<PAGE> 1
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(a) OF THE
SECURITIES EXCHANGE ACT OF 1934
(AMENDMENT NO. )
Filed by the Registrant [X]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
[X] Preliminary Proxy Statement
[ ] Confidential, for Use of the Commission Only (as permitted by
Rule 14a-6(e)(2))
[ ] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to 240.14a-11(c) or 240.14a-12
PACIFIC HEALTH SYSTEMS, INC.
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(Name of Registrant as Specified In Its Charter)
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[X] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
(1) Title of each class of securities to which transaction applies:
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(2) Aggregate number of securities to which transaction applies:
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(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which the
filing fee is calculated and state how it was determined):
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(4) Proposed maximum aggregate value of transaction:
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(5) Total fee paid:
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[ ] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee was
previously. Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
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(2) Form, Schedule or Registration Statement No.:
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(3) Filing Party:
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(4) Date Filed:
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<PAGE> 2
PACIFICARE HEALTH SYSTEMS, INC.
3120 LAKE CENTER DRIVE
SANTA ANA, CALIFORNIA 92704
(714) 825-5200
Dear Stockholder:
You are cordially invited to attend the Annual Meeting of Stockholders of
PacifiCare Health Systems, Inc. to be held at the PacifiCare Health Systems
Learning and Conference Center, 3515 Harbor Blvd., Costa Mesa, California 92626
on , 1999 at 10:00 a.m., Pacific Daylight Savings Time.
At the Annual Meeting, you will be asked to vote upon an amended and
restated certificate of incorporation of PacifiCare which, if approved, would
combine and reclassify PacifiCare's voting and non-voting classes of common
stock into a single class of voting common stock. The Reclassified Common Stock
will have the same rights, powers and limitations as the existing Class A Common
Stock. Approval of the Amended Certificate requires the affirmative vote of both
the Class A Common Stock and the Class B Common Stock voting separately as a
class. Please read the Proxy Statement and its exhibits for a full description
of the rights, powers, limitations and characteristics of the Reclassified
Common Stock.
The reclassification of the Class A and Class B Common Stock will have no
impact on the total number of issued and outstanding shares of common stock of
PacifiCare. Today, there are approximately million shares of Class A Common
Stock and Class B Common Stock outstanding. After approval and adoption of the
Amended Certificate, the same number of shares of the Reclassified Common Stock
will be outstanding.
UniHealth Foundation, PacifiCare's largest stockholder, currently owns
5,909,500 shares of Class A Common Stock or 39.8 percent of the Class A Common
Stock and 285,000 shares of Class B Common Stock or 0.9 percent of the Class B
Common Stock. UniHealth has agreed to vote all of its Class A Common Stock and
Class B Common Stock FOR approval of the Amended Certificate, subject to certain
conditions. In addition, PacifiCare has agreed, if the Amended Certificate is
approved, to repurchase in installments 5,909,500 shares of the Reclassified
Common Stock currently held by UniHealth as Class A Common Stock. In addition,
upon approval of the Amended Certificate, PacifiCare will pay UniHealth $60
million for the transactions and agreements set forth in the Proxy Statement.
The initial purchase of the UniHealth shares would occur on the first
business day immediately following the first 30 trading days after the
reclassification of the Class A and Class B Common Stock, which, if approved, is
expected to occur on . The final repurchase is scheduled to occur
on February 15, 2001. The purchase price for the UniHealth shares will equal the
average of the closing prices of Reclassified Common Stock for the 30 trading
days immediately preceding the repurchase date (excluding the repurchase date
itself). UniHealth, however, is not obligated to sell any UniHealth shares on
any scheduled repurchase date if the purchase price is less than $75.00 per
share ($70.00 per share in the case of the initial repurchase). PacifiCare is
not obligated to purchase any UniHealth shares if the purchase price on any
scheduled repurchase date exceeds $120.00 per share. Any shares that are not
repurchased because the price is less than $75.00 per share ($70.00 per share in
the case of the initial repurchase) or more than $120.00 per share, may be sold
by UniHealth through the open market or through other means.
The Special Opportunities Committee of the Board of Directors and the full
Board of Directors each considered the Amended Certificate and regard the
adoption of the Amended Certificate to be extremely important to PacifiCare.
PacifiCare believes that the elimination of its dual classes of common stock
will align the voting rights of the PacifiCare stockholders with their economic
risk of ownership, increase PacifiCare's flexibility to structure acquisitions
or equity financings, increase the overall liquidity of PacifiCare's common
stock and eliminate the liquidity discount of the Class A Common Stock.
<PAGE> 3
At the Annual Meeting, holders of Class A Common Stock will also be asked
to:
(1) Elect four Directors of PacifiCare for three-year terms;
(2) Approve performance objectives for, and maximum awards under the 1996
Management Incentive Compensation Plan;
(3) Approve amendments to the 1996 Stock Option Plan for Officers and Key
Employees; and
(4) Approve the Amended and Restated 1996 Non-Officer Directors Stock
Option Plan.
The Compensation Committee approved an increase in the maximum annual award
under the Management Incentive Plan from $1 million to $2 million to enable
PacifiCare to attract and retain executive officers and key employees. Approval
of the modifications to the Management Incentive Plan and the Employee Plan is
necessary to maintain the income tax deductibility of awards granted under each
of these plans. Approval of the Amended Directors Plan is necessary to retain
its exemption from the short-swing trading rules under the federal securities
law.
Your Board of Directors believes that the Amended Certificate is in the
best interests of PacifiCare, including its stockholders. Your Board of
Directors has approved and strongly recommends that you vote:
"FOR" the Amended Certificate;
"FOR" the election of the four Directors;
"FOR" the modifications to the Management Incentive Plan;
"FOR" approval of the amendments to the Employee Plan; and
"FOR" approval of the Amended Directors Plan.
Attached is a Proxy Statement that provides you with a detailed description
of the reasons for the Board of Directors' recommendations. It also contains a
description of the Amended Certificate and the transactions with UniHealth, the
biographies of the four director nominees, a description of the modifications to
the Management Incentive Plan, the amendments to the Employee Plan and the
Amended Directors Plan.
Approval and adoption of the Amended Certificate requires the affirmative
vote of a majority of the outstanding shares of Class A Common Stock and Class B
Common Stock voting separately as a class. A plurality of the shares of Class A
Common Stock is required to vote for the election of the four Director nominees
and the affirmative vote of a majority of the outstanding shares of Class A
Common Stock present at the meeting is required to approve the modifications to
the Management Incentive Plan, the amendments to the Employee Plan and the
Amended Directors Plan.
It is important that your shares be represented and voted at the meeting,
whether or not you plan to attend in person. PLEASE COMPLETE, SIGN, DATE AND
MAIL THE ACCOMPANYING PROXY CARD AND RETURN IT IN THE ENCLOSED ENVELOPE, WHICH
REQUIRES NO POSTAGE.
Sincerely,
Alan R. Hoops
Chairman and
Chief Executive Officer
<PAGE> 4
PACIFICARE HEALTH SYSTEMS, INC.
3120 LAKE CENTER DRIVE
SANTA ANA, CALIFORNIA 92704
(714) 825-5200
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD , 1999
To the Stockholders of PacifiCare Health Systems, Inc.:
The Annual Meeting of Stockholders of PacifiCare Health Systems, Inc., a
Delaware corporation, will be held at the PacifiCare Health Systems Learning and
Conference Center, 3515 Harbor Blvd., Costa Mesa, California 92626 on
, 1999 at 10:00 a.m., Pacific Daylight Savings Time, to vote upon
the following matters:
(1) To approve an amended and restated certificate of incorporation of
PacifiCare which, if approved, would combine and reclassify
PacifiCare's two classes of common stock into a single class of common
stock, each share of which will be entitled to one vote;
(2) To elect four Directors of PacifiCare for three-year terms;
(3) To approve performance objectives for, and maximum awards under the
1996 Management Incentive Compensation Plan;
(4) To approve amendments to the 1996 Stock Option Plan for Officers and
Key Employees;
(5) To approve the Amended and Restated 1996 Non-Officer Directors Stock
Option Plan; and
(6) To transact other business properly coming before the meeting.
Only the holders of Class A and Class B Common Stock of record at the close
of business on , 1999 are entitled to vote at the Annual Meeting and
will receive a Proxy Card. Holders of PacifiCare Class A Common Stock are
entitled to vote on all matters to be considered at the meeting. Holders of
PacifiCare Class B Common Stock are entitled to vote only on the approval and
adoption of the Amended Certificate. PacifiCare invites the holders of both the
Class A Common Stock and the Class B Common Stock to attend the meeting in
person.
Your attention is directed to the accompanying Proxy Statement and Proxy
Card. Whether or not you intend to be present, you are requested to COMPLETE,
DATE AND SIGN THE APPROPRIATE ACCOMPANYING PROXY CARD AND RETURN IT IN THE
ENCLOSED ENVELOPE WHICH REQUIRES NO POSTAGE. Your prompt cooperation is greatly
appreciated.
By order of the Board of Directors
Alan R. Hoops
Chairman of the Board
and Chief Executive Officer
Santa Ana, California
, 1999
<PAGE> 5
NOTICE TO PARTICIPANTS IN THE
PACIFICARE HEALTH SYSTEMS, INC.
SAVINGS AND PROFIT-SHARING PLAN
Ladies and Gentlemen:
As a participant in the PacifiCare Health Systems, Inc. Savings and
Profit-Sharing Plan (the "Plan"), you have certain voting rights in the Class A
Common Stock and/or Class B Common Stock of PacifiCare Health Systems, Inc.
At PacifiCare's Annual Meeting of Stockholders to be held at the PacifiCare
Health Systems Learning and Conference Center, 3515 Harbor Blvd., Costa Mesa,
California 92626 on , 1999 at 10:00 a.m., Pacific Daylight Savings
Time, PacifiCare's stockholders will be asked to consider and vote upon the
following matters:
(1) To approve an amended and restated certificate of incorporation of
PacifiCare which, if approved, would combine and reclassify
PacifiCare's two classes of common stock into a single class of common
stock, each share of which will be entitled to one vote;
(2) To elect four Directors of PacifiCare for three-year terms;
(3) To approve performance objectives for, and maximum awards under the
1996 Management Incentive Compensation Plan;
(4) To approve amendments to the 1996 Stock Option Plan for Officers and
Key Employees;
(5) To approve the Amended and Restated 1996 Non-Officer Directors Stock
Option Plan; and
(6) To transact other business properly coming before the meeting.
The Proxy Statement is being mailed to Plan participants who have rights in
PacifiCare's Class A Common Stock and Class B Common Stock as of the close of
business on , 1999. Participants who have rights in the Class A
Common Stock are entitled to vote on all matters to be considered at the
meeting. Participants who have rights in the Class B Common Stock are entitled
to vote only on the approval and adoption of the Amended Certificate.
Wells Fargo Bank is the trustee (the "Trustee") of the Plan and holds all
shares of PacifiCare's Class A Common Stock and Class B Common Stock allocated
to the Plan. The Plan requires the Trustee to solicit voting instructions from
you and to vote your shares of Class A Common Stock and Class B Common Stock in
accordance with your instructions. Under the Plan, you are designated as a
"named fiduciary" for voting purposes and as a named fiduciary, you are entitled
to instruct the Trustee as to how to vote all shares of Class A Common Stock and
Class B Common Stock allocated to your Plan account.
You should understand that by signing and returning the enclosed Voting
Instruction Card, you are accepting the designation as a named fiduciary of the
Plan. Accordingly, you should exercise your voting rights prudently.
CONFIDENTIAL INSTRUCTIONS
Attached is a Proxy Statement that provides you with a detailed description
of the Amended Certificate, the biographies of the four director nominees and
descriptions of the modifications to the Management Incentive Plan, the
amendments to the Employee Plan and the Amended Directors Plan. For your
information, as explained in the attached Proxy Statement, the Board of
Directors recommends a vote:
"FOR" the Amended Certificate;
"FOR" the election of the four directors;
"FOR" the modifications to the Management Incentive Plan;
"FOR" the amendments to the Employee Plan; and
"FOR" the Amended Directors Plan.
<PAGE> 6
However, the Trustee makes no recommendation with respect to your voting
decisions. IN YOUR COMPLETE DISCRETION, YOU MAY FOLLOW PACIFICARE'S BOARD OF
DIRECTORS' RECOMMENDATIONS OR YOU MAY VOTE DIFFERENTLY ON ANY OR ALL ISSUES. As
provided in the Plan, your voting instructions will be kept confidential and
will not be disclosed by the Trustee to any person, except as may be necessary
to tabulate your voting instructions.
HOW THE VOTES ARE COUNTED
IF THE TRUSTEE RECEIVES A VOTING INSTRUCTION CARD FROM YOU ON TIME, IT WILL
VOTE THE SHARES OF CLASS A COMMON STOCK AND/OR CLASS B COMMON STOCK ALLOCATED TO
YOUR PLAN ACCOUNT AS YOU INSTRUCT. IF THE TRUSTEE DOES NOT RECEIVE A VOTING
INSTRUCTION CARD FROM YOU ON TIME, THE TRUSTEE WILL VOTE THE SHARES OF CLASS A
COMMON STOCK AND/OR CLASS B COMMON STOCK ALLOCATED TO YOUR PLAN ACCOUNT IN
ACCORDANCE WITH THE INSTRUCTIONS OF THE OTHER PARTICIPANTS WHO PROVIDE TIMELY
VOTING INSTRUCTIONS TO THE TRUSTEE. IF YOU SIGN AND TIMELY RETURN A VOTING
INSTRUCTION CARD WITHOUT INDICATING A VOTE, THE TRUSTEE WILL VOTE THE SHARES OF
CLASS A COMMON STOCK AND/OR CLASS B COMMON STOCK ALLOCATED TO YOUR PLAN ACCOUNT
IN ACCORDANCE WITH PACIFICARE'S BOARD OF DIRECTORS' RECOMMENDATIONS LISTED
ABOVE.
COMPLETE YOUR VOTING
ChaseMellon Shareholder Services has been asked to receive and tabulate
your voting instructions on behalf of the Trustee. In order for your voting
instructions to the Trustee to be effective, YOU MUST COMPLETE, SIGN AND DATE
THE ACCOMPANYING VOTING INSTRUCTION CARD AND RETURN IT TO CHASEMELLON
SHAREHOLDER SERVICES IN THE ENCLOSED PRE-ADDRESSED ENVELOPE WHICH REQUIRES NO
POSTAGE. YOUR VOTING INSTRUCTION CARD MUST BE RECEIVED NO LATER THAN THE CLOSE
OF BUSINESS ON , 1999. YOUR PROMPT COOPERATION IS GREATLY
APPRECIATED.
Dated: , 1999
WELLS FARGO BANK (Trustee)
<PAGE> 7
PACIFICARE HEALTH SYSTEMS, INC.
3120 LAKE CENTER DRIVE
SANTA ANA, CALIFORNIA 92704
(714) 825-5200
PROXY STATEMENT
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
NUMBER
------
<S> <C>
Information About the Annual Meeting........................ 1
Questions and Answers....................................... 1
Proposal 1 -- Approval of the Amended Certificate........... 4
Proposal 2 -- Re-Election of Directors...................... 15
Company Information......................................... 15
Nominee Biographies....................................... 15
The Board of Directors.................................... 16
Security Ownership of Certain Beneficial Owners and
Management............................................. 18
Executive Officers and Directors Other Than Nominees...... 21
Executive Compensation.................................... 24
Option Grants in Last Fiscal Year......................... 28
Aggregated Option Exercises in Last Fiscal Year and Fiscal
Year-End Option Values................................. 30
Compensation of Directors................................. 31
Report of the Compensation Committee...................... 32
Performance Graph......................................... 36
Certain Relationships and Related Transactions............ 36
Compliance With Section 16(a) of the Securities Exchange
Act.................................................... 37
Proposal 3 -- Approval of Performance Objectives of, and
Maximum Awards Under, the 1996 Management
Incentive Compensation Plan................... 38
Proposal 4 -- Approval of Amendments to the 1996 Stock
Option Plan for Executive Officers and Key
Employees..................................... 40
Proposal 5 -- Approval of Amended and Restated 1996
Non-Officer Directors
Stock Option Plan............................. 44
Relationship of Certified Public Accountants.............. 45
Other Matters to Come Before the Annual Meeting........... 45
Stockholders' Proposals................................... 45
Exhibit A -- Amended and Restated Certificate of
Incorporation.................................. A-1
Exhibit B -- Stock Purchase Agreement....................... B-1
Exhibit C -- Warburg Dillon Read Fairness Opinion........... C-1
Exhibit D -- Amendments to the 1996 Stock Option Plan for
Executive Officers and Key Employees........... D-1
Exhibit E -- Amended and Restated 1996 Non-Officer Directors
Stock Option Plan.............................. E-1
</TABLE>
i
<PAGE> 8
PROXY STATEMENT FOR
ANNUAL MEETING OF STOCKHOLDERS OF
PACIFICARE HEALTH SYSTEMS, INC.
TO BE HELD ON , 1999
APPROXIMATE DATE OF MAILING PROXY STATEMENT
AND PROXY TO STOCKHOLDERS
, 1999
PROXY SOLICITATION
This Proxy Statement is furnished in connection with the solicitation by
the Board of Directors of PacifiCare(R) Health Systems, Inc. of proxies for the
Annual Meeting of Stockholders to be held on , 1999.
This Proxy Statement is being mailed to the holders of PacifiCare's Class A
(Voting) Common Stock, par value $0.01 per share, and the Class B (Non-Voting)
Common Stock, par value $0.01 per share. The Class A Common Stock together with
the Class B Common Stock shall be referred to as the "Common Stock." Only the
holders of Class A Common Stock and Class B Common Stock of record at the close
of business on , 1999, are entitled to vote at the meeting.
It is important that your shares of Common Stock be represented at the
Annual Meeting whether or not you plan to attend. Accordingly, you are asked to
sign, date and return the appropriate Proxy Card to ensure that your shares of
Class A Common Stock and/or Class B Common Stock are voted. Shares cannot be
voted at the meeting unless the stockholder is represented by proxy or is
present in person. The shares of Class A Common Stock and/or Class B Common
Stock represented by the proxy will be voted in accordance with the
specifications or other indications set forth on the Proxy Card.
The following question-and-answer format presents important information
regarding the Annual Meeting and the Proxy Statement.
Q: WHY AM I RECEIVING THIS PROXY STATEMENT AND PROXY CARD?
A: You are receiving a Proxy Statement and Proxy Card from us because you own
shares of PacifiCare's Common Stock. This Proxy Statement describes issues on
which we would like holders of the Class A Common Stock and Class B Common Stock
to vote and provides you with information on these issues so that you can make
an informed decision.
When a stockholder signs the Proxy Card, Alan R. Hoops and Terry O.
Hartshorn are appointed as representatives of the Class A Stockholder and Class
B Stockholder at the meeting. At the meeting, Mr. Hoops and Mr. Hartshorn will
vote the Class A Common Stock and/or Class B Common Stock as instructed on the
Proxy Card. This way your shares of Class A Common Stock and/or Class B Common
Stock will be voted whether or not you attend the Annual Meeting. Even if you
plan to attend the meeting, it is a good idea to complete, sign and return your
Proxy Card in advance of the meeting just in case your plans change.
If an issue comes up for vote at the meeting that is not on the Proxy Card,
Mr. Hoops and Mr. Hartshorn will vote the shares of Class A Common Stock and/or
Class B Common Stock, under your proxy, in accordance with their best judgment.
Q: WHAT IS THE CLASS A COMMON STOCK VOTING ON?
A: The Class A Common Stockholders are being asked to:
(1) Approve an amended and restated certificate of incorporation of
PacifiCare which, if approved, would combine and reclassify
PacifiCare's two classes of common stock into a single class of common
stock, each share of which will be entitled to one vote (the
"Reclassification"). If the
<PAGE> 9
Amended Certificate is approved each outstanding share of Class A
Common Stock and each outstanding share of Class B Common Stock will be
reclassified as one share of voting common stock without any action by
the holder;
(2) Vote for the election of four directors for three-year terms;
(3) Approve the performance objectives for, and the maximum award granted
under the 1996 Management Incentive Corporation Plan (the "Management
Incentive Plan");
(4) Approve amendments to the 1996 Stock Option Plan for Officers and Key
Employees (the "Employee Plan"); and
(5) Approve the Amended and Restated 1996 Non-Officer Directors Stock
Option Plan (the "Amended Directors Plan").
More information on the Reclassification, the Amended Certificate, the
nominees for election to our Board, the proposed modifications to the Management
Incentive Plan, the amendments to the Employee Plan and the Amended Directors
Plan is contained in other sections of this Proxy Statement.
Q: WHAT IS THE CLASS B COMMON STOCK VOTING ON?
A: The Class B Stockholders are being asked to approve and adopt the Amended
Certificate.
Q: WHO IS ENTITLED TO VOTE?
A: Only holders of the Class A Common Stock and Class B Common Stock who owned
their shares of stock as of , 1999 are entitled to vote at the
meeting. On , there were shares of Class A Common Stock
issued and outstanding and entitled to vote and shares of Class B
Common Stock issued and outstanding and entitled to vote. Holders of both Class
A Common Stock and Class B Common Stock are entitled to, and welcomed to, attend
the Annual Meeting.
Q: HOW DO THE STOCKHOLDERS VOTE THEIR SHARES?
A: They may vote by mail. Stockholders do this by signing their Proxy Card and
mailing it in the enclosed, prepaid and addressed envelope. If voting
instructions are marked on the Proxy Card, the shares will be voted as
instructed.
If a Class A Common Stockholder returns a signed Proxy Card but does not
provide voting instructions, the shares will be voted:
FOR the Amended Certificate;
FOR the four named nominees;
FOR the proposed modifications to the Management Incentive Plan;
FOR the amendments to the Employee Plan; and
FOR the Amended Directors Plan.
If a Class B Common Stockholder returns a signed Proxy Card but does not
provide voting instructions, the shares will be voted FOR the Amended
Certificate.
You may vote your shares in person at the Meeting. We will pass out written
ballots to anyone who wants to, and is entitled to, vote at the Meeting. If you
hold your shares in street name, you must request a legal proxy from your
stockbroker in order to vote at the meeting.
WE ENCOURAGE YOU TO EXAMINE YOUR PROXY CARD CLOSELY TO MAKE SURE YOU ARE
VOTING ALL OF YOUR SHARES IN PACIFICARE.
2
<PAGE> 10
Q: WHAT DOES IT MEAN IF I RECEIVE MORE THAN ONE PROXY CARD?
A: If you own shares of both the Class A Common Stock and the Class B Common
Stock, you will receive two Proxy Cards: one for the shares of Class A Common
Stock held by you, the other for the shares of Class B Common Stock held by you.
Since the Class A Common Stock will vote on all matters being presented to
PacifiCare's stockholders and the Class B Common Stock will vote only on the
Amended Certificate, separate Proxy Cards have been prepared that contain the
items to be considered and voted upon by each class of Common Stock.
If you receive two Proxy Cards and only own shares of one class of
PacifiCare's Common Stock, it means that you have multiple accounts at the
transfer agent and/or with stockbrokers. Please sign and return all Proxy Cards
to ensure that all your shares are voted.
For better customer service, we recommend consolidation of as many transfer
agent or brokerage accounts as possible under the same name and address.
Q: WHAT IF I CHANGE MY MIND AFTER I RETURN MY PROXY?
A: You may revoke your proxy and change your vote at any time before the polls
close at the meeting. You may do this by signing another proxy with a later date
or time or by voting at the meeting.
Q: WILL MY SHARES BE VOTED IF I DO NOT SIGN AND RETURN MY PROXY CARD?
A: If shares are held in street name, the brokerage firm, under certain
circumstances, may vote the shares.
Brokerage firms have authority under certain circumstances to vote
customers' unvoted shares on "routine" matters, including election of directors.
If you do not vote your proxy, the brokerage firm may either vote the shares on
routine matters or leave the shares unvoted. When a brokerage firm votes its
customers' unvoted shares on routine matters, these shares are counted for
purposes of establishing a quorum to conduct business at the meeting. If a
majority of the outstanding shares is required for approval, the non-vote of
these shares will have the same effect as a vote against. Approval of the
Amended Certificate is not a routine matter; therefore, SHARES NOT VOTED WILL
HAVE THE SAME EFFECT AS A VOTE AGAINST THIS PROPOSAL.
We encourage you to provide instructions to brokerage firms by voting their
proxy. This ensures the shares will be voted at the meeting.
YOU MAY HAVE GRANTED TO YOUR STOCKBROKER DISCRETIONARY VOTING AUTHORITY
OVER YOUR ACCOUNT. YOUR STOCKBROKER MAY BE ABLE TO VOTE YOUR SHARES DEPENDING ON
THE TERMS OF THE AGREEMENT YOU HAVE WITH YOUR STOCKBROKER.
Q: HOW DO I VOTE MY PROFIT-SHARING PLAN SHARES?
A: You will receive separate Voting Instruction Cards for the shares of Class A
Common Stock and Class B Common Stock allocated to you under the PacifiCare
Profit-Sharing Plan. By completing the appropriate Voting Instruction Card, you
provide voting instructions to Wells Fargo, the Plan's Trustee, for the shares
of Class A Common Stock and/or Class B Common Stock you hold through the
Profit-Sharing Plan.
If the Trustee does not receive voting instructions from you, the Trustee
may vote the shares of Class A Common Stock and/or Class B Common Stock
allocated to you under PacifiCare's Savings and Profit-Sharing Plan in the same
proportion as the shares voted by all other Profit-Sharing Plan participants. If
the Trustee receives a signed but not voted Voting Instruction Card, the Trustee
will vote the shares of Class A Common Stock and Class B Common Stock according
to the Board's recommendations.
Q: HOW MANY VOTES ARE NEEDED TO HOLD THE MEETING?
A: Shares are counted as present at the meeting if the stockholder is either
present and votes in person at the meeting, or has properly submitted a Proxy
Card. A majority of PacifiCare's outstanding shares as of the
3
<PAGE> 11
record date must be present at the meeting in order to hold the meeting and
conduct business. This is called a quorum.
Q: HOW ARE VOTES COUNTED?
A: You may vote "for," "against" or "withheld" for all the nominees to
PacifiCare's Board of Directors. You may vote "for," "against," or "abstain" on
the Amended Certificate, the modifications to the Management Incentive Plan, the
amendments to the Employee Plan and the Amended Directors Plan. If you abstain
from voting on the Amended Certificate, the modifications to the Management
Incentive Plan, the amendment to the Employee Plan or the Amended Directors
Plan, it has the same effect as a vote against. If you just sign your Proxy Card
with no further instructions, your shares will be counted as a vote FOR the
Amended Certificate, FOR each director, FOR the modifications to the Management
Incentive Plan, FOR the amendment to the Employee Plan and FOR the Amended
Directors Plan.
Voting results are tabulated and certified by our transfer agent,
ChaseMellon Shareholder Services.
Q: HOW MANY VOTES MUST BE CAST IN FAVOR OF THE AMENDED CERTIFICATE IN ORDER FOR
IT TO BE APPROVED AND ADOPTED?
A: The Amended Certificate requires the affirmative vote of a majority of the
outstanding shares of Class A Common Stock and Class B Common Stock voting
separately as a class.
Q: HOW MANY AFFIRMATIVE VOTES MUST THE NOMINEES RECEIVE IN ORDER TO BE ELECTED?
A: The four nominees receiving the highest number of "For" votes will be elected
as directors. This number is called a plurality and may be less than a majority
of votes.
Q: WHAT HAPPENS IF A NOMINEE IS UNABLE TO STAND FOR RE-ELECTION?
A: The Board may, by resolution, provide for a lesser number of directors or
designate a substitute nominee. In the latter event, shares represented by
proxies may be voted for a substitute nominee. Proxies cannot be voted for more
than four nominees.
Q: HOW MANY AFFIRMATIVE VOTES MUST THE MODIFICATIONS TO THE MANAGEMENT INCENTIVE
PLAN, THE AMENDMENT TO THE EMPLOYEE PLAN AND THE AMENDED DIRECTORS PLAN RECEIVE
IN ORDER TO PASS?
A: The modifications to the Management Incentive Plan, the amendments to the
Employee Plan and the Amended Directors Plan must each receive a "For" vote of a
majority of the shares of Class A Common Stock present at the meeting to pass.
Q: WHERE DO I FIND THE VOTING RESULTS OF THE MEETING?
A: We will announce preliminary voting results at the meeting. We will publish
the final results in our quarterly report on the Form 10-Q that immediately
follows the Annual Meeting. We will file that report with the Securities and
Exchange Commission, and you can get a copy by contacting our Investor Relations
Department at (714) 825-5491 or the Securities and Exchange Commission at (800)
SEC-0330 for the location of the nearest public reference room, or through the
EDGAR system at WWW.SEC.GOV.
APPROVAL OF THE AMENDED CERTIFICATE
(ITEM 1 ON THE PROXY CARD)
THE AMENDED CERTIFICATE
The Board of Directors of PacifiCare has determined that it is in the best
interests of PacifiCare and its stockholders to amend and restate, subject to
certain conditions as more fully explained herein, PacifiCare's Certificate of
Incorporation to effect the combination and reclassification of its two classes
of common stock
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<PAGE> 12
into a single class of common stock with each share having one vote (the
"Reclassified Common Stock"), and recommends the approval of PacifiCare's
amended and restated certificate of incorporation (the "Amended Certificate").
The following is a summary of the material provisions of the Amended Certificate
and its various provisions; it should, however, be read in conjunction with, and
is qualified in its entirety by reference to, the complete text of the Amended
Certificate which is attached hereto as Exhibit A.
At the Annual Meeting, the stockholders of PacifiCare are being asked to
consider and act upon a proposal to approve the Amended Certificate which would:
(i) combine and reclassify PacifiCare's two classes of common stock into a
single class of common stock with each share being entitled to one vote; and
(ii) establish the rights, powers and limitations of the Reclassified Common
Stock. If the Amended Certificate is approved, each outstanding share of
PacifiCare Class A and Class B Common Stock will be changed, reclassified and
converted without any action on the part of the holder into one share of
Reclassified Common Stock. The Reclassified Common Stock will trade on the
Nasdaq National Market System under the symbol PHSY.
Approval of a majority of the outstanding Class A and Class B Common Stock,
voting separately as a class, is required to approve the Amended Certificate
under both Delaware law and PacifiCare's Certificate of Incorporation.
If the stockholders approve the Amended Certificate, the Board of Directors
intends to file the Amended Certificate with the Secretary of State of the State
of Delaware as soon as practicable following approval. The Amended Certificate
will be effective immediately upon acceptance of filing by the Secretary of
State of the State of Delaware. Although the Board of Directors presently
intends to file the Amended Certificate if it is approved by stockholders, the
resolution of the stockholders will reserve the right of the Board of Directors
to abandon the Amended Certificate and not file such Amended Certificate even if
the Amended Certificate is approved by stockholders. Although the Board of
Directors does not currently anticipate exercising its right to abandon the
Amended Certificate nor does it contemplate any specific events that would
trigger the abandonment of the Amended Certificate, the Board will defer or
abandon the Amended Certificate, if in its business judgment, adverse market
conditions, general economic conditions or other developments affecting
PacifiCare are such as to make the combination and reclassification of the Class
A and Class B Common Stock and the filing of the Amended Certificate no longer
in the best interests of PacifiCare or its stockholders.
Upon approval of the Amended Certificate, the relative voting power of
PacifiCare's stockholders will change as will the relative voting power of
UniHealth Foundation, PacifiCare's largest stockholder. UniHealth Foundation
currently owns 5,909,500 shares of Class A Common Stock or 39.8 percent of the
Class A Common Stock and 285,000 shares of the Class B Common Stock or 0.9
percent of the Class B Common Stock. If the Amended Certificate is approved,
UniHealth Foundation will own 6,194,500 shares of Reclassified Common Stock or
13.5 percent of the Reclassified Common Stock. This ownership level will be
reduced as PacifiCare commences the repurchase of UniHealth Foundation's shares
of Reclassified Common Stock. See "Repurchase of UniHealth Shares."
DESCRIPTION OF THE RECLASSIFIED COMMON STOCK
The rights, powers and limitations of the Reclassified Common Stock are set
forth in full in Article FOUR of the Amended Certificate. The Amended
Certificate is set forth as Exhibit A to this Proxy Statement and is
incorporated herein by reference. The Amended Certificate eliminates the Class B
Common Stock and combines, reclassifies and converts the Class B Common Stock
with the Class A Common Stock to create one class of common stock, with each
share entitled to one vote. The Reclassified Common Stock will have the same
rights, preferences and privileges as the Class A Common Stock.
Voting. Upon approval of the Amended Certificate, each share of the
Reclassified Common Stock will have one (1) vote and holders of the Reclassified
Common Stock will be entitled to vote for the election of directors and all
other matters requiring stockholder approval. Under PacifiCare's Certificate of
Incorporation as now in effect, the affirmative vote of the holders of a
majority of the outstanding shares of Class A Common Stock entitled to vote is
required (i) to amend the Certificate; (ii) to authorize additional shares of
Class A
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<PAGE> 13
Common Stock; (iii) to approve any merger or consolidation of PacifiCare with or
into any other corporation; and (iv) to approve the dissolution of PacifiCare.
Currently, the holders of Class A Common Stock elect the entire board of
directors and may increase or decrease the number of authorized shares of Class
B Common Stock (but not below the number of shares then outstanding). In
addition, the Certificate and Delaware General Corporation Law provides the
Class B Common Stock with limited voting rights. The holders of Class B Common
Stock are entitled to vote as a class on: (i) any merger or consolidation of
PacifiCare which involves an amendment to PacifiCare's Certificate of
Incorporation and which would have an adverse effect on the rights of the Class
B Common Stock; or (ii) on proposals to change the par value of the Class B
Common Stock or to alter or change the powers, preferences or special rights of
the shares of Class B Common Stock, which may affect the Class B Common
Stockholders adversely.
Dividends and Other Distributions. Holders of the Reclassified Common Stock
will be entitled to equal per share cash dividends and dividends paid in stock
or property of PacifiCare, when, as and if such dividends may be declared by the
Board of Directors and paid out of legally available assets.
Preemptive Rights. The Reclassified Common Stock will not carry any
preemptive rights enabling a holder to subscribe for, or receive shares of any
class of stock of PacifiCare or any other securities convertible into shares of
any class of stock of PacifiCare.
Authorized Reclassified Common Stock. The total number of shares of
Reclassified Common Stock authorized for issuance will not change if the Amended
Certificate is approved. PacifiCare's Certificate of Incorporation presently
authorizes the issuance of up to 100,000,000 shares of Class A Common Stock and
up to 100,000,000 shares of Class B Common Stock. The Amended Certificate would
authorize PacifiCare to issue up to 200,000,000 shares of Reclassified Common
Stock. Following the filing of the Amended Certificate, approximately 45,679,000
shares of Reclassified Common Stock would be issued and outstanding.
Approximately 154,321,000 shares of Reclassified Common Stock would therefore be
available for issuance from time to time for any proper corporate purpose,
including stock splits, stock dividends, acquisitions, stock option plans and
funding of employee benefit plans.
CERTAIN EFFECTS OF THE AMENDED CERTIFICATE
Effect on Stock Certificates. Stockholders should retain all certificates
that represent the Class A and Class B Common Stock since pursuant to the
Amended Certificate, such certificates will represent shares of the Reclassified
Common Stock immediately upon the effectiveness of the Amended Certificate
without any further action on the part of the holder or PacifiCare. As soon as
practicable after the Amended Certificate is approved (the "Effective Time"), we
will mail to each holder of record of Class A Common Stock and Class B Common
Stock a letter of transmittal to be used in forwarding certificates evidencing
such shares for surrender and exchange for certificates evidencing the shares of
Reclassified Common Stock to which the holder has been entitled. After receipt
of the applicable transmittal form, each holder of certificates formerly
representing shares of Class A Common Stock or Class B Common Stock should
surrender such certificates to ChaseMellon Shareholder Services, the Transfer
Agent for the Reclassified Common Stock, together with a properly completed and
duly executed transmittal form and such documents as may reasonably be required
by the Transfer Agent. Each holder will receive in exchange therefor
certificates evidencing the shares of Reclassified Common Stock to which such
holder is entitled. The transmittal forms will be accompanied by instructions
specifying other details of the exchange. If, following the filing of the
Amended Certificate, a valid certificate previously representing any of shares
of Class A Common Stock or Class B Common Stock is presented to the Transfer
Agent or to PacifiCare, the stock certificate will be canceled and exchanged as
provided above.
Stock Option Plans. At the Effective Date, each outstanding option to
purchase shares of PacifiCare Class A Common Stock and Class B Common Stock (a
"PacifiCare Option") under any of PacifiCare's stock options plans shall be
converted into options to purchase shares of Reclassified Common Stock.
PacifiCare shall issue in substitution therefor an option to purchase
Reclassified Common Stock (a "Substitute Option"). The exercise price and the
number of shares of Reclassified Common Stock, as the case may be, subject to
each Substitute Option shall be identical to the exercise price and the number
of shares of Class A Common
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<PAGE> 14
Stock and Class B Common Stock subject to the PacifiCare Option that such
Substitute Option replaces. Each Substitute Option shall be subject to
substantially all of the terms and conditions of the PacifiCare Option it
replaces.
Material Tax Consequences. Stockholders of PacifiCare will not recognize
gain or loss upon the exchange of their shares of Class A Common Stock or Class
B Common Stock for shares of Reclassified Common Stock. The aggregate tax basis
of the shares of Reclassified Common Stock received in exchange for Class A
Common Stock or Class B Common Stock, as applicable, will be the same as the
aggregate tax basis of the shares of Class A Common Stock and/or Class B Common
Stock. The holding period for the shares of Reclassified Common Stock will
include the holding period of the shares of Class A Common Stock and/or Class B
Common Stock.
