5.9 percent for the fiscal year ended September 30, 1996 and
for the three months ended December 31, 1996.
(8) INCOME TAXES. Pro forma adjustment to reflect the tax effects of the FHP
Merger and related non-deductible goodwill amortization at the statutory rates
in effect during the fiscal year ended September 30, 1996 and the three months
ended December 31, 1996.
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Fiscal Year Ended Three Months Ended
(In thousands) September 30, 1996 December 31, 1996
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Pro forma adjustments to income before
income taxes $ (97,970) $ (24,885)
Increase in non-deductible goodwill
amortization 16,249 4,454
- --------------------------------------------------------------------------------
(81,721) (20,431)
Statutory tax rate 40.2% 40.2%
- --------------------------------------------------------------------------------
Pro forma income tax benefit adjustment $ (32,852) $ (8,213)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(9) PREFERRED STOCK DIVIDENDS. Pro forma adjustment to reflect a reduction in
dividend payments as a result of the conversion of FHP Preferred Stock into cash
and assuming the conversion of PacifiCare Holding Series A Preferred to
PacifiCare Holding Class B Common occurred on October 1, 1995 and 1996. Because
PacifiCare Holding Series A Preferred is considered to be a common stock
equivalent, the assumed conversion to PacifiCare Holding Class B Common on the
dates indicated would result in no dividend payments for the periods indicated.
-12-
<PAGE>
(10) COMMON SHARES AND EQUIVALENTS OUTSTANDING. The pro forma adjustment
reflects the following events related to the FHP Merger for the fiscal year
ended September 30, 1996 and the three months ended December 31, 1996.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------
Fiscal Year Three Months
Ended Ended
(In thousands) September 30, 1996 December 31, 1996
- ---------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C>
PacifiCare weighted average common shares
and equivalents outstanding 31,671 31,800
Dilutive shares issuable, net of shares assumed to have
been purchased (at the average market price) for
treasury with assumed proceeds from the contingent
exercise of stock options 192 192
Assumed conversion of PacifiCare Holding Series A Preferred
to PacifiCare Holding Class B Common 3,974 3,974
Issuance of PacifiCare Holding Class A Common 2,337 2,337
Issuance of PacifiCare Holding Class B Common 7,346 7,346
- ---------------------------------------------------------------------------------------------------------
PacifiCare Holding weighted average shares and
equivalents outstanding, as adjusted, used in calculation of
of primary earnings per share 45,520 45,649
- ---------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------
Difference between the higher of ending or average market
price for dilutive shares issuable, net of shares assumed to
have been purchased for treasury with assumed proceeds
from the contingent exercise of stock options 2
- ---------------------------------------------------------------------------------------------------------
PacifiCare Holding weighted average shares and equivalents
outstanding, as adjusted, used in calculation of fully diluted
earnings per share 45,651
- ---------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------
</TABLE>
PRO FORMA BALANCE SHEET ADJUSTMENTS RELATED TO THE MERGERS
(11) PROPERTY, PLANT AND EQUIPMENT. Pro forma adjustment to conform FHP's
accounting policies with those of PacifiCare related to expensing rather than
capitalizing costs for purchased and internally developed software. This
adjustment is reflected in goodwill and intangible assets (see Note (12)).