Trading Market. Currently, the shares of Class A Common Stock and Class B
Common Stock are traded separately on the Nasdaq National Market. Following the
filing of the Amended Certificate, the Reclassified Common Stock will trade as a
single class on the Nasdaq National Market under the symbol PHSY. Since ,
the average daily trading volume in the Class A Common Stock has been
. The average daily trading volume for the Class B Common
Stock has been . Although one of the reasons underlying
PacifiCare's desire for a single class of common stock is increasing the
liquidity and trading efficiency of PacifiCare's Common Stock, PacifiCare cannot
assure that the liquidity and trading efficiency of the Reclassified Common
Stock will increase as a result of the combination of the two classes.
Effect on Market Price. The market price of shares of Reclassified Common
Stock following the combination of the two classes will depend on many factors,
including, among others, the future performance of PacifiCare, general market
conditions and conditions relating to companies in industries similar to that of
PacifiCare. Accordingly, PacifiCare cannot predict the prices at which the
Reclassified Common Stock will trade following the adoption of the Amended
Certificate, just as PacifiCare could not predict the price at which the Class A
Common Stock and Class B Common Stock trade. On , 1999,
the closing price of the Class A Common Stock and the Class B Common Stock was
$ per share and $ per share, respectively, as reported on the Nasdaq
National Market System.
Securities Act of 1933. The combination, reclassification and conversion of
the Class A and Class B Common Stock into the Reclassified Common Stock is being
made pursuant to an exemption from registration under Section 3(a)(9) of the
Securities Act of 1933. Shares of Reclassified Common Stock held immediately
upon effectiveness of the Amended Certificate, other than any such shares held
by affiliates of PacifiCare within the meaning of the Securities Act and other
than shares received in respect of unregistered shares, may be offered for sale
and sold in the same manner as the existing Common Stock without registration
under the Securities Act. Affiliates of PacifiCare, including UniHealth, and
holders of unregistered shares, will continue to be subject to the restrictions
specified in Rule 144 under the Securities Act.
REPURCHASE OF UNIHEALTH SHARES
In 1998, UniHealth Foundation ("UniHealth"), PacifiCare's largest
stockholder, converted to a charitable foundation under the Internal Revenue
Code. As a result of UniHealth's new status, UniHealth determined that it was in
its best interest to diversify its holdings and reduce the number of shares of
PacifiCare Common Stock it owns. In December 1998, PacifiCare and UniHealth
initiated discussions about a possible repurchase by PacifiCare of UniHealth's
shares. UniHealth currently owns 5,909,500 shares of Class A Common Stock, or
39.8 percent of PacifiCare's Class A Common Stock, and 285,000 shares of Class B
Common Stock, or 0.9 percent of PacifiCare's Class B Common Stock. After
extensive negotiations that were directed by the Special Opportunities Committee
of PacifiCare (with the UniHealth designee not participating), PacifiCare and
UniHealth entered into a Stock Purchase Agreement. In the Stock Purchase
Agreement, UniHealth has agreed to vote in favor of the Amended Certificate,
subject to certain conditions, and PacifiCare has agreed to repurchase, and
UniHealth has agreed to sell, 5,909,500 shares of Reclassified Common Stock held
by UniHealth (the "UniHealth Shares"). The UniHealth Shares will be repurchased
in installments during a period beginning 30 trading days after the filing of
the Amended Certificate and ending
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<PAGE> 15
in February 2001 if the Amended Certificate is approved. In consideration of the
covenants and agreements of UniHealth set forth in the Stock Purchase Agreement,
PacifiCare has agreed to pay UniHealth $60 million in cash (the "UniHealth
Payment") upon approval of the Amended Certificate. The full text of the Stock
Purchase Agreement is set forth as Exhibit B to this Proxy Statement and
incorporated herein. The following is a summary of the material provisions of
the Stock Purchase Agreement. This summary should, however, be read in
conjunction with, and is qualified in its entirety by reference to Exhibit B.
STOCK PURCHASE AGREEMENT
Repurchase of UniHealth Shares. Subject to approval of the Amended
Certificate, beginning on or about August 15, 1999 and ending on February 20,
2001, PacifiCare will repurchase the UniHealth Shares on the following dates
(each a "Repurchase Date") and in the following installments:
<TABLE>
<S> <C>
August 15,1999.............................................. 1,000,000 shares
November 15, 1999........................................... 1,000,000 shares
February 15, 2000........................................... 750,000 shares
May 15, 2000................................................ 750,000 shares
August 15, 2000............................................. 750,000 shares
November 15, 2000........................................... 750,000 shares
February 15, 2001........................................... 909,500 shares
</TABLE>
The purchase price (the "Purchase Price") for the UniHealth Shares on any
Repurchase Date shall equal the average of the closing sales prices of one share
of Reclassified Common Stock as quoted on the Nasdaq National Market for the 30
trading days immediately preceding the Repurchase Date (not including the
Repurchase Date) (the "Price Date"). If the Purchase Price on any Repurchase
Date is less than $75.00 per share ($70.00 per share in the case of the first
installment), UniHealth may elect during the 10-days following the Repurchase
Date to sell the subject shares to PacifiCare for less than the $75.00 per share
($70.00 per share in the case of the first installment) and PacifiCare may elect
to pay $75.00 per share ($70.00 per share in the case of the first installment).
If the Purchase Price is more than $120.00 per share, PacifiCare may elect
during the 10 days immediately after the Price Date not to repurchase the
subject shares. If PacifiCare does not repurchase the shares during the 10 day
period, then the shares are no longer subject to the Stock Purchase Agreement
and UniHealth may resell the shares by any means, including open market
transactions. Prior to selling such shares, UniHealth is required to first give
PacifiCare 10 days notice of its intention to sell and the opportunity to
repurchase such shares during such 10-day period at the price equal to the same
price as the proposed sale (which, if an open market transaction, shall be
deemed to be the average of the closing prices of the Reclassified Common Stock
as quoted on the Nasdaq National Market for the 10 trading days immediately
preceding the notice). PacifiCare has agreed to file a shelf registration
statement covering the UniHealth Shares following the approval of the Amended
Certificate to enable UniHealth to resell in open market transactions or by
other means any shares that are released from the Stock Purchase Agreement.
Stockholder approval of the Stock Purchase Agreement is not required by
Delaware law and is not being solicited by this Proxy Statement. The repurchase
of the UniHealth Shares is specifically conditioned on approval of the Amended
Certificate by PacifiCare's stockholders and the filing of the Amended
Certificate with the Secretary of State of the State of Delaware.
Agreement to Vote. Pursuant to the Stock Purchase Agreement, UniHealth has
agreed to vote all of its Class A Common Stock (approximately 39.8 percent of
the outstanding shares of Class A Common Stock) and all of its Class B Common
Stock (approximately 0.9 percent of the outstanding shares of Class B Common
Stock) in favor of adoption and approval of the Amended Certificate and has
delivered to PacifiCare an irrevocable proxy (the "UniHealth Proxy") with
respect to those shares. The voting agreement and proxy are subject to the
following conditions: (i) that immediately prior to the stockholders' meeting no
other conditions on the obligation of PacifiCare to file the Amended Certificate
and pay UniHealth the $60 million payment exist other than stockholder approval
of the Amended Certificate; and (ii) there are no hearings scheduled by any
court of competent jurisdiction or any governmental authority seeking any
temporary
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<PAGE> 16
restraining order, injunction or other relief to restrain, enjoin or otherwise
prohibit the holding of the stockholders meeting, the consideration of the
Amended Certificate or any other aspect of the transactions with UniHealth. If
the conditions are not satisfied, then UniHealth's proxy is automatically
revoked and UniHealth may vote for or against the Amended Certificate. If either
condition is not satisfied and UniHealth indicates that it is not prepared to
vote in favor of the Amended Certificate, then PacifiCare would probably
postpone the stockholders meeting until the matters causing the failure of the
conditions were resolved. In addition, UniHealth has agreed to vote at the
Annual Meeting or at any other meeting of PacifiCare stockholders against:
(a) any proposal or transaction which could prevent or delay the
consummation of the Transaction (as defined below);
(b) any action or agreement that would result in a breach of any
representation, warranty, covenant or obligation of PacifiCare in the Stock
Purchase Agreement; provided that PacifiCare advises UniHealth prior to the
vote, that it believes that such action or agreement would have such an
effect and the basis for such belief;
(c) any extraordinary corporate transaction, such as a merger,
consolidation or other business combination involving PacifiCare or any of
significant subsidiary of PacifiCare;
(d) any sale, lease or transfer of all or substantially all of the
assets of PacifiCare or any significant subsidiary of PacifiCare;
(e) any reorganization, recapitalization, dissolution or liquidation
of PacifiCare or any significant subsidiary of PacifiCare other than the
Reclassification and the Amended Certificate;
(f) any change in a majority of the Board of Directors; or
(g) any other action which is intended to, or could reasonably be
expected to, impede, interfere with, delay, postpone, discourage, or
adversely affect the contemplated benefits to PacifiCare and its
stockholders of the Transaction (as defined below) provided that PacifiCare
advises UniHealth prior to the vote, that PacifiCare believes that such
action or agreement would have such an effect and the basis for its belief.
Payment to UniHealth. In consideration of UniHealth's covenants and
agreements in the Stock Purchase Agreement, including, the agreement to sell the
UniHealth Shares to PacifiCare in accordance with the terms of the agreement,
its standstill agreements, the voting agreement and the confidentiality
agreement, PacifiCare will pay UniHealth $60 million on the date the Amended
Certificate is approved by PacifiCare's stockholders. The Amended Certificate
and the transactions and agreements with UniHealth set forth in the Stock
Purchase Agreement are collectively referred to herein as the "Transaction."
No Negotiation and Standstill. Pursuant to the Stock Purchase Agreement,
UniHealth has agreed not to purchase or sell any shares of Class A Common Stock,
or Reclassified Common Stock (other than the 285,000 shares received upon
conversion and reclassification of the Class B Common Stock ("Old UniHealth
Class B Shares") until February 15, 2001 unless the Amended Certificate is not
approved or if UniHealth withholds shares or PacifiCare waives an installment,
then UniHealth may sell such shares at any time in open market transactions or
otherwise as described above.
During the period from May 4, 1999, the date of the Stock Purchase
Agreement, until the termination of the Stock Purchase Agreement (the "Pre-Final
Closing Period"), except with respect to a Sale Transaction (as defined below)
of any Common Stock released from purchase or the Old UniHealth Class B Shares,
neither UniHealth nor any of its representatives shall directly or indirectly:
(a) solicit or encourage the initiation of any inquiry, proposal or
offer from any person relating to a possible Sale Transaction;
(b) participate in any discussions or negotiations or enter into any
agreement with, or provide any information to, any person relating to or in
connection with a possible Sale Transaction;
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<PAGE> 17
(c) consider, entertain or accept any proposal or offer from any
person relating to a possible Sale Transaction;
(d) engage in any Sale Transaction;
(e) make, effect, initiate, cause or participate in (i) any
acquisition of beneficial ownership of any securities of PacifiCare or any
securities of any subsidiary or other affiliate of PacifiCare, (ii) any
acquisition of any assets of PacifiCare or any assets of any subsidiary or
other affiliate of PacifiCare, (iii) except for the Reclassification and
except as expressly authorized, any tender offer, exchange offer, merger,
business combination, recapitalization, restructuring, liquidation,
dissolution or extraordinary transaction involving PacifiCare or any
subsidiary or other affiliate of PacifiCare, or involving any securities or
assets of PacifiCare or any securities or assets of any subsidiary or other
affiliate of PacifiCare, or (iv) any "solicitation" of "proxies" (as those
terms are used in the proxy rules of the Securities and Exchange
Commission) or consents with respect to any securities of PacifiCare;
(f) form, join or participate in a "group" (as defined in the
Securities Exchange Act of 1934 and the rules promulgated thereunder (the
"Exchange Act")) with respect to the beneficial ownership of any securities
of PacifiCare;
(g) act, alone or in concert with others, to seek to control or
influence the management, board of directors or policies of PacifiCare;
(h) take any action that might require PacifiCare to make a public
announcement regarding any of the types of matters set forth in clause
"(e)" above;
(i) agree or offer to take, or encourage or propose (publicly or
otherwise) the taking of, any action referred to in clause "(e)", "(f)",
"(g)" or "(h)" above;
(j) assist, induce or encourage any other person, entity or group to
take any action of the type referred to in clause "(e)", "(f)", "(g)" "(h)"
or "(i)" above;
(k) enter into any discussions, negotiations, arrangement or agreement
with any other person, entity or group relating to any of the foregoing; or
(l) request or propose that PacifiCare or any of PacifiCare's
representatives amend, waive or consider the amendment or waiver of any
provision set forth above.
For purpose of the Stock Purchase Agreement, "Sale Transaction" is defined
as any transaction involving the sale, disposition, acquisition, transfer, or
"short sale" of, or grant of an option to purchase, shares of Reclassified
Common Stock beneficially owned by UniHealth or any hedging or similar
transaction with the same economic effect as a sale of any or all of UniHealth's
shares of Reclassified Common Stock.
No Proxy or Voting Agreement. UniHealth shall not, without the prior
written consent of PacifiCare, directly or indirectly, grant any proxies (other
than the UniHealth Proxy and any proxies solicited by the Board of Directors of
PacifiCare with respect to stockholders meetings, including the Annual Meeting)
or enter into any voting trust or other agreement or arrangement with respect to
the voting of any of the UniHealth Shares until termination of the agreement.
Termination of Board Rights. Following approval of the Amended Certificate,
PacifiCare shall have no obligation to nominate and UniHealth shall not take any
action (including the submission of any nomination to the Governance and
Nominating Committee of PacifiCare's Board of Directors) to have nominated any
of Bradley C. Call, David R. Carpenter, Gary L. Leary or Jean Bixby Smith for
reelection to PacifiCare's Board of Directors following expiration of his or her
current term.
Support for Rights Plan. UniHealth will support the adoption of an
appropriate stockholder rights plan promptly following approval of the Amended
Certificate by the PacifiCare stockholders. In addition, UniHealth has agreed
not to take or support any action which is intended, or could reasonably be
expected to, impede, interfere with, delay, postpone, discourage or adversely
affect the adoption, implementation or enforcement of a rights plan.
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<PAGE> 18
Change in Control. If PacifiCare enters into a definitive agreement for a
change of control of PacifiCare during the term of the Stock Purchase Agreement,
UniHealth does not have to sell any of its shares to PacifiCare while the
transaction is pending. A change of control is defined as the sale of
substantially all of the assets of PacifiCare or any transaction or series of
transactions that if consummated will result in any person or group acquiring
beneficial ownership of more than 40 percent of the total outstanding voting
power of PacifiCare. Upon closing of the change in control transaction,
UniHealth shall be entitled to receive the same consideration as is received by
the other holders of Reclassified Common Stock for the UniHealth Shares it then
owns. In addition, if PacifiCare repurchases any UniHealth Shares during the 90
days prior to the date of the first public announcement of the proposed change
in control transaction or the first public announcement of an offer that leads
to a change in control transaction ("Pre-Announcement Period"), then, upon the
closing of the change in control transaction, PacifiCare shall pay UniHealth a
cash amount equal to the positive difference, if any, between (1) the aggregate
consideration payable in the change in control transaction for the number of
UniHealth Shares purchased under the Stock Purchase Agreement during the
Pre-Announcement Period ("Subject Shares") and (2) the aggregate purchase price
of the Subject Shares. The Stock Purchase Agreement specifies the methods to be
used in valuing any non-cash consideration. If the definitive agreement for the
change of control transaction is terminated without closing, then any UniHealth
Shares that are not repurchased during the period from the execution of the
definitive agreement for the change in control transaction and the termination
date shall be added pro rata to all remaining UniHealth Shares.
Registration Rights. PacifiCare has agreed to register for resale all of
the UniHealth Shares in a shelf registration following the approval of the
Amended Certificate and to reasonably support an underwritten secondary offering
for the sale of such shares after February 15, 2001.
Termination of Stock Purchase Agreement. The Stock Purchase Agreement will
terminate automatically if the Amended Certificate is not approved by September
30, 1999. Either party may terminate the Stock Purchase Agreement if the
conditions to closing on any Repurchase Date are not satisfied within 45 days
after the scheduled repurchase date.
Credit Agreement. PacifiCare's credit facility currently limits total stock
repurchases to $500 million. As of March 31, 1999, PacifiCare had repurchased
$45 million of its common stock through open market repurchases. Under the
repurchase plan approved by the Board, PacifiCare may purchase up to 10 percent
of its outstanding common stock in addition to the UniHealth Shares. Depending
on the repurchase prices of the UniHealth Shares and other open market
repurchases of common stock, PacifiCare may need to seek an amendment under its
credit facility in 2000 or 2001. If an amendment cannot be obtained, PacifiCare
would be required to negotiate a new facility.
Attorney General of the State of California. The Attorney General of the
State of California, who has jurisdiction to intervene in the sale of assets by
UniHealth, has requested that UniHealth provide the Attorney General with an
additional opinion reviewing the fairness of the transactions, from a financial
point of view, to UniHealth. The Attorney General is also reviewing the original
fairness opinion delivered by UniHealth's financial advisors to its Board of
Directors and has requested the materials supporting that opinion.
BACKGROUND OF THE AMENDED CERTIFICATE AND REPURCHASE OF UNIHEALTH'S SHARES
In December 1998, UniHealth and PacifiCare initiated discussions about a
possible repurchase by PacifiCare of UniHealth shares. UniHealth indicated that
because of its change in status from an active health care company to a
charitable foundation, its board of directors believed that it was in
UniHealth's best interest to diversify its holdings and reduce its ownership
interest in PacifiCare. The UniHealth designee to the PacifiCare Board of
Directors who serves on the Special Opportunities Committee, David R. Carpenter,
recused himself from participation in any of the Special Opportunities Committee
meetings relating to this issue.
The Special Opportunities Committee's charter is to consider strategic
transactions for PacifiCare. Since its formation, the committee has explored
with financial advisors various strategic alternatives available to PacifiCare
for enhancing its stockholders' value.
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<PAGE> 19
The Special Opportunities Committee retained Warburg Dillon Read (who has
previously advised the committee) to serve as its financial advisor with respect
to a potential transaction with UniHealth and began exploring a potential
transaction with its professional advisors and PacifiCare's senior executives.
The committee's objectives for the transaction were eliminating the dual class
structure and preventing a disorderly disposition of UniHealth's shares in a
transaction that would be accretive to earnings and benefit all of PacifiCare's
stockholders. On January 8, 1999, Warburg Dillon Read made a presentation to the
committee regarding: (1) its analysis of the benefits of the elimination of the
dual class structure; (2) an accretion analysis of a repurchase of UniHealth
shares in comparison to alternative uses of PacifiCare's free cash; and (3) an
analysis of premiums paid in connection with comparable transactions and issuer
tender offers. The committee discussed alternatives to the repurchase of
UniHealth shares including the impact of UniHealth selling the shares through
the open market or in block transactions that were not managed through
PacifiCare. The committee also considered whether UniHealth would vote in favor
of the elimination of the dual class structure without securing the repurchase
of its stock and the payment of a premium.
After meetings with its financial advisors and professionals and
discussions with representatives of UniHealth, the Special Opportunities
Committee authorized and supervised the preparation of an initial term sheet to
be sent to UniHealth to begin the negotiations. During the period from January
through the end of March, PacifiCare and UniHealth negotiated the terms of the
Amended Certificate, the stock repurchase and other aspects of the Transaction.
Throughout the negotiation process, the Special Opportunities Committee held
meetings, consulted with its financial advisor and other professionals and
approved changes offered to basic terms.
In March 1999, PacifiCare, with the assistance of counsel, prepared and
began negotiating a definitive Stock Purchase Agreement, proxy, registration
rights agreement and confidentiality agreement with UniHealth. The negotiations
of those agreements were completed on April 30, 1999.
On April 22, 1999, the Special Opportunities Committee held a meeting to
review the status of the transaction and make its recommendation to the full
Board of Directors regarding the Amended Certificate and the transactions with
UniHealth as set forth in the most recent drafts of the Stock Purchase
Agreement. Representatives of its financial advisor and counsel attended the
meeting and made presentations on the transaction. After a full discussion and
consideration of all aspects of the transaction, the Special Opportunities
Committee (without the participation of Mr. Carpenter) recommended that the
Board of Directors approve the Amended Certificate and the other aspects of the
Transaction with UniHealth.
On April 22, 1999, the Board of Directors met to consider the Amended
Certificate and the other aspects of the Transaction with UniHealth. At the
meeting, Warburg Dillon Read gave a full presentation on the fairness opinion
that it was prepared to give in connection with this Transaction. The UniHealth
designees on the Board of Directors did not attend the presentations on the
Transaction or the board discussions. After a full discussion, the Board of
Directors (without the vote of any of the UniHealth designees) unanimously
approved the Amended Certificate, the Stock Purchase Agreement with UniHealth
and the transactions contemplated by the Stock Purchase Agreement, subject to
receipt of the fairness opinion and final approval by the Special Opportunities
Committee. The Board of Directors delegated to the Special Opportunities
Committee the authority to approve the Stock Purchase Agreement so long as no
substantive changes were made to the basic economic terms of the transaction. On
May 4, 1999, Warburg Dillon Read delivered the fairness opinion described below
to the Board of Directors and the Special Opportunities Committee met and
approved the final Stock Purchase Agreement.
RECOMMENDATION OF THE BOARD OF DIRECTORS AND REASONS FOR THE AMENDED CERTIFICATE
AND REPURCHASE OF UNIHEALTH'S SHARES
At a meeting on April 22, 1999, PacifiCare's Board of Directors, excluding
the UniHealth designated directors, by unanimous vote: (i) determined that the
Amended Certificate and the transactions with UniHealth are in the best
interests of PacifiCare and its stockholders; and (ii) approved the Amended
Certificate and the transactions with UniHealth. At such meeting, PacifiCare's
Board of Directors also recommended that PacifiCare's stockholders approve and
adopt the Amended Certificate. In reaching the
12
<PAGE> 20
foregoing conclusions and recommendations, PacifiCare's Board of Directors
considered the recommendation of PacifiCare's Special Opportunities Committee to
approve the Amended Certificate and the Transactions with UniHealth and a number
of additional factors:
(i) the presentations and views expressed by PacifiCare's management
regarding (1) the potential benefits of a simplified capital structure; (2)
the potential adverse effects of UniHealth selling its PacifiCare stock in
the open market or other transactions not managed through PacifiCare, (3)
the accretive impact of the repurchases on, and potential growth of,
PacifiCare's earnings per share in 1999 and 2000 in comparison to
alternative uses of free cash;
(ii) the long-term interests of PacifiCare and its stockholders and
PacifiCare's strategic business plans;
(iii) the fairness opinion delivered by Warburg Dillon Read on May 4,
1999 to the effect that the Transaction with UniHealth (including the
Amended Certificate) was fair from a financial point of view to
PacifiCare's stockholders (other than UniHealth);
(iv) historical trading prices of the Class B Common Stock and the
Class A Common Stock, including the persistent discount in the Class A
Common Stock Price;
(v) the fact that the Class A Common Stock represents approximately 33
percent of the total outstanding Common Stock and the Class B Common Stock
represents approximately 67 percent of the total outstanding Common Stock,
yet the Class A Common Stock controls the selection of the Board of
Directors and most other matters requiring stockholder vote;
(vi) the rights, powers and limitations of the Reclassified Common
Stock as set forth in the Amended Certificate; and
(vii) the terms and conditions of the Stock Purchase Agreement and the
UniHealth Payment, including the fact that UniHealth had agreed to vote in
favor of the Amended Certificate and without UniHealth's vote and support
it would be extremely difficult to approve the Amended Certificate.
PACIFICARE'S REASONS FOR THE PROPOSAL
For PacifiCare to achieve its goal of increasing stockholder value and
improving the liquidity of its equity securities, management and the Board of
Directors believe that PacifiCare must eliminate its present dual class common
stock structure. It is PacifiCare's intent that a simplified structure with a
single class of common stock, each share of which is entitled to one vote, will
increase the appeal of PacifiCare's stock to investors and provide PacifiCare
with the following benefits.
1. Simplification of the Capital Structure of PacifiCare. The Board of
Directors believes that PacifiCare's dual classes of common stock have had
negative consequences on its stock prices and its ability to pursue its long
term business plans. The Class A Common Stock has traded at a persistent
discount to the Class B Common Stock, and might be depressing overall
stockholder value. The existence of the two classes has reduced PacifiCare's
flexibility to structure potential acquisitions and other transactions using
voting securities and has potentially increased PacifiCare's acquisition cost if
it were to use Class A Common Stock. Finally, the voting control of PacifiCare
no longer reflects the risk of ownership, because, over time, PacifiCare has
raised capital through the sale of Class B Common Stock. The Class A Common
Stock now controls the selection of the Board of Directors, but represents only
approximately 33 percent of the total Common Stock outstanding. The Class B
Common Stock represents approximately 67 percent of the total Common Stock
outstanding. The Board of Directors believes that the simplification of the
capital structure will eliminate these negative effects as described below and
will make PacifiCare common stock a more attractive investment.
2. Providing all Common Equity Owners the Right to Vote. As the result of
the Amended Certificate, each share of Reclassified Common Stock will be
entitled to one vote and no stockholder will control more than 13.5 percent of
the total outstanding Reclassified Common Stock (before the UniHealth
repurchases). As a result, stockholders' voting rights will be aligned with
their economic interest.
13
<PAGE> 21
3. Increasing the Liquidity and Trading Efficiency of the Common Stock of
PacifiCare. PacifiCare's Board of Directors believes that the Class A Common
Stock has traded at a persistent discount to the Class B Common Stock, in part,
due to its low trading volume and relative illiquidity. The combination of the
two classes will result in a combined 45,679,000 shares outstanding, which
should improve the trading volumes and overall liquidity of both Class A Common
Stock and Class B Common Stock.
4. Better Positioning of PacifiCare to Pursue Strategic Mergers and Access
to Capital Markets. PacifiCare's Board of Directors believes that the dual class
structure of its common stock hinders its access to capital markets and its
ability to undertake transactions that would be in the best interests of
PacifiCare and its stockholders that would require the use of its voting
securities. In addition, the persistent trading discount in the Class A Common
Stock would increase the cost of any transaction using voting securities. The
Board of Directors believes that by establishing a single class of common stock
with equal voting rights and increasing the liquidity of PacifiCare's common
stock, PacifiCare will be in a better position to offer its shares in private
and public equity and convertible debt offerings, and to use its shares as
consideration in strategic transactions.
The foregoing discussion of the information and factors considered by
PacifiCare's Board of Directors and the Special Opportunities Committee is not
intended to be exhaustive, but includes all material factors considered by
PacifiCare's Board of Directors and the Special Opportunities Committee.
PacifiCare's Board of Directors and the Special Opportunities Committee did not
assign relative weights to the above factors or determine that any factor was of
particular importance. A determination of various weightings would, in the view
of the PacifiCare Board of Directors, be impractical. Rather, PacifiCare's Board
of Directors viewed its position and recommendations as being based on the
totality of the information presented to, and considered by, it. In addition,
individual members of the PacifiCare Board of Directors may have given different
weight to different factors.
FOR THE REASONS DESCRIBED ABOVE, PACIFICARE'S BOARD OF DIRECTORS (EXCLUDING THE
UNIHEALTH DESIGNEES) HAS UNANIMOUSLY APPROVED THE AMENDED CERTIFICATE AND
RECOMMENDS THAT PACIFICARE STOCKHOLDERS VOTE FOR APPROVAL AND ADOPTION OF THE
AMENDED CERTIFICATE.
OPINION OF WARBURG DILLON READ
PacifiCare's Board of Directors has received a written fairness opinion,
dated May 4, 1999, from Warburg Dillon Read to the effect that the
Reclassification of the Class A and Class B Common Stock into a single class of
common stock in accordance with the Amended Certificate, the repurchase of the
UniHealth Shares after the Reclassification and the payment to UniHealth of $60
million on the date of approval of the Amended Certificate, as more fully set
forth in the Stock Purchase Agreement, is fair, from a financial point of view,
to the stockholders of PacifiCare (other than UniHealth). THE FULL TEXT OF THE
WDR OPINION, WHICH SETS FORTH THE ASSUMPTIONS MADE, GENERAL PROCEDURES FOLLOWED,
MATTERS CONSIDERED AND METHODS EMPLOYED BY WARBURG DILLON READ IN ARRIVING AT
ITS OPINION IS ATTACHED HERETO AS EXHIBIT C AND IS INCORPORATED HEREIN BY
REFERENCE. The summary of the Warburg Dillon Read Opinion contained in this
Proxy Statement is qualified in its entirety by reference to the full text of
such opinion. Holders of the Class A and Class B Common Stock are urged to and
should read the opinion in its entirety.
FINANCIAL ADVISORS TO PACIFICARE
PacifiCare retained Warburg Dillon Read as its financial advisor in
connection with the Proposal. PacifiCare will pay Warburg Dillon Read a fee of
$900,000, plus reimbursement of out-of-pocket costs and expenses for the
services rendered to date, including delivery of the opinion set forth herein,
and $800,000 upon approval of the Amended Certificate. See "Background of the
Proposal."
EXPENSES
The costs of proceeding with the Amended Certificate proposal (such as
transfer agent's fees, printing, engraving and mailing costs, legal fees,
financial advisory fees, and NASD fees) will be charged against PacifiCare's
pre-tax earnings. The approximate cost of proceeding with the Amended
Certificate proposal is estimated to be approximately $ , inclusive of
fees of financial and legal advisors. $ of such fees
14
<PAGE> 22
has been expended to the date hereof, approximately $ is expected to be
spent between the date hereof and the Annual Meeting.
RE-ELECTION OF DIRECTORS
(ITEM 2 ON PROXY CARD)
Members of the Board of Directors are divided into three classes: Class I,
Class II and Class III. The terms of the Directors in each of these three
classes are staggered and Directors in each of the three classes hold office for
a three-year term until their successors have been duly elected and qualified.
The number of authorized members of PacifiCare's Board of Directors is 12.
Bradley C. Call, David R. Carpenter, David A. Reed and Lloyd E. Ross are
standing for re-election as Class II Directors at the Annual Meeting. If
re-elected, Messrs. Call, Carpenter, Reed and Ross will serve as Class II
Directors for a three-year term which expires at the 2002 Annual Meeting. All of
the nominees are presently Directors of PacifiCare. Each person nominated for
election has agreed to serve if elected and the Board has no reason to believe
that any nominee will be unable to serve. The persons named in the Proxy Card
intend to vote the proxies in favor of the re-election of the four nominees
named above unless the authority is withheld in accordance with the instructions
on the Proxy Card. In the event the nominees named below refuse or are unable to
serve as Directors (which is not anticipated), the persons named as proxies
reserve full discretion to vote for any or all persons as may be nominated by
the Board. Proxies cannot be voted for a greater number of persons than the
number of nominees.
NOMINEE BIOGRAPHIES
<TABLE>
<CAPTION>
DIRECTOR POSITION WITH COMPANY (OTHER THAN AS A DIRECTOR), IF ANY;
NAME AND AGE SINCE PRESENT PRINCIPAL OCCUPATION FOR PAST FIVE YEARS
------------ ----- ---------------------------------------------------------
<S> <C> <C>
Bradley C. Call, 56....................... 1997 Bradley C. Call has been President and Chief Executive
Officer of Stellex Aerostructures, Inc., a subsidiary of
Stellex Technologies, Inc. a privately held aerospace and
defense firm, since 1988 and a member of the Board of
Directors of Stellex Aerostructures, Inc. since 1988. Mr.
Call has also served as a member of the Board of
Directors of UniHealth since 1995.
David R. Carpenter, 60.................... 1989 Since January 1998, David R. Carpenter has served as
Chairman and CEO of UniHealth. From February 1997 through
December 1997, Mr. Carpenter served as Chairman,
President and CEO of UniHealth. Since 1997, Mr. Carpenter
has also served as Chairman and CEO of Paradigm Partners
International, LLC. From 1990 through 1995, Mr. Carpenter
served in various capacities for Transamerica
Corporation, including Executive Vice President and Group
Vice President. Mr. Carpenter is a Director of Employee
Solutions, Inc.
David A. Reed, 66......................... 1992 David A. Reed is the President of DAR Consulting Group.
Mr. Reed is the former president of St. Joseph Health
Systems in Orange, California and is past Chairman of the
Board and Speaker of the House of Delegates of the
American Hospital Association. Mr. Reed has also served
as a special advisor to the Health Care Practice Group of
Deloitte & Touche LLP. Mr. Reed has been a Director of
In-Vitro International since 1996 and is Chairman of the
Board of Directors of Mission Hospital Regional Medical
Center in Mission Viejo, California.
</TABLE>
15
<PAGE> 23
<TABLE>
<CAPTION>
DIRECTOR POSITION WITH COMPANY (OTHER THAN AS A DIRECTOR), IF ANY;
NAME AND AGE SINCE PRESENT PRINCIPAL OCCUPATION FOR PAST FIVE YEARS
------------ ----- ---------------------------------------------------------
<S> <C> <C>
Lloyd E. Ross, 58......................... 1985 Lloyd E. Ross is Managing Partner of InverMex, L.P. From
February 1996 to January 1997, Mr. Ross served as Vice
President/Division Manager of SMI Corporation, a division
of ARB, Inc., a commercial and industrial building
company, as President/CEO of SMI Construction from 1961
to 1996. Mr. Ross is a Director of the Southern
California Water Company.
</TABLE>
Directors Continuing In Office Until 2000 Annual Meeting. Craig T. Beam,
Richard M. Burdge, Sr., Alan R. Hoops and Gary L. Leary are Class I Directors.
Their terms expire as of the 2000 Annual Meeting.
Directors Continuing In Office Until 2001 Annual Meeting. Jack R. Anderson,
Terry O. Hartshorn, Warren E. Pinckert II and Jean Bixby Smith are Class III
Directors. Their terms expire as of the 2001 Annual Meeting.
THE BOARD OF DIRECTORS
BOARD MEETINGS
During 1998, the Board held eight meetings. No Director attended fewer than
75 percent of the aggregate of (a) the total number of meetings of the Board,
and (b) the total number of meetings held by all committees of the Board on
which they served.
COMMITTEES OF THE BOARD
Your Board has established five standing committees:
The Audit Committee.
Members: Messrs. Anderson, Call, Pinckert (Chairman), Reed, and Ross.
Number of Meetings in 1998: Nine.
Functions:
- Meets with PacifiCare's independent auditors;
- Makes recommendations to the Board concerning acceptance of the
reports of such auditors and the accounting policies and procedures of
PacifiCare; and
- Reviews financial plans and operating results of PacifiCare.
The Compensation Committee.
Members: Messrs. Burdge, Carpenter (Chairman), Pinckert and Ross.
Number of Meetings in 1998: Six.
Functions:
- Establishes compensation for PacifiCare's chief executive officer,
presidents of subsidiary operating units and executive officers with
salaries in excess of $250,000;
- Administers PacifiCare's employee benefit plans and performance
incentive plans; and
- Determines contributions to be made by PacifiCare to PacifiCare's
employee benefit and performance incentive plans.
16
<PAGE> 24
The Governance and Nominating Committee.
Members: Messrs. Hartshorn (Chairman), Leary and Ross and Ms. Smith.
Number of Meetings in 1998: Four.
Functions:
- Evaluates the performance of each member of the Board and each
committee;
- Reviews the composition of the Board and the structure of each
committee; and
- Nominates new members to the Board.
The Governance and Nominating Committee does not consider nominees
recommended by stockholders of PacifiCare.
The Special Opportunities Committee.
Members: Messrs. Beam, Carpenter, Pinckert, Reed and Ross (Chairman).
Number of Meetings in 1998: Eight.
Function:
- Evaluates strategic alliances and transactions for PacifiCare.
The Real Estate Committee.
Members: Messrs. Beam and Leary and Ms. Smith (Chair)
Number of Meetings in 1998: Three.
Functions:
- Reviews leases, acquisitions and dispositions of real property; and
- Makes recommendations to the Board of Directors concerning significant
real property transactions.
17
<PAGE> 25
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
This table shows the names of those stockholders known to PacifiCare to be
the beneficial owners Exchange Act of more than five percent of PacifiCare's
outstanding shares of Class A Common Stock as of April 15, 1999.
<TABLE>
<CAPTION>
AMOUNT AND
NATURE OF PERCENT
NAME AND ADDRESS OF BENEFICIAL OWNER BENEFICIAL OWNERSHIP OF CLASS
------------------------------------ -------------------- --------
<S> <C> <C>
UniHealth Foundation(1)................................... 5,909,500 39.8%
3400 Riverside Drive
Burbank, CA 91505
Franklin Mutual Advisors, Inc............................. 1,382,456(2) 9.3%
51 John F. Kennedy Parkway
Short Hills, NJ 07078
Wellington Management Company, LLP........................ 1,212,500(3) 8.1%
75 State Street
Boston, MA 02109
Capital Guardian Trust Company............................ 1,186,800(4) 8.0%
11100 Santa Monica Boulevard
Suite 1500
Los Angeles, CA 90025
United States Steel and Carnegie Pension Fund............. 1,184,262(5) 8.0%
767 Fifth Avenue
New York, NY 10153
Vanguard/Windsor Funds, Inc. -- Windsor Fund.............. 1,126,300(6) 7.6%
Post Office Box 2600
Valley Forge, PA 19428
</TABLE>
- ---------------
(1) Shares beneficially owned by UniHealth as of February 11, 1999 according to
information provided by UniHealth.
(2) Number of shares beneficially owned as of January 26, 1999 according to a
Schedule 13D filed with the Securities and Exchange Commission ("SEC").