-13-
<PAGE>
(12) GOODWILL AND INTANGIBLE ASSETS. Pro forma adjustment to record the FHP
Merger and reflect the excess of the purchase price over the net assets acquired
and the related deferred tax effect. The purchase price allocation is based on
currently available information and may be adjusted upon completion of the final
valuations of FHP's assets and liabilities. Based on current information,
PacifiCare Holding does not expect the final purchase price allocation to be
materially different from that assumed in the Unaudited Pro Forma Condensed
Consolidated Balance Sheet.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------
(In thousands)
- ---------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C>
Purchase price consideration (see subsection (a) below) $ 2,189,147
Direct transaction costs 105,300
------------
Total purchase price 2,294,447
Less FHP shareholders' equity as follows:
Preferred shares 1,052
Common shares 2,078
Additional paid-in capital 953,756
Unrealized holding loss on available-for-sale securities (844)
Retained earnings 263,733
------------
1,074,672
Plus: FHP goodwill and intangible assets 1,013,510
Conforming accounting adjustment (see Note (11)) 29,000
Talbert Rights Offering adjustment (see Note (17)) 7,402
------------
Acquisition cost in excess of net assets acquired $ 2,124,584
------------
------------
Allocation of acquisition cost in excess of net assets acquired:
Allocation to identifiable intangible assets:
Employer groups $ 225,370
Provider networks 84,500
Bank fees 11,300
----------
Subtotal $ 321,170
Allocation to goodwill:
Goodwill, before deferred tax adjustment 1,803,414
Less FHP goodwill 1,013,510
----------
Subtotal 789,904
Pro forma increase in deferred tax liability due to
step up in identifiable intangible assets 129,110
------------
Pro forma increase in goodwill 919,014
- ---------------------------------------------------------------------------------------------------------
Net pro forma adjustment to goodwill and intangible assets $ 1,240,184
- ---------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------
</TABLE>
-14-
<PAGE>
(a) The Cash Consideration portion of the purchase price was derived by using
the actual number of FHP shares outstanding immediately prior to the Effective
Time. The stock consideration portion of the purchase price was based on the
actual number of PacifiCare Holding capital shares issued in conjunction with
the FHP Merger, and average closing market prices of PacifiCare common stock
over a reasonable period of time before and after the final shareholder approval
date of the Mergers on December 31, 1996 as follows:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------
Preferred Common
(In thousands, except per share data) Shares Shares Total
- ---------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash Consideration:
FHP shares outstanding 21,034 41,738
Cash conversion price $ 14.113 $ 17.500
---------- ----------
Total cash consideration $ 296,853 $ 730,415 $ 1,027,268
---------- ----------
---------- ----------
Stock Consideration:
PacifiCare Holding Class A Common shares issued 2,337
Average closing price of PacifiCare Class A Common Stock $ 80.616
----------
Total PacifiCare Holding Class A Common value 188,400
PacifiCare Holding Class B Common shares issued 7,346
Average closing price of PacifiCare Class B Common Stock $ 83.964
----------
Total PacifiCare Holding Class B Common value 616,800
PacifiCare Holding Series A Preferred shares issued 10,517
PacifiCare Holding Series A Preferred consideration $ 31.120
---------
Total PacifiCare Holding Series A Preferred value 327,289
Stock Option Consideration:
Average closing price of PacifiCare Class B Common Stock $ 83.964
Average exercise price of FHP stock options as if converted 52.598
----------
In-the-money value of converted options $ 31.366
FHP stock options converted to PacifiCare Holding stock options 937
----------
Total consideration attributable to conversion of FHP options 29,390
- ---------------------------------------------------------------------------------------------------------
Total purchase price consideration $ 2,189,147
- ---------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------
</TABLE>
(13) ACCOUNTS PAYABLE AND ACCRUED LIABILITIES. Pro forma adjustment to reflect
estimated transaction costs (see Note (12)).
-15-
<PAGE>
(14) LONG-TERM DEBT. Pro forma adjustments to reflect actual borrowings
totaling $1.12 billion under the Credit Facility to finance the FHP Merger,
including the Cash Consideration, Talbert Capitalization (see Note (17)) and
certain transactions, including PacifiCare Holding's repayment of amounts
outstanding under FHP's bank credit facility, associated with the Mergers as
follows (see Note (7)):
- --------------------------------------------------------------------------------
(In thousands)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Total cash borrowed $ 1,120,000
Less: FHP bank credit facility repayment (19,076)
- --------------------------------------------------------------------------------
1,100,924
Less: FHP Merger cash consideration (1,027,268)
Talbert Capitalization (67,000)
- --------------------------------------------------------------------------------
Cash balance remaining $ 6,656
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(15) DEFERRED INCOME TAXES. Pro forma adjustment to reflect increase in
deferred tax liability due to step up in identifiable intangible assets (see
Note (12)).
(16) SHAREHOLDERS' EQUITY. Pro forma adjustment to reflect issuance of stock as
a result of the FHP Mergers (see Note (12)).
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------
Preferred Common Additional Paid-
(In thousands) Stock Stock in Capital Total
- ---------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Issuance of PacifiCare
Holding Class A Common $ - $ 23 $ 188,377 $ 188,400
Issuance of PacifiCare
Holding Class B Common - 73 616,727 616,800
Issuance of PacifiCare
Holding Series A Preferred 105 - 327,184 327,289
Conversion of FHP stock options - - 29,390 29,390
Cancellation of FHP capital stock (1,052) (2,078) (953,756) (956,886)
- ---------------------------------------------------------------------------------------------------------------
Pro forma adjustments $ (947) $ (1,982) $ 207,922 $ 204,993
- ---------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
PRO FORMA ADJUSTMENTS RELATED TO THE TALBERT RIGHTS OFFERING
(17) PRO FORMA EFFECT OF TALBERT RIGHTS OFFERING. FHP will distribute, as
soon as practicable and legally permissible, to former holders of FHP Common
Stock and FHP Preferred Stock as of February 14, 1997, one Talbert Right for
each 21.19154 shares of FHP Common Stock and one Talbert Right for each 26.27752
shares of FHP Preferred Stock. Pursuant to the Talbert Rights Offering,
holders of Talbert Rights may purchase one share of Talbert Common Stock for
each Talbert Right held for the subscription price of $21.50 per share. Holders
of Talbert Rights will be entitled to subscribe for all, or any portion of, the
shares of Talbert Common Stock underlying their Talbert Rights, as well as to
subscribe for any unallocated
-16-
<PAGE>
additional shares. On February 14, 1997, FHP contributed $67 million to Talbert
to increase its net worth to approximately $60 million. Also at that time, FHP
sold its investment in Talbert in exchange for the Talbert Rights and a
non-recourse promissory note in the amount of $59.6 million. Proceeds from the
exercise of the Talbert Rights, to the extent subscribed, will be used to repay
the note payable to FHP. To the extent that the Talbert Rights are not fully
subscribed, the note will be repaid by issuance of the underlying shares of
Talbert common stock to FHP.
The pro forma adjustments reflect a note receivable for the expected Talbert
Rights Offering proceeds totaling $59.6 million. In addition, goodwill includes
an adjustment for $7.4 million to reflect FHP's net capitalization and sale of
Talbert. FHP's investment in Talbert approximates the expected Talbert Rights
Offering proceeds if fully subscribed; therefore, no gain or loss is expected on
the transaction. There can be no assurance that the Talbert Rights Offering
will be partially or fully subscribed. Other than those pro forma adjustments
discussed above, the pro forma effects of the Talbert Rights Offering on the
results of operations and financial position of PacifiCare Holding have not been
disclosed, given their immateriality relative to PacifiCare Holding's Unaudited
Pro Forma Condensed Consolidated Financial Statements taken as a whole.
FHP has negotiated a written agreement with Talbert, under which all Talbert-
contracted medical providers or sites agree to provide professional services to
members of FHP's HMOs and enrollees in insurance products of FHP and its
subsidiaries in exchange for a negotiated capitation fee. In addition, FHP
entered into an agreement for FHP to render certain administrative services
(primarily related to certain information systems) for a period not to exceed
one year following the Effective Time at a rate and on other terms that were
approved by PacifiCare Holding.
Talbert and FHP have entered into a Real Estate and Equipment Master Transfer
Agreement (the "Master Lease Agreement") to provide for the lease, sublease
or assignment by FHP to Talbert of facilities and equipment used by Talbert
that are either owned or leased by FHP. The leases are accounted for as
operating leases. The Master Lease Agreement has been amended to include (i)
the extension, at prevailing market rates, of the existing terms of the
individual leases to December 31, 2005, with the exception of leases with
respect to up to 90,000 square feet (of a total of approximately 472,000
square feet) that Talbert may elect not to renew; (ii) two five-year
extension options at prevailing market rates, exercisable solely at Talbert's
discretion; and (iii) a right of first offer for Talbert to purchase the
furniture, fixtures and equipment subject to the Master Lease Agreement
("FF&E"). The parties have also agreed to enter into a separate lease
agreement with respect to FF&E that will expire on December 31, 2000. The
Master Lease Agreement, as amended, also provides that FHP and Talbert will
enter into individual leases with respect to the real estate and equipment
subject to the Master Lease Agreement. Talbert has assumed the obligations of
FHP under certain other leases with third parties.