(3) Number of shares beneficially owned as of December 31, 1998 according to
Schedule 13G filed with the SEC.
(4) Number of shares beneficially owned as of February 8, 1999 according to a
Schedule 13G filed with the SEC.
(5) Number of shares beneficially owned as of February 5, 1999 according to a
Schedule 13G filed with the SEC.
(6) Number of shares beneficially owned as of February 10, 1999 according to a
Schedule 13G filed with the SEC.
18
<PAGE> 26
This table shows the names of those stockholders known to PacifiCare to be
the beneficial owners (as defined under the Exchange Act) of more than five
percent of PacifiCare's outstanding Class B Common Stock as of April 15, 1999.
<TABLE>
<CAPTION>
AMOUNT AND
NATURE OF PERCENT
NAME AND ADDRESS OF BENEFICIAL OWNER BENEFICIAL OWNERSHIP OF CLASS
------------------------------------ -------------------- --------
<S> <C> <C>
Sanford C. Bernstein & Company, Inc......................... 4,198,366(1) 13.6%
767 Fifth Avenue
New York, NY 10153
Fidelity Investments........................................ 2,463,000(2) 8.0%
82 Devonshire Street
Boston, MA 02109
Neuberger & Berman Management Company LLP................... 2,304,655(3) 7.5%
605 Third Avenue
New York, NY 10158
Prudential Insurance Company of America..................... 1,706,379(4) 5.5%
751 Broad Street
Newark, NJ 07102
</TABLE>
- ---------------
(1) Number of shares beneficially owned as of February 5, 1999 according to a
Schedule 13G filed with the SEC.
(2) Number of shares beneficially owned as of February 15, 1999 according to a
Schedule 13G filed with the SEC.
(3) Number of shares beneficially owned as of February 11, 1999 according to a
Schedule 13G/A filed with the SEC.
(4) Number of shares beneficially owned as of February 2, 1999 according to a
Schedule 13G filed with the SEC.
19
<PAGE> 27
SECURITY OWNERSHIP OF MANAGEMENT
This table shows the number of shares of PacifiCare's Common Stock
beneficially owned as of April 15, 1999, by: (1) each of the Directors of
PacifiCare; (2) the NEOs (as defined herein); and (3) all Executive Officers (as
defined in Section 3b-7 of the Exchange Act) and Directors of PacifiCare as a
group.
<TABLE>
<CAPTION>
AMOUNT AND NATURE OF BENEFICIAL OWNERSHIP(1)
---------------------------------------------------
CLASS A COMMON STOCK CLASS B COMMON STOCK
------------------------------------- --------------------------------
NUMBER NUMBER TOTAL
OF SHARES RIGHT TO TOTAL OF SHARES RIGHT TO % OF
NAME OF BENEFICIAL OWNER OWNED ACQUIRE(2) % OF CLASS OWNED ACQUIRE(3) CLASS
------------------------ --------- ---------- ---------- --------- ---------- -----
<S> <C> <C> <C> <C> <C> <C>
Alan R. Hoops................. 149,604 40,000 1.3% 94,469 361,750 1.5%
Terry O. Hartshorn............ 123,056 40,000 1.1% 70,676 57,500 *
Jack R. Anderson(4)........... 48,091 -- * 556,898 2,500 1.8%
Craig T. Beam................. 600 -- * 130 2,500 *
Richard M. Burdge, Sr.(5)..... 2,688 -- * 87,293 2,500 *
Bradley C. Call............... 100 -- * -- 2,500 *
David R. Carpenter............ 700 6,900 * 300 18,650 *
Gary L. Leary................. 636 6,900 * -- 18,650 *
Warren E. Pinckert II......... 316 6,900 * 316 13,650 *
David A. Reed................. 800 -- * 200 9,750 *
Lloyd E. Ross................. -- 1,500 * 1,000 12,650 *
Jean Bixby Smith.............. 575 -- * 425 5,750 *
Jeffrey M. Folick............. 1,000 -- * 4,042 277,375 *
Robert B. Stearns............. -- -- * 1,000 125,000 *
Bradford A. Bowlus............ -- -- * -- 93,125 *
Christopher P. Wing........... -- -- * -- 88,875 *
Linda M. Lyons, M.D........... 600 -- * -- 89,850 *
All other Executive
Officers.................... 11,305 30,000 * 65,844 863,751 3.0%
All Executive Officers and
Directors as a group (29
persons).................... 340,071 132,200 3.2% 882,593 2,046,326 17.3%
</TABLE>
- ---------------
* Less than one percent of class.
(1) Information with respect to the beneficial ownership is based on information
furnished to PacifiCare by each person in this table. Each stockholder
included in the table has sole voting and dispositive power with respect to
the shares of equity securities shown to be beneficially owned by the
stockholder. Most of the stockholders included in this table reside in
states having community property laws under which his or her spouse may be
entitled to vote or dispose of the shares.
(2) These amounts reflect shares of Class A Common Stock that the individuals
have the right to acquire by exercising stock options within 60 days after
April 15, 1999.
(3) These amounts reflect shares of Class B Common Stock that the individuals
have the right to acquire by exercising stock options within 60 days after
April 15, 1999.
(4) Includes 8,683 shares of Class A Common Stock and 140,843 shares of Class B
Common Stock held by Mr. Anderson's wife and 15,186 shares of Class A Common
Stock and 216,866 shares of Class B Common Stock held by trusts of which Mr.
Anderson's relatives are beneficiaries. Mr. Anderson disclaims beneficial
ownership of these shares.
(5) Includes 15,610 shares of Class B Common Stock held by Mr. Burdge's wife and
2,688 shares of Class A Common Stock and 8,448 shares of Class B Common
Stock held by trusts of which Mr. Burdge's relatives are beneficiaries. Mr.
Burdge disclaims beneficial ownership of these shares.
20
<PAGE> 28
EXECUTIVE OFFICERS AND DIRECTORS OTHER THAN NOMINEES
The following table shows PacifiCare's Executive Officers and Directors
other than the Director nominees:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Alan R. Hoops.............................. 51 Chairman of the Board and Chief Executive
Officer
Terry O. Hartshorn......................... 54 Vice Chairman of the Board
Jack R. Anderson........................... 74 Director
Craig T. Beam.............................. 43 Director
Richard M. Burdge, Sr...................... 72 Director
Gary L. Leary.............................. 64 Director
Warren E. Pinckert II...................... 55 Director
Jean Bixby Smith........................... 61 Director
Jeffrey M. Folick.......................... 51 President and Chief Operating Officer
Robert B. Stearns.......................... 47 Executive Vice President and Chief
Financial Officer
Joseph S. Konowiecki....................... 46 General Counsel and Secretary
Richard E. Badger.......................... 49 Regional Vice President, Desert Region and
President and CEO of PacifiCare of Arizona,
Inc.
Bradford A. Bowlus......................... 43 Regional Vice President, Western Region and
President and CEO of PacifiCare of
California
Patrick E. Feyen........................... 42 Regional Vice President, Southwest Region
and President and CEO of PacifiCare of
Texas, Inc.
Eric D. Sipf............................... 50 Regional Vice President, Central Region and
President and CEO of PacifiCare of
Colorado, Inc.
Christopher P. Wing........................ 41 Regional Vice President, Northwest Region
and President and CEO of PacifiCare of
Washington, Inc.
Craig S. Schub............................. 44 President, Secure Horizons USA, Inc.
Ronald M. Davis............................ 39 Senior Vice President, Operations
Robert N. Franklin......................... 56 Senior Vice President, Public Affairs
Mitchell J. Goodstein...................... 47 Senior Vice President, Health Care
Economics
John E. Kao................................ 37 Senior Vice President, Corporate
Development and Chief Financial Officer,
Secure Horizons USA, Inc.
Mary C. Langsdorf.......................... 39 Senior Vice President and Corporate
Controller
Wanda A. Lee............................... 58 Senior Vice President, Corporate Human
Resources
Linda M. Lyons, M.D........................ 49 Senior Vice President, Health Services
James A. Williams.......................... 52 Senior Vice President and Chief Information
Officer
</TABLE>
Alan R. Hoops has been a Director of PacifiCare since 1994. His current
term expires in 2000. As of January 1, 1999, Mr. Hoops became PacifiCare's
Chairman of the Board and has been PacifiCare's Chief Executive Officer since
April 1993. Mr. Hoops previously served as PacifiCare's President from April
1993 to December 1998.
Terry O. Hartshorn has been a director of PacifiCare since 1985 and is
currently Vice Chairman of the Board. His current term expires in 2001. Mr.
Hartshorn served as Chairman of PacifiCare's Board of Directors from April 1993
to December 1998. Mr. Hartshorn was President and Chief Executive Officer of
UniHealth
21
<PAGE> 29
from April 1993 to February 1997. Mr. Hartshorn is a Director of Professional
Bancorp Inc., a bank holding company.
Jack R. Anderson has been a director of PacifiCare since 1997. His current
term expires in 2001. Mr. Anderson was a Director of FHP from 1994 until
February 1997 when FHP International Corporation ("FHP") was acquired by
PacifiCare. He has been President of Calver Corporation, a health care
consulting and investing firm, and a private investor since 1982. Mr. Anderson
currently serves on the Boards of Directors of Horizon Mental Health Management,
Inc. and Genesis Health Ventures, Inc.
Craig T. Beam has been a Director of PacifiCare since 1997. His current
term expires in 2000. Mr. Beam is President of Beam & Associates, a real estate
development and management company, including health care project management.
Mr. Beam was a Director of UniHealth from 1993 to December 1998.
Richard M. Burdge, Sr. has been a Director since 1997. His current term
expires in 2000. Mr. Burdge was a member of the FHP Board of Directors from July
1994 until February 1997. Mr. Burdge retired in 1984 as Executive Vice President
of CIGNA Corporation, a position he held from 1982 to 1984. Mr. Burdge has
served as a Director of First Commonwealth since 1985.
Gary L. Leary has been a Director of PacifiCare since 1989. His current
term expires in 2000. Mr. Leary has served as the President and General Counsel
of UniHealth since 1998. Mr. Leary also is a Director of UniHealth. Mr. Leary
was an Executive Vice President and General Counsel of UniHealth from April 1992
to January 1998.
Warren E. Pinckert II has been a Director since 1985. His current term
expires in 2001. Mr. Pinckert has been President, Chief Executive Officer and a
Director of Cholestech Corporation, a medical device manufacturing firm, since
June 1993.
Jean Bixby Smith has been a Director since 1995. Her current term expires
in 2001. Ms. Smith has been Chairman of Bixby Land Company since January 1994
and President of Alamitos Land Company since March 1991, both of which are
engaged in the development and management of commercial and industrial real
estate. Ms. Smith has also been a Director of UniHealth since 1988.
Jeffrey M. Folick became PacifiCare's President as of January 1, 1999 and
has been its Chief Operating Officer since April 1993. Mr. Folick previously
served as an Executive Vice President of PacifiCare from April 1993 to December
1998.
Robert B. Stearns became an Executive Vice President and PacifiCare's Chief
Financial Officer in July 1998. Prior to joining PacifiCare, Mr. Stearns served
as Senior Vice President/Chief Financial Officer of The Dial Corporation from
May 1995 to May 1997 and Chief Executive Officer of RB Stearns & Co. from April
1991 to May 1995.
Joseph S. Konowiecki has been General Counsel of PacifiCare since October
1989 and Secretary of PacifiCare since April 1993. Mr. Konowiecki has been a
partner of Konowiecki & Rank LLP, including a professional corporation, or its
predecessor, since 1980 and has over 20 years of practice in business, corporate
and health care law.
Richard E. Badger has been Regional Vice President, Desert Region and
President and CEO of PacifiCare of Arizona, Inc. since June 1998. Mr. Badger
served as President of PacifiCare of Northern California from November 1993
through June 1998.
Bradford A. Bowlus joined PacifiCare in 1994 and currently serves as
Regional Vice President of the Western Region and President and CEO of
PacifiCare of California or "PCC." From April 1994 through October 1997, Mr.
Bowlus served in various capacities for PacifiCare, including President and CEO
of PacifiCare of Washington, Inc., President and CEO of PacifiCare Dental and
Vision and Vice President of PCC.
Patrick E. Feyen has been Regional Vice President of the Southwest Region
and President and CEO of PacifiCare of Texas, Inc. since February 1995. Mr.
Feyen served as President of PacifiCare of Oklahoma from
22
<PAGE> 30
February 1995 through January 1997 and as Regional Vice President of the
Northwest from September 1994 to December 1994.
Eric D. Sipf joined PacifiCare in February 1997 and currently serves as
Regional Vice President, Central Region. Mr. Sipf has been President and CEO of
PacifiCare of Colorado, Inc., formerly FHP of Colorado, Inc., since 1996. Mr.
Sipf joined FHP as a Senior Vice President Eastern Division in 1994 and served
in that capacity until February 1997.
Christopher P. Wing joined PacifiCare in 1994 and currently serves as
Regional Vice President, Northwest Region and President and CEO of PacifiCare of
Washington, Inc. From February 1994 through December 1997, Mr. Wing served in
various capacities for PacifiCare, including President and CEO of PacifiCare of
Utah, Inc., Senior Vice President Health Services PCC and Vice President,
General Manager PCC.
Craig S. Schub has been President of Secure Horizons USA, Inc. since April
1993. Mr. Schub served as Senior Vice President, Marketing of PacifiCare from
June 1996 to March 1998 and as Senior Vice President, Government Programs from
June 1995 to March 1998. Mr. Schub serves as a Director of Presbyterian Health
Plan.
Ronald M. Davis has been Senior Vice President, Corporate Operations since
June 1995. Mr. Davis served as Senior Vice President, Operations of PCC from
July 1993 to July 1995.
Robert N. Franklin has been Senior Vice President, Public Affairs since
February 1997. From 1993 to February 1997, Mr. Franklin was Senior Vice
President, Public Affairs of FHP.
Mitchell J. Goodstein currently serves as Senior Vice President, Health
Care Economics. Mr. Goodstein was Regional Vice President of the Southeast
Region and President of PacifiCare of Florida, Inc. from 1995 to February 1997.
Prior to joining PacifiCare, Mr. Goodstein served as the Chief Executive Officer
of HMO California, a licensed health care service plan, from June 1992 to August
1995.
John E. Kao has been Senior Vice President, Corporate Development and Chief
Financial Officer, Secure Horizons USA since March 1998, and Vice President,
Corporate Development since February 1997. From March 1995 to February 1997, Mr.
Kao was Vice President, Corporate Development for FHP. Prior to joining FHP, Mr.
Kao held numerous positions at Bank of America.
Mary C. Langsdorf has been Senior Vice President, Finance since January
1999 and Corporate Controller since February 1996. From October 1995 to January
1999, Ms. Langsdorf served as Vice President, Finance.
Wanda A. Lee has been Senior Vice President, Corporate Human Resources of
PacifiCare since March 1993. From 1984 to March 1993, Ms. Lee was Vice President
of Human Resources of FHP.
Linda M. Lyons, M.D. has been Senior Vice President, Health Services since
June 1996. Prior to joining PacifiCare, Dr. Lyons served in various capacities
for SCRIPPS Clinic Medical Group, including as Senior Vice President, Managed
Care Operations, from January 1986 to June 1996.
James A. Williams has been Senior Vice President and Chief Information
Officer since June 1993. Prior to joining PacifiCare, Mr. Williams served as
Senior Vice President, Information Services of Sanwa Bank California from August
1992 to May 1993.
Each Executive Officer of PacifiCare is elected or appointed by the Board
of Directors of PacifiCare and holds office until his successor is elected, or
until the earlier of his death, resignation or removal.
The information given in this Proxy Statement concerning the Directors is
based upon statements made or confirmed to PacifiCare by or on behalf of such
Directors, except to the extent that such information appears in its records.
23
<PAGE> 31
EXECUTIVE COMPENSATION
The following table shows the compensation paid to Alan Hoops, who served
as Chief Executive Officer of PacifiCare during 1998, and the other most highly
compensated executive officers of PacifiCare (collectively, the "NEOs") for the
years ended December 31, 1998 and 1997, the three-month transition period ended
December 31, 1996 ("TP96"), and the fiscal year ended September 30, 1996.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION LONG-TERM COMPENSATION
------------------------------------ -----------------------
OTHER ANNUAL SECURITIES LTIP ALL OTHER
NAME AND SALARY BONUS COMPENSATION UNDERLYING PAYOUTS COMPENSATION
PRINCIPAL POSITION YEAR (1) (2) (3) OPTIONS (4) (5)
------------------ ---- -------- ---------- ------------ ----------- --------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Alan R. Hoops.............. 1998 $893,078 $1,161,001 $553,708 15,000 $ -- $ 47,983
Chairman and CEO 1997 $860,000 $ -- $ 80,000 445,000 $ -- $120,497
TP96 $152,308 $ 105,023 $ -- 35,000 $ -- $ 34,368
1996 $638,750 $ 400,000 $ -- 30,000 $161,760 $138,300
Jeffrey M. Folick.......... 1998 $597,115 $ 621,000 $248,400 12,500 $ -- $ 44,762
President and COO 1997 $575,000 $ -- $ -- 310,000 $ -- $ 93,325
TP96 $108,462 $ 67,310 $ -- 25,000 $ -- $ 24,495
1996 $452,500 $ 190,350 $ -- 25,000 $165,898 $100,468
Robert B. Stearns(6)....... 1998 $216,347 $ 236,251 $ 94,500 275,000 $ -- $172,597
Exec. Vice President 1997 $ -- $ -- $ -- -- $ -- $ --
and CFO TP96 $ -- $ -- $ -- -- $ -- $ --
1996 $ -- $ -- $ -- -- $ -- $ --
Bradford A. Bowlus......... 1998 $363,463 $ 252,000 $ 40,320 10,000 $ -- $269,037
Regional Vice President, 1997 $235,385 $ -- $ -- 195,000 $ 76,667 $129,166
Western Region TP96 $ 43,076 $ 18,140 $ -- -- $ -- $ 45,993
1996 $197,500 $ 102,000 $ -- 6,500 $ 62,611 $ 48,892
Linda M. Lyons, M.D. ...... 1998 $305,307 $ 190,365 $ 45,688 10,000 $ -- $ 81,965
Senior Vice President 1997 $275,000 $ -- $ -- 164,400 $ -- $ 56,677
Health Services TP96 $ 60,000 $ 22,342 $ -- -- $ -- $ 41,931
1996 $ 80,000 $ 22,618 $ -- 20,000 $ -- $ 22,090
Christopher P. Wing........ 1998 $301,154 $ 182,700 $ 73,080 10,000 $ -- $109,866
Regional Vice President, 1997 $290,000 $ -- $ -- 177,500 $118,000 $ 59,575
Northwest Region TP96 $ 50,307 $ 32,700 $ -- -- $ -- $ 1,339
1996 $213,501 $ 71,580 $ -- 6,500 $ 95,370 $ 14,087
Wayne B. Lowell (7)........ 1998 $415,385 $ 270,000 $108,000 -- $ -- $ 33,493
Exec. Vice President 1997 $400,000 $ -- $ -- 200,000 $ -- $ 48,493
and CFO TP96 $ 75,000 $ 41,373 $ -- 15,500 $ -- $ 10,643
1996 $318,750 $ 130,000 $ -- 15,000 $ 64,960 $ 41,774
</TABLE>
- ---------------
(1) 1998 salaries included one extra pay period because of year-end timing. Base
salaries for 1998 were as follows:
<TABLE>
<S> <C>
Alan R. Hoops.............. $860,000
Jeffrey M. Folick.......... $575,000
Robert B. Stearns.......... $450,000
Bradford A. Bowlus......... $350,000
Linda M. Lyons, M.D........ $294,000
Christopher P. Wing........ $290,000
Wayne B. Lowell............ $400,000
</TABLE>
(2) The amounts shown in this column include payments made pursuant to
PacifiCare's Management Incentive Plan and include amounts awarded and
accrued during the fiscal years earned, but paid in the following fiscal
year. A portion of the 1998 Management Incentive Plan bonus was attributable
to a one-time incentive under the Management Incentive Plan where executive
officers received bonuses in excess of the maximum payable under the
Management Incentive Plan for the achievement of maximum performance
objectives. Bonuses awarded under this one-time incentive are payable in
installments over a three-year period. In order to receive each installment,
the executive officer must be employed by
24
<PAGE> 32
PacifiCare at the time of payment and PacifiCare must achieve target
earnings per share for the prior year.
(3) Amounts shown are attributable to a risk premium applied to amounts deferred
under PacifiCare's stock unit deferred compensation plan. Under this
deferred compensation plan, executive officers may defer all or a portion of
their bonus. The CEO may also defer all or a portion of his salary under
this plan. Amounts deferred, multiplied by the risk premium, are converted
into shares of PacifiCare's Class B Common Stock at a price of the Class B
Common Stock determined by PacifiCare's Compensation Committee based on the
closing price of the Class B Common Stock on the Nasdaq National Market.
Distributions are made in shares of Class B Common Stock.
(4) Includes amounts awarded and accrued under PacifiCare's Long-Term
Performance Incentive Plan (the "LTPIP") during the fiscal years earned, but
paid in the following fiscal year. In 1997 and fiscal 1996, 60 percent of
the awards were paid in cash and 40 percent of the awards were paid in
shares of Class B Common Stock. No awards were made under the LTPIP to the
NEOs for 1998 or TP96. The shares of Class B Common Stock distributed were
valued at $72.875 per share in 1997 and $83.75 per share in fiscal 1996 (the
fair market values of the Class B Common Stock at the time the payments were
awarded). Payments under the LTPIP to the NEOs were as follows:
<TABLE>
<CAPTION>
1997 FISCAL 1996
------------------------------ ------------------------------
NUMBER OF SHARES NUMBER OF SHARES
CASH PAID OF CLASS B COMMON CASH PAID OF CLASS B COMMON
--------- ----------------- --------- -----------------
<S> <C> <C> <C> <C>
Alan R. Hoops........ $ -- -- $97,105 772
Jeffrey M. Folick.... $ -- -- $99,568 792
Bradford A. Bowlus... $46,060 420 $37,570 299
Christopher P.
Wing............... $70,850 647 $57,264 455
Wayne B. Lowell...... $ -- -- $38,997 310
</TABLE>
PacifiCare suspended the LTPIP in 1997.
(5) Amounts in this column include contributions by PacifiCare to the PacifiCare
Health Systems, Inc. Savings and Profit-Sharing Plan (the "Profit-Sharing
Plan") and miscellaneous fringe benefits. In 1998, all PacifiCare employees
who completed 12 months of continuous service and worked at least 1,000
hours were eligible to participate in the Profit-Sharing Plan.
(a) PacifiCare contributed amounts equal to two percent of annual salaries
up to a specified maximum amount. For the NEOs, these contributions were:
<TABLE>
<CAPTION>
1998 1997 FISCAL 1996
------ ------ -----------
<S> <C> <C> <C>
Alan R. Hoops.............................. $3,200 $3,200 $3,000
Jeffrey M. Folick.......................... $3,200 $3,200 $3,000
Bradford A. Bowlus......................... $3,200 $3,200 $3,811
Linda M. Lyons, M.D. ...................... $3,200 $2,115 $ --
Christopher P. Wing........................ $3,200 $3,200 $3,000
Wayne B. Lowell............................ $3,200 $3,200 $3,000
</TABLE>
25
<PAGE> 33
(b) PacifiCare contributed amounts equal to one-half of the compensation
deferred by each employee up to three percent of the employee's annual
compensation up to a specified amount. For the NEOs, these contributions
were:
<TABLE>
<CAPTION>
1998 1997 FISCAL 1996
------ ------ -----------
<S> <C> <C> <C>
Alan R. Hoops.............................. $4,800 $4,750 $4,500
Jeffrey M. Folick.......................... $4,800 $4,750 $4,500
Bradford A. Bowlus......................... $4,800 $6,409 $4,500
Linda M. Lyons, M.D. ...................... $4,800 $3,730 $ --
Christopher P. Wing........................ $4,800 $4,750 $4,500
Wayne B. Lowell............................ $4,800 $4,750 $4,500
</TABLE>
(c) PacifiCare contributed discretionary amounts, determined solely at the
discretion of the Board of Directors, from PacifiCare's current or
accumulated earnings (generally based upon a percentage of pretax income).
For the NEOs, these contributions were:
<TABLE>
<CAPTION>
1998 1997 FISCAL 1996
------ ------ -----------
<S> <C> <C> <C>
Alan R. Hoops.............................. $2,997 $3,494 $5,291
Jeffrey M. Folick.......................... $2,997 $3,494 $5,291
Bradford A. Bowlus......................... $2,997 $3,494 $5,291
Linda M. Lyons, M.D. ...................... $2,997 $ 423 $ --
Christopher P. Wing........................ $2,997 $ -- $5,291
Wayne B. Lowell............................ $ -- $3,494 $5,291
</TABLE>
(d) Includes amounts contributed by PacifiCare pursuant to the Statutory
Restoration Plan of PacifiCare (the "Statutory Restoration Plan"). The
Statutory Restoration Plan allows participants to defer the portion of
their pay that otherwise would be deferred under the Profit-Sharing Plan
and to receive excess matching contributions, profit-sharing contributions
and discretionary contributions in the same percentages as those provided
by the Profit-Sharing Plan. Employees in PacifiCare's two highest salary
grades are eligible to participate in the Statutory Restoration Plan. For
the NEOs, these contributions were:
<TABLE>
<CAPTION>
1998 1997 TP96 FISCAL 1996
------- ------- ------ -----------
<S> <C> <C> <C> <C>
Alan R. Hoops...................... $25,077 $48,844 $8,885 $60,668
Jeffrey M. Folick.................. $21,856 $40,766 $6,327 $40,399
Bradford A. Bowlus................. $12,642 $ -- $ -- $ --
Linda M. Lyons, M.D................ $ 6,977 $13,192 $6,100 $ 1,800
Christopher P. Wing................ $ 4,564 $ 6,565 $1,174 $ 1,006
Wayne B. Lowell.................... $ 7,769 $24,828 $4,314 $24,072
</TABLE>
(e) Includes premiums paid by PacifiCare for term life insurance for all
employees. For each of the NEOs, these amounts were $290 for 1998, 1997 and
fiscal 1996 and $73 for TP96. Also includes additional insurance premiums
paid by PacifiCare for Mr. Hoops totaling $2,802 for 1997 and $38,979 for
fiscal 1996, and for Mr. Folick totaling $1,532 for 1997 and $29,839 for
fiscal 1996.
(f) Includes amounts paid by PacifiCare for excess sick time and vacation
time accrued. For the NEOs, these amounts were:
<TABLE>
<CAPTION>
1998 1997 TP96 FISCAL 1996
------- ------- ------ -----------
<S> <C> <C> <C> <C>
Alan R. Hoops...................... $ -- $53,783 $25,410 $22,138
Jeffrey M. Folick.................. $ -- $35,959 $18,095 $13,624
Bradford A. Bowlus................. $ -- $ 3,349 $ -- $ --
Linda M. Lyons, M.D................ $ -- $ -- $ -- $ --
Christopher P. Wing................ $ 5,577 $ 5,582 $ 92 $ --
Wayne B. Lowell.................... $ -- $11,931 $6,256 $ 4,621
</TABLE>
26
<PAGE> 34
(g) Includes amounts paid by PacifiCare for personal financial services.
For the NEOs, these amounts were:
<TABLE>
<CAPTION>
1998 1997 FISCAL 1996
------- ------ -----------
<S> <C> <C> <C>
Alan R. Hoops................................. $11,619 $3,334 $3,433
Jeffrey M. Folick............................. $11,619 $3,334 $3,525
Bradford A. Bowlus............................ $17,452 $ -- $ --
Linda M. Lyons, M.D........................... $13,701 $ -- $ --
Christopher P. Wing........................... $16,425 $ -- $ --
Wayne B. Lowell............................... $17,434 $ -- $ --
</TABLE>
(h) Includes amounts paid by PacifiCare for relocation expenses. For the
NEOs, these amounts were:
<TABLE>
<CAPTION>
1998 1997 TP96 FISCAL 1996
-------- ------- ------- -----------
<S> <C> <C> <C> <C>
Robert B. Stearns................ $ 47,500 $ -- $ -- $ --
Bradford A. Bowlus............... $227,656 $88,249 $21,745 $ --
Linda M. Lyons, M.D.............. $ 50,000 $16,927 $25,758 $ --
Christopher P. Wing.............. $ 72,013 $39,188 $ -- $ --
</TABLE>
(i) Includes amounts paid by PacifiCare as sign on bonuses. For the NEOs,
these amounts were:
<TABLE>
<CAPTION>
1998 1997 TP96 FISCAL 1996
-------- ------- ------- -----------
<S> <C> <C> <C> <C>
Robert B. Stearns................ $125,000 $ -- $ -- $ --
Bradford A. Bowlus............... $ -- $24,175 $24,175 $35,000
Linda M. Lyons, M.D.............. $ -- $20,000 $10,000 $20,000
</TABLE>
(6) Mr. Stearns joined PacifiCare in July 1998 as Executive Vice President and
Chief Financial Officer.
(7) Mr. Lowell retired as Executive Vice President and Chief Financial Officer
effective July 31, 1998.
27
<PAGE> 35
OPTION GRANTS IN LAST FISCAL YEAR
The following table provides information on stock options granted in 1998
to PacifiCare's NEOs pursuant to the Employee Plan and the Amended 1997 Premium
Priced Stock Option Plan, as amended (the "Premium Priced Plan").
<TABLE>
<CAPTION>
PERCENT OF
NUMBER OF TOTAL OPTIONS
SECURITIES GRANTED TO EXERCISE OR
UNDERLYING EMPLOYEES BASE PRICE EXPIRATION GRANT DATE
NAME OPTIONS(1) IN 1998 PER SHARE(2) DATE PRESENT VALUE(3)
---- ---------- ------------- ------------ ---------- ----------------
<S> <C> <C> <C> <C> <C>
Alan R. Hoops
Class B......................... 15,000(4) 1.2% $72.875 03/27/08 $ 585,407
Jeffrey M. Folick
Class B 12,500(4) 1.0% $72.875 03/27/08 $ 354,109
Robert B. Stearns
Class B......................... 50,000(4) 4.0% $ 82.00 06/16/08 $1,587,086
112,500(5) 9.1% $ 92.50 10/07/07 $3,139,470
112,500(6) 9.1% $114.00 10/07/07 $3,555,720
Bradford A. Bowlus
Class B......................... 10,000(4) 0.8% $72.875 03/27/08 $ 283,288
Linda M. Lyons, M.D.
Class B......................... 10,000(4) 0.8% $72.875 03/27/08 $ 283,288
Christopher P. Wing Class B....... 10,000(4) 0.8% $72.875 03/27/08 $ 283,288
</TABLE>
<TABLE>
<CAPTION>
CHANGE IN TOTAL MARKET VALUE OF COMPANY
AT ASSUMED ANNUAL RATES OF STOCK PRICE APPRECIATION FOR 10 YEARS(7) 5% 10%
- ------------------------------------------------------------------- -------------- --------------
<S> <C> <C>
Class A, 14,837,711 shares outstanding, $72.75 per share at
12/31/98..................................................... $ 678,969,946 $1,720,632,900
Class B, 30,777,990 shares outstanding, $79.50 per share at
12/31/98..................................................... $1,539,068,779 $3,900,279,227
</TABLE>
- ---------------
(1) Only non-qualified stock options ("NQSOs") were granted in 1998 pursuant to
the Employee Plan and the Premium Priced Plan. No incentive stock options or
stock appreciation rights were granted in 1998. NQSOs that have been held
for six months and which are not already exercisable or expired
automatically become exercisable if there is a "Change of Control." Under
the Employee Plan and the Premium Priced Plan, a Change of Control is
defined as the occurrence of any of the following:
(a) a business combination effectuated through the merger or consolidation
of PacifiCare with or into another entity where PacifiCare is not the
Surviving Organization. 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 PacifiCare'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 PacifiCare's executive management
(PacifiCare's chief executive officer and those individuals who report
directly to PacifiCare'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) any business combination effectuated through the merger or consolidation
of PacifiCare with or into another entity where PacifiCare 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 PacifiCare's market capitalization prior to the
transaction;
(c) the sale in a transaction or series of transactions of all or
substantially all of PacifiCare's assets;
(d) any "person" or "group" (within the meaning of Sections 13(d)and 14(d)
of the Exchange Act) other than UniHealth, acquires beneficial ownership
(within the meaning of Rule 13d-3 of the Exchange Act), directly or
indirectly, of 20 percent or more of the voting common stock of
PacifiCare and the beneficial ownership of the voting common stock of
PacifiCare 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;
(e) a dissolution or liquidation of PacifiCare; or
28
<PAGE> 36
(f) PacifiCare ceases to be subject to the reporting requirements of the
Exchange Act as a result of a "going private transaction" (within the
meaning of the Exchange Act).
(2) The exercise price may be paid in cash, in shares of Common Stock valued at
fair market value on the date of exercise or pursuant to a cashless exercise
procedure under which the optionee provides irrevocable instructions to a
brokerage firm to sell the purchased shares and to remit to PacifiCare, out
of the sale proceeds, an amount equal to the exercise price plus all
applicable withholding taxes.
(3) These values were established using the Black-Scholes stock option pricing
model. Assumptions used to calculate the grant date present value of option
shares granted during 1998 were in accordance with Statement of Financial
Accounting Standards ("SFAS") No. 123, as follows:
(a) Expected Volatility -- The standard deviation of the continuously
compounded rates of return calculated on the average daily stock
price over a period of time immediately preceding the grant and equal
in length to the expected life. The volatility was 45 percent.
(b) Risk-Free Interest Rate -- The rate available at the time the grant
was made on zero-coupon U.S. government issues with a remaining term
equal to the expected life. The risk-free interest rate was 6
percent.
(c) Dividend Yield -- The expected dividend yield was zero percent based
on the historical dividend yield over a period of time immediately
preceding the grant date equal in length to the expected life of the
grant.
(d) Expected Life -- The expected life of grant was two years, calculated
based on the historical expected life of previous grants.
(e) Forfeiture Rate -- Under SFAS No. 123, forfeitures may be estimated
or assumed to be zero. The forfeiture rate was assumed to be zero.
(4) The NQSOs granted to the NEOs become exercisable in four cumulative annual
installments of 25 percent on each anniversary of the date of grant.
(5) NQSOs vest if the Class B Common Stock reaches a closing price of $92.50 by
October 6, 2000. On May 5, 1999, these NQSOs vested when the closing price
for the Class B Common Stock was $93.81 per share.
(6) NQSOs vest if the Class B Common Stock reaches a closing price of $114.00 on
any day by October 6, 2002. If the closing price is not reached by October
6, 2002, the NQSOs expire.
(7) These amounts are not intended to forecast possible future appreciation, if
any, of PacifiCare's stock prices. No assurances can be given that the stock
prices will appreciate at these rates or experience any appreciation at all.
29
<PAGE> 37
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION VALUES
The following table provides information with respect to the NEOs
concerning the exercise of options during 1998 and unexercised options held as
of December 31, 1998.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS
SHARES OPTIONS AT FY-END AT FY-END
ACQUIRED ON VALUE --------------------------- ---------------------------
NAME EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- ---------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Alan R. Hoops
Class A................. 32,000 $1,788,000 40,000 -- $2,575,000 --
Class B................. 10,000 $ 747,500 185,500 472,500 $5,587,125 $643,125
Jeffrey M. Folick
Class B................. 16,250 $ 619,125 156,750 351,750 $2,558,250 $656,063
Robert B. Stearns
Class B................. -- -- -- 275,000 -- --
Bradford A. Bowlus
Class B................. -- -- 15,625 197,875 $ 174,250 $488,750
Linda M. Lyons, M.D.
Class B................. -- -- 12,350 182,050 $ 75,781 $355,469
Christopher P. Wing
Class B................. -- -- 16,375 183,500 $ 194,922 $442,266
Wayne B. Lowell
Class A................. 5,000 $ 203,125 -- -- -- --
Class B................. 18,000 $ 676,063 86,000 -- $1,296,750 --
</TABLE>
EMPLOYMENT AGREEMENTS
PacifiCare has entered into employment agreements with each of the NEOs.
Each agreement continues until the death, disability, misconduct or written
notice of termination by either PacifiCare or the NEO. The agreements provide
that each NEO is entitled to his or her base salary, participation in all
employee benefit programs, reimbursement for business expenses and participation
in the Management Incentive Plan and the Employee Plan of PacifiCare. The
agreements also contain provisions that entitle each of the NEOs to receive
severance benefits which are payable if the officer's employment with PacifiCare
is terminated for various reasons, including death, disability, termination
following a change of ownership or control of PacifiCare and termination without
cause.
Under the employment agreements, a change of ownership or control would result
from:
(a) any merger, consolidation or sale such that any individual, entity or
group (within the meaning of Section 13(d)(3) or 14(d)(2) of the
Exchange Act) acquires beneficial ownership, within the meaning of Rule
13d-3 of the Exchange Act, of 20 percent or more of the voting common
stock of PacifiCare and the ownership interest of the voting common
stock owned by UniHealth is less than or equal to the ownership
interest of the voting common stock of such individual, entity or
group;
(b) any transaction in which PacifiCare sells substantially all of its
material assets;
(c) a dissolution or liquidation of PacifiCare; or
(d) PacifiCare becomes a non-publicly held company.
In the event one of the above officers is terminated by PacifiCare (other
than for incapacity, disability, habitual neglect or gross misconduct) within 24
months of a change in ownership or control or is terminated without cause, the
employment agreements provide for payment of base salary and certain benefits
for 36 months in the case of Mr. Hoops, 24 months for the other NEOs and payment
of benefits under PacifiCare's Management Incentive Plan which will be deemed to
have accrued to the termination date. The contingent liability for severance
payments that PacifiCare would be required to make under the employment
agreements (excluding amounts which may be payable under incentive plans and the
value of certain benefits)
30
<PAGE> 38
would be approximately $2,611,000 to Mr. Hoops, $1,170,000 to Mr. Folick,
$920,000 to Mr. Stearns, $718,000 to Mr. Bowlus, $606,000 to Dr. Lyons and
$598,000 to Mr. Wing.
Executive Officers, who are participants of the Premium Priced Plan, will
also receive additional cash consideration (the "Premium Priced Consideration")
upon a Change of Control (as defined in the Employee Plan), if the "Adjusted
Change of Control Consideration" (as defined below) is equal to, or greater than
the exercise price of any of the Premium Priced Options. The Premium Priced
Consideration to be received upon a Change of Control will equal the difference
between the Adjusted Change of Control Consideration and the exercise price of
each Premium Priced Option, adjusted to reflect any excise taxation incurred by
the Executive Officer resulting from such payment. "Adjusted Change of Control
Consideration" means the per share consideration to be received by each holder
of the Company's Class B Common Stock upon consummation of a transaction
effecting a Change of Control multiplied by 110 percent. No Premium Priced
Consideration will be paid to a participating Executive Officer if the per share
consideration for a Change of Control transaction is equal to or greater than
$115.00. If the Amended Certificate is approved, the reference to Class B Common
Stock contained in this paragraph shall refer to the Reclassified Common Stock.
COMPENSATION OF DIRECTORS
Cash Compensation. Directors who are not full-time employees of PacifiCare
receive, as compensation for their services, an annual retainer of $35,000,
$1,200 for each PacifiCare Board of Directors meeting attended, $1,000 for each
Board of Directors committee meeting attended and a telephone meeting fee equal
to one-half the fee paid for a Board of Directors meeting or Board committee
meeting, as the case may be. The Chairman of the Board, when not an employee or
officer, receives $2,400 for attendance at meetings of the Board. Chairmen of
committees receive $2,000 for attendance at each committee meeting attended.
Directors are also reimbursed for usual and customary travel expenses. In 1996,
the Board of Directors determined that each Director must own a minimum amount
of PacifiCare's Common Stock. For Directors who do not own the required amount
of Common Stock, the annual retainer is adjusted to assist such Directors in
achieving such ownership levels. PacifiCare does not have a retirement plan for
non-employee directors.
Stock Option Plan. Under the 1996 Non-Officer Directors Stock Option Plan,
as amended (the "Directors Plan"), non-officer Directors of PacifiCare who are
not eligible to receive awards under the Employee Plan are automatically granted
NQSOs to purchase 5,000 shares of Class B Common Stock on December 31 of each
year; provided that, during the preceding 12 months, the director served on the
Board of Directors and was not eligible to receive awards under the Employee
Plan. The Directors Plan also provides for the automatic grant of NQSOs to
purchase 10,000 shares of Class B Common Stock upon being elected to the Board
of Directors. Currently, no more than 390,000 shares of Class B Common Stock are
available for NQSOs under the Directors Plan. The Board also has the authority
to make discretionary grants under the Directors Plan.
The exercise price of the shares of Class B Common Stock subject to any
NQSO granted under the Directors Plan is 100 percent of the fair market value of
the underlying common stock on the date of grant. NQSOs granted under the
Directors Plan vest in four cumulative annual installments of 25 percent of the
shares of Class B Common Stock covered by each NQSO beginning on the first
anniversary of the date of the grant.
NQSOs granted under the Directors Plan may not be exercised after the
earlier of: (i) the expiration of 10 years from the date the NQSO was granted;
(ii) the expiration of one year from the time the optionee voluntarily or
involuntary ceases to serve as a director of PacifiCare; and (iii) the
expiration of one year from the date an optionee ceases to serve as a director
of PacifiCare by reason of disability or death. In addition, the Directors Plan
provides for an automatic and immediate acceleration of the vesting of all NQSOs
granted under the Directors Plan that have been held for at least six months
upon the occurrence of a Change of Control (as defined in the Employee Plan).
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During 1998, Messrs. Anderson, Beam, Burdge, Call, Carpenter, Leary,
Pinckert, Reed and Ross and Ms. Smith were each granted NQSOs to purchase 5,000
shares of Class B Common Stock at a price of $79.50 per share under the
Directors Plan.
Terry Hartshorn, Vice Chairman of the Board, receives grants of stock
options under the Employee Plan. In 1998, Mr. Hartshorn was granted options to
purchase 5,000 shares of PacifiCare Class B Common Stock at a price of $79.50
per share.
Filings made by PacifiCare with the Securities and Exchange Commission
sometimes "incorporate information by reference." This means PacifiCare is
referring you to information that has previously been filed with the Securities
and Exchange Commission, and that this information should be considered as part
of the filing you are reading. The Performance Graph and Compensation Committee
Report on Executive Compensation in this Proxy Statement are specifically not
incorporated by reference into any other filings with the Securities and
Exchange Commission.
REPORT OF THE COMPENSATION COMMITTEE
During 1998, the Compensation Committee (the "Committee") of the Board of
Directors of PacifiCare Health Systems, Inc. ("PacifiCare") consisted of Mr.
Burdge, Mr. Carpenter, Mr. Pinckert and Mr. Ross. No member of the Committee
during 1998 was an employee of PacifiCare or any of its subsidiaries. Each
Committee member meets the definition of "non-employee director" under Rule
16b-3 of the Securities Exchange Act of 1934, as amended, and is an "outside
director" within the meaning of Section 162(m) of the Internal Revenue Code of
1986, as amended (the "Code"). The Committee has provided the following report
on the compensation policies of PacifiCare as they apply to its executive
officers, the relationship of Company performance to executive compensation and
the Chief Executive Officer's compensation.
EXECUTIVE COMPENSATION PHILOSOPHY
PacifiCare maintains executive compensation programs which are integrated
with the business strategies and long-range plans of PacifiCare, the markets
PacifiCare serves and which coincide with the interests of PacifiCare's
stockholders. In doing so, PacifiCare's compensation programs reflect the
following themes:
- A compensation program that stresses PacifiCare's financial performance
as well as individual performance.
- An annual incentive plan, which generates a portion of compensation based
on the achievement of specific corporate and individual performance
goals, with superior performance resulting in total annual cash
compensation at approximately the 75th percentile of competitive levels
of companies with a similar business structure, size, complexity, and
marketplace orientation.
- Stock option plans which use increases in shareholder value to reward and
retain executive officers.
- A competitive program that meets the needs of PacifiCare's employees and
is both economical and easy to administer.
COMPENSATION POLICIES
The Committee has overall responsibility for PacifiCare's executive compensation
policies and practices. The Committee's functions include, among others:
- establishing and periodically reviewing PacifiCare's executive
compensation philosophy to assure that it is effective in attracting,
motivating and retaining key officers, links compensation to business
strategy and performance, is consistent with sound competitive practices
and is administered in the shareholders' best interest;
- reviewing and administering PacifiCare's compensation practices, policies
and plans;
- administering PacifiCare's stock option plans;
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- annually evaluating the performance of the Chief Executive Officer;
- reviewing and approving the compensation and benefits for the top five
highest paid executive officers of PacifiCare, each president of a
strategic business unit and any officer that has a base salary in excess
of $250,000;
- making recommendations regarding the compensation of directors; and
- reviewing PacifiCare's long-range plans for management development and
executive succession and to make appropriate recommendations.
The Committee retains the services of nationally recognized consulting
firms which provide independent expertise on executive compensation matters to
advise it on trends and issues related to PacifiCare's executive compensation
program.
EXECUTIVE COMPENSATION COMPONENTS
PacifiCare's executive compensation program is based on three components,
each of which is intended to serve the overall compensation philosophy.
Base Salary. Base salary is intended to be set at a level equal to
approximately the 50th percentile of amounts paid to executive officers of
companies with a similar business structure, complexity, size, and marketplace
orientation. The Committee surveys health care, service-oriented and Fortune
1000 companies to provide target salaries for PacifiCare's executive officers,
which are then adjusted based on an individual's responsibilities.
Annual Incentive Compensation. Under the 1996 Management Incentive
Compensation Plan, (the "MICP"), annual incentive awards are granted upon the
achievement by the executive officers of performance objectives established by
the Committee and approved by PacifiCare's shareholders. The performance
objective for 1998 was growth in earnings per share ("EPS") and was stated in
terms of minimum, target and maximum goals. Business unit specific financial
measures, in addition to EPS, were established for some executive officers under
the MICP. Achievement of each goal corresponds to an award equal to a specified
percentage of an executive officer's salary as determined at the beginning of
each fiscal year.
Stock Options. Executive officers are eligible to receive periodic grants
of non-qualified stock options, incentive stock options, stock payments (in lieu
of cash compensation payments other than base salary) and stock appreciation
rights (collectively, the "Awards") pursuant to PacifiCare's 1996 Stock Option
Plan for Officers and Key Employees (the "Employee Plan"). The Awards are
intended to retain and motivate executive officers to improve long-term stock
performance. Awards are granted at an exercise price at least equal to the fair
market value of the underlying common stock on the date of grant. Stock options,
generally, vest in installments over multiple years. To date, only non-qualified
stock options have been granted pursuant to the Employee Plan. Prior to granting
Awards, the Committee considers previous grants and stock ownership levels of
executive officers and grants of stock options by competitors to their executive
officers to ensure that Awards are consistent with competitive practices.
A select group of executive officers participate in the Amended 1997
Premium Priced Stock Option Plan, as amended (the "Premium Priced Plan"). The
executive officers who participate in the Premium Priced Plan received a one
time grant of options. Fifty percent of the options granted under this plan vest
if certain stock prices are achieved by 2000 with the remaining fifty percent
vesting if certain stock prices are achieved by 2002. The options expire if the
targeted stock prices are not achieved.
Benefit Plans. PacifiCare also makes available to its executive officers a
broad range of benefit programs, which are available to employees generally,
including life and disability insurance and a savings and profit-sharing plan
(the "401(k) plan").
Executive Officers also are eligible to participate in a non-qualified
deferred compensation plan and a non-qualified stock unit deferred compensation
plan. Under the non-qualified deferred compensation plan, executive officers may
defer all or a portion of their salary or bonus. PacifiCare also offers a stock
unit deferred
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<PAGE> 41
compensation plan under which executive officers may defer all or a portion of
their bonuses into units of PacifiCare's Class B Common Stock. Under the stock
unit plan, the CEO may defer all or a portion of his base salary in addition to
deferring his bonus. A risk premium is applied to all amounts deferred under
this plan. At the time of deferral, the amount deferred, multiplied by the risk
premium, is converted into units of the Class B Common Stock at a price of the
Class B Common Stock determined by the Committee based on the closing price of
the stock on the Nasdaq National Market. Distributions under the stock unit plan
are made in shares of PacifiCare's Class B Common Stock.
Finally, PacifiCare offers a statutory restoration plan where executive
officers may defer the amount of their salary and/or bonus that they could defer
under the terms of the 401(k) Plan, except for the application of statutory
limits imposed by the Code for qualified plans. PacifiCare provides matching
contributions up to a certain percentage and profit-sharing contributions to
this plan.
1998 ACTIONS
In 1998, the Committee reviewed and re-approved its charter and
PacifiCare's executive compensation philosophy. It also requested that its
consultants review the Committee's choice of comparative industry compensation
data, which it uses for compensation comparisons. The Committee has emphasized
that use of comparative compensation data should be periodically reviewed and
updated consistent with PacifiCare's growth and strategic business plans.
POLICY ON DEDUCTIBILITY OF COMPENSATION
Section 162(m) and the regulations promulgated thereunder ("Section
162(m)") limit the tax deduction to $1 million for compensation paid to
PacifiCare's most highly compensated executive officers. Certain types of
compensation are deductible only if performance criteria are specified in detail
and stockholders have approved the compensation arrangements. In response to the
requirements of Section 162(m), the Committee administers the Employee Plan, the
MICP, the Premium Priced Plan and has obtained shareholder approval for each of
these plans. The Committee has increased the maximum dollar award to be awarded
under the MICP from $1 million to $2 million. PacifiCare is seeking shareholder
approval for the increase in the maximum amount to be awarded under the MICP in
order to comply with Section 162(m) and to continue to allow the awards under
the MICP to be exempt from the $1 million pay cap imposed by Section 162(m). The
Committee believes that PacifiCare is in compliance with Section 162(m) and
intends to continue to comply with the requirements of Section 162(m) unless the
Committee feels that required changes would not be in the best interest of
PacifiCare or its shareholders.
CEO COMPENSATION
In 1997, the Committee increased the salary of Alan Hoops, PacifiCare's
Chief Executive Officer, to $860,000 to align Mr. Hoops' salary with the
salaries of CEO's of companies of similar size, organization, complexity and
marketplace orientation of PacifiCare after the acquisition of FHP International
Corporation. For 1998, Mr. Hoops received no increase in annual base salary and
no bonuses as a result of PacifiCare's results in 1997. After a review of
salaries of peer companies and in recognition of Mr. Hoops' performance and the
performance of PacifiCare in 1998, the Committee increased Mr. Hoops' base
salary for 1999 to $920,000.
Mr. Hoops earned approximately $1.2 million in MICP compensation for fiscal
1998 performance. Mr. Hoops received the maximum incentive award under the 1998
MICP for surpassing the maximum performance goal for EPS specified in the 1998
MICP. A portion of Mr. Hoops' 1998 MICP Bonus was attributable to a one-time
incentive under the MICP where executive officers received bonuses in excess of
the maximum payable under the MICP for the achievement of maximum performance
objectives. Bonuses awarded under this one-time incentive are payable in
installments over a three-year period. In order to receive each installment, Mr.
Hoops must be employed by PacifiCare at the time of payment and PacifiCare must
achieve target EPS for the prior year.
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Mr. Hoops received a grant of non-qualified stock options ("NQSOs") during
1998 to purchase 15,000 shares of PacifiCare's Class B Common Stock at $72.875
per share (the fair market value of the stock at the time of grant). The NQSOs
vest 25 percent per year following the first year of grant.
The foregoing report has been furnished by:
David R. Carpenter, Chairman
Richard M. Burdge
Warren E. Pinckert II
Lloyd E. Ross
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<PAGE> 43
PERFORMANCE GRAPH
The following performance graph compares the performance of the cumulative
total return to the stockholders of PacifiCare's Class B Common Stock during the
previous five years in comparison to the cumulative total return on the Standard
& Poor's Health Care Composite Index and Standard & Poor's 500 Stock Index.
PERFORMANCE GRAPH
<TABLE>
<CAPTION>
PACIFICARE HEALTH SYS -CL
B HEALTH CARE-500 S&P 500 INDEX
------------------------- --------------- -------------
<S> <C> <C> <C>
Sep-93 100 100 100
Sep-94 213 117 104
Sep-95 193 164 134
Sep-96 245 211 162
Dec-96 242 220 175
Dec-97 149 311 234
Dec-98 226 444 301
</TABLE>
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
PacifiCare and its subsidiaries purchased health care services from
hospitals owned and managed by UniHealth totaling $24.5 million for the year
ended December 31, 1998. UniHealth purchased health care coverage from
PacifiCare and its subsidiaries in the amount of $1.8 million for the year ended
December 31, 1998. Amounts receivable from UniHealth were $0.6 million at
December 31, 1998.
Joseph S. Konowiecki, Secretary and General Counsel of PacifiCare, is the
sole shareholder of Joseph S. Konowiecki, a Professional Corporation, a
California professional corporation, which is a partner of the law firm of
Konowiecki & Rank LLP. PacifiCare purchased legal services from Konowiecki &
Rank LLP in the amount of $7.1 million for the year ended December 31, 1998. The
amount payable to Konowiecki & Rank LLP at December 31, 1998 was $0.6 million.
In connection with the relocation of Robert Stearns, PacifiCare extended a
loan in the amount of $125,000 to Mr. Stearns. The loan bears interest at the
Internal Revenue Service mandated rate and is being forgiven in a series of
annual installments over a five-year period beginning June 14, 1998. If Mr.
Stearns is terminated for cause or Mr. Stearns terminates his employment for
reasons other than death or disability, Mr. Stearns will be obligated to repay
the outstanding balance on the loan. As of December 31, 1998, the entire
principal amount remained outstanding.
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<PAGE> 44
COMPLIANCE WITH SECTION 16(a) OF THE SECURITIES EXCHANGE ACT
PacifiCare believes that during 1998, all filings with the Securities and
Exchange Commission of its officers, directors and 10 percent shareholders
complied with the requirement for reporting ownership and changes in ownership
of PacifiCare's Common Stock pursuant to Section 16(a) of the Exchange Act,
except that Patrick E. Feyen, Terry O. Hartshorn, Alan R. Hoops, Mary C.
Langsdorf, Wanda A. Lee, Linda M. Lyons, M.D. and Eric D. Sipf each did not file
a report for one transaction on a timely basis. Once discovered, these
oversights were promptly corrected.
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<PAGE> 45
APPROVAL OF PERFORMANCE OBJECTIVES OF,
AND MAXIMUM AWARDS UNDER, THE 1996 MANAGEMENT
INCENTIVE COMPENSATION PLAN
(ITEM 3 ON PROXY CARD)
The following is a summary of the modifications to Management Incentive
Plan.
DESCRIPTION OF THE MANAGEMENT INCENTIVE PLAN
The Compensation Committee administers the Management Incentive Plan or
MICP. All of the members of the Compensation Committee are Directors who are
considered outside directors for purposes of Section 162(m) of the Internal
Revenue Code ("Section 162(m)"). Under the terms of the Management Incentive
Plan, any officer or full-time employee of PacifiCare or any subsidiary of
PacifiCare who has a direct, significant, and measurable impact on the
attainment of PacifiCare's or any of its subsidiary's annual growth and
profitability objectives, as determined by the Compensation Committee, may be
eligible to participate in the Management Incentive Plan. Of the eligible
participants, the Compensation Committee has total discretion to determine who
receives awards under the plan. The number of eligible participants of the
Management Incentive Plan, as of the date hereof, totals approximately 380 of
the executive officers and key employees of PacifiCare.
Awards granted under the Management Incentive Plan are based on the
achievement of performance objectives established by the Compensation Committee
for each plan year. The performance objectives are based on any of the following
qualifying performance criteria:
(1) revenue(sales);
(2) cash flow;
(3) earnings per share (including earnings before interest, taxes and
amortization);
(4) return on equity;
(5) total shareholder return;
(6) return on capital;
(7) return on assets or net assets;
(8) income or net income;
(9) operating income or net operating income;
(10) operating profit or net operating profit;
(11) operating margin;
(12) market share;
(13) member satisfaction; or
(14) employee satisfaction.
The Committee may establish for any prospective award a single qualifying
performance criterion or any combination of criteria, on either a consolidated
basis or a subsidiary operating unit level, and may measure performance either
on an absolute basis, relative basis against a pre-established target, a peer
group's performance, or prior year's performance. The qualifying performance
criteria may include or exclude any or all of the following items as the
Compensation Committee may specify: extraordinary, unusual or non-recurring
items; effects of accounting changes; effects of financing activities; expenses
for restructuring or productivity initiatives; other non-operating items;
spending for acquisitions; and effects of divestitures. Any such qualifying
performance criteria or combination of such criteria may apply to a
Participant's award opportunity in its entirety or to any designated portion of
the award. Class A Common Stockholders are being requested at the Annual Meeting
to reapprove the qualifying performance criteria to ensure awards granted
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<PAGE> 46
under the Management Incentive Plan continue to be performance-based
compensation and deductible under Section 162(m).
No later than 90 days after the commencement of each Plan Year, the
Committee establishes, in writing, which of the qualifying performance criteria
will be used to determine strategic performance objectives for that Plan Year.
At such time, the Compensation Committee will establish minimum performance
objectives below which no awards will be earned, maximum performance objectives
above which awards will not be affected, and the formula for computing each
Participant's award. The performance objectives for any portion of the
Management Incentive Plan that is intended by the Compensation Committee to
satisfy the requirements for "performance-based" compensation under Section
162(m) shall be based on one or more qualifying performance criteria. The
corporate performance objectives established for the 1999 Plan Year are based
upon PacifiCare meeting certain earnings per share targets. If the performance
objectives are satisfied, the Committee shall certify in writing, prior to the
payment of any performance award, that such objectives were satisfied.
If the Compensation Committee determines the established performance
measures are no longer suitable due to a change in PacifiCare's business,
operations, corporate structure, capital structure, or other conditions as
determined by the Compensation Committee to be material, the Compensation
Committee will have sole discretion during the Plan Year to modify the
performance objectives as considered appropriate and equitable. No adjustment,
however, will decrease the minimum performance goal applicable to an Executive
Officer, or otherwise have the potential effect of increasing the amount of
compensation that would be payable to an Executive Officer upon the attainment
of the original performance goals and no adjustment will be inconsistent with
the terms of the Management Incentive Plan.
Under the terms of the Management Incentive Plan, the Compensation
Committee may not adjust individual awards to reflect an overall evaluation of
performance at the end of each plan year. The Management Incentive Plan,
however, permits the Compensation Committee to make discretionary incentive
awards to participants, including Executive Officers, who are determined by the
Compensation Committee to have positively impacted directly on the attainment of
the performance objectives established by the Compensation Committee.
Under Section 162(m), the establishment of awards for Executive Officers is
subject to, and contingent upon, stockholder approval of the material terms of
the performance objectives. Material terms include: (i) a general description of
the business criteria on which the performance objective is based; and (ii)
either the maximum amount of the compensation to be paid, or the formula used to
calculate the amount of compensation if such performance objective is obtained,
and may exclude the precise targets below which no compensation will be paid, or
above which no additional awards will be made. Absent a change in the material
terms of the performance objectives, PacifiCare will be required to obtain
reapproval of the material terms of the qualifying performance criteria from its
stockholders at its 2004 annual meeting if the qualifying performance criteria
are approved at this year's Annual Meeting.
As currently in effect, any award that a participant may receive under the
Management Incentive Plan is based solely upon a formula. Pursuant to this
formula, a participant will receive between 10 percent and 75 percent of base
salary (depending upon the level of the Executive Officer) if the minimum
targeted performance objective is achieved. The percentage of base salary
increases to an amount between 20 percent and 150 percent (depending upon the
level of the Executive Officer) if the maximum targeted performance objective is
achieved. Currently, the maximum award which a participant may receive pursuant
to the Management Incentive Plan is $1 million. PacifiCare is proposing to
increase the maximum award to $2 million.
Awards based on achieving certain performance objectives (assuming
stockholder approval of the criteria) will qualify as performance-based
compensation under Section 162(m). Any discretionary incentive awards, however,
will not qualify as performance-based compensation for purposes of the Section
162(m) and may be subject to the $1 million deduction limitation of Section
162(m).
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MODIFICATIONS TO THE MANAGEMENT INCENTIVE PLAN
We are requesting that the Class A Common Stockholders reapprove the
following qualifying performance criteria upon which performance objectives may
be determined for each Plan Year:
(1) revenue(sales);
(2) cash flow;
(3) earnings per share (including earnings before interest, taxes and
amortization);
(4) return on equity;
(5) total shareholder return;
(6) return on capital;
(7) return on assets or net assets;
(8) income or net income;
(9) operating income or net operating income;
(10) operating profit or net operating profit;
(11) operating margin;
(12) market share;
(13) member satisfaction; or
(14) employee satisfaction.
In addition, the Class A Common Stockholders are being requested to approve
an increase in the maximum award from $1 million to $2 million for any
individual participant.
REASON FOR PROPOSAL
We are submitting these modifications to stockholder approval to qualify
the awards as performance-based compensation under U.S. tax law and to preserve
our ability to deduct compensation for tax purposes. Since awards granted under
the Management Incentive Plan are based on a percentage of salary and
application of this percentage to the salaries of certain participants would
result in awards in excess of $1 million, PacifiCare wishes to increase the
maximum amount which may be granted under the Management Incentive Plan to
retain the deductibility under Section 162(m) of awards granted to these
individuals.
The Compensation Committee unanimously approved the modifications to the
Management Incentive Plan and the Board of Directors recommends that the Class A
Common Stockholders approve the modifications to the Management Incentive Plan.
APPROVAL OF AMENDMENTS TO
THE 1996 STOCK OPTION PLAN FOR
EXECUTIVE OFFICERS AND KEY EMPLOYEES
(ITEM 4 ON PROXY CARD)
The following is a summary of the material provisions of the Employee Plan
and the proposed amendments; it should, however, be read in conjunction with,
and is qualified in its entirety by reference to the complete text of the
amendments which are attached hereto as Exhibit D.
DESCRIPTION OF THE EMPLOYEE PLAN
Officers, key employees and consultants are eligible to receive awards
granted under the Employee Plan. The number of eligible participants of the
Employee Plan as of the date hereof, totals approximately 1,560 of
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<PAGE> 48
PacifiCare's key employees and officers. Directors who are also officers of
PacifiCare may receive awards under the Employee Plan.
The Employee Plan is administered by the Compensation Committee that
consists of Directors who are both "Disinterested Persons" as that term is
defined under Rule 16b-3 of the Exchange Act and outside directors for purposes
of Section 162(m). The Committee possesses absolute discretion in determining to
whom awards may be granted, the types of awards granted, the number of shares of
Class A Common Stock or Class B Common Stock subject to the award and the terms
and conditions of such awards consistent with the Employee Plan. No participant,
however, may be granted awards for more than 200,000 shares during any year. The
Compensation Committee also has the power to interpret the Employee Plan and any
award granted under the plan and to adopt such rules as may be necessary to
interpret, regulate or administer the Employee Plan. If the Amended Certificate
is approved, all references to Class B Common Stock contained in the description
of the Employee Plan shall refer to the Reclassified PacifiCare Common Stock.
Awards granted under the Employee Plan may take the form of incentive stock
options which qualify under Section 422 of the Internal Revenue Code, NQSOs and
stock appreciation rights. In addition, PacifiCare may grant shares of Class B
Common Stock in lieu of cash compensation other than base salary ("Stock
Payments").
SARs compensate holders for an increase in value of the underlying common
stock during the period commencing with the grant of the SAR until such rights
are exercised. A SAR may be granted either with or independently of an option.
Currently, on each December 31, additional shares of Common Stock become
available for awards under the Employee Plan in an amount equal to two (2)
percent of the then outstanding shares of Common Stock. The Amendment will
revise the time when additional shares become available from December 31 to June
30. The maximum number of shares of Common Stock available for ISOs under the
Employee Plan is 1,800,000.
The Compensation Committee may approve a payment in Class B Common Stock to
any employee who otherwise may be entitled to a cash payment, other than base
salary, such as in a payment under one of PacifiCare's benefit plans or as an
incentive to join PacifiCare. The Class B Common Stock issued as a stock payment
under the Employee Plan will be valued at its fair market value on the date of
payment.
The per share exercise price of the Common Stock subject to an option shall
not be less than 100 percent of the fair market value of such Common Stock on
the date of grant. If an ISO is granted to an individual or entity who owns more
than 10 percent of the total combined voting power of the Company or of any
subsidiary or parent, the per share exercise price for the Common Stock subject
to such ISO shall not be less than 110 percent of the fair market value of the
Common Stock on the date of grant. ISOs must be exercised within the earlier of
10 years after being granted (within five if granted to a 10 percent
Shareholder).
Generally, options granted under the Employee Plan may not be exercised
within the first year after their grant and terminate three months after an
employee's termination for any reason, or one year after an employee's death or
disability. Options held for more than six months will automatically vest upon a
Change of Control (as defined in the Employee Plan).
SARs unrelated to options may be granted at any time. SARs related to NQSOs
may be granted either at the time such options are granted or at any time
thereafter. SARs related to an ISO may only be granted at the time the ISO is
granted. All SARs granted to persons subject to Section 16(b) of the Exchange
Act may not be exercised any time prior to six months after the grant of such
SAR. SARs related to options are exercisable only when and to the extent the
related options are exercisable. Upon the exercise of an SAR related to an
option, the holder will be entitled to receive the difference between the
exercise price per share of the option and the fair market value of a share of
Common Stock on the date of exercise multiplied by the number of shares subject
to the SAR. Upon the exercise of an SAR not related to an option, the holder
will be entitled to receive the difference between the fair market value of a
share of Common Stock on the date of exercise of the SAR and the fair market of
a share of Common Stock on the date of grant multiplied by the number of shares
subject to the SAR. Upon the exercise of a SAR, payment shall be made in cash or
at the discretion of the Committee, in whole shares of Common Stock.
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A participant may exercise an award by written notice to the Secretary or
Chief Financial Officer of PacifiCare. In the case of options, the notice must
be accompanied by the full purchase price of the Common Stock. The purchase
price may be paid in cash, or with the consent of the Compensation Committee, by
tender of shares of any class of Common Stock or through a cashless exercise of
options or any combination thereof. Shares of any class of PacifiCare's Common
Stock tendered in exercise of options are valued at their fair market value on
the date of delivery to PacifiCare.
During 1998, the following individuals and groups were granted NQSOs under
the Employee Plan: Mr. Hoops 15,000 shares, Mr. Folick 12,500 shares, Mr.
Stearns 50,000 shares, Mr. Bowlus 10,000 shares, Dr. Lyons 10,000 shares, Mr.
Wing 10,000 shares; all Executive Officers as group (18 persons) 267,115 shares;
and all employees who are not Executive Officers as a group 801,695 shares. The
aggregated market value of the Common Stock underlying outstanding awards as of
December 31, 1998 was $282,655,000.
FEDERAL INCOME TAX CONSEQUENCES
Set forth below is a description of the federal income tax consequences
under the Internal Revenue Code of the grant and exercise of the benefits
awarded under the Employee Plan.
Non-Qualified Stock Option. There will be no federal income tax
consequences to either the employee or PacifiCare on the grant of a NQSO. On the
exercise of a NQSO, the employee will have taxable ordinary income equal to the
excess of the fair market value of the shares of Common Stock received on the
exercise date over the option price of the shares. PacifiCare will be entitled
to a tax deduction in an amount equal to such excess, provided PacifiCare
complies with applicable withholding or reporting rules. Any ordinary income
realized by an employee upon exercise of a NQSO will increase the employee's tax
basis in the Common Stock thereby acquired. Upon the sale of Common Stock
acquired by exercise of a NQSO, employees will realize long-term or short-term
capital gain or loss depending upon their holding period for such stock.
An employee who surrenders shares of Common Stock in payment of the
exercise price of a NQSO will not recognize gain or loss on his surrender of
such shares, but will recognize ordinary income on the exercise of the NQSO as
described above. Of the shares received in such an exchange, that number of
shares equal to the number of shares surrendered will have the same tax basis
and capital gains holding period as the shares surrendered. The balance of the
shares received will have a tax basis equal to their fair market value on the
date of exercise and the capital gains holding period will begin on the date of
exercise.
If PacifiCare delivers cash (in lieu of fractional shares) or shares of
Common Stock to an employee pursuant to a cashless exercise program, the
employee will recognize ordinary income equal to the cash and the fair market
value as of the date of exercise of any shares delivered to him. An amount equal
to any such ordinary income will be deductible by the Company, provided it
complies with applicable withholding requirements.
Incentive Stock Options. Under the Code, an employee will not realize
taxable income by reason of the grant or the exercise of an ISO, although the
employee will have a tax preference item in the year of exercise for purposes of
the alternative minimum tax equal to the amount by which the fair market value
of the shares of Common Stock received on the date of exercise exceeded the
option price and PacifiCare will not be entitled to any deduction. If an
employee exercises an ISO and does not dispose of the shares within two years
from the date the option was granted or within one year from the date shares
were transferred to the employee, the entire gain, if any, realized upon
disposition will be taxable to the employee as long-term capital gain. If an
employee sells or exchanges the shares within such one-year or two-year period
in a manner so as to violate the holding period requirements (a "disqualifying
disposition"), the employee generally will realize ordinary income in the year
of disposition, and, provided the Company complies with applicable withholding
or reporting requirements, the Company will receive a corresponding deduction,
in an amount equal to the excess of (1) the lesser of (a) the amount realized on
the sale or exchange and (b) the fair market value of the shares on the date of
option exercise over (2) the option price. Any additional gain realized on the
sale or exchange will be long-term or short-term capital gain. If the
disposition is by gift and violates the holding
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period requirements, the amount of the employee's ordinary income, and the
Company's deduction, is equal to the fair market value of the shares on the date
of exercise less the option price.
An employee who surrenders shares of Common Stock as payment of the
exercise price of his ISO generally will not recognize gain or loss on his
surrender of such shares. The surrender of shares previously acquired upon
exercise of an ISO in payment of the exercise price of another ISO will be a
disqualifying disposition of such stock if the ISO holding period requirements
described above have not been satisfied.
Under the proposed Treasury Regulations, all of the shares received by an
employee upon such stock exchange exercise will be subject to the ISO holding
period requirements. Of those shares, a number of shares equal to the number of
shares of Common Stock surrendered by the employee (the "Exchange Shares") will
have the same tax basis for capital gains purposes (increased by any ordinary
income recognized as a result of any disqualifying disposition of the
surrendered shares if they were ISO shares) and the same capital gains holding
period as the shares surrendered. For purposes of determining ordinary income
upon a subsequent disqualifying disposition of the Exchange Shares, the amount
paid for such shares will be deemed to be the fair market value of the shares
surrendered. The balance of the shares received by the employee will have a tax
basis (and a deemed purchase price) of zero and a capital gains holding period
beginning on the date of exercise. The ISO holding period for all shares will be
the same as if the option had been exercised for cash.
If PacifiCare delivers cash (in lieu of fractional shares) or shares of
Common Stock to an employee pursuant to a cashless exercise program, the
employee will recognize ordinary income in an amount equal to the cash paid and
the fair market value as of the date of exercise of any shares delivered to him.
An amount equal to any such ordinary income will be deductible by PacifiCare.
An ISO that is exercised by the employee more than three months after the
employee retires will be treated as a NQSO for federal income tax purposes.
SARs. There will be no federal income tax consequences to either the
employee or PacifiCare on the grant of an SAR or during the period that the SAR
remains outstanding. On the exercise of an SAR, the amount that the employee is
paid, whether in Common Stock or cash, is taxable to the employee as ordinary
income and PacifiCare is entitled to a corresponding deduction, provided it
complies with applicable withholding requirements. Upon the sale of Common Stock
acquired by exercise of an SAR, the employee will realize long-term or
short-term capital gain or loss, depending upon his holding period for such
stock, with the tax basis in the Common Stock being the ordinary income realized
upon exercise.
Stock Payments. An employee who received a payment of stock will have
compensation income equal to the fair market value of the stock received and the
Company will have a deduction in the same amount.
Parachute Payments. The exercise of any portion of an option that is
accelerated, as a result of a change in control or a similar event, may cause
payments with respect to such accelerated options to be treated as "parachute
payments" as defined in the Code. Any such parachute payments may be
non-deductible to PacifiCare in whole or in part and may subject the employee to
a non-deductible 20 percent federal excise tax on all or a portion of such
payment.
ERISA. The Employee Plan is not subject to any provisions of the Employee
Retirement Income Security Act of 1974 and is not required to the qualified
under Section 401(a) of the Code.
AMENDMENTS TO THE EMPLOYEE PLAN
The Amendments to the Employee Plan will change the date when additional
shares become available for awards under the Employee Plan. Currently, on
December 31 of each year, additional shares become available for awards under
the Employee Plan in an amount equal to two percent of the outstanding Common
Stock. If the Amendment is adopted, the date on which the additional shares will
become available will be June 30 of each year. Accordingly, if adopted,
beginning on June 30, 1999, and on each June 30 thereafter, an additional number
of shares of Common Stock, equal to two percent of the outstanding shares of
Common Stock as of June 30, will be made available for Awards granted under the
Employee Plan.
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<PAGE> 51
The effectiveness of the Amendment is subject to approval of the majority
of Class A Common Stockholders represented in person or by proxy at the Annual
Meeting. If the Amendment to the Employee Plan is not approved, any additional
shares added prior to stockholder action will be canceled. The Amendment is
being submitted for shareholder approval in order to satisfy Rule 16b-3 of the
Exchange Act and Section 162(m) of the Code.
REASON FOR PROPOSAL
To recruit and retain executive officers and key employees, the Company is
changing the date on which additional shares are added to the plan to ensure
that there are a sufficient number of shares available for awards under the
Employee Plan during 1999.
The Board of Directors unanimously approved the amendment to the Employee
Plan and recommends that the Class A Common Stockholders approve the amendment
to the Employee Plan.
APPROVAL OF AMENDED AND RESTATED
1996 NON-OFFICER DIRECTORS
STOCK OPTION PLAN
(ITEM 5 ON PROXY CARD)
The Board of Directors has approved the Amended and Restated 1996
Non-Officer Directors Stock Option Plan (the "Amended Directors Plan"). The full
text of the Amended Directors Plan is attached hereto as Exhibit E and is
incorporated herein by reference. The summary of the Amended Directors Plan is
qualified in its entirety by reference to the full text of the Amended Directors
Plan. If the Amended Certificate is approved, all references to Class B Common
Stock contained in the description of the Amended Directors Plan and the
Directors Plan shall refer to Reclassified Common Stock.
DESCRIPTION OF THE PACIFICARE DIRECTORS STOCK OPTION PLAN
Under the Directors Plan, non-officer directors of PacifiCare who are not
eligible to receive awards under the Employee Plan are automatically granted
NQSOs to purchase 5,000 shares of PacifiCare Class B Common Stock on December 31
of each year; provided that, during the 12 preceding months, the directors
served on the PacifiCare Board of Directors. As of the date hereof, ten
directors are eligible to participate in the Directors Plan. Currently, no more
than 390,000 shares of PacifiCare Class B Common Stock are available for NQSOs
under the Directors Plan. In addition, upon being elected to the Board of
Directors, each non-officer Director is automatically granted options to
purchase 10,000 shares of Class B Common Stock. The Board also has the authority
to make discretionary grants under the Directors Plan.