-17-
<PAGE>
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS (continued).
(c) Exhibit Index
2.01 Amended and Restated Agreement and Plan of Reorganization,
dated as of November 11, 1996, among N-T Holdings, Inc., a
Delaware corporation, PacifiCare Health Systems, Inc., a
Delaware corporation, FHP International Corporation, a
Delaware corporation, Neptune Acquisition Corp., a Delaware
corporation, and Tree Acquisition Corp., a Delaware
corporation. Incorporated by reference herein from Appendix
A of the prospectus, included in the Registration Statement
on Form S-4 (No. 333-16271), as amended, filed by PacifiCare
Holding on November 26, 1996 pursuant to Rule 424(b) (3)
promulgated under the Securities Act of 1933, as amended
(the "Prospectus").
2.02 The subsection entitled "Merger Consideration" of the
section entitled "The Mergers and Related Transactions" of
the Prospectus and the subsection entitled "Financing of FHP
Merger Consideration" of the section entitled "The Mergers
and Related Transactions" of the Prospectus. Incorporated
by reference herein from the Prospectus.
2.03 The section entitled "The Offering" of the prospectus
included in the Registration Statement on Form S-1 (No.
333-17679), as amended, filed by Talbert Medical Management
Holdings Corporation, most recently filed on April 4, 1997
(the "Talbert S-1"). Incorporated by reference herein from
the Talbert S-1.
4.01 Form of Specimen Certificate for PacifiCare's Holding Class
A Common Stock. Incorporated by reference herein from the
PacifiCare Health Systems, Inc. Current Report on Form 8-K
filed on February 21, 1997.
4.02 Form of Specimen Certificate for PacifiCare Holding's Class
B Common Stock. Incorporated by reference herein from the
PacifiCare Health Systems, Inc. Current Report on Form 8-K
filed on February 21, 1997.
4.03 Form of Specimen Certificate for PacifiCare Holding's Series
A Cumulative Convertible Preferred Stock. Incorporated by
reference herein from the PacifiCare Health Systems, Inc.
Current Report on Form 8-K filed on February 21, 1997.
23.1 Consent of Ernst & Young LLP.
23.2 Consent of Deloitte & Touche LLP.
99.01 Press Release of February 14, 1997. Incorporated by
reference herein from the PacifiCare Health Systems, Inc.
Current Report on Form 8-K filed on February 21, 1997.
-18-
<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: April 11, 1997 By: /s/ Alan R. Hoops
------------------------- -----------------------------
Alan R. Hoops
President and Chief Executive Officer
-19-
<PAGE>
EXHIBIT 23.1
CONSENT OF ERNST & YOUNG LLP INDEPENDENT AUDITORS
We consent to the incorporation by reference in PacifiCare Health Systems,
Inc.'s Current Report on Form 8-K of our report dated November 18, 1996, with
respect to the consolidated financial statements and schedule of PacifiCare
Health Systems, Inc. included in the Annual Report (Form 10-K, as amended) for
the year ended September 30, 1996, filed with the Securities and Exchange
Commission.
ERNST & YOUNG LLP
Los Angeles, California
April 4, 1997
<PAGE>
Exhibit 23.2
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in this Current Report on
Form 8-K/A of Pacificare Health System, Inc. of our report dated September 4,
1996, relating to the financial statements of FHP International Corporation
appearing in the Annual Report on Form 10-K of FHP International Corporation
for the year ended June 30, 1996.
DELOITTE & TOUCHE LLP
Costa Mesa, California
April 11, 1997