The per share exercise price of the shares of Class B Common Stock subject
to any NQSO granted under the Directors Plan is 100 percent of the fair market
value of the shares on the date of grant. NQSOs granted under the Directors Plan
vest in four cumulative installments of 25 percent of the shares of Class B
Common Stock covered by each NQSO beginning on the first anniversary of the date
of the grant.
NQSOs granted under the PacifiCare Directors Stock Option Plan may not be
exercised after the earlier of the expiration of 10 years from the date the NQSO
was granted or the expiration of one year from the time the optionee voluntarily
or involuntarily ceases to serve as a director of PacifiCare for any reason,
including disability or death. In addition, the Directors Plan provides for an
automatic and immediate acceleration of the vesting of all NQSOs granted under
the Directors Plan that have been held for at least six months upon the
occurrence of a Change of Control of PacifiCare (as defined in the Employee
Plan) or upon the liquidation or dissolution of PacifiCare.
During 1998, Messrs. Anderson, Beam, Burdge, Call, Carpenter, Leary,
Pinckert, Reed and Ross and Ms. Smith were each granted NQSOs to purchase 5,000
shares of Class B Common Stock and no discretionary grants were made. The
aggregate market value of the Class B Common Stock underlying NQSOs outstanding
under the Directors Plan as of December 31, 1998 was $16,425,000.
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FEDERAL INCOME TAX CONSEQUENCES
Options granted under the Directors Plan generally have the same federal
income tax consequences of NQSOs described under "Federal Income Tax
Information" in Proposal 4 above.
DESCRIPTION OF THE AMENDED DIRECTORS PLAN AND REASON FOR PROPOSAL
The Amended Directors Plan amends Section 2 of the PacifiCare Directors
Stock Option Plan to change the date on which Directors will receive their
automatic grant of 5,000 NQSOs each year from December 31 of each year to June
30 of each year beginning on June 30, 1999, if approved by the Class A Common
Stockholders. The date on which the Directors will receive their automatic grant
of options under the Amended Directors Plan is being changed for consistency
with the modifications to the Employee Plan. The Amended Directors Plan also
incorporates all amendments to the Directors Plan since its initial approval in
1996.
The Amended Directors Plan is being submitted to the holders of PacifiCare
Class A Common Stock for approval at the Annual Meeting in order to retain its
exemption under Section 16(b) of the Exchange Act.
The Board of Directors approved the Amended Directors Plan and recommends
that the Class A Common Stockholders approve the Amended Directors Plan.
RELATIONSHIP OF CERTIFIED PUBLIC ACCOUNTANTS
Our Board has selected Ernst & Young LLP as PacifiCare's independent public
accountants for the current fiscal year. They have served in this capacity since
1984.
We expect representatives of Ernst & Young LLP to attend the Annual
Meeting, make a statement if they so desire, and be available to respond to
appropriate questions. If possible, such questions should be submitted in
writing to PacifiCare, at least 10 days prior to the Annual Meeting, at P.O. Box
25186, Santa Ana, California 92799-5186, Attention: Mr. David K. Erickson,
Director, Investor Relations.
OTHER MATTERS TO COME BEFORE THE ANNUAL MEETING
At the time this Proxy Statement was published, the Board of Directors knew
of no other matters constituting a proper subject for action by the stockholders
which would be presented at the Annual Meeting. However, if any other business
should come before the meeting for stockholder action, the persons acting under
proxies in the enclosed Proxy Card will vote thereon in accordance with their
best judgment.
STOCKHOLDERS' PROPOSALS
If you want to consider including a proposal in our 2000 Proxy Statement,
you must deliver it to PacifiCare's Investor Relations department no later than
December 31, 1999. Proposals should be submitted in writing to Mr. David K.
Erickson, Director, Investor Relations, P.O. Box 25186, Santa Ana, California
92799-5186. Unless a stockholder who wishes to bring a matter before the
stockholders at PacifiCare's 2000 annual meeting of stockholders notifies the
PacifiCare of such matter prior to [45 days prior to the year anniversary of
mailing], management will have discretionary authority to vote all shares for
which it has proxies in opposition to such matter.
SOLICITATION OF PROXIES
PacifiCare will pay the entire cost of the solicitation of proxies of
holders of Class A Common Stock and Class B Common Stock, including preparation,
assembly, printing and mailing of this Proxy Statement, the proxy and any
additional information furnished to its stockholders. PacifiCare has engaged the
firm of Georgeson & Company, Inc. ("Georgeson") to assist it in the distribution
and solicitation of proxies and has agreed to pay Georgeson a fee of $
plus expenses for its services. Copies of the solicitation materials will be
furnished to banks, brokerage houses, fiduciaries and custodians holding in
their names shares of
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Class A Common Stock and Class B Common Stock beneficially owned by others to
forward to such beneficial owners. PacifiCare may reimburse persons representing
beneficial owners of Class A Common Stock and Class B Common Stock for their
costs of forwarding solicitation materials to such beneficial owners. Original
solicitation of proxies by mail may be supplemented by telephone, telegram,
letter or personal solicitation by PacifiCare's Directors, officers or employees
and by Georgeson. No additional compensation will be paid to Directors, officers
or employees for such services.
NOTE: UPON WRITTEN REQUEST OF ANY STOCKHOLDER ENTITLED TO RECEIVE THIS
PROXY STATEMENT, PACIFICARE WILL PROVIDE, WITHOUT CHARGE, A COPY OF ITS ANNUAL
REPORT ON FORM 10-K/A AS FILED WITH THE SEC. ANY SUCH REQUEST SHOULD BE
ADDRESSED TO PACIFICARE AT P.O. BOX 25186, SANTA ANA, CALIFORNIA 92799-5186,
ATTENTION: INVESTOR RELATIONS DEPARTMENT. THE REQUEST MUST INCLUDE
REPRESENTATION BY THE STOCKHOLDER THAT, AS OF , 1999,
SAID SHAREHOLDER WAS A STOCKHOLDER OF PACIFICARE ON SUCH DATE.
By order of the Board of Directors
Joseph S. Konowiecki
Secretary
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EXHIBIT A
AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
OF
PACIFICARE HEALTH SYSTEMS, INC.
I.
The name of this Corporation is: PacifiCare Health Systems, Inc.
II.
The address of its registered office in the State of Delaware is 1209
Orange Street, County of New Castle, Wilmington, Delaware. The name of its
registered agent at such address is the Corporation Trust Company.
III.
The nature of business or purposes to be conducted or promoted is to engage
in any lawful act or activity for which corporations may be organized under the
Delaware General Corporation Law.
IV.
A. PacifiCare Health Systems, Inc. (the "Corporation") is authorized to
issue two classes of shares of stock to be designated, respectively, "Common
Stock" and "Preferred Stock." The total number of shares of stock which the
Corporation shall have authority to issue is two hundred forty million
(240,000,000). The total number of shares of Common Stock which the Corporation
shall have authority to issue is two hundred million (200,000,000), and the par
value of each share of such Common Stock shall be one cent ($0.01). The total
number of shares of Preferred Stock which the Corporation shall have the
authority to issue is forty million (40,000,000), and the par value of each
share of Preferred Stock shall be one cent ($0.01). Upon filing of this Amended
and Restated Certificate of Incorporation, each Class A Common Share and each
Class B Common Share outstanding immediately prior to such filing shall
automatically be changed, reclassified and converted, without any action on the
part of any holder thereof, into one (1) share of Common Stock.
B. The powers, preferences and rights of the holders of Common Stock, and
the qualifications, limitations or restrictions thereof, shall be in all
respects identical, except as otherwise required by law, and subject to the
powers, preferences and rights of the holders of Preferred Stock, as provided in
or as otherwise determined by the Board of Directors pursuant to paragraph C of
this Article IV.
1. Dividends. Dividends may be declared and paid to the holders of the
Common Stock in cash, property, or other securities of the Corporation out of
any funds legally available therefor. If and when dividends on the Common Stock
are declared from time to time by the Board of Directors, whether payable in
cash, in property or in securities of the Corporation, the holders of the Common
Stock shall be entitled to share equally, on a per share basis in such
dividends.
2. Distribution on Dissolution, Etc. Upon any liquidation, dissolution or
winding up of the Corporation, whether voluntary or involuntary, the remaining
net assets of the Corporation shall, after payment in full of the liquidation
preference, if any, of any outstanding Preferred Stock, be distributed pro rata
to the holders of the Common Stock.
3. Voting Rights. At each annual or special meeting of the stockholders,
each holder of the Common Stock shall be entitled to one (1) vote in person or
by proxy for each share of Common Stock standing in his name on the stock
transfer records of the corporation in connection with the election of directors
and all other actions submitted to a vote of stockholders.
C. The Preferred Stock may be issued from time to time in one or more
series. The Board of Directors is hereby authorized, by filing a certificate (a
"Preferred Stock Designation") pursuant to the Delaware General
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Corporation Law, to fix or alter from time to time the designation, powers,
preferences and rights of the shares of each such series and the qualifications,
limitations or restrictions thereof, and to establish from time to time the
number of shares constituting any such series; and, subject to the express terms
of any series of Preferred Stock outstanding, to increase or decrease the number
of shares of any series subsequent to the issuance of shares of that series, but
not below the number of shares of such series then outstanding. The Board of
Directors shall designate each series to distinguish it from other series and
classes of stock of the Corporation, shall specify the number of shares to be
included in the series, and shall fix the terms, rights, restrictions and
qualifications of the shares of the series, including, without limitation, any
preferences, voting powers, dividend rights and redemption, sinking fund and
conversion rights. Subject to the express terms of any series of Preferred Stock
outstanding, the Board of Directors may increase or decrease the number of
shares or alter the designation or classify or reclassify any unissued shares of
a particular series of Preferred Stock by fixing or altering in any one or more
respects from time to time before issuing the shares, any terms, rights,
restrictions and qualifications of the shares. In case the number of shares of
any series shall be decreased in accordance with the foregoing sentence, the
shares constituting such decrease shall resume the status that they had prior to
the adoption of the resolution originally fixing the number of shares of such
series (unless the Preferred Stock Designation relating thereto provides
otherwise).
V.
The number of Directors of the Corporation shall be twelve. The number of
Directors may hereafter be fixed from time to time by bylaw or amendment to this
Certificate of Incorporation duly adopted by the Board of Directors, provided,
however, that the number of Directors shall not be more than twelve nor less
than five.
VI.
A. The Board of Directors shall be and is divided into three classes, Class
I, Class II and Class III, respectively. The number of Directors in each class
shall be the whole number contained in the quotient arrived at by dividing the
authorized number of Directors by three, and if a fraction is also contained in
such quotient then if such fraction is one-third ( 1/3) the extra Director shall
be a member of Class I and if the fraction is two-thirds ( 2/3) one of the extra
Directors shall be a member of Class I and the other shall be a member of Class
II. Each Director shall serve for a term to expire at the third annual meeting
following the annual meeting at which such Director was elected, provided,
however, that the Directors initially appointed to Class I shall serve for a
term to expire at the third annual meeting next following February 14, 1997, the
Directors initially appointed to Class II shall serve for a term to expire at
the second annual meeting next following February 14, 1997, and the Directors
initially appointed to Class III shall serve for a term to expire at the first
annual meeting next following February 14, 1997.
B. In the event of any increase or decrease in the authorized number of
Directors, (1) each Director then serving as such shall nevertheless continue as
a Director of the class of which he is a member until the expiration of his
current term, or his prior death, resignation or removal, and (2) the newly
created or eliminated Directorships resulting from such increase or decrease
shall be apportioned by the Board of Directors to such class or classes as
shall, so far as possible and subject to clause (1) of this paragraph, bring the
number of Directors in the respective classes into conformity with the formula
in this Article, as applied to the new authorized number of Directors.
C. Notwithstanding any of the foregoing provisions of this Article, each
Director shall serve until his successor is elected and qualified or until his
death, resignation or removal. A Director shall not be removed from office prior
to the expiration of his term except by the affirmative vote or written consent
of stockholders entitled to cast not less than sixty-six and two-thirds percent
(66 2/3%) of the total votes entitled to be cast in an election of Directors.
Should a vacancy occur or be created, the remaining Directors (even though less
than a quorum) may fill the vacancy for the full term of the class in which the
vacancy occurs or is created.
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VII.
A. In addition to requirements of any applicable statute, the affirmative
vote or written consent of not less than 66 2/3% of the total votes entitled to
be cast in an election of Directors, considered for purposes of this Article as
one class, shall be required for approval or authorization of any Business
Transaction (as hereinafter defined) between the Corporation and any Control
Person (as hereinafter defined), provided, however, that such additional voting
requirement shall not be applicable if:
(1) The Business Transaction was approved by a two-thirds vote of the
Board of Directors of the Corporation prior to the acquisition by the
Control Person, together with its Affiliates and Associates (as hereinafter
defined), of stock of the Corporation, which, in the aggregate, bears the
rights to 10% or more of the total votes entitled to be cast in an election
of Directors; or
(2) The Business Transaction was approved by a two-thirds vote of the
Board of Directors of the Corporation after the acquisition by the Control
Person, together with its Affiliates and Associates, of stock of the
Corporation, which, in the aggregate, bears the rights to 10% or more of
the total votes entitled to be cast in an election of Directors, and such
acquisition by such Control Person and its Affiliates and Associates was
unanimously approved by the Board of Directors of Corporation; or
(3) The Business Transaction is solely between the Corporation and
another corporation, 50% or more of the voting stock of which is owned by
the Corporation and none of which is owned by a Control Person, and each
holder of stock of the Corporation receives the same type of consideration
in proportion to his holdings; or
(4) Both of the following are satisfied:
(A) the cash or fair market value of the property, securities or
other consideration to be received per share in the Business Transaction
by holders of the stock of the Corporation is not less than the higher
of (i) the highest price per share (including brokerage commissions,
soliciting dealers' fees, dealer-management compensation, and other
expenses, including, but not limited to, newspaper advertisements,
printing and attorney's fees) paid by such Control Person in acquiring
any of its holdings of the Corporation's stock, or (ii) the highest per
share market price of the stock of the Corporation during the 3-month
period immediately preceding the date of the proxy statement described
in (B) below; and
(B) a proxy statement satisfying the requirements of the 1934 Act
shall be mailed to public stockholders of the Corporation for the
purpose of soliciting stockholder approval of such Business Transaction
and shall contain at the front thereof, in a prominent place, any
recommendations as to the advisability (or inadvisability) of the
Business Transaction which the Continuing Directors, or any of them, may
choose to state, and, if deemed advisable by a majority of the
Continuing Directors, an opinion of a reputable investment banking firm
as to the fairness (or unfairness) of the terms of such Business
Transaction, from the point of view of the remaining public stockholders
of the Corporation (such investment banking firm to be selected by a
majority of the Continuing Directors and to be paid a reasonable fee for
their services by the Corporation upon receipt of such opinion).
B. For the purposes of this Article:
1. The term "Control Person" shall mean and include any individual,
corporation, partnership or other person or entity which, together with its
Affiliates and Associates, "beneficially owns" (as this term is defined on
the date on which this Article becomes effective in Rule 13d-3 of the
General Rules and Regulations under the 1934 Act) in the aggregate, stock
of the Corporation, which bears the rights to 10% or more of the total
votes entitled to be cast in an election of Directors, and any Affiliate or
Associate (as those terms are defined on the date of which this Article is
adopted in Rule 12b-2 of the General Rules and Regulations under the 1934
Act) of any such individual, corporation, partnership or other person or
entity;
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2. The term "Business Transaction" shall mean (a) any merger or
consolidation of the Corporation with or into a Control Person, (b) any
sale, lease, exchange, transfer or other disposition, including without
limitation a mortgage or any other security device, of all or any
Substantial Part (as hereinafter defined) of the assets of the Corporation
(including, without limitation, any voting securities of a subsidiary) or
of a subsidiary, to a Control Person, (c) any merger of consolidation of a
Control Person with or into the Corporation or a subsidiary of the
Corporation, (d) any sale, lease, exchange, transfer or other disposition
of all or any Substantial Part (as hereinafter defined) of the assets of a
Control Person to the Corporation or a subsidiary of the Corporation, (e)
the issuance of any securities of the Corporation or a subsidiary of the
Corporation to a Control Person, (f) the acquisition by the Corporation or
a subsidiary of the Corporation of any securities of a Control Person, (g)
any reclassification or recapitalization (including any reverse stock
split) involving stock of the Corporation, consummated within five (5)
years after a Control Person becomes a Control Person, (h) any plan or
proposal by a Control Person for the dissolution or liquidation of the
Corporation, and (i) any agreement, contract or other arrangement providing
for any of the transactions described in this definition of Business
Transaction;
3. The term "Continuing Director" shall mean any Director who was
elected by the public stockholders of the Corporation prior to the
acquisition by the Control Person, together with its Affiliates and
Associates, in the aggregate, of stock of the Corporation, which bears the
rights to 10% or more of the total votes entitled to be cast in an election
of Directors, or a person recommended to succeed a Continuing Director by a
majority of Continuing Directors;
4. The term "Substantial Part" shall mean more than 10% of the total
assets of the Corporation in question as of the end of its most recent
fiscal year ending prior to the time that the determination is being made;
5. Without limitation, any stock of the Corporation which any Control
Person has the right to acquire at any time pursuant to any agreement, or
upon exercise of conversion rights, warrants or options, or otherwise,
shall be deemed outstanding and beneficially owned by such Control Person
for purposes of this Article only;
6. For the purpose of subparagraph 4 of paragraph A of this Article,
the phrase, "other consideration to be received" shall include, without
limitation, stock of the Corporation retained by its existing public
stockholders in the event of a Business Transaction with such Control
Person in which the Corporation is the surviving corporation.
C. The provisions set forth in this Article shall not be repealed or
amended in any respect or in any manner, including in any merger or
consolidation of the Corporation with any other corporation, unless the
surviving or resulting corporation's Certificate of Incorporation contains an
Article to the same effect as this Article, except by the affirmative vote or
written consent of not less than 66 2/3% of the total votes entitled to be cast
in an election of Directors attributable to stock owned by persons other than a
Control Person.
D. A majority of the Continuing Directors shall have the power and duty to
determine for purposes of this Article on the basis of information known to
them:
1. Whether any proposed transaction is a Business Transaction and
within the scope of this Article;
2. Whether a stockholder is a Control Person; and
3. For the purposes of subparagraph 4 of paragraph A, the per share
market value to be paid to stockholders in the Business Transaction and the
highest per share price paid by the Control Person in acquiring any of its
holdings of the Corporation's stock.
VIII.
In furtherance and not in limitation of the powers conferred by statute,
the Board of Directors is expressly authorized to make, alter or repeal the
Bylaws of the Corporation.
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IX.
No Director shall be personally liable to the Corporation or any
stockholder for monetary damages for breach of fiduciary duty as a director,
except for any matter in respect of which such director shall be liable under
Section 174 of Title 8 of the Delaware Code (relating to the Delaware General
Corporation Law) or any amendment thereto or successor provision thereto or
shall be liable by reason that, in addition to any and all other requirements
for such liability, he (i) shall have breached his duty of loyalty to the
corporation or its stockholders, (ii) shall not have acted in good faith, (iii)
shall have acted in a manner involving intentional misconduct or a knowing
violation of law or, in failing to act, shall have acted in a manner involving
intentional misconduct or a knowing violation of law or, (iv) shall have derived
an improper personal benefit. Neither the amendment nor repeal of this Article
Nine, nor the adoption of any provision of the Certificate of Incorporation
inconsistent with this Article Nine, shall eliminate or reduce the effect of
this Article Nine in respect of any matter occurring or any cause of action,
suit or claim that, but for this Article Nine would accrue or arise, prior to
such amendment, repeal or adoption of an inconsistent provision.
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AMENDED AND RESTATED CERTIFICATE OF INCORPORATION
OF
PACIFICARE HEALTH SYSTEMS, INC.
PACIFICARE HEALTH SYSTEMS, INC., a corporation organized and existing under
the General Corporation Law of the State of Delaware (the "Corporation"), does
hereby certify:
FIRST: The original Certificate of Incorporation was filed with the
Secretary of State of Delaware on August 2, 1996 under the name N-T Holdings,
Inc.
SECOND: The Amended and Restated Certificate of Incorporation of PacifiCare
Health Systems, Inc. in the form attached hereto as Exhibit A has been duly
adopted in accordance with the provisions of Sections 242 and 245 of the General
Corporation Law of the State of Delaware by the directors and stockholders of
the Corporation.
THIRD: The Amended and Restated Certificate of Incorporation so adopted
reads in full as set forth in Exhibit A attached hereto and is hereby
incorporated herein by this reference.
IN WITNESS WHEREOF, the Corporation has caused this Certificate to be
signed by its President on this day of , 1999.
PACIFICARE HEALTH SYSTEMS, INC.
By:
------------------------------------
Jeffrey M. Folick
President
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EXHIBIT B
STOCK PURCHASE AGREEMENT
This STOCK PURCHASE AGREEMENT, is made and entered into as of May 4, 1999,
by and between PACIFICARE HEALTH SYSTEMS, INC., a Delaware corporation
("PacifiCare"), and UNIHEALTH FOUNDATION, a California nonprofit public benefit
corporation ("UniHealth").
RECITALS
WHEREAS, PacifiCare proposes to combine (the "Recapitalization") its Class
A Common Shares and Class B Common Shares into a single class of Common Stock
(the "Common Stock") with the Class A Common Shares being renamed Common Stock
and the Class B Common Shares being exchanged for Common Stock at an exchange
rate of one share of Class B Common Shares for one share of Common Stock;
WHEREAS, the Recapitalization, if approved, will be effected through an
amendment to PacifiCare's Certificate of Incorporation (the "Amendment") in the
form of Exhibit A hereto;
WHEREAS, UniHealth currently owns 5,909,500 shares, or approximately 39.7%,
of PacifiCare's outstanding Class A Common Shares and 285,000 shares of
PacifiCare's outstanding Class B Common Shares and, as a result of the
Recapitalization, would hold 6,194,500 shares, or approximately 13.58%, of
PacifiCare's outstanding Common Stock (as constituted before and after the
Recapitalization, such shares are referred to herein as the "UniHealth Shares");
WHEREAS, in order to effect the Amendment and thereby the Recapitalization,
PacifiCare must obtain approval of a majority of the Class A Common Shares and a
majority of the Class B Common Shares outstanding on the record date for the
PacifiCare Meeting of Stockholders (the "Approval");
WHEREAS, PacifiCare desires to obtain UniHealth's agreement to vote the
UniHealth Shares in favor of the Amendment at the Meeting of Stockholders;
WHEREAS, UniHealth has become a charitable foundation under the Internal
Revenue Code and has informed PacifiCare that it desires to diversify its
holdings and reduce the number of UniHealth Shares it owns;
WHEREAS, UniHealth could reduce its holdings through a private or public
underwritten sale, a large block sale, open market sales or other means that
could adversely affect the market value of PacifiCare's securities and adversely
affect PacifiCare's ability to pursue its long term business plan;
WHEREAS, PacifiCare believes that it is in the best interests of PacifiCare
and its stockholders for PacifiCare to purchase a significant number of the
UniHealth Shares from UniHealth, subject to and in accordance with the terms and
conditions of this Agreement;
WHEREAS, UniHealth is willing to agree to vote in favor of the Amendment
and to sell 5,909,500 of the UniHealth Shares to PacifiCare, subject to and in
accordance with the terms and conditions of this Agreement (the Recapitalization
and the transactions with UniHealth pursuant to this Agreement are collectively
referred to as the "Transaction");
WHEREAS, the Board of Directors of PacifiCare has received a fairness
opinion from its financial advisor, Warburg Dillon Read, to the effect that the
Transaction is fair, from a financial point of view, to the stockholders of
PacifiCare (the "Fairness Opinion"); and
WHEREAS, the Board of Directors of PacifiCare has determined that the
Transaction is in the best interest of the stockholders of PacifiCare and
PacifiCare and has agreed to submit the Amendment for approval by the
stockholders of PacifiCare at the Meeting of Stockholders.
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NOW, THEREFORE, in consideration of the foregoing premises and the mutual
representations, warranties and covenants herein contained, the parties,
intending to be legally bound, mutually agree as follows:
1. DEFINITIONS.
1.1 DEFINITIONS. As used herein, the following terms have the following
meanings:
(a) "AMENDMENT" has the meaning set forth in the Recitals.
(b) "APPROVAL" has the meaning set forth in the Recitals.
(c) "APPROVAL DATE" means the date on which the Approval occurs.
(d) "CLASS B SHARES" means the 285,000 shares of Common Stock acquired
by UniHealth in exchange for the Class B Common Shares owned by UniHealth upon
the filing of the Amendment.
(e) "CLOSING PLACE" means the location where the Initial Closing, each
of the Subsequent Closings and the Final Closing are consummated, which shall be
at the offices of Konowiecki & Rank, 633 West Fifth Street, Los Angeles
California, or at a place to be agreed to by UniHealth and PacifiCare.
(f) "CREDIT AGREEMENT" means the Credit Agreement dated October 31,
1996, among NT Holdings, Inc. (now known as PacifiCare), The Bank of New York,
The Bank of Nova Scotia, Banque Nationale de Paris, The Dai-ichi Kangyo Bank,
Ltd., The Industrial Bank of Japan Limited, Rabobank Nederland, Sanwa Bank
California, The Sumitomo Bank, Limited and Wells Fargo Bank, N.A. as Co-Agents,
The Chase Manhattan Bank and Citicorp USA, Inc., as Managing Agents, Bank of
America National Trust and Savings Association, as Agent, and the other
financial institutions who are a party thereto, as amended by the First
Amendment to Credit Agreement date as of August 15, 1997 and the Second
Amendment to Credit Agreement dated December 31, 1997.
(g) "FAIRNESS OPINION" has the meaning set forth in the Recitals.
(h) "FINAL CLOSING" means the purchase and sale of the Final Shares
pursuant to Section 4.3 below.
(i) "FINAL CLOSING DATE" means February 15, 2001.
(j) "FINAL SHARES" means all UniHealth Shares beneficially owned by
UniHealth as of the date of this Agreement (which the parties believe is
approximately 909,500), excluding the 285,000 shares of Common Stock acquired
upon conversion of the Class B Shares, the Initial Shares, all of the Subsequent
Shares and the Released Shares.
(k) "FINANCIAL ADVISOR" means Warburg Dillon Read.
(l) "INITIAL CLOSING" means the purchase and sale of the Initial Shares
pursuant to Section 4.1 below.
(m) "INITIAL CLOSING DATE" means the first business day immediately
following the first thirty (30) trading days of the Common Stock on the Nasdaq
National Market.
(n) "INITIAL SHARES" means 1,000,000 of the UniHealth Shares.
(o) "MEETING OF STOCKHOLDERS" means the annual meeting of stockholders
of PacifiCare scheduled to be held on June 24, 1999, or such subsequent date
designated by the Board of Directors of PacifiCare or a special meeting of
stockholders of PacifiCare at which the Amendment is submitted for approval and
any adjournment, postponement or continuation thereof.
(p) "PRE-FINAL CLOSING PERIOD" has the meaning set forth in Section 7.1.
(q) "PURCHASE PRICE" means, determined as of the applicable Initial
Closing Date, Subsequent Closing Date or Final Closing Date for the repurchase
of the Initial Shares, Subsequent Shares or Final Shares, as applicable, the
average of the closing prices (last sales price) of one share of PacifiCare's
Common Stock as quoted on the Nasdaq National Market (or if PacifiCare Common
Stock is subsequently listed for trading on the New York Stock Exchange, then on
the New York Stock Exchange) for the thirty (30) trading
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days immediately preceding such date (excluding the repurchase date itself)
unless PacifiCare agrees to a different price in accordance with Section 9.2
below.
(r) "RECAPITALIZATION" has the meaning set froth in the Recitals.
(s) "REGISTRATION RIGHTS AGREEMENT" has the meaning set forth in Section
7.8 below.
(t) "RELEASED SHARES" has the meaning set forth in Section 9.2 below.
(u) "SALE TRANSACTION" means any transaction involving the sale,
disposition, acquisition, transfer or "short sale" of, or grant of an option to
purchase, the UniHealth Shares, or any hedging or similar transaction with the
same economic effect as a sale of all or any of the UniHealth Shares.
(v) "SUBSEQUENT CLOSING" means the purchase and sale of Subsequent
Shares on each Subsequent Closing Date pursuant to Section 4.2 below.
(w) "SUBSEQUENT CLOSING DATE" means each of November 15, 1999, February
15, 2000, May 15, 2000, August 15, 2000 and November 15, 2000.
(x) "SUBSEQUENT SHARES" means, with respect to November 15, 1999,
1,000,000 of the UniHealth Shares, and with respect to February 15, 2000, May
15, 2000, August 15, 2000, November 15, 2000, 750,000 of the UniHealth Shares.
(y) "TRANSACTION" has the meaning set forth in the Recitals.
1.2 OTHER TERMS. All terms defined in the other Sections of this Agreement
shall have the meaning ascribed to them in those Sections.
2. AGREEMENT TO VOTE.
2.1 AMENDMENT. UniHealth hereby revokes any and all previous proxies with
respect to the UniHealth Shares. Subject only to the conditions that (i)
immediately prior to the Meeting of Stockholders, there are no conditions to
PacifiCare's obligation to effect the Recapitalization and make the payment
contemplated by Section 3 other than receipt of the Approval and (ii) there are
no hearings scheduled by any court of competent jurisdiction or any governmental
authority seeking any temporary restraining order, injunction, or other relief
restraining, enjoining or otherwise prohibiting the holding of the Meeting of
Stockholders, the consideration of the Amendment, the filing of the Amendment,
or any other aspect of the Transaction, UniHealth irrevocably agrees to vote all
of the UniHealth Shares in favor of the approval of the Amendment and otherwise
act (including pursuant to written consent) with respect to all of the UniHealth
Shares, for the approval of the Amendment and any action reasonably required in
furtherance hereof or thereof, at the Meeting of Stockholders. In addition,
UniHealth agrees to vote at the Meeting of Stockholders or at any other meeting
or meetings of the stockholders of PacifiCare against: (a) any proposal or
transaction which could prevent or delay the consummation of the Transaction;
(b) any action or agreement that would result in a breach of any representation,
warranty, covenant or obligation of PacifiCare in this Agreement, provided that
PacifiCare advises UniHealth prior to the vote, that it believes that such
action or agreement would have such an effect and the basis for such belief; (c)
any extraordinary corporate transaction, such as a merger, consolidation or
other business combination involving PacifiCare or any significant subsidiary of
PacifiCare; (d) any sale, lease or transfer of all or substantially all of the
of assets of PacifiCare or any significant subsidiary of PacifiCare; (e) any
reorganization, recapitalization, dissolution or liquidation of PacifiCare or
any significant subsidiary of PacifiCare other than the Amendment and
Recapitalization; (f) any change in a majority of the Board of Directors of
PacifiCare, or (g) any other action which is intended, or could reasonably be
expected to, impede, interfere with, delay, postpone, discourage or adversely
affect the contemplated economic benefits to PacifiCare and its stockholders of
the Transaction as contemplated by this Agreement, provided that PacifiCare
advises UniHealth prior to the vote that it believes such action would have such
an effect and the basis for such belief. The voting agreements in this Section
2.1 shall remain in effect with respect to the UniHealth Shares until the
earlier of (i) receipt of the Approval or (ii) the termination of this
Agreement. Immediately prior to the Meeting of Stockholders, PacifiCare shall
deliver to
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UniHealth a certificate executed by its chief executive officer, president or
chief operating officer and its chief financial officer or secretary
substantially in the form of Exhibit B hereto.
2.2 PROXY; FURTHER ASSURANCES.
(a) with the execution of this Agreement, UniHealth shall deliver to
PacifiCare a proxy in the form attached hereto as Exhibit C hereto, which shall
be irrevocable to the fullest extent permitted by law, with respect to the
UniHealth Shares except as otherwise provided in Section 2.1 (the "Proxy").
(b) shall perform such further acts and execute such further documents
and instruments as may reasonably be required to vest in PacifiCare the power to
carry out and give effect to the provisions of Sections 2.1 and 2.2.
(c) Proxy shall remain in effect with respect to the UniHealth Shares
until the earlier of (i) receipt of the Approval or (ii) the termination of this
Agreement.
3. PAYMENT TO UNIHEALTH UPON APPROVAL OF AMENDMENT.
In consideration of UniHealth's voting agreements set forth in Section 2.1
above and its agreement to sell the UniHealth Shares in accordance with this
Agreement, on the Approval Date, if the Approval is received, PacifiCare will
pay UniHealth sixty million dollars ($60,000,000.00) in cash (paid by wire
transfer, cashier's or certified check or other means of payment of immediately
available funds) following receipt at the Meeting of Stockholders, from the
inspector of elections for the meeting, of the preliminary vote count on the
Amendment reasonably confirming its Approval.
4. SALE AND PURCHASE OF UNIHEALTH SHARES.
4.1 PURCHASE OF INITIAL SHARES. Subject to the terms and conditions of
this Agreement, at the Initial Closing, PacifiCare shall purchase from
UniHealth, and UniHealth shall sell to PacifiCare, the Initial Shares at a price
per share equal to the Purchase Price. The Initial Closing shall take place at
the Closing Place at 10:00 a.m., Pacific time, on the Initial Closing Date.
4.2 PURCHASE OF SUBSEQUENT SHARES. Subject to the terms and conditions of
this Agreement, at each Subsequent Closing, PacifiCare shall purchase from
UniHealth, and UniHealth shall sell to PacifiCare, the corresponding number of
Subsequent Shares at a price per share equal to the Purchase Price. A Subsequent
Closing shall take place at the Closing Place at 10:00 a.m., Pacific time, on
each Subsequent Closing Date.
4.3 PURCHASE OF FINAL SHARES. Subject to the terms and conditions of this
Agreement, at the Final Closing, PacifiCare shall purchase from UniHealth, and
UniHealth shall sell to PacifiCare, the Final Shares at a price per share equal
to the Purchase Price. The Final Closing shall take place at the Closing Place
at 10:00 a.m., Pacific time, on the Final Closing Date.
4.4 DELIVERIES AT THE INITIAL CLOSING, EACH SUBSEQUENT CLOSING AND THE
FINAL CLOSING. At the Initial Closing, each Subsequent Closing and the Final
Closing, as applicable:
(a) UNIHEALTH DELIVERIES.
(i) shall deliver to PacifiCare stock certificates registered in
UniHealth's name, duly endorsed for transfer or accompanied by duly executed
stock transfer powers, representing the UniHealth Shares being sold, assigned,
conveyed and transferred hereunder by UniHealth at such closing.
(ii) UniHealth shall deliver to PacifiCare a certificate executed by
its chief executive officer, president or chief operating officer and its chief
financial officer or secretary certifying that the representations and
warranties contained in Section 5.2 are accurate in all material respects as of
such date and that it has complied with all obligations and covenants required
to be complied with by it prior to such date.
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(b) PACIFICARE DELIVERIES.
(i) PacifiCare shall deliver to UniHealth a certificate executed by
its chief executive officer, president or chief operating officer and its chief
financial officer or secretary certifying that all conditions to its obligations
to close such sale, as set forth in Section 8 have been satisfied or waived by
PacifiCare and that it has complied with all obligations and covenants required
to be complied with by it prior to such date.
(ii) Against delivery of the stock certificates in accordance with
Section 4.4(a)(i), PacifiCare shall pay UniHealth an amount in cash (paid by
wire transfer, cashier's or certified check or other means of payment of
immediately available funds) equal to the amount specified in Sections 4.1, 4.2
or 4.3, as applicable.
4.5 FURTHER ASSURANCES. From time to time at or after the Initial Closing,
each Subsequent Closing and the Final Closing, as applicable, at PacifiCare's
request and without further consideration, UniHealth agrees to execute and
deliver such other instruments of conveyance and transfer and take such other
actions as PacifiCare reasonably may require to more effectively convey,
transfer to and vest in PacifiCare, all right, title and interest in and to the
UniHealth Shares sold, assigned, conveyed and transferred hereunder by UniHealth
on such date.
4.6 TRANSFER TAXES. Any stock transfer taxes incurred by PacifiCare,
UniHealth or any other party in connection with the transfer of the UniHealth
Shares to PacifiCare shall be borne and paid exclusively by UniHealth.
5. REPRESENTATIONS AND WARRANTIES OF UNIHEALTH.
Except as disclosed or excepted in the disclosure schedule attached hereto
as Exhibit D hereto (the "UniHealth Disclosure Schedule"), UniHealth hereby
makes the representations and warranties set forth in this Section 5, which
representations and warranties shall be deemed to have been made again as of and
at the Initial Closing.
5.1 AUTHORITY, APPROVAL AND ENFORCEABILITY.
(a) CORPORATE EXISTENCE. UniHealth is a nonprofit public benefit
corporation duly organized, validly existing and in good standing under the laws
of the State of California.
(b) POWER TO EXECUTE AGREEMENT. UniHealth has full power and authority
to execute, deliver and perform its obligations under this Agreement. All
actions of UniHealth necessary for such execution, delivery and performance have
been duly taken.
(c) ABSENCE OF CONFLICTS. The execution and delivery by UniHealth of
this Agreement does not, and the completion of the transactions contemplated by
this Agreement will not, result in any conflict with, breach of, or termination
or forfeiture under (or upon the failure to give notice or the lapse of time, or
both, result in any conflict with, breach of, or termination or forfeiture
under) any terms or provisions of the charter documents, as amended, of
UniHealth or any statute, rule, regulation, judicial or governmental decree,
order, judgment, agreement, lease, loan agreement, debenture, indenture or
mortgage to which UniHealth is a party or to which any of its assets are
subject, except to the extent that any such conflict, breach or termination does
not and could not be reasonably expected to have a material adverse effect on
UniHealth's ability to perform its obligations under this Agreement.
(d) ENFORCEABILITY. Upon the due execution and delivery by the parties,
this Agreement will be a binding obligation of UniHealth enforceable against
UniHealth in accordance with its terms, except as may be limited by applicable
bankruptcy, insolvency, reorganization, moratorium or similar laws affecting
creditors' rights generally.
5.2 TITLE TO STOCK. UniHealth is the sole, true, lawful record and
beneficial owner of the UniHealth Shares, with no restrictions on UniHealth's
voting rights or rights of disposition pertaining to such shares, and the
UniHealth Shares constitute all of the shares of capital stock of PacifiCare
owned beneficially or of record by UniHealth. On the Initial Closing Date, each
Subsequent Closing Date and the Final Closing Date, as
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applicable, upon payment of the Purchase Price therefor, PacifiCare will acquire
good title to the UniHealth Shares being sold, assigned, conveyed and
transferred hereunder by UniHealth on such date, free and clear of all liens,
mortgages, claims, options, proxies, charges, security interests, encumbrances,
rights of first refusal and similar rights and other transfer restrictions of
any nature whatsoever, except for restrictions imposed by applicable securities
laws and any encumbrances created by or through PacifiCare.
5.3 NO CONSENTS. No consent, approval, order or authorization of, or
registration, declaration or filing with, any third party is required by or with
respect to UniHealth in connection with the execution and delivery of this
Agreement or the consummation of the transactions contemplated hereby.
5.4 BROKERS. UniHealth has not dealt with any investment bankers, finders
or brokers in connection with the transactions contemplated by this Agreement
except ING Furman Selz and UniHealth is solely responsible for the payment of
any investment banking or other fees payable to ING Furman Selz.
5.5 INVESTMENT REPRESENTATIONS. UniHealth represents that by reason of
its, or of its representatives', business or financial experience, UniHealth has
the capacity to protect its own interests in connection with the Transaction.
UniHealth has received and read the financial statements of PacifiCare contained
in its Annual Report on Form 10-K for the year ended December 31, 1998, as
amended by the Form 10-K/A. UniHealth is aware of and has considered the
financial and market risks of selling the UniHealth Shares on the terms set
forth in this Agreement and is willing to forego through such sale the potential
for future economic gain that might be realized from owning the UniHealth
Shares. UniHealth agrees that following the Meeting of Stockholders, PacifiCare
shall not have an ongoing obligation to UniHealth to publicly disclose material
corporate developments that might affect the trading price of its Common Stock,
and thereby the Purchase Price for the Initial Shares, any Subsequent Shares or
the Final Shares. UniHealth acknowledges and agrees that one or more of the
trading prices used to determine the Purchase Price for each of repurchases may
not adequately reflect all publicly available information or all material
non-public information that PacifiCare has not yet disclosed.
6. REPRESENTATIONS AND WARRANTIES OF PACIFICARE.
PacifiCare hereby makes the representations and warranties set forth in
this Section 6, which representations and warranties shall be deemed to have
been made again as of and at the Initial Closing.
6.1 AUTHORITY, APPROVAL AND ENFORCEABILITY.
(a) CORPORATE EXISTENCE. PacifiCare is a corporation duly organized,
validly existing and in good standing under the laws of Delaware.
(b) POWER TO EXECUTE AGREEMENT. Subject to receipt of the Approval,
PacifiCare has full power and authority to execute, deliver and perform its
obligations under this Agreement. The Board of Directors of PacifiCare (with the
director nominees of UniHealth abstaining) has unanimously approved the
execution, delivery and performance of this Agreement, subject to the Approval.
All actions of PacifiCare necessary for such execution, delivery and performance
have been, or, as of the Initial Closing Date will have been, duly taken.
(c) ABSENCE OF CONFLICTS. The execution and delivery by PacifiCare of
this Agreement does not, and the completion of the transactions contemplated by
this Agreement will not, result in any conflict with, breach of, or termination
or forfeiture under (or upon the failure to give notice or the lapse of time, or
both, result in any conflict with, breach of, or termination or forfeiture
under) any terms or provisions of the charter documents, as amended as of the
date of this Agreement or as amended by the Amendment, of PacifiCare or any
statute, rule, regulation, judicial or governmental decree, order, judgment,
agreement, lease, loan agreement, debenture, indenture or mortgage to which
PacifiCare is a party or to which any of its assets except to the extent that
any such conflict, breach or termination does not and could not be reasonably
expected to have a material adverse effect on PacifiCare's ability to perform
its obligations under this Agreement.
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(D) ENFORCEABILITY. Upon the due execution and delivery by the
parties, this Agreement will be a binding obligation of PacifiCare enforceable
against PacifiCare in accordance with its terms, except as may be limited by
applicable bankruptcy, insolvency, reorganization, moratorium or similar laws
affecting creditors' rights generally.
6.2 NO CONSENTS. No consent, approval, order or authorization of, or
registration, declaration or filing with any third party, is required by or with
respect to PacifiCare in connection with the execution and delivery of this
Agreement or the consummation of the transactions contemplated hereby, except
for (1) the filing of a proxy statement with the Securities and Exchange
Commission and Nasdaq for the Meeting of Stockholders; (2) the filing of the
Amendment by the Secretary of State of Delaware, (3) any filings required under
the Registration Rights Agreement; and (4) the waiver or amendment of certain
covenants in the Credit Agreement.
6.3 SEC DOCUMENTS. PacifiCare has filed all forms, reports and documents
required to be filed by it with the Securities and Exchange Commission since
January 1, 1999, and each such form, report and document (i) complied with the
requirements of the Securities Act of 1933 or the Securities Exchange Act of
1934, as applicable, at and as of the times they were filed (or, if amended or
superseded by a filing prior to the date of this Agreement, then on the date of
such filing); and (ii) did not at and as of the time they were filed (or, if
amended or superseded by a filing prior to the date of this Agreement, then on
the date of such filing) contain any untrue statement of a material fact or omit
to state a material fact required to be stated therein or necessary in order to
make the statements therein, in the light of the circumstances under which they
were made, not misleading.
6.4 WHEREWITHAL. PacifiCare has on hand, or will have arranged at or prior
to each of the Initial Closing, each Subsequent Closing and the Final Closing,
sufficient funds to enable it to pay the Purchase Price for the Initial Shares,
Subsequent Shares or Final Shares, as applicable, and to otherwise consummate
the Transaction.
6.5 BROKERS. PacifiCare has not dealt with any investment bankers, finders
or brokers in connection with the transactions contemplated by this Agreement
except Warburg Dillon Read and PacifiCare is solely responsible for the payment
of any investment banking or other fees payable to Warburg Dillon Read.
7. COVENANTS.
7.1 NO NEGOTIATION AND STANDSTILL. During the period from the date of this
Agreement until the termination of this Agreement (the "Pre-Final Closing
Period"), except with respect to the Released Shares as permitted in Sections
8.5 and 9.2, neither UniHealth nor any of its representatives shall directly or
indirectly:
(a) solicit or encourage the initiation of any inquiry, proposal or
offer from any person relating to a possible Sale Transaction;
(b) participate in any discussions or negotiations or enter into any
agreement with, or provide any information to, any person relating to or in
connection with a possible Sale Transaction;
(c) consider, entertain or accept any proposal or offer from any
person relating to a possible Sale Transaction.
(d) engage in any Sale Transaction;
(e) make, effect, initiate, cause or participate in (i) any
acquisition of beneficial ownership of any securities of PacifiCare or any
securities of any subsidiary or other affiliate of PacifiCare, (ii) any
acquisition of any assets of PacifiCare or any assets of any subsidiary or other
affiliate of PacifiCare, (iii) except for the Recapitalization and except as
expressly authorized in Section 10.2, any tender offer, exchange offer, merger,
business combination, recapitalization, restructuring, liquidation, dissolution
or extraordinary transaction involving PacifiCare or any subsidiary or other
affiliate of PacifiCare, or involving any securities or assets of PacifiCare or
any securities or assets of any subsidiary or other affiliate of PacifiCare,
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or (iv) any "solicitation" of "proxies" (as those terms are used in the proxy
rules of the Securities and Exchange Commission) or consents with respect to any
securities of PacifiCare;
(f) form, join or participate in a "group" (as defined in the
Securities Exchange Act of 1934 and the rules promulgated thereunder) with
respect to the beneficial ownership of any securities of PacifiCare;
(g) act, alone or in concert with others, to seek to control or
influence the management, board of directors or policies of PacifiCare;
(h) take any action that might require PacifiCare to make a public
announcement regarding any of the types of matters set forth in clause "(e)" of
this sentence;
(i) agree or offer to take, or encourage or propose (publicly or
otherwise) the taking of, any action referred to in clause "(e)", "(f)", "(g)"
or "(h)" of this covenant;
(j) assist, induce or encourage any other person, entity or group to
take any action of the type referred to in clause "(e)", "(f)", "(g)", "(h)" or
"(i)" of this covenant;
(k) enter into any discussions, negotiations, arrangement or
agreement with any other person, entity or group relating to any of the
foregoing; or
(l) request or propose that PacifiCare or any of PacifiCare's
representatives amend, waive or consider the amendment or waiver of any
provision set forth in this Section 7.1.
Notwithstanding the foregoing, if at the time UniHealth takes any of the
foregoing actions (i) PacifiCare has breached in any material respect any of its
obligations or covenants under this Agreement, and (ii) PacifiCare has failed to
cure such breach or take reasonable steps to cure such breach within thirty (30)
days of notice from UniHealth of such breach (which notice will contain the
basis for such breach)("uncured breach")(provided that PacifiCare shall not be
entitled to cure any payment default), then UniHealth shall not be deemed to be
in breach of this covenant for taking such action. If PacifiCare subsequently
cures any uncured breach and the Agreement has not been terminated, then this
covenant will apply from and after such cure. Sections 7.1(a) through (d)
inclusive and Section 7.1(k) as it relates to any Sale Transaction shall not
apply to the Class B Shares so long as UniHealth does not enter into a Sale
Transaction with respect to any of the Class B Shares on or before the Meeting
of Stockholders. UniHealth acknowledges that any breach of this covenant by any
representative of UniHealth shall be deemed a breach by UniHealth. UniHealth
shall promptly notify PacifiCare in writing of any material inquiry, proposal or
offer relating to a possible Sale Transaction or any of the transactions
specified in clauses (e) through (k) of this covenant that is received by
UniHealth during the Pre-Final Closing Period.
7.2 NO PROXY OR VOTING AGREEMENT. UniHealth shall not, without the prior
written consent of PacifiCare, directly or indirectly, grant any proxies (other
than the Proxy and any proxies solicited by the Board of Directors of PacifiCare
with respect to stockholders meetings, including the Meeting of Stockholders) or
enter into any voting trust or other agreement or arrangement with respect to
the voting of any of the UniHealth Shares during the Pre-Final Closing Period.
7.3 ACCURACY OF REPRESENTATIONS AND WARRANTIES. Neither UniHealth nor
PacifiCare will (i) take, agree or commit to take any action that would make any
of its respective representations and warranties hereunder inaccurate in any
respect as of any time prior to the Initial Closing (or in the case of Section
5.2 prior to the purchase of Final Shares) or (ii) omit, agree or commit to omit
to take any action necessary to prevent any such representation or warranty from
being inaccurate in any respect at any such time.
7.4 DESIGNEES TO BOARD OF DIRECTORS. After the Approval Date, PacifiCare
shall have no obligation to nominate, and UniHealth shall not take any action
(including the submission of any nomination to the Governance and Nominating
Committee of the Board of Directors of PacifiCare) to have nominated, any of
Bradley C. Call. David R. Carpenter, Gary L. Leary or Jean Bixby Smith for
reelection to the Board of Directors of PacifiCare following expiration of his
or her current term.
7.5 SUPPORT FOR RIGHTS PLAN. Following the Approval of the Amendment, the
Board of Directors of PacifiCare intends to approve the designation of a series
of Junior Participating Preferred Stock, enter into a
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Rights Agreement substantially in the form provided to UniHealth and to declare
a dividend on the Common Stock (collectively referred to as the "Rights Plan"),
without seeking stockholder approval. UniHealth will use all reasonable efforts
to support and promote PacifiCare's adoption of the Rights Plan, including,
without limitation, requesting its designees on the Board of Directors to vote
in favor of the Rights Plan and by supporting PacifiCare and voting against any
proposal of any stockholder (whether submitted for inclusion in PacifiCare's
proxy statement, duly presented at a meeting of stockholders or informally
presented) directed against the Rights Plan or seeking to have the Rights Plan
terminated and the accompanying rights redeemed. UniHealth will not take or
otherwise support any other action which is intended, or could reasonably be
expected to, impede, interfere with, delay, postpone, discourage or adversely
affect the adoption, implementation or enforcement of the Rights Plan.
7.6 NOTICE. Each party will promptly advise the other party of any event
that may impair such party's ability to perform its obligations under this
Agreement, including any event that could cause the failure to satisfy any
condition to any party's covenants or obligations under this Agreement.
7.7 CONFIDENTIALITY. Concurrent with the execution of this Agreement, the
parties shall enter a confidentiality agreement in the form of Exhibit E hereto.
7.8 REGISTRATION RIGHTS AGREEMENT. Concurrent with the execution of this
Agreement, the parties will enter a registration rights agreement in the form of
Exhibit F hereto (the "Registration Rights Agreement").
7.9 SATISFACTION OF CONDITIONS. Each of the parties will use all
commercially reasonable efforts to satisfy its conditions to its obligations
hereunder to be timely satisfied and to perform and fulfill all obligations on
its part to be performed and fulfilled under this Agreement, to the end that the
Transaction contemplated by this Agreement shall be effected in accordance with
its terms; provided, however, that PacifiCare shall have no obligation to settle
or otherwise resolve any legal proceeding that causes the condition in Section
8.2 not to be satisfied.
8. CONDITIONS TO PACIFICARE'S OBLIGATION TO CLOSE.
The obligation of PacifiCare to purchase UniHealth Shares at the Initial
Closing, each Subsequent Closing and the Final Closing, as applicable, is
subject to the following conditions:
8.1 NO RESTRAINTS. No action shall have been taken, and no statute, rule,
regulation, executive order, decree or injunction (other than a temporary
restraining order) shall have been enacted, entered, promulgated or enforced
(and not repealed, superseded, lifted or otherwise made inapplicable) by any
court of competent jurisdiction or by any governmental authority that restrains,
enjoins or otherwise prohibits the consummation of the Transactions contemplated
by this Agreement (each party agreeing to use commercially reasonable efforts to
avoid the effect of any such statute, rule, regulation or order or to have any
such order, judgment, decree or injunction repealed, superseded or lifted).
8.2 NO LEGAL PROCEEDINGS. No person or entity shall have commenced or
overtly threatened in writing to commence any legal proceeding against
PacifiCare or its Board of Directors or officers challenging, or seeking the
recovery of damages in connection with, the Recapitalization or any other aspect
of the Transaction that if successful would have a material adverse effect on
the business, assets, condition (financial or otherwise), results of operations
or prospects of PacifiCare.
8.3 NO IMPAIRMENT. With respect to the Initial Purchase, any Subsequent
Purchase or the Final Purchase, on the Initial Closing Date, Subsequent Closing
Date or Final Closing Date, as applicable, the capital of PacifiCare shall not
be impaired within the meaning of Section 160 of the General Corporation Law of
Delaware and the repurchase shall not cause any impairment of the capital of
PacifiCare within the meaning of Section 160 of the General Corporation Law of
Delaware Prior to execution of this Agreement, PacifiCare has delivered to
UniHealth a certificate showing PacifiCare's unimpaired capital as of March 31,
1999.
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8.4 ACCURACY OF REPRESENTATIONS AND WARRANTIES. The representations and
warranties of UniHealth set forth in Section 5.2 shall be accurate in all
material respects as of the Initial Closing Date, each Subsequent Closing Date
and the Final Closing Date, as applicable.
8.5 PURCHASE PRICE. Each Purchase Price shall not be more than $120 per
share for the UniHealth Shares; provided that if the Purchase Price for any
specific repurchase, as determined by formula in accordance with Section 1.1(q),
is more than $120 per share, then PacifiCare, in its sole discretion, may elect
during the ten (10) days following the Initial Closing Date, the Subsequent
Closing Date or Final Closing Date, as applicable, to pay such higher Purchase
Price and repurchase such shares. If PacifiCare does not repurchase such
UniHealth Shares within such ten-day period, then such shares will no longer be
repurchased in accordance with this Agreement (the "Released Shares").
Notwithstanding Section 7.1, UniHealth may engage in any Sale Transaction with
respect to the Released Shares only; provided that UniHealth provides to
PacifiCare ten (10) days' prior written notice of its intention to engage in the
Sale Transaction (including open market sales) and PacifiCare is given the
opportunity to repurchase the Released Shares at the same price as the proposed
sale (which in the case of proposed sales in open market transactions shall be
deemed to be the average of the closing prices (last sales price) of the
PacifiCare Common Stock as quoted on the Nasdaq National Market (or if
PacifiCare Common Stock is subsequently listed for trading on the New York Stock
Exchange, then on the New York Stock Exchange) for the ten (10) trading days
immediately preceding the date of notice).
9. CONDITIONS TO UNIHEALTH'S OBLIGATION TO CLOSE.
The obligation of UniHealth to sell UniHealth Shares at the Initial
Closing, each Subsequent Closing and the Final Closing, as applicable, is
subject to the following conditions:
9.1 NO RESTRAINTS. No action shall have been taken, and no statute, rule,
regulation, executive order, decree or injunction (other than a temporary
restraining order) shall have been enacted, entered, promulgated or enforced
(and not repealed, superseded, lifted or otherwise made inapplicable) by any
court of competent jurisdiction or by any governmental authority that restrains,
enjoins or otherwise prohibits the filing of the Amendment or the consummation
of the transactions contemplated by this Agreement (each party agreeing to use
commercially reasonable efforts to avoid the effect of any such statute, rule,
regulation or order or to have any such order, judgment, decree or injunction
repealed, superseded or lifted).
9.2 PURCHASE PRICE. The Purchase Price for the Initial Shares shall not be
less than $70 per share and each Purchase Price for the Subsequent Shares and
the Final Shares shall not be less than $75 per share; provided that if the
Purchase Price, as determined by formula in accordance with Section 1.1(q), for
the Initial Shares is less than $70 per share or for any other specific
repurchase is less than $75 per share, then UniHealth, in its sole discretion,
may elect during the ten (10) days following the Initial Closing Date, the
Subsequent Closing Date or Final Closing Date, as applicable, to sell such
shares to PacifiCare for such lower Purchase Price, and provided further that
this condition will be deemed to be satisfied as to any specific repurchase if
PacifiCare agrees to a $70 per share Purchase Price with respect to the Initial
Shares or a $75 per share Purchase Price with respect to any Subsequent Shares
or the Final Shares, as applicable, notwithstanding the Purchase Price, as
determined by formula in accordance with Section 1.1(q). If PacifiCare does not
repurchase such UniHealth Shares within such ten-day period, then such shares
will no longer be repurchased in accordance with this Agreement (the "Released
Shares"). Notwithstanding Section 7.1, UniHealth may engage in any Sale
Transaction with respect to the Released Shares only; provided that UniHealth
provides to PacifiCare ten (10) days' prior written notice of its intention to
engage in the Sale Transaction (including open market sales) and PacifiCare is
given the opportunity to repurchase the Released Shares at the same price as the
proposed sale (which in the case of proposed sales in open market transactions
shall be deemed to be the average of the closing prices (last sales price) of
the PacifiCare Common Stock as quoted on the Nasdaq National Market (or if
PacifiCare Common Stock is subsequently listed for trading on the New York Stock
Exchange, then on the New York Stock Exchange) for the ten (10) trading days
immediately preceding the date of notice).
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10. TERMINATION RIGHTS.
10.1 TERMINATION.
(a) This Agreement shall terminate automatically if either (i)
PacifiCare requests and does not receive, the Fairness Opinion updated to the
date of mailing of the definitive proxy statement relating to the Amendment to
PacifiCare's stockholders; or (ii) the Approval is not received (and the payment
contemplated by Section 3 is not made) by September 30, 1999.
(b) This Agreement may be terminated by either party upon the
material breach by the other party of this Agreement if (i) the non-breaching
party provides written notice to the breaching party of its intention to
terminate this Agreement (which notice shall include the basis for such
termination), (ii) the breaching party does not cure the breach or take
reasonable steps to cure the breach within thirty (30) days of receipt of the
notice and (iii) the non-breaching party provides written notice of the
termination of the Agreement after such 30-day cure period has expired;
provided, however, that there will be no cure period for UniHealth's failure to
deliver any of the Initial Shares, Subsequent Shares or Final Shares for
purchase at the applicable closing in accordance with this Agreement or for any
default by PacifiCare in its payment obligations under this Agreement.
(c) This Agreement may be terminated by either party if the Initial
Closing, any Subsequent Closing or the Final Closing, as applicable, does not
occur within forty-five (45) days following the Initial Closing Date, the
corresponding Subsequent Closing Date, or the Final Closing Date because of
failure to satisfy a condition to closing (other than the conditions set forth
in Sections 8.5 and 9.2 resulting in Released Shares).
10.2 CHANGE IN CONTROL. If PacifiCare enters into a definitive agreement
for the sale of substantially all of the assets of PacifiCare or for any
transaction or series of transactions (including any merger or any agreement
consenting to a tender offer for all of the outstanding shares of Common Stock
of PacifiCare or other reorganization) that if consummated will result in any
person or group acquiring beneficial ownership of more than 40% of the total
outstanding voting power of PacifiCare ("Change in Control Transaction"), then
UniHealth shall have no obligation to sell any UniHealth Shares to PacifiCare in
accordance with this Agreement between the date of execution of the definitive
agreement for such Change in Control Transaction and any termination of such
definitive agreement (other than by closing of the Change in Control
Transaction). Upon closing of the Change in Control Transaction, UniHealth shall
be entitled to receive the same consideration for the UniHealth Shares that it
then beneficially owns as is received by the other holders of Common Stock
(provided that if a tender offer is made for less than all of PacifiCare Common
Stock, then UniHealth shall be entitled to receive the tender offer price for
any shares it tenders that are accepted by the tender offeror and any remaining
UniHealth Shares shall remain subject to this Agreement (with a pro rata
reduction for each tranche of Subsequent Shares and Final Shares)). In addition,
if PacifiCare repurchases any UniHealth Shares during the 90 days prior to the
date of the first public announcement of the proposed Change in Control
Transaction or the first public announcement of an offer that subsequently leads
to a Change in Control Transaction ("Pre-Announcement Period"), then, upon the
closing of the Change in Control Transaction, PacifiCare shall pay UniHealth a
cash amount equal to the positive difference, if any, between (1) the aggregate
consideration payable in the Change in Control Transaction for the number of
UniHealth Shares purchased under this Agreement during the Pre-Announcement
Period ("Subject Shares") and (2) the aggregate Purchase Price of the Subject
Shares. For purposes of the preceding sentence, any non-cash consideration
payable in a Change in Control Transaction shall be valued in the case of a
fixed exchange ratio, based upon the value of one share of Common Stock used in
setting the fixed exchange ratio; in the case of a formula-based exchange ratio,
using the same formula used to value one share of Common Stock and in the case
of any earn-out consideration, assuming that the earn-out is not earned
(provided, that in the case of an earn-out, UniHealth shall be entitled to a
future cash payment if and when the earn-out is earned in an amount that
reflects the cash value of the earn-out for the Subject Shares had those shares
not been repurchased). If the definitive agreement for the Change of Control
Transaction is terminated without closing, then any Initial Shares, Subsequent
Shares or Final Shares that are not repurchased during the period from the
execution of the definitive agreement for the Change in Control Transaction and
the termination date
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shall be added pro rata to all remaining Subsequent Shares and Final Shares.
This Section 10.2 shall be binding on any successor in interest to PacifiCare or
any assignee of all or substantially all of the assets of PacifiCare.
11. NOTICES.
All notices, requests, demands, waivers, consents or other communications
required or permitted hereunder shall be in writing and be deemed to have been
duly given when deposited in the United States Mail via registered, certified or
express mail, return receipt requested, or deposited with Federal Express or
United Parcel Service for overnight delivery, addressed to the party to be
notified with postage and fees prepaid as follows:
If to PacifiCare: 3120 Lake Center Drive
Santa Ana, CA 92704-6917
Attn: President
Phone: (714) 825-5200
Fax: (714) 825-5041
With a copy to: Konowiecki & Rank
Library Tower
833 West Fifth Street, Suite 3500
Los Angeles, CA 90071-2007
Attn: Joseph S. Konowiecki, Esq.
Phone: (213) 229-0990
Fax: (213) 229-0992
Cooley Godward LLP
4365 Executive Drive, Suite 1100
San Diego, CA 92121
Attn: Frederick T. Muto, Esq.
Phone: (619) 550-6000
Fax: (619) 453-3555
If to UniHealth: 3400 Riverside Drive
Burbank, CA 91505
Attn: David R. Carpenter, Chairman
Phone: (818) 238-6350
Fax: (818) 238-7686
With a copy to: O'Melveny & Myers LLP
400 South Hope Street
Los Angeles, CA 90071-2899
Attn: Frederick B. McLane, Esq.
Phone: (213) 430-6000
Fax: (213) 430-6407
Either party may change its address for notice purposes by providing a notice in
accordance with this Section.
12. ADJUSTMENTS UPON CHANGES IN PACIFICARE COMMON STOCK.
In the event of any change in PacifiCare's Common Stock by reason of any
stock dividends, stock splits, mergers, consolidations, recapitalizations,
combinations, conversions, exchanges of shares, extraordinary or liquidating
dividends, or other similar changes in the capital structure of PacifiCare which
would affect the rights of PacifiCare hereunder (other than a Change of Control
Transaction), the number and kind of shares or securities representing the
Initial Shares, Subsequent Shares and the Final Shares, and the per share
Purchase Price (but not the aggregate l Purchase Price), respectively, shall be
appropriately and equitably adjusted so that PacifiCare shall receive upon the
Initial Closing, each Subsequent Closing or the Final
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Closing, as applicable, the number and class of shares or other securities or
property that PacifiCare would have received in respect of the Initial Shares,
Subsequent Shares or Final Shares, respectively, if PacifiCare had purchased the
Initial Shares, Subsequent Shares or Final Shares, as the case may be,
immediately prior to such event. PacifiCare and UniHealth agree to take such
steps in connection with such consolidation, merger, liquidation or other such
action as may be necessary to assure that the provisions hereof shall thereafter
apply as nearly as possible to any securities or property thereafter deliverable
in place of the Initial Shares, Subsequent Shares or Final Shares, as the case
may be.
13. MISCELLANEOUS.
13.1 HEADINGS. The headings of the Sections of this Agreement are for
convenience of reference only, and do not form a part thereof, and do not in any
way modify, interpret or construe the meaning of the sections themselves or the
intentions of the parties.
13.2 LEGENDS. Each of the certificates for the UniHealth Shares (other
than the Class B Shares) shall bear a restrictive legend indicating that the
UniHealth Shares (other than the Class B Shares) are subject to restrictions on
transfer under the Stock Purchase Agreement dated May 4, 1999 between PacifiCare
and UniHealth. PacifiCare covenants to have the legend removed from any Released
Shares promptly upon UniHealth's request and submission of its stock
certificate(s) for such shares.
13.3 ENTIRE AGREEMENT. This Agreement and any other agreements entered
into contemporaneously herewith set forth the entire agreement of the parties
and are intended to supersede all prior negotiations, understandings, and
agreements and cannot be altered, amended, changed or modified in any respect or
particular unless each such alteration, amendment, change or modification shall
have been agreed to by PacifiCare and UniHealth and reduced to writing in its
entirety and signed and delivered by each party.
13.4 EQUITABLE REMEDIES. UniHealth acknowledges that there will be no
adequate remedy at law for its failure to comply with the terms of this
Agreement. Accordingly, if UniHealth fails to comply with any of the terms of
this Agreement, PacifiCare shall have the right to have any breach remedied by
equitable relief by way of temporary retraining order, preliminary injunction,
permanent injunction and such other alternative relief as may be appropriate
without the necessity of posting any bond or proving any damages.
13.5 NO WAIVER. No provision, condition or covenant of this Agreement
shall be waived by either party hereto except by a written instrument delivered
to the other party and signed by the party consenting to and to be charged with
such waiver.
13.6 ASSIGNMENT AND SUCCESSORS. UniHealth may not assign its rights,
duties or obligations hereunder without the prior written consent of PacifiCare.
This Agreement shall be binding upon the successors and permitted assignees of
PacifiCare and UniHealth.
13.7 OTHER AND FURTHER DOCUMENTS. The parties hereto agree to execute,
acknowledge and deliver, at or after the Initial Closing Date, each Subsequent
Closing Date and the Final Closing Date, as applicable, such other and further
instruments and documents as may be reasonably necessary to implement,
consummate and effectuate the terms of this Agreement.
13.8 GOOD FAITH. All parties hereto shall act in good faith in performing
and discharging their respective duties and obligations hereunder.
13.9 GOVERNING LAW. The parties agree that this Agreement will be
interpreted, construed, and enforced under and according to the internal laws of
the State of California.
13.10 COUNTERPARTS. This Agreement may be executed in counterparts, all of
which together shall comprise one and the same instrument.
[THIS SPACE INTENTIONALLY LEFT BLANK]
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IN WITNESS WHEREOF, the parties hereto have caused this Stock Purchase
Agreement to be signed and executed by their proper officers thereunto duly
authorized as of the day and year first above written.
PACIFICARE HEALTH SYSTEMS, INC.,
a Delaware corporation
By:
------------------------------------
Alan Hoops
Chairman of the Board &
Chief Executive Officer
UNIHEALTH FOUNDATION,
a California nonprofit public benefit
corporation
By:
------------------------------------
David R. Carpenter
Chairman of the Board
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EXHIBIT A
AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
OF
PACIFICARE HEALTH SYSTEMS, INC.
I.
The name of this Corporation is: PacifiCare Health Systems, Inc.
II.
The address of its registered office in the State of Delaware is 1209
Orange Street, County of New Castle, Wilmington, Delaware. The name of its
registered agent at such address is the Corporation Trust Company.
III.
The nature of business or purposes to be conducted or promoted is to engage
in any lawful act or activity for which corporations may be organized under the
Delaware General Corporation Law.
IV.
A. PacifiCare Health Systems, Inc. (the "Corporation") is authorized to
issue two classes of shares of stock to be designated, respectively, "Common
Stock" and "Preferred Stock." The total number of shares of stock which the
Corporation shall have authority to issue is two hundred forty million
(240,000,000). The total number of shares of Common Stock which the Corporation
shall have authority to issue is two hundred million (200,000,000), and the par
value of each share of such Common Stock shall be one cent ($0.01). The total
number of shares of Preferred Stock which the Corporation shall have the
authority to issue is forty million (40,000,000), and the par value of each
share of Preferred Stock shall be one cent ($0.01). Upon filing of this Amended
and Restated Certificate of Incorporation, each Class A Common Share and each
Class B Common Share outstanding immediately prior to such filing shall
automatically be changed, reclassified and converted, without any action on the
part of any holder thereof, into one (1) share of Common Stock.
B. The powers, preferences and rights of the holders of Common Stock, and
the qualifications, limitations or restrictions thereof, shall be in all
respects identical, except as otherwise required by law, and subject to the
powers, preferences and rights of the holders of Preferred Stock, as provided in
or as otherwise determined by the Board of Directors pursuant to paragraph C of
this Article IV.
1. Dividends. Dividends may be declared and paid to the holders of the
Common Stock in cash, property, or other securities of the Corporation out of
any funds legally available therefor. If and when dividends on the Common Stock
are declared from time to time by the Board of Directors, whether payable in
cash, in property or in securities of the Corporation, the holders of the Common
Stock shall be entitled to share equally, on a per share basis in such
dividends.
2. Distribution on Dissolution, Etc. Upon any liquidation, dissolution or
winding up of the Corporation, whether voluntary or involuntary, the remaining
net assets of the Corporation shall, after payment in full of the liquidation
preference, if any, of any outstanding Preferred Stock, be distributed pro rata
to the holders of the Common Stock.
3. Voting Rights. At each annual or special meeting of the stockholders,
each holder of the Common Stock shall be entitled to one (1) vote in person or
by proxy for each share of Common Stock standing in his name on the stock
transfer records of the corporation in connection with the election of directors
and all other actions submitted to a vote of stockholders.
C. The Preferred Stock may be issued from time to time in one or more
series. The Board of Directors is hereby authorized, by filing a certificate (a
"Preferred Stock Designation") pursuant to the Delaware General
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Corporation Law, to fix or alter from time to time the designation, powers,
preferences and rights of the shares of each such series and the qualifications,
limitations or restrictions thereof, and to establish from time to time the
number of shares constituting any such series; and, subject to the express terms
of any series of Preferred Stock outstanding, to increase or decrease the number
of shares of any series subsequent to the issuance of shares of that series, but
not below the number of shares of such series then outstanding. The Board of
Directors shall designate each series to distinguish it from other series and
classes of stock of the Corporation, shall specify the number of shares to be
included in the series, and shall fix the terms, rights, restrictions and
qualifications of the shares of the series, including, without limitation, any
preferences, voting powers, dividend rights and redemption, sinking fund and
conversion rights. Subject to the express terms of any series of Preferred Stock
outstanding, the Board of Directors may increase or decrease the number of
shares or alter the designation or classify or reclassify any unissued shares of
a particular series of Preferred Stock by fixing or altering in any one or more
respects from time to time before issuing the shares, any terms, rights,
restrictions and qualifications of the shares. In case the number of shares of
any series shall be decreased in accordance with the foregoing sentence, the
shares constituting such decrease shall resume the status that they had prior to
the adoption of the resolution originally fixing the number of shares of such
series (unless the Preferred Stock Designation relating thereto provides
otherwise).
V.
The number of Directors of the Corporation shall be twelve. The number of
Directors may hereafter be fixed from time to time by bylaw or amendment to this
Certificate of Incorporation duly adopted by the Board of Directors, provided,
however, that the number of Directors shall not be more than twelve nor less
than five.
VI.
A. The Board of Directors shall be and is divided into three classes, Class
I, Class II and Class III, respectively. The number of Directors in each class
shall be the whole number contained in the quotient arrived at by dividing the
authorized number of Directors by three, and if a fraction is also contained in
such quotient then if such fraction is one-third ( 1/3) the extra Director shall
be a member of Class I and if the fraction is two-thirds ( 2/3) one of the extra
Directors shall be a member of Class I and the other shall be a member of Class
II. Each Director shall serve for a term to expire at the third annual meeting
following the annual meeting at which such Director was elected, provided,
however, that the Directors initially appointed to Class I shall serve for a
term to expire at the third annual meeting next following February 14, 1997, the
Directors initially appointed to Class II shall serve for a term to expire at
the second annual meeting next following February 14, 1997, and the Directors
initially appointed to Class III shall serve for a term to expire at the first
annual meeting next following February 14, 1997.
B. In the event of any increase or decrease in the authorized number of
Directors, (1) each Director then serving as such shall nevertheless continue as
a Director of the class of which he is a member until the expiration of his
current term, or his prior death, resignation or removal, and (2) the newly
created or eliminated Directorships resulting from such increase or decrease
shall be apportioned by the Board of Directors to such class or classes as
shall, so far as possible and subject to clause (1) of this paragraph, bring the
number of Directors in the respective classes into conformity with the formula
in this Article, as applied to the new authorized number of Directors.
C. Notwithstanding any of the foregoing provisions of this Article, each
Director shall serve until his successor is elected and qualified or until his
death, resignation or removal. A Director shall not be removed from office prior
to the expiration of his term except by the affirmative vote or written consent
of stockholders entitled to cast not less than sixty-six and two-thirds percent
(66 2/3%) of the total votes entitled to be cast in an election of Directors.
Should a vacancy occur or be created, the remaining Directors (even though less
than a quorum) may fill the vacancy for the full term of the class in which the
vacancy occurs or is created.
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VII.
A. In addition to requirements of any applicable statute, the affirmative
vote or written consent of not less than 66 2/3% of the total votes entitled to
be cast in an election of Directors, considered for purposes of this Article as
one class, shall be required for approval or authorization of any Business
Transaction (as hereinafter defined) between the Corporation and any Control
Person (as hereinafter defined), provided, however, that such additional voting
requirement shall not be applicable if:
(1) The Business Transaction was approved by a two-thirds vote of the
Board of Directors of the Corporation prior to the acquisition by the
Control Person, together with its Affiliates and Associates (as hereinafter
defined), of stock of the Corporation, which, in the aggregate, bears the
rights to 10% or more of the total votes entitled to be cast in an election
of Directors; or
(2) The Business Transaction was approved by a two-thirds vote of the
Board of Directors of the Corporation after the acquisition by the Control
Person, together with its Affiliates and Associates, of stock of the
Corporation, which, in the aggregate, bears the rights to 10% or more of
the total votes entitled to be cast in an election of Directors, and such
acquisition by such Control Person and its Affiliates and Associates was
unanimously approved by the Board of Directors of Corporation; or
(3) The Business Transaction is solely between the Corporation and
another corporation, 50% or more of the voting stock of which is owned by
the Corporation and none of which is owned by a Control Person, and each
holder of stock of the Corporation receives the same type of consideration
in proportion to his holdings; or
(4) Both of the following are satisfied:
(A) the cash or fair market value of the property, securities or
other consideration to be received per share in the Business Transaction
by holders of the stock of the Corporation is not less than the higher
of (i) the highest price per share (including brokerage commissions,
soliciting dealers' fees, dealer-management compensation, and other
expenses, including, but not limited to, newspaper advertisements,
printing and attorney's fees) paid by such Control Person in acquiring
any of its holdings of the Corporation's stock, or (ii) the highest per
share market price of the stock of the Corporation during the 3-month
period immediately preceding the date of the proxy statement described
in (B) below; and
(B) a proxy statement satisfying the requirements of the 1934 Act
shall be mailed to public stockholders of the Corporation for the
purpose of soliciting stockholder approval of such Business Transaction
and shall contain at the front thereof, in a prominent place, any
recommendations as to the advisability (or inadvisability) of the
Business Transaction which the Continuing Directors, or any of them, may
choose to state, and, if deemed advisable by a majority of the
Continuing Directors, an opinion of a reputable investment banking firm
as to the fairness (or unfairness) of the terms of such Business
Transaction, from the point of view of the remaining public stockholders
of the Corporation (such investment banking firm to be selected by a
majority of the Continuing Directors and to be paid a reasonable fee for
their services by the Corporation upon receipt of such opinion).
B. For the purposes of this Article:
1. The term "Control Person" shall mean and include any individual,
corporation, partnership or other person or entity which, together with its
Affiliates and Associates, "beneficially owns" (as this term is defined on
the date on which this Article becomes effective in Rule 13d-3 of the
General Rules and Regulations under the 1934 Act) in the aggregate, stock
of the Corporation, which bears the rights to 10% or more of the total
votes entitled to be cast in an election of Directors, and any Affiliate or
Associate (as those terms are defined on the date of which this Article is
adopted in Rule 12b-2 of the General Rules and Regulations under the 1934
Act) of any such individual, corporation, partnership or other person or
entity;
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2. The term "Business Transaction" shall mean (a) any merger or
consolidation of the Corporation with or into a Control Person, (b) any
sale, lease, exchange, transfer or other disposition, including without
limitation a mortgage or any other security device, of all or any
Substantial Part (as hereinafter defined) of the assets of the Corporation
(including, without limitation, any voting securities of a subsidiary) or
of a subsidiary, to a Control Person, (c) any merger of consolidation of a
Control Person with or into the Corporation or a subsidiary of the
Corporation, (d) any sale, lease, exchange, transfer or other disposition
of all or any Substantial Part (as hereinafter defined) of the assets of a
Control Person to the Corporation or a subsidiary of the Corporation, (e)
the issuance of any securities of the Corporation or a subsidiary of the
Corporation to a Control Person, (f) the acquisition by the Corporation or
a subsidiary of the Corporation of any securities of a Control Person, (g)
any reclassification or recapitalization (including any reverse stock
split) involving stock of the Corporation, consummated within five (5)
years after a Control Person becomes a Control Person, (h) any plan or
proposal by a Control Person for the dissolution or liquidation of the
Corporation, and (i) any agreement, contract or other arrangement providing
for any of the transactions described in this definition of Business
Transaction;
3. The term "Continuing Director" shall mean any Director who was
elected by the public stockholders of the Corporation prior to the
acquisition by the Control Person, together with its Affiliates and
Associates, in the aggregate, of stock of the Corporation, which bears the
rights to 10% or more of the total votes entitled to be cast in an election
of Directors, or a person recommended to succeed a Continuing Director by a
majority of Continuing Directors;
4. The term "Substantial Part" shall mean more than 10% of the total
assets of the Corporation in question as of the end of its most recent
fiscal year ending prior to the time that the determination is being made;
5. Without limitation, any stock of the Corporation which any Control
Person has the right to acquire at any time pursuant to any agreement, or
upon exercise of conversion rights, warrants or options, or otherwise,
shall be deemed outstanding and beneficially owned by such Control Person
for purposes of this Article only;
6. For the purpose of subparagraph 4 of paragraph A of this Article,
the phrase, "other consideration to be received" shall include, without
limitation, stock of the Corporation retained by its existing public
stockholders in the event of a Business Transaction with such Control
Person in which the Corporation is the surviving corporation.
C. The provisions set forth in this Article shall not be repealed or
amended in any respect or in any manner, including in any merger or
consolidation of the Corporation with any other corporation, unless the
surviving or resulting corporation's Certificate of Incorporation contains an
Article to the same effect as this Article, except by the affirmative vote or
written consent of not less than 66 2/3% of the total votes entitled to be cast
in an election of Directors attributable to stock owned by persons other than a
Control Person.
D. A majority of the Continuing Directors shall have the power and duty to
determine for purposes of this Article on the basis of information known to
them:
1. Whether any proposed transaction is a Business Transaction and
within the scope of this Article;
2. Whether a stockholder is a Control Person; and
3. For the purposes of subparagraph 4 of paragraph A, the per share
market value to be paid to stockholders in the Business Transaction and the
highest per share price paid by the Control Person in acquiring any of its
holdings of the Corporation's stock.
VIII.
In furtherance and not in limitation of the powers conferred by statute,
the Board of Directors is expressly authorized to make, alter or repeal the
Bylaws of the Corporation.
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IX.
No Director shall be personally liable to the Corporation or any
stockholder for monetary damages for breach of fiduciary duty as a director,
except for any matter in respect of which such director shall be liable under
Section 174 of Title 8 of the Delaware Code (relating to the Delaware General
Corporation Law) or any amendment thereto or successor provision thereto or
shall be liable by reason that, in addition to any and all other requirements
for such liability, he (i) shall have breached his duty of loyalty to the
corporation or its stockholders, (ii) shall not have acted in good faith, (iii)
shall have acted in a manner involving intentional misconduct or a knowing
violation of law or, in failing to act, shall have acted in a manner involving
intentional misconduct or a knowing violation of law or, (iv) shall have derived
an improper personal benefit. Neither the amendment nor repeal of this Article
Nine, nor the adoption of any provision of the Certificate of Incorporation
inconsistent with this Article Nine, shall eliminate or reduce the effect of
this Article Nine in respect of any matter occurring or any cause of action,
suit or claim that, but for this Article Nine would accrue or arise, prior to
such amendment, repeal or adoption of an inconsistent provision.
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AMENDED AND RESTATED CERTIFICATE OF INCORPORATION
OF
PACIFICARE HEALTH SYSTEMS, INC.
PACIFICARE HEALTH SYSTEMS, INC., a corporation organized and existing under
the General Corporation Law of the State of Delaware (the "Corporation"), does
hereby certify:
FIRST: The original Certificate of Incorporation was filed with the
Secretary of State of Delaware on August 2, 1996 under the name N-T Holdings,
Inc.
SECOND: The Amended and Restated Certificate of Incorporation of PacifiCare
Health Systems, Inc. in the form attached hereto as Exhibit A has been duly
adopted in accordance with the provisions of Sections 242 and 245 of the General
Corporation Law of the State of Delaware by the directors and stockholders of
the Corporation.
THIRD: The Amended and Restated Certificate of Incorporation so adopted
reads in full as set forth in Exhibit A attached hereto and is hereby
incorporated herein by this reference.
IN WITNESS WHEREOF, the Corporation has caused this Certificate to be
signed by its President on this day of , 1999.
PACIFICARE HEALTH SYSTEMS, INC.
By:
------------------------------------
Jeffrey M. Folick
President
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EXHIBIT B
FORM OF PACIFICARE OFFICERS' CERTIFICATE
Pursuant to Section 2.1 of that certain Stock Purchase Agreement dated as
of May 4, 1999 (the "Agreement") by and between PACIFICARE HEALTH SYSTEMS, INC.,
a Delaware corporation ("PacifiCare"), and UNIHEALTH FOUNDATION, a California
nonprofit public benefit corporation ("UniHealth"), the undersigned, being the
duly appointed and qualified and respectively of
PacifiCare, do hereby certify to UniHealth on behalf of PacifiCare as follows:
Other than the Approval, all conditions precedent to the consummation of
the Recapitalization and the making of the payment contemplated by Section 3 of
the Agreement (the "Payment") have been satisfied;
Assuming that the Approval is obtained, PacifiCare is prepared to, and
will, make the Payment;
There are no hearings scheduled by any court of competent jurisdiction or
any governmental authority seeking any temporary restraining order, injunction
or other relief restraining, enjoining or otherwise prohibiting the holding of
the Meeting of Stockholders, the consideration of the Amendment, the filing of
the Amendment, or any other aspect of the Transaction; and
Assuming that the Approval is obtained, PacifiCare will promptly file a
Certificate of Amendment with the Secretary of State of Delaware amending its
Certificate of Incorporation as set forth in Exhibit A to the Agreement.
Capitalized terms used in this certificate and not defined herein shall
have the meanings set forth in the Agreement.
IN WITNESS WHEREOF, each of the undersigned has executed this Officer's
Certificate as of this day of , 1999.
By:
--------------------------------------
Name:
--------------------------------------
Title:
--------------------------------------
By:
--------------------------------------
Name:
--------------------------------------
Title:
--------------------------------------
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EXHIBIT C
FORM OF PROXY
The undersigned Stockholder ("Stockholder") of PACIFICARE HEALTH SYSTEMS,
INC., a Delaware corporation (the "Company"), hereby irrevocably (to the fullest
extent permitted by law) appoints and constitutes Company, the attorney-in-fact
and proxy of the undersigned, with full power of substitution, with respect to
(i) the shares of capital stock of the Company owned by the undersigned as of
the date of this proxy, which shares are specified on the final page of this
proxy and (ii) any and all other shares of capital stock of the Company which
the undersigned may acquire after the date hereof. (The shares of the capital
stock of the Company referred to in clauses (i) and (ii) of the immediately
preceding sentence are collectively referred to as the "Shares.") Upon the
execution hereof, all prior proxies given by the undersigned with respect to any
of the Shares are hereby revoked, and no subsequent proxies will be given with
respect to any of the Shares.
This proxy is irrevocable except that the proxy holder shall have no
authority to vote in favor of the matter specified in subsection (i) below if
the conditions to the voting agreement specified in Section 2.1 of the Stock
Purchase Agreement dated May 4, 1999 between PacifiCare and Stockholder (the
"Stock Purchase Agreement") is not satisfied immediately prior to the Meeting of
Stockholders and this proxy shall automatically be revoked. This proxy is
coupled with an interest, and is granted in connection with the voting agreement
set forth in Section 2.1 of the Stock Purchase Agreement. The voting agreement
and proxy are granted in consideration of PacifiCare entering into the Stock
Purchase Agreement and consummating the transactions contemplated thereby,
including the payment of the $60 million fee pursuant to Section 3 of the Stock
Purchase Agreement and the repurchase of the Shares. Capitalized terms used but
not otherwise defined in this proxy have the meanings ascribed to such terms in
the Stock Purchase Agreement.
The attorney and proxy named above will be empowered, and may exercise this
proxy, to vote the Shares at any time at any meeting of the Stockholders of the
Company, however called, or in any written action by consent of Stockholders of
the Company until the earlier to occur of the (i) valid termination of the Stock
Purchase Agreement or (ii) receipt of the Approval at the Meeting of
Stockholders as follows:
(i) in favor of the Amendment and any action reasonably required in
furtherance of the Stock Purchase Agreement or the Amendment;
(ii) against any action or agreement that would result in a breach of
any representation, warranty, covenant or obligation of the Company in the Stock
Purchase Agreement; provided that the Company advises UniHealth Foundation
("UniHealth") prior to the vote, that PacifiCare believes such action or
agreement would have such an effect (and PacifiCare's basis for such belief);
and
(iii) against the following actions (other than the Amendment and the
Transaction contemplated by the Stock Purchase Agreement): (i) any proposal or
transaction which could prevent or delay the consummation of the Transaction
contemplated by the Stock Purchase Agreement; (ii) any extraordinary corporate
transaction, such as a merger, consolidation or other business combination
involving the Company or any significant subsidiary of the Company; (iii) any
sale, lease or transfer of a material amount of assets of the Company or any
significant subsidiary of the Company; (iv) any reorganization,
recapitalization, dissolution or liquidation of the Company or any significant
subsidiary of the Company; (v) any change in a majority of the board of
directors of the Company; or (vi) any other action which is intended, or could
reasonably be expected to, impede, interfere with, delay, postpone, discourage
or adversely affect the contemplated economic benefits to the Company and its
stockholders of the Transaction contemplated by the Stock Purchase Agreement,
provided that the Company advises UniHealth prior to the vote that PacifiCare
believes such action would have such an effect (and PacifiCare's basis for such
belief).
This proxy shall be binding upon the heirs, successors and assigns of the
undersigned (including any transferee of any of the Shares).
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Any obligation of the undersigned hereunder shall be binding upon the
heirs, successors and assigns of the undersigned (including any transferee of
any of the Shares).
Dated: May 4, 1999
STOCKHOLDER:
UNIHEALTH FOUNDATION
By:
------------------------------------
David R. Carpenter
Chairman of the Board
Number of Shares of Company Common
Stock:
5,909,500 Series A Common Shares
285,000 Series B Common Shares
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EXHIBIT E
CONFIDENTIALITY AGREEMENT
THIS AGREEMENT is being made and entered into as of May 4, 1999, by and
between PACIFICARE HEALTH SYSTEMS, INC., a Delaware corporation ("PacifiCare")
and UNIHEALTH FOUNDATION, a California nonprofit public benefit corporation
("UniHealth").
RECITALS
A. PacifiCare and UniHealth have entered into a Stock Purchase Agreement
dated as of the date hereof (the "Stock Purchase Agreement") providing for the
repurchase by PacifiCare of up to an aggregate of 5,909,500 of the shares of
common stock of PacifiCare held by UniHealth.
B. The parties have agreed, as a condition to consummating the transactions
contemplated by the Stock Purchase Agreement, that PacifiCare and UniHealth
enter into this Agreement with respect to Confidential Information (as defined
below) previously exchanged between PacifiCare and UniHealth in the context of
the relationships between the parties and with respect to Confidential
Information that will be exchanged between PacifiCare and UniHealth in
connection with the transactions contemplated by the Stock Purchase Agreement
and in connection with the ongoing relationship between the parties. This
Agreement does not relate to any confidential information of PacifiCare that has
been received by any member of the Board of Directors of PacifiCare, in his or
her capacity as a director that has not been provided to UniHealth, even if the
member is a designee of UniHealth.
AGREEMENT
1. As used herein, "Confidential Information" shall mean any and all
technical and non-technical information provided by either party to the other
since January 1, 1996, including but not limited to, trade secrets, and
proprietary information ideas, techniques, works of authorship, inventions,
know-how, processes, algorithms, software systems, operations systems and
formulae related to the current, future, and proposed products and services of
each of the parties, and including, without limitation, their respective
information concerning research, development, design details and specifications,
financial information, provider requirements, purchasing, customer and provider
lists, investors, employees, business and contractual relationships, business
forecasts, sales and merchandising, marketing plans and information the
disclosing party provides regarding third parties, including confidential
information provided to UniHealth's current designees on the Board of Directors
of UniHealth which has been provided by such designees to UniHealth.
2. Each party agrees that at all times and notwithstanding the termination
of the Stock Purchase Agreement it will hold in strict confidence and not
disclose to any third party Confidential Information of the other for the term
of this Agreement, except as approved in writing by the other party to this
Agreement. Notwithstanding the above, the party to whom Confidential Information
was disclosed (the "Recipient") shall not be in violation of this Section 2 with
regard to a disclosure that was in response to a valid order by a court or other
governmental body or pursuant to the request of a governmental authority having
jurisdiction over the Recipient, provided that the Recipient provides the other
party with prior written notice of such disclosure in order to permit the other
party to seek confidential treatment of such information. Each party shall only
permit access to Confidential Information of the other party to those of its
employees or authorized representatives having a need to know and Recipient will
be responsible for any disclosure of Confidential Information by such employees
or authorized representatives.
3. Each party shall immediately notify the other upon discovery of any
unauthorized disclosure of the Confidential Information of the other party.
4. Confidential Information shall not include information that: (a) was in
the public domain at the time it was communicated to the Recipient by the other
party; (b) entered the public domain subsequent to the time it was communicated
to the Recipient by the other party through no fault of the Recipient; (c) was
in the Recipient's possession free of any obligation of confidence at the time
it was communicated to the Recipient
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by the other party; (d) was rightfully communicated to the Recipient free of any
obligation of confidence subsequent to the time it was communicated to the
Recipient by the other party; (e) was communicated by the other party to an
unaffiliated third party free of any obligation of confidence; or (f) was
independently developed by the Recipient without reference to the Confidential
Information of the disclosing party.
5. The parties recognize and agree that nothing contained in this Agreement
shall be construed as granting any property rights, by license or otherwise, to
any Confidential Information of the other party, or to any invention or any
patent, copyright, trademark, or other intellectual property right that has
issued or that may issue, based on such Confidential Information.
6. Recipient's obligations under this Agreement shall be binding upon the
Recipient's successors and assigns. The Recipient's obligations hereunder shall
continue in full force and effect with respect to Confidential Information for
five (5) years from the date of this Agreement.
7. This Agreement shall be governed by and construed in accordance with the
laws of California without reference to conflict of laws principles. Any
disputes under this Agreement may be brought in the state courts and the Federal
courts located in Orange County, California and the parties hereby consent to
the personal jurisdiction and venue of these courts. This Agreement may not be
amended except by a writing signed by both parties hereto.
8. Each party acknowledges that its breach of the Agreement will cause
irreparable damage and hereby agrees that the other party shall be entitled to
seek injunctive relief under this Agreement, as well as such further relief as
may be granted by a court of competent jurisdiction.
9. If any provision of this Agreement is found by a proper authority to be
unenforceable or invalid such unenforceability or invalidity shall not render
this Agreement unenforceable or invalid as a whole and in such event, such
provision shall be changed and interpreted so as to best accomplish the
objectives of such unenforceable or invalid provision within the limits of
applicable law or applicable court decisions.
10. Neither party will assign or transfer any rights or obligations under
this Agreement without the prior written consent of the other party.
11. All notices or reports permitted or required under this Agreement shall
be in writing and shall be delivered by personal delivery, electronic mail,
facsimile transmission or by certified or registered mail, return receipt
requested, and shall be deemed given upon personal delivery, five (5) days after
deposit in the mail, or upon acknowledgment of receipt of electronic
transmission. Notices shall be sent to the addresses set forth at the end of
this Agreement or such other address as either party may specify in writing.
[THIS SPACE INTENTIONALLY LEFT BLANK]
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IN WITNESS WHEREOF, the parties hereto have caused this Confidentiality
Agreement to be executed as of the date first above written.
PACIFICARE HEALTH SYSTEMS, INC.,
a Delaware corporation
By:
------------------------------------
Alan Hoops
Chairman of the Board &
Chief Executive Officer
Address: 3120 Lake Center Drive
Santa Ana, CA 92704-6917
UNIHEALTH FOUNDATION,
a California nonprofit public benefit
corporation
By:
------------------------------------
David R. Carpenter
Chairman of the Board
Address: 3400 Riverside Drive
Burbank, CA 91505
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EXHIBIT F
REGISTRATION RIGHTS AGREEMENT
This REGISTRATION RIGHTS AGREEMENT (the "Agreement") is entered into as of
May 4, 1999 by and between PACIFICARE HEALTH SYSTEMS, INC., a Delaware
corporation ("PacifiCare"), and UNIHEALTH FOUNDATION, a California nonprofit
public benefit corporation ("UniHealth").
1. INTRODUCTION. UniHealth and PacifiCare have entered into a Stock
Purchase Agreement dated as of the date hereof (the "Stock Purchase Agreement")
providing for the repurchase by PacifiCare of up to an aggregate of 5,909,500
shares of common stock of PacifiCare held by UniHealth (the "UniHealth Shares")
on the terms and conditions set forth therein. In connection with the execution
of the Stock Purchase Agreement, PacifiCare has agreed to (i) file a shelf
registration statement to enable UniHealth to sell any UniHealth Shares which
may be released from PacifiCare's repurchase obligation pursuant to the terms
set forth in Sections 8.5 and 9.2 of the Stock Purchase Agreement (the "Released
Shares") and any of the 285,000 shares of Class B Common Stock owned by
UniHealth and the shares of PacifiCare Common Stock to be exchanged for such
shares of Class B Common Stock following the Approval ("Class B Shares"), and
(ii) reasonably cooperate with UniHealth if UniHealth desires to sell any
Released Shares or Class B Shares it continues to own after February 15, 2001
(the "Remaining Released Shares") through an underwritten offering. For purposes
of this Agreement, each of UniHealth Shares, Released Shares, Class B Shares and
Remaining Released Shares shall include any shares of Common Stock issued as a
dividend or other distribution with respect to, in exchange for or in
replacement of, such UniHealth Shares, Released Shares, Class B Shares and
Remaining Released Shares, as applicable. Certain capitalized terms used in this
Agreement are defined in Section 3.3.
2. REGISTRATION UNDER SECURITIES ACT.
2.1 SHELF REGISTRATION.
(a) REGISTRATION. Within thirty (30) days following the date of the
Approval, PacifiCare shall prepare and file with the Securities and Exchange
Commission a shelf registration statement on Form S-3 (or any successor form
thereto) with respect to the resale of UniHealth Shares that are not purchased
by PacifiCare at the Initial Closing and the Class B Shares (including or
incorporating by reference such audited financial statements as may be required
by the Securities Act or the rules and regulations promulgated thereunder) (the
"Shelf Registration Statement") and use its reasonable efforts to cause the
Shelf Registration Statement to become and remain effective.
(b) SHARES ELIGIBLE FOR SALE. The shares eligible for sale under the
registration pursuant to this Section 2.1 shall be limited to the Released
Shares.
(c) NOTICE OF SALE. UniHealth shall provide PacifiCare with written
notice of any proposed sales to be made under the Shelf Registration Statement
pursuant to this Section 2.1 (the "Notice") at least ten (10) days prior to any
such proposed sale. The Notice shall describe the nature of the shares proposed
to be sold in sufficient detail to establish that such shares are Released
Shares.
(d) EXPENSES. PacifiCare will pay all Authorized Registration
Expenses in connection with the registration pursuant to this Section 2.1,
including the Underwritten Offering pursuant to Section 2.2. UniHealth will pay
all Excluded Registration Expenses in connection with the registration pursuant
to this Section 2.1.
(e) NO UNDERWRITERS. Until the Final Closing under the Stock Purchase
Agreement, UniHealth will not retain an underwriter in connection with any
proposed sale under the Shelf Registration Statement.
2.2 REQUEST FOR UNDERWRITTEN OFFERING.
(a) REQUEST. Subject to the conditions of this Section 2.2 and the
other terms and conditions of this Agreement, during the one year period
commencing on February 15, 2001, and ending on February 14,
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2002, upon the written request of UniHealth for an underwritten offering under
the Shelf Registration Statement for all Remaining Released Shares
("Underwritten Offering"), PacifiCare shall reasonably cooperate in one
Underwritten Offering, provided that PacifiCare shall not be obligated to
maintain the effectiveness of any prospectus for the Underwritten Offering for
more than ninety (90) days, and provided further that PacifiCare shall have no
obligation to participate in an Underwritten Offering if the market value of the
Remaining Released Shares if less than $25,000,000.
(b) SELECTION OF UNDERWRITERS. If UniHealth elects an Underwritten
Offering pursuant to Section 2.2(a), UniHealth shall select and obtain the
investment banker or investment bankers and manager or managers that will
administer the offering, provided that such selection shall be subject to
PacifiCare's approval, which approval shall not unreasonably be withheld.
2.3 REGISTRATION PROCEDURES.
(a) PROCEDURES. If and whenever PacifiCare is required by the
provisions of this Agreement to use all reasonable efforts to effect or cause
the registration of any Released Shares or Class B Shares (including the
Remaining Released Shares) under the Securities Act or the sale of any Released
Shares or Class B Shares registered on the Shelf Registration Statement as
provided in this Agreement, PacifiCare shall, as expeditiously as possible:
(i) prepare and file with the Securities and Exchange Commission
the Shelf Registration Statement on Form S-3 (or any successor form thereto)
with respect to resale on a continuous basis of such Released Shares or Class B
Shares (including or incorporating by reference such audited financial
statements as may be required by the Securities Act or the rules and regulations
promulgated thereunder in order to maintain its effectiveness) and use its
reasonable efforts to cause such registration statement to become and remain
effective, provided that before filing such registration statement or any
amendment or supplement thereto, PacifiCare will furnish to the counsel selected
by UniHealth copies of all such documents proposed to be filed for review and
comment;
(ii) prepare and file with the Securities and Exchange Commission
such amendments and supplements to such registration statement and the
prospectus used in connection therewith as may be necessary to maintain the
effectiveness of the Shelf Registration Statement and to comply with the
provisions of the Securities Act with respect to the disposition of all
securities covered by such registration statement until (i) if no Underwritten
Offering is requested under Section 2.2(a), on February 14, 2002, and (ii) if
UniHealth elects an Underwritten Offering, until the earlier to occur of the
completion of the offering pursuant to such prospectus and the expiration of
ninety (90) days after the final prospectus for the Underwritten Offering
becomes effective;
(iii) furnish to UniHealth and each underwriter, if any, such
number of copies of such registration statement and of each such amendment and
supplement thereto (in each case including all exhibits), such number of copies
of the prospectus and supplements thereto included in such registration
statement (including each preliminary prospectus and any summary prospectus), in
conformity with the requirements of the Securities Act, and such other
documents, as UniHealth or any underwriter, if any, may reasonably request in
order to facilitate the public sale or other disposition of the Released Shares
or Class B Shares;
(iv) use all reasonable efforts to register or qualify all
UniHealth Shares and Class B Shares covered by such registration statement under
such other state securities laws or blue sky laws of such United States
jurisdictions as UniHealth or any underwriter, if any, shall reasonably request,
to keep such registrations or qualifications in effect for so long as the
registration statement filed under the Securities Act remains in effect and to
do any and all other acts and things which may be reasonably necessary or
advisable to enable UniHealth and such underwriter, if any, to consummate the
disposition in such jurisdictions of such Released Shares or Class B Shares,
provided, however, that PacifiCare shall not for any such purpose be required to
qualify generally to do business as a foreign corporation in any jurisdiction
wherein it would not but for the requirements of this clause (iv) be obligated
to be qualified, to subject itself to taxation in any such jurisdiction or to
consent to general service of process in any such jurisdiction;
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(v) notify UniHealth, at any time when a prospectus relating to
the UniHealth Shares and Class B Shares is required to be delivered under the
Securities Act, of PacifiCare's becoming aware that the prospectus included in
such registration statement, as then in effect, includes an untrue statement of
a material fact or omits to state any material fact required to be stated
therein or necessary to make the statements therein not misleading in the light
of the circumstances then existing, and promptly prepare and furnish to
UniHealth and each underwriter, if any, a reasonable number of copies of a
prospectus supplemented or amended so that, as thereafter delivered to the
purchasers of such Released Shares or Class B Shares, such prospectus shall not
include an untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary to make the statements therein not
misleading in the light of the circumstances then existing;
(vi) advise UniHealth, promptly after it receives notice thereof,
of the time when such registration statement or any amendment thereto has become
effective or any related prospectus or any supplement to such prospectus or any
amendment to such prospectus has been filed, of the issuance by the Securities
and Exchange Commission of any stop order or of any order preventing or
suspending the use of any related preliminary prospectus or prospectus, of the
suspension of the qualification of such Released Shares or Class B Shares for
offering or sale in any jurisdiction, of the initiation or threatening of any
proceeding for any such purpose, or of any request by the Securities and
Exchange Commission for the amending or supplementing of such registration
statement or prospectus or for additional information; and in the event of the
issuance of any stop order or of any order preventing or suspending the use of
any such preliminary prospectus or prospectus or suspending any such
qualification, to use promptly all reasonable efforts to obtain withdrawal of
such order;
(vii) file promptly all documents required to be filed with the
Securities and Exchange Commission pursuant to Sections 13, 14 or 15(d) of the
Exchange Act subsequent to the time such registration statement becomes
effective and during any period when any related prospectus is required to be
delivered;
(viii) otherwise use all reasonable efforts to comply with all
applicable provisions of the Securities Act and all applicable rules and
regulations of the Securities and Exchange Commission, and make available to its
security holders, as soon as reasonably practicable, an earnings statement which
shall satisfy the provisions of Section 11(a) of the Securities Act;
(ix) in connection with the Underwritten Offering pursuant to
Section 2.2 hereof, furnish, at the request of UniHealth on the date such
securities are delivered to the underwriters for sale pursuant to such
registration (i) an opinion, dated such date, of counsel representing PacifiCare
for purposes of such registration, addressed to the underwriters, covering such
legal matters with respect to such registration as UniHealth may reasonably
request and are customarily included in such an opinion, and (ii) letters, dated
the effective date of the amendment to the registration statement containing the
prospectus for the Underwritten Offering and the date such securities are
delivered to the underwriters for sale pursuant to such registration, from the
independent certified public accountants of PacifiCare, addressed to the
underwriters and to UniHealth covering such financial, statistical and
accounting matters with respect to such registration as UniHealth may reasonably
request and are customarily included in such letters; and
(x) in connection with the Underwritten Offering pursuant to
Section 2.2 hereof, at the request of UniHealth, cause its executive officers to
reasonably participate in a roadshow for the Underwritten Offering; provided
that the roadshow is scheduled, with the reasonable prior consent of PacifiCare,
so as not to disrupt the normal business operations and existing scheduled
events of PacifiCare or its affected executive officers.
Upon receipt of any notice from PacifiCare of the occurrence of any event of the
kind described in clause (vi) of this Section 2.3(a), UniHealth will forthwith
discontinue UniHealth's disposition of Released Shares or Class B Shares
pursuant to the registration statement covering such Released Shares or Class B
Shares until UniHealth's receipt of the copies of the supplemented or amended
prospectus contemplated by clause (vi) of this Section 2.3(a) and, if so
directed by PacifiCare, will deliver to PacifiCare all copies, other than
permanent file copies, then in UniHealth's possession of the prospectus covering
such Released Shares or
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Class B Shares current at the time of receipt of such notice. In the event
PacifiCare shall give any such notice, the period mentioned in clause (ii) of
this Section 2.3(a) shall be extended by the length of the period from and
including the date when PacifiCare shall have given such notice to and including
the date when UniHealth shall have received the copies of the supplemented or
amended prospectus contemplated by clause (vi) of this Section 2.3(a).
(b) INFORMATION CONCERNING DISTRIBUTION. As a condition to filing or
effecting the Shelf Registration Statement pursuant to Section 2.1 or amending
the Shelf Registration Statement for an Underwritten Offering, PacifiCare may
require UniHealth to furnish PacifiCare such information regarding UniHealth and
the distribution of such securities as PacifiCare may reasonably request in
writing for inclusion in the registration statement in accordance with the rules
and regulations of the Securities and Exchange Commission or in connection with
any registration, qualification, compliance or filing for an exemption under
state securities laws.
(c) OTHER REGISTRATION RIGHTS. PacifiCare represents and warrants to
UniHealth that, as of the date of this Agreement, it has not agreed to register
any securities of PacifiCare under the Securities Act or the laws of any other
jurisdiction pursuant to registration rights which conflict with those granted
pursuant to this Agreement.
(d) SUSPENSION OF EFFECTIVENESS OF REGISTRATION
STATEMENT. Notwithstanding any other provision of this Agreement, following the
effectiveness of the Shelf Registration Statement hereunder, PacifiCare may, at
any time, suspend the effectiveness of the registration statement for up to no
longer forty-five (45) days, as appropriate (a "Suspension Period"), by giving
notice to UniHealth that in the good faith judgment of the Board of Directors of
PacifiCare, it would be seriously detrimental to PacifiCare and its stockholders
to disclose any previously undisclosed material corporate development that would
be required to be disclosed if the registration statement is not suspended.
PacifiCare will use its best efforts to minimize the length of any Suspension
Period. UniHealth agrees that, upon receipt of any notice from PacifiCare of a
Suspension Period, UniHealth will not sell any Released Shares or Class B Shares
until (i) UniHealth is advised in writing by PacifiCare that the use of the
applicable prospectus may be resumed, (ii) UniHealth has received copies of any
additional supplemental or amended prospectus, if applicable, and (iii)
UniHealth has received copies of any additional or supplemental filings which
are incorporated or deemed to be incorporated by reference in such prospectus.
2.4 INDEMNIFICATION AND CONTRIBUTION.
(a) INDEMNIFICATION BY PACIFICARE. With respect to the Shelf
Registration Statement and any amendment or supplement thereto, to the extent
permitted by law, PacifiCare will indemnify and hold harmless UniHealth, its
directors, officers, employees and agents, each other Person who participates as
an underwriter in the offering or sale of such Released Shares or Class B Shares
and each other Person, if any, who controls UniHealth or any such underwriter
within the meaning of the Securities Act or the Exchange Act, against any
losses, claims, damages or liabilities (whether arising out of a claim of a
party hereto, a third party or otherwise), to which UniHealth or any such
director or officer or underwriter or controlling person may become subject
under the Securities Act, the Exchange Act or otherwise, insofar as such losses,
claims, damages or liabilities (or actions or proceedings, whether commenced or
threatened, in respect thereof) arise out of or are based upon any untrue
statement or alleged untrue statement of any material fact contained in the
Shelf Registration Statement, any preliminary prospectus, final prospectus,
summary prospectus, notification or offering circular contained therein or
otherwise used or approved for use by PacifiCare in the offering pursuant
thereto, or any amendment or supplement thereto, or any omission or alleged
omission to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading, and PacifiCare will
reimburse UniHealth and each such director, officer, employee, agent,
underwriter and controlling person for any legal or any other expenses
reasonably incurred by them in connection with investigating or defending any
such loss, claim, liability, action or proceeding or successfully enforcing the
provisions hereof; provided, however, that (i) PacifiCare shall not be liable in
any such case to the extent that any such loss, claim, damage, liability (or
action or proceeding in respect thereof) or expense arises out of or is based
upon an untrue statement or alleged untrue statement or omission or alleged
omission
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made in such registration statement, any such preliminary prospectus, final
prospectus, summary prospectus, notification, offering circular, amendment or
supplement in reliance upon and in conformity with information furnished to
PacifiCare in writing by UniHealth or, if the Person seeking indemnification is
an underwriter, by such underwriters, in either case expressly for use therein,
and (ii) the provisions of this Section 2.4(a) shall not inure to the benefit of
any underwriter (or any Person controlling such underwriter) on account of any
losses, claims, damages, liabilities or actions arising from the sale of
securities to any Person if such underwriter failed to send or give a copy of
the related prospectus, as the same may be then amended or supplemented, to such
Person within the time required by the Securities Act. Such indemnity shall
remain in full force and effect regardless of any investigation made by or on
behalf of UniHealth or any such director, officer, employee, agent, underwriter
or controlling person and shall survive the transfer of such securities by
UniHealth.
(b) INDEMNIFICATION BY UNIHEALTH. PacifiCare may require, as a
condition to including any Released Shares or Class B Shares in the Shelf
Registration Statement or amending the Shelf Registration Statement for the
Underwritten Offering, that PacifiCare shall have received an undertaking
satisfactory to it from UniHealth, to indemnify and hold harmless (in the same
manner and to the same extent as set forth in Section 2.4(a) hereof) PacifiCare,
each director of PacifiCare (or each person performing a similar function), each
officer of PacifiCare (or each person performing a similar function), each
employee and agent of PacifiCare and each other Person, if any, who controls
PacifiCare within the meaning of the Securities Act, each Person who
participates as an underwriter in the offering or sale of such Released Shares
or Class B Shares and each other Person, if any, who controls such underwriter
within the meaning of the Securities Act, with respect to any statement or
alleged statement in or omission or alleged omission from such registration
statement, any preliminary prospectus, final prospectus, summary prospectus,
notification or offering circular contained therein, or any amendment or
supplement thereto, if and to the extent such statement or alleged statement or
omission or alleged omission was made in reliance upon and in conformity with
information furnished to PacifiCare in writing by UniHealth expressly for use
therein; provided, however, that with respect to any untrue statement or
omission or alleged untrue statement or omission made in any preliminary
prospectus, no such undertaking shall apply to the extent that any loss, claim,
damage, liability or expense results from the fact that a current copy of the
prospectus was not sent or given to the Person asserting any such loss, claim,
damage, liability or expense at or prior to the written confirmation of the sale
of the Released Shares or Class B Shares concerned to such Person if it is
determined that it was the responsibility of PacifiCare to provide such Person
with such current copy of the prospectus and such current copy of the prospectus
would have cured the defect giving rise to such loss, claim, damage, liability
or expense; and provided, further, that the maximum obligation of UniHealth
pursuant to any such undertaking shall be limited to an amount equal to the
aggregate sales price of the Released Shares and Class B Shares sold pursuant
thereto. Such indemnity shall remain in full force and effect regardless of any
investigation made by or on behalf of PacifiCare or any such director, officer,
employee, agent or controlling person and shall survive the transfer of such
securities by UniHealth.
(c) NOTICES OF CLAIMS, ETC. Promptly after receipt by an indemnified
party of notice of the commencement of any action or proceeding involving a
claim referred to in Section 2.4(a) or 2.4(b) hereof, such indemnified party
will, if a claim in respect thereof is to be made against an indemnifying party,
give prompt written notice to the latter of the commencement of such action;
provided, however, that the failure of any indemnified party to give notice as
provided herein shall not relieve the indemnifying party of its obligations
under Section 2.4(a) or 2.4(b) hereof except to the extent that the indemnifying
party is actually prejudiced by such failure to give notice. In case any such
action is brought against an indemnified party, unless in such indemnified
party's reasonable judgment a conflict of interest between such indemnified and
indemnifying parties may exist in respect of such claim, the indemnifying party
shall be entitled to participate in and to assume the defense thereof, jointly
with any other indemnifying party similarly notified, to the extent that it may
wish, with counsel reasonably satisfactory to such indemnified party, and after
notice from the indemnifying party to such indemnified party of its election so
to assume the defense thereof (unless in such indemnified party's reasonable
judgment a conflict of interest between such indemnified and indemnifying
parties may exist in respect of such claim, the counsel chosen by such
indemnifying party is not reasonably satisfactory to such indemnified party or
the indemnifying party does not in fact assume such defense), the
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indemnifying party shall not be liable to such indemnified party for any legal
or other expenses subsequently incurred by the latter in connection with the
defense thereof other than reasonable costs of investigation or enforcement. No
indemnifying party shall consent to entry of any judgment or enter into any
settlement without the consent of the indemnified party (which shall not be
unreasonably withheld) if it does not include as an unconditional term thereof
the giving by the claimant or plaintiff to such indemnified party of a complete
and unconditional release from all liability in respect of such claim or
litigation without any payment or consideration provided by such indemnified
party other than a payment or consideration as to which such indemnified party
is concurrently indemnified by an equal payment to such indemnified party. No
indemnified party shall consent to entry of any judgment or enter into any
settlement of any such action the defense of which has been assumed by an
indemnifying party without the consent of such indemnifying party (which shall
not be unreasonably withheld).
(d) CONTRIBUTION. If the indemnification provided for in Section
2.4(a) or 2.4(b) hereof is unavailable to a party that would have been an
indemnified party under such Section in respect of any losses, claims, damages
or liabilities (or actions or proceedings in respect thereof) referred to
therein, then each party that would have been an indemnifying party thereunder
shall, in lieu of indemnifying such indemnified party, contribute to the amount
paid or payable by such indemnified party as a result of such losses, claims,
damages or liabilities (or actions or proceedings in respect thereof) in such
proportion as is appropriate to reflect the relative fault of the indemnifying
party on the one hand and such indemnified party on the other in connection with
the statements or omissions or alleged statements or omissions which resulted in
such losses, claims, damages or liabilities (or actions or proceedings in
respect thereof); provided, however, that the liability of UniHealth shall be
limited to an amount equal to the aggregate sales price under the Shelf
Registration Statement of the Released Shares and Class B Shares. The relative
fault shall be determined by reference to, among other things, whether the
untrue statement or alleged untrue statement of a material fact or the omission
or alleged omission to state a material fact relates to information supplied by
the indemnifying party or such indemnified party and the parties' relative
intent, knowledge, access to information and opportunity to correct or prevent
such statement or omission. PacifiCare and UniHealth agree that it would not be
just and equitable if contribution pursuant to this Section 2.4(d) were
determined by pro rata allocation or by any other method of allocation which
does not take account of the equitable considerations referred to above in this
Section 2.4(d). The amount paid or payable by an indemnified party as a result
of the losses, claims, damages or liabilities (or actions in respect thereof)
referred to above in this Section 2.4(d) shall include any legal or other
expenses reasonably incurred by such indemnified party in connection with
investigating or defending any such action or claim (which shall be limited as
provided in Section 2.4(d) hereof if the indemnifying party has assumed the
defense of any such action in accordance with the provisions thereof) and of
successfully enforcing the provisions hereof. No Person guilty of fraudulent
misrepresentation (within the meaning of Section 11(f) of the Securities Act)
shall be entitled to contribution from any person who was not guilty of such
fraudulent misrepresentation.
(e) OTHER INDEMNIFICATION AND CONTRIBUTION. Indemnification and
contribution similar to that specified in Sections 2.4(a), 2.4(b), 2.4(c) and
2.4(d) hereof (with appropriate modifications) shall be given by PacifiCare and
UniHealth with respect to any required registration or other qualification of
such Released Shares or Class B Shares under any federal or state law or
regulation of any governmental authority, other than the Securities Act.
(f) PAYMENTS. The indemnification and contribution required by this
Section 2.4 shall be made by periodic payments of the amount thereof during the
course of the investigation or defense, as and when bills are received or
expense, loss, damage or liability is incurred.
3. GENERAL.
3.1 AMENDMENTS AND WAIVERS. Any term of this Agreement may be amended and
the observance of any term of this Agreement may be waived (either generally or
in a particular instance and either retroactively or prospectively) only with
the written consent of PacifiCare and UniHealth.
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3.2 NOTICES. Any notice or other communication in connection with this
Agreement shall be deemed to be delivered if in writing (or in the form of a
telex or telecopy) addressed as hereinafter provided and if either (x) actually
delivered at said address (evidenced in the case of a telex or telecopy by
receipt of the correct answerback or other communication) or (y) in the case of
a letter, five business days shall have elapsed after the same shall have been
deposited in the mails, postage prepaid and registered or certified: (a) if to
UniHealth, at its registered address as set forth in the register kept by
PacifiCare, (b) if to PacifiCare, to the attention of the Chief Executive
Officer at 3120 Lake Center Drive, Santa Ana, California 92704-6917, or at such
other address as PacifiCare shall have furnished to each holder of Released
Shares or Class B Shares at the time outstanding.
3.3 CERTAIN DEFINITIONS. As used in this Agreement, the following terms
have the following respective meanings:
"AFFILIATE" has the meaning set forth in Rule 405 under the Securities Act.
"APPROVAL" has the meaning set forth in the Recitals to the Stock Purchase
Agreement.
"AUTHORIZED REGISTRATION EXPENSES" means all expenses incident to
PacifiCare's performance of or compliance with Section 2.1 hereof, including all
registration, filing and NASD fees, all fees and expenses of complying with
securities or blue sky laws, all expenses of formatting for electronic
submission to the Securities and Exchange Commission, messenger and delivery
expenses, the fees and disbursements of counsel for PacifiCare and of its
independent public accountants, provided that, in any case where any
registration expenses are not to be borne by PacifiCare, such expenses shall not
include salaries or fringe benefits of PacifiCare personnel or general overhead
expenses of PacifiCare, and shall not include premiums or other expenses
relating to liability insurance required by underwriters or PacifiCare, or other
expenses for the preparation of financial statements or other data normally
prepared by PacifiCare in the ordinary course of its business or which
PacifiCare would have incurred in any event.
"CLASS B SHARES" has the meaning set forth in Section 1 of this Agreement.
"EXCHANGE ACT" means the Securities Exchange Act of 1934, or any similar
federal statute, and the rules and regulations of the Securities and Exchange
Commission thereunder, all as the same shall be amended from time to time.
"EXCLUDED REGISTRATION EXPENSES" means all expenses, fees and disbursements
of counsel retained by UniHealth, all expenses, fees and disbursements of any
underwriters, any printing costs incurred at the election of UniHealth, all
accounting fees incurred in connection with any comfort letter for the
Underwritten Offering, if any, and all other expenses, fees and disbursements
incident to any registration either initiated or effected pursuant to this
Agreement which are not explicitly included as Authorized Registration Expenses.
"INITIAL CLOSING" has the meaning set forth in Section 1 of the Stock
Purchase Agreement.
"NASD" means the National Association of Securities Dealers, Inc.
"PACIFICARE" has the meaning set forth in the Preamble to this Agreement.
"PERSON" means a corporation, an association, a partnership, an
organization, a trust, a business, an individual, a government or political
subdivision thereof, a governmental agency or any other entity.
"RELEASED SHARES" has the meaning set forth in Section 1 of this Agreement.
"REMAINING RELEASED SHARES" has the meaning set forth in Section 1 of this
Agreement.
"SECURITIES ACT" means the Securities Act of 1933, or any similar federal
statute, and the rules and regulations of the Securities and Exchange Commission
thereunder, all as the same shall be amended from time to time.
"SECURITIES AND EXCHANGE COMMISSION" means the U.S. Securities and Exchange
Commission, or any other federal agency at the time administering the Exchange
Act or the Securities Act, whichever is the relevant statute for the particular
purpose.
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"STOCK PURCHASE AGREEMENT" has the meaning set forth in Section 1 of this
Agreement.
"UNIHEALTH" has the meaning set forth in the Preamble to this Agreement.
"UNIHEALTH SHARES" has the meaning set forth in Section 1 of this
Agreement.
3.4 MISCELLANEOUS. This Agreement shall be binding upon and inure to the
benefit of and be enforceable by the holders from time to time of Released
Shares and Class B Shares, whether so expressed or not. This Agreement embodies
the entire agreement and understanding between PacifiCare and UniHealth and
supersedes all prior agreements and understandings relating to the subject
matter hereof. This Agreement shall be construed and enforced in accordance with
and governed by the domestic substantive laws of the State of California,
without reference to any choice or conflict of laws principles which could cause
the application of the domestic substantive laws of any other jurisdiction. The
headings in this Agreement are for purposes of reference only and shall not
limit or otherwise affect the meaning hereof. This Agreement may be executed in
any number of counterparts, each of which shall be an original, but all of which
together shall constitute one instrument.
3.5 ARBITRATION. A party asserting the existence of any dispute or
controversy arising out of or in connection with this Agreement (a "Dispute"),
including any Dispute relating to the existence, materiality or cure of a
claimed material breach, shall notify the other parties to this Agreement in
writing of the existence and subject matter of the Dispute. For a thirty (30)
day period following such notification, the parties shall meet and negotiate in
good faith to attempt the resolve the Dispute and shall escalate the Dispute to
the respective Chief Executive Officers of the parties if resolution is not made
within the first fifteen (15) days. If such efforts do not resolve the Dispute
within such thirty (30) day period, the Dispute shall be referred to and finally
resolved by arbitration under the rules of the American Arbitration Association,
and except for proceedings commenced to enforce an arbitration award, each party
hereby irrevocably waives its right to commence any proceeding in any court with
respect to any matter arising under this Agreement. The tribunal shall consist
of a sole arbitrator appointed jointly by the parties. In the case of the
parties failing to choose a sole arbitrator, the tribunal shall consist of three
arbitrators, two of whom shall be appointed by the respective parties and the
third arbitrator shall be appointed jointly by the first two. The place of
arbitration shall be Orange County, California or such other location as the
parties shall agree. The language of the arbitration shall be English. No
arbitrator shall be an Affiliate, employee, officer or director of either party
or of their respective Affiliates, nor shall any Arbitrator have any interest
that would be affected in any material respect by the outcome of the Dispute.
The decision of the sole arbitrator or of a majority of the arbitrators, where
applicable, shall be final and binding on the parties and their respective
successors and assigns. The decision shall not be subject to appeal or judicial
review except in circumstances of fraud. The prevailing party in any such
arbitration shall be entitled to recover reasonable fees of attorneys and other
professionals in addition to all court costs and arbitrator's fees which that
party may incur as a result. Judgment upon the award granted by the
arbitrator(s) may be entered in any court having jurisdiction over the relevant
party or its assets.
3.6 ATTORNEYS' FEES. In any action at law or in equity to enforce any of
the provisions or rights under this Agreement, the prevailing party shall be
entitled to reasonable attorneys' fees, costs and expenses incurred in such
action, in addition to any other relief to which such party shall be entitled.
[THIS SPACE INTENTIONALLY LEFT BLANK]
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IN WITNESS WHEREOF, the parties hereto have caused this instrument to be
duly executed on the date first written above.
PACIFICARE HEALTH SYSTEMS, INC.,
a Delaware corporation
By:
------------------------------------
Alan Hoops
Chairman of the Board &
Chief Executive Officer
UNIHEALTH FOUNDATION,
a California nonprofit public benefit
corporation
By:
------------------------------------
David R. Carpenter
Chairman of the Board
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EXHIBIT C
FAIRNESS OPINION OF
WARBURG DILLON READ
May 4, 1999
Board of Directors
PacifiCare Health Systems, Inc.
3120 W. Lake Center Drive
Santa Ana, CA 92799-5186
Dear Board of Directors:
We understand that PacifiCare Health Systems, Inc. (the "Company") is
undertaking a transaction whereby the Company intends to (i) reclassify its
Series A and B Common Stock into a single class of Common Stock in accordance
with the Amended and Restated Certificate of Incorporation, (ii) repurchase the
Common Stock owned by UniHealth after the reclassification of the two series of
shares and (iii) pay UniHealth $60 million on the date of the approval of the
Amended and Restated Certification of Incorporation (the "Transaction"). The
terms and conditions of the Transaction are more fully set forth in the Purchase
Agreement.
You have requested our opinion as to whether the Transaction is fair to the
stockholders other than UniHealth, from a financial point of view.
Warburg Dillon Read LLC has acted as financial advisor to the Company in
connection with the Transaction and will receive a fee upon the consummation
thereof. We are familiar with the Company, having provided financial advisory
services to the Company in the past and received customary compensation for the
rendering of such services. In the ordinary course of business, Warburg Dillon
Read LLC, its affiliates, and its predecessors may trade securities of the
Company for our own account and for the accounts of our customers and,
accordingly, may at any time hold a long or short position in such securities.
In arriving at our opinion, we have, among other things: (i) reviewed
certain publicly available business and historical financial information
relating to the Company, (ii) reviewed certain financial information and other
data provided to us by the Company that is not publicly available relating to
the business and prospects of the Company, including financial projections
prepared by the management of the Company, (iii) conducted discussions with
members of the senior management of the Company, (iv) reviewed publicly
available financial and stock market data with respect to certain other
companies in lines of business we believe to be generally comparable to those of
the Company (the "Comparables"), (v) considered the pro forma effects of the
Transaction on the Company's financial statements, (vi) reviewed the historical
market prices and trading volumes of the common stocks of the Company and its
Comparables, (vii) compared the Consideration and other terms of the Transaction
with the financial terms and premiums paid in certain other stock repurchase
transactions which we believe to be generally comparable to the Transaction,
(viii) reviewed the Purchase Agreement and other ancillary agreements, and (ix)
conducted such other financial studies, analyses and investigations, and
considered such other information as we deemed necessary or appropriate.
In connection with our review, at your direction we have not independently
verified any of the foregoing information and have, with your consent, relied on
its being complete and accurate in all material respects. In addition, at your
direction we have not made any evaluation or appraisal of any of the assets or
liabilities (contingent or otherwise) of the Company, nor have we been furnished
with any such evaluation or appraisal. With respect to the financial projections
referred to above, we have assumed, with your consent, that they have been
reasonably prepared on bases reflecting the best currently available estimates
and judgments of the Company's management as to the future financial performance
of each company and will be realized in the amounts and at the times
contemplated thereby. Further, our opinion is based on economic, monetary and
market conditions existing on the date hereof.
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Based upon and subject to the foregoing, it is our opinion that, as of the
date hereof, the Transaction is fair to the stockholders other than UniHealth
from a financial point of view.
Very truly yours,
Warburg Dillon Read LLC
By: /s/ PATRICK J. LANDERS
-----------------------------------
Patrick J. Landers
Managing Directors
By: /s/ EDWIN Y. CHIN
-----------------------------------
Edwin Y. Chin
Director
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EXHIBIT D
FIRST AMENDMENT TO
1996 STOCK OPTION PLAN
FOR OFFICERS AND KEY EMPLOYEES OF
PACIFICARE HEALTH SYSTEMS, INC.
This First Amendment, dated as of April 15, 1999 (the "Amendment"), to the
1996 Stock Option Plan for Officers and Key Employees (the "Plan") of PacifiCare
Health Systems, Inc. hereby amends the Plan as follows:
1. Amendment to Section 2.1. Section 2.1 is hereby deleted and replaced in
its entirety by the following:
"The shares of stock subject to Awards shall be shares of the
Company's Class A Common Stock and shares of the Company's Class B Common
Stock. The aggregate number of such shares which may be subject to Awards
granted under the Plan shall be 4,300,000 shares of Common Stock, subject
to adjustment as provided herein including, but not limited to, adjustments
for dividends consisting of one share of Class B Common Stock for one share
of Class A Common Stock. Beginning June 30, 1999, the aggregate number of
shares of Common Stock which may be subject to Awards granted during any
calendar year ("Plan Year"), shall not exceed two percent (2%) of the
aggregate outstanding shares of Class A and Class B Common Stock of the
Company as of June 30th of each Plan Year (the "Determination Date"),
subject to adjustment as provided herein. To the extent permissible under
Rule 16b-3 of the Act, any shares of Common Stock available to be subject
to Awards granted during a Plan Year and not made subject to Awards shall
be added to the aggregate number of shares of Common Stock available for
Awards on each Determination Date. The maximum number of Incentive Stock
Options available for grant under the Plan shall be 1,800,000, subject to
adjustment as provided herein.
"The maximum number of Incentive Stock Options, Non-Qualified Stock
Options and Stock Appreciation Rights available for grant to any
Participant during any Plan Year shall not exceed 200,000, subject to
adjustment as provided herein. If any Award, expires or is terminated or
canceled without having been fully exercised, the number of shares subject
to such Award but as to which such Award was not exercised prior to its
expiration or cancellation may again be granted hereunder, subject to the
limitations contained herein, provided, however, that, in the case of the
cancellation or termination of an Incentive Stock Option, a Non-Qualified
Stock Option or Stock Appreciation Right in the same Plan Year that such
Incentive Stock Option, Non-Qualified Stock Option or Stock Appreciation
Right was granted, both the cancelled or terminated Incentive Stock Option,
Non-Qualified Stock Option or Stock Appreciation Right and the newly
granted Incentive Stock Option, Non-Qualified Stock Option or Stock
Appreciation Right shall be counted in determining whether the recipient
has received the maximum number of such Awards permitted under the Plan."
2. Limitation of Amendments. Except as expressly provided herein, no terms
or provision of any agreement or instrument are modified or changed by this
Amendment and the terms and provisions of the Plan, as amended by this
Amendment, shall continue in full force and effect.
3. Governing Law. This Amendment shall be construed, interpreted and
enforced in accordance with, and governed by California law.
4. Capitalized Terms. Capitalized terms not defined herein shall have the
meanings ascribed to them in the Plan.
5. Waivers and Amendments. Neither this Amendment nor any term hereof may
be changed, waived, discharged or terminated orally, or by any action or
inaction, but only by an instrument in writing.
6. Section Headings. The titles of the sections hereof appear as a matter
of convenience only, do not constitute a part of this Amendment and shall not
affect the construction hereof.
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EXHIBIT E
AMENDED AND RESTATED
1996 NON-OFFICER DIRECTORS
STOCK OPTION PLAN
1. Purpose.
This Amended and Restated 1996 Non-Officer Directors Stock Option Plan (the
"Plan") of PacifiCare Health Systems, Inc., a Delaware corporation (the
"Company"), is intended to promote the best interests of the Company and its
stockholders by strengthening the Company's ability to attract and retain the
services of experienced and knowledgeable non-officer directors and to provide
additional incentive for such directors to continue to work for the best
interests of the Company and its stockholders. The options granted hereunder are
not intended to qualify under Section 422 of the Internal Revenue Code of 1986,
as amended (the "Code"), as incentive stock options.
2. Amount and Source of Stock.
The shares of stock subject to options shall be shares of the Company's
Class B Common Stock, par value $0.01 per share (the "Class B Common Stock").
The total number of shares of Class B Common Stock which may be the subject of
options granted pursuant to this Plan shall be limited so that the total number
of shares of Class B Common Stock issued upon the exercise of options granted
under this Plan shall not exceed 390,000, subject to adjustment as provided in
Section 10 of this Plan. In the event that any option granted hereunder expires
or is terminated or canceled prior to its exercise in full for any reason, the
shares subject to such option shall be added to the shares of Class B Common
Stock otherwise available for issuance pursuant to the exercise of options under
this Plan.
3. Administration of the Plan.
(a) Duties and Powers of the Committee. This Plan shall be
administered by a committee of the Board of Directors of the Company (the
"Board") comprised of two or more members of the Board, selected by the
Board (the "Committee"). Such members of the Committee shall be,
Non-Employee Directors as defined in Rule 16b-3(b)(3) (or any successor
provision) promulgated under the Securities Exchange Act of 1934, as
amended (the "Exchange Act"). It shall be the duty of the Committee to
conduct the general administration of this Plan in accordance with its
provisions. The Committee shall have the power to interpret this Plan and
the respective option agreements and to adopt such rules for the
administration, interpretation and application of this Plan as are
consistent therewith and to interpret, amend or revoke any such rules.
(b) Majority Rule. The Committee shall act by a majority of its
members in office. The Committee may act either by vote at a meeting or by
a memorandum or other written instrument signed by a majority of the
Committee.
(c) Compensation; Professional Assistance; Good Faith Actions. Members
of the Committee shall not receive compensation for their services as
members but all expenses and liabilities they incur in connection with the
administration of this Plan shall be borne by the Company. The Committee
may, with the approval of the Board, employ attorneys, consultants,
accountants, appraisers, brokers or other persons. The Committee, the
Company and its officers and directors shall be entitled to rely upon the
advice, opinions or valuations of any such persons. All actions taken and
all interpretations and determinations made by the Committee in good faith
shall be final and binding upon all optionees, the Company and all other
interested persons. No member of the Committee shall be personally liable
for any action, determination or interpretation made in good faith with
respect to this Plan or the options and all members of the Committee shall
be fully protected by the Company in respect to any such action,
determination or interpretation.
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<PAGE> 99
4. Grant of Stock Options.
(a) Eligibility. All non-officer directors of the Company, who are not
eligible to receive options under the 1996 Stock Option Plan for Officers
and Key Employees of the Company as amended from time to time, (the "1996
Plan"), shall be eligible to receive options hereunder (the "Eligible
Directors").
(b) Stock Option Grants.
(i) The Committee shall, subject to the applicable limits of this
Plan, automatically grant each Eligible Director, upon being elected to
the Board, options to purchase 10,000 shares of Class B Common Stock.
(ii) The Committee shall, subject to the applicable limits of this
Plan, automatically grant each Eligible Director annually options to
purchase 5,000 shares of Class B Common Stock on the 30th day of June in
each calendar year commencing June 30, 1999; provided that the optionee
shall not have been eligible to receive options under the 1996 Plan for
all or any part of the preceding 12-month period and shall have served
on the Board the entire preceding 12-month period. If additional
Eligible Directors are hereafter appointed to the Board, the Committee
shall, subject to the applicable limits of this Plan, automatically
grant annually each such person options to purchase 5,000 shares of
Class B Common Stock on the 30th day of June in each calendar year
commencing with the first June 30th following the date on which such
director was appointed; so long as the director is then eligible for the
granting of options pursuant to this Plan and has not been eligible to
receive options under the 1996 Plan for all of the preceding 12-month
period, and, such director shall have served on the Board the entire
preceding 12-month period. If the number of shares of Class B Common
Stock which may be the subject of options under this Plan is not
sufficient to make all automatic grants required to be made pursuant to
this Plan on the applicable date, the number of shares of Class B Common
Stock subject to the options granted to each director shall be reduced
on a pro rata basis.
(iii) Subject to the applicable limits of this Plan, the Committee
shall have the authority, from time to time, to (x) grant, in its
absolute discretion, such additional options under the Plan (a
"Discretionary Option Grant") to any Eligible Director and (y) determine
the number of shares of Class B Common Stock to be granted under such
Discretionary Option Grant to an Eligible Director. All other terms and
conditions of a Discretionary Option Grant shall be consistent with
terms of the Plan."
(c) Option Price. The exercise price for the shares of Class B Common
Stock purchasable under any option granted hereunder shall be an amount
equal to 100 percent of the Fair Market Value of the Class B Common Stock
on the date of grant. For purposes of this Plan, the "Fair Market Value" of
the Class B Common Stock on a given date shall be based upon: (i) the
closing price per share of the Class B Common Stock on the principal
exchange on which the Class B Common Stock is then trading, if any, on such
date, or, if the Class B Common Stock was not traded on such date, then on
the next preceding trading day during which a sale occurred; or (ii) if the
Class B Common Stock was not traded on an exchange but is quoted on Nasdaq
or a successor quotation system, (1) the last sales price (if the Class B
Common Stock is then listed as a National Market Issue under the Nasdaq
National Market System), or (2) the mean between the closing representative
bid and asked prices (in all other cases) for the Class B Common Stock on
such date as reported by Nasdaq or such successor quotation system; or
(iii) if the Class B Common Stock is not publicly traded on an exchange and
not quoted on Nasdaq or a successor quotation system, the mean between the
closing bid and asked prices for the Class B Common Stock on such date as
determined in good faith by the Committee; or (iv) if the Class B Common
Stock is not publicly traded, the fair market value established by the
Committee acting in good faith.
5. Terms and Conditions of Options; Vesting; Sales of Options.
(a) Commencement of Exercisability. Subject to Sections 5(b) and (c), and
Sections 7, 8 and 14, each option granted under this Plan shall become
exercisable in four cumulative installments as follows:
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<PAGE> 100
(i) The first installment shall consist of 25 percent of the shares of
Class B Common Stock covered by the option and shall become exercisable on
the first anniversary of the date of grant;
(ii) The second installment shall consist of 25 percent of the shares
of Class B Common Stock covered by the option and shall become exercisable
on the second anniversary of the date of grant;
(iii) The third installment shall consist of 25 percent of the shares
of Class B Common Stock covered by the option and shall become exercisable
on the third anniversary of the date of grant; and
(iv) The fourth installment shall consist of all remaining shares of
Class B Common Stock covered by the option and shall become exercisable on
the fourth anniversary of the date of grant.
(b) Vesting Cumulative. The installments provided for in this Section 5 are
cumulative. Each such installment which becomes exercisable pursuant to Section
5(a) shall remain exercisable until such installment becomes unexercisable under
Section 7. No portion of an option which is unexercisable at Termination of
Directorship (as defined in Section 7) shall thereafter be exercisable.
(c) Stock Option Agreement. Subject to Section 14, the grant of
options by the Committee shall be effective as of the date of grant;
provided, however, that no option granted hereunder shall be exercisable
unless and until the holder shall enter into an individual option agreement
with the Company that shall set forth the terms and conditions of such
option. Each such agreement shall expressly incorporate by reference the
provisions of this Plan (a copy of which shall be made available for
inspection by the optionee during normal business hours at the principal
office of the Company) and shall state that in the event of any
inconsistency between the provisions hereof and the provisions of such
agreement, the provisions of this Plan shall govern. (c) Sales of Stock
Underlying Stock Option. Any stock option granted under this Plan may not
be sold within six months from its date of grant.
6. Exercise of Options.
(a) Person Eligible to Exercise. During the lifetime of the optionee,
only he, his guardian, legal representative or other person approved by the
Committee in its sole discretion and described in the terms of the
agreement documenting the option may exercise an option granted to him, or
any portion thereof. After the death of the optionee, any exercisable
portion of an option may, prior to the time when such option becomes
unexercisable under Section 7, be exercised by his personal representative
or by any person empowered to do so under the deceased optionee's will or
under the applicable laws of descent and distribution.
(b) Partial Exercise. At any time and from time to time prior to when
any exercisable option or exercisable portion thereof becomes unexercisable
under Section 7, such option or portion thereof may be exercised in whole
or in part; provided, however, that the Company shall not be required to
issue fractional shares and the number of shares for which an option may be
partially exercised shall be not less than 100 shares.
(c) Manner of Exercise. An exercisable option, or any exercisable
portion thereof, may be exercised solely by delivery to the Secretary or
Chief Financial Officer of the Company or their respective offices of all
of the following prior to the time when such option or such portion becomes
unexercisable under this Plan:
(i) Notice in writing signed by the optionee or other person then
entitled to exercise such option or portion, stating that such option or
portion is exercised, such notice complying with all applicable rules
established by the Committee;
(ii) (A) Full payment (in cash or by check) for the shares with
respect to which such option or portion is hereby exercised;
(B) With the consent of the Committee, shares of any class of
the Company's stock owned by the optionee either duly endorsed for
transfer to the Company or duly attested as to ownership with a Fair
Market Value (as determinable under Section 4(c)) on the date of
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<PAGE> 101
delivery equal to the aggregate option price of the shares of Class B
Common Stock with respect to which such option or portion is thereby
exercised (which shares shall be owned by the optionee for more than
six months at the time they are delivered);
(C) With the consent of the Committee, any other form of
cashless exercise permitted under Section 6(d) hereof; or
(D) Any combination of the consideration provided in the
foregoing subsections (A), (B) and (C);
(iii) Such representations and documents as the Committee, in its
absolute discretion, deems necessary or advisable to effect compliance
with all applicable provisions of the Securities Act of 1933, as
amended, and any other federal or state securities laws or regulations.
The Committee may, in its absolute discretion, also take whatever
additional actions it deems appropriate to effect such compliance
including, without limitation, placing legends on share certificates and
issuing stop transfer orders to transfer agents and registrars; and
(iv) In the event that the option, or portion thereof, shall be
exercised by any person or persons other than the optionee, appropriate
proof of the right of such person or persons to exercise the option or
portion thereof.
(d) Cashless Exercise. The Company, in its sole discretion, may
establish procedures whereby an optionee, to the extent permitted by and
subject to the requirements of Rule 16b-3 under the Exchange Act,
Regulation T issued by the Board of Governors of the Federal Reserve System
pursuant to the Exchange Act, federal income tax laws, and other federal,
state and local tax and securities laws, can exercise an option or a
portion thereof without making a direct payment of the option price to the
Company. If the Company so elects to establish a cashless exercise program,
the Company shall determine, in its sole discretion and from time to time,
such administrative procedures and policies as it deems appropriate
provided such procedures and policies are consistent with those of any
cashless exercise program established pursuant to the 1996 Plan. Such
procedures and policies shall be binding on any optionee wishing to utilize
the cashless exercise program.
7. Expiration of Options.
No option may be exercised to any extent by anyone after the first to occur
of the following events:
(i) The expiration of 10 years from the date the option was
granted; or
(ii) The expiration of one year from the time the optionee shall
voluntarily or involuntarily cease to continue to serve as a director of
the Company (a "Termination of Directorship"), including a Termination
of Directorship by reason of death or disability.
For purposes of this Section 7, "disability" shall mean a medically
determinable physical or mental impairment which has lasted or can be expected
to last for a continuous period of not less than 12 months and which renders a
director substantially unable to function as a director of the Company. Nothing
contained herein or in any option agreement shall be construed to confer on any
optionee any right to continue as a director of the Company.
8. Acceleration of Vesting Upon A Change of Control.
Notwithstanding anything to the contrary in Section 7 and/or any vesting
provisions of any option, any option 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, 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
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<PAGE> 102
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 Exchange Act) other than UniHealth, a California nonprofit public benefit
corporation ("UniHealth"), acquires beneficial ownership (within the meaning of
Rule 13d-3 of the Exchange 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 requirements of the
Exchange Act as a result of a "going private transaction" (within the meaning of
the Exchange 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. 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. Each optionee shall
receive at least 10 days' notice prior to the effective date of the Change of
Control that their options 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 optionees to exercise their options as of the effective date of
the Change of Control.
9. Non-Transferability of Options.
No option or interest or right therein or part thereof shall be liable for
the debts, contracts or engagements of the optionee or his successors in
interest or shall be subject to disposition by transfer, alienation,
anticipation, pledge, encumbrance, assignment or any other means whether such
disposition be voluntary or involuntary or by operation of law or judgment,
levy, attachment, garnishment or any other legal or equitable proceedings
(including bankruptcy) and any attempted disposition thereof shall be null and
void and of no effect; provided, however, that nothing in this Section 9 shall
prevent transfers by will or by the applicable laws of descent and distribution
or by other methods to any approved person pursuant to Section 6(a).
10. Adjustments Upon Certain Events.
(a) Changes in Company's Shares. In the event that the outstanding
shares of Class B Common Stock of the Company are hereafter changed into or
exchanged for a different number or kind of shares or other securities of
the Company, or of another corporation, by reason of reorganization,
merger, consolidation, recapitalization, reclassification, stock split,
stock dividend or combination of shares, or in the event of extraordinary
cash or non-cash dividends being declared with respect to the outstanding
shares of Class B Common Stock or other similar transactions, proportionate
adjustments shall be made by the Committee in the number and kind of shares
for the purchase of which options may be granted (including adjustments of
the limitation on the maximum number and kind of shares which may be issued
on exercise of options), which adjustments shall be consistent with
comparable adjustments made pursuant to the corresponding provision in the
1996 Plan.
(b) Adjustments in Outstanding Awards. In the event that the
outstanding shares of Class B Common Stock of the Company are hereafter
changed into or exchanged for a different number or kind of shares or other
securities of the Company, or of another corporation, by reason of
reorganization, merger, consolidation, recapitalization, reclassification,
stock split, stock dividend or combination of shares, or in the event of
extraordinary cash or non-cash dividends being declared with respect to the
outstanding shares of Class B Common Stock or other similar transactions,
the Committee shall make proportionate adjustments in the number and kind
of shares as to which all outstanding options, or portions thereof then
unexercised, shall be exercisable, to the end that after such event the
optionee's
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<PAGE> 103
proportionate interest shall be maintained as before the occurrence of such
event. Such adjustments shall be consistent with comparable adjustments
made pursuant to the corresponding provision in the 1996 Plan. Such
adjustment in an outstanding option shall be made without change in the
total price applicable to the option or the unexercised portion of the
option (except for any change in the aggregate price resulting from
rounding-off of share quantities or prices) and with any necessary
corresponding adjustment in option price per share. Any such adjustment
made by the Committee shall be final and binding upon all optionees, the
Company and all other interested persons.
11. General Restrictions.
(a) Conditions to Issuance of Stock Certificates. The shares of Class
B Common Stock issuable and deliverable upon the exercise of any option, or
any portion thereof, may be either previously authorized but unissued
shares of Class B Common Stock or issued shares of Class B Common Stock
which have then been reacquired by the Company. The Company shall not be
required to issue or deliver any certificate or certificates for shares of
Class B Common Stock purchased upon the exercise of any option or portion
thereof prior to fulfillment of all of the following conditions:
(i) The admission of such shares of Class B Common Stock to listing
on all stock exchanges on which such class of stock is then listed;
(ii) The completion of any registration or other qualification of
such shares of Class B Common Stock under any state or federal law or
under the rulings or regulations of the Securities and Exchange
Commission or any other governmental regulatory body, which the
Committee shall, in its absolute discretion, deem necessary or
advisable;
(iii) The obtaining of any approval or other clearance from any
state or federal governmental agency which the Committee shall, in its
absolute discretion, determine to be necessary or advisable;
(iv) The payment to the Company of all amounts which it is required
to withhold under federal, state or local law in connection with the
exercise of the option; and
(v) The lapse of such reasonable period of time following the
exercise of the option as the Committee may establish from time to time
for reasons of administrative convenience.
(b) Rights as Stockholders. The holders of options shall not be, nor
have any of the rights or privileges of, stockholders of the Company in
respect of any shares of Class B Common Stock receivable upon the exercise
of any part of an option unless and until certificates representing the
shares of Class B Common Stock have been issued by the Company to such
holders.
12. Withholding Tax Liability.
(a) A holder of an option granted hereunder may elect to deliver
shares of Class B Common Stock to the Company or have the Company withhold
shares otherwise issuable upon the exercise of an option in order to
satisfy federal, state and local withholding tax liability (a "share
withholding election"), provided: (i) the Board or, if so designated, the
Committee, shall not have revoked its advance approval of the holder's
share withholding election; and (ii) the share withholding election is made
on or prior to the date on which the amount of withholding tax liability is
determined (the "Tax Date"). Notwithstanding the foregoing, a holder whose
transactions in the Company's equity securities are subject to Section
16(b) of the Exchange Act may make a share withholding election only if the
following additional conditions are met: (i) the withholding is made at
least six months after the date of the grant of the option; and (ii) either
(x) the share withholding election is irrevocably made at least six months
in advance of the withholding, or (y) the share withholding election and
the share withholding take place during the period beginning on the third
business day following the date of release of the Company's quarterly or
annual financial results and ending on the twelfth business day following
such date.
(b) A share withholding election shall be deemed made when written
notice of such election, signed by the holder, has been delivered or
transmitted by registered or certified mail to the Secretary or Chief
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<PAGE> 104
Financial Officer of the Company at its then principal office. Delivery of
said notice shall constitute an irrevocable election to have shares
withheld.
(c) Upon exercise of an option by a holder, the Company shall transfer
the total number of shares of Class B Common Stock subject to the option to
the holder on the date of exercise, less any shares of Class B Common Stock
the holder elects to withhold.
13. Amendment, Suspension or Termination of the Plan.
This Plan may be wholly or partially amended or otherwise modified,
suspended or terminated at any time or from time to time by the Board; provided
that the Board may not amend or modify this Plan without the approval of the
stockholders of the Company if stockholder approval would be required under
Section 422 of the Code or any law or rule of any governmental authority, stock
exchange or other self-regulatory organization to which the Company is subject.
Neither the amendment, suspension nor termination of this Plan shall, without
the consent of the holder of the option, impair any rights or obligations under
any option theretofore granted. The Committee may amend or otherwise modify the
terms of an option granted hereunder, from time to time, but no amendment or
modification shall, without the consent of the holder of such option impair any
rights or obligations of such option. No option may be granted during any period
of suspension nor after termination of this Plan, and in no event may any option
be granted under this Plan after exhaustion of the shares reserved for shares
subject to options granted pursuant to this Plan.
14. Approval of Plan by Stockholders.
This Plan will be submitted for the approval of the Company's stockholders
within 12 months after the date of the Board's initial adoption of this Plan and
as determined necessary or desirable for actions taken pursuant to Section 13.
Options may be granted prior to such stockholder approval; provided, however,
that such options shall not be exercisable prior to the time when this Plan is
approved by the stockholders; provided, further, that if such approval has not
been obtained at the end of said 12-month period, all options previously granted
under this Plan shall thereupon be canceled and become null and void.
15. Effective Date of Plan.
Subject to Section 14, the effective date of this Plan shall be May 1,
1999.
E-7
<PAGE> 105
PROXY
PROXY CARD
(HOLDERS OF CLASS A COMMON STOCK)
PACIFICARE HEALTH SYSTEMS, INC.
THIS PROXY SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned holder of Class A Common Stock acknowledges receipt of a
copy of the Annual Report and the Proxy Statement, dated _____________, 1999,
and, revoking any proxy heretofore given, hereby constitutes and appoints
Messrs. Terry Hartshorn and Alan Hoops, and each of them, as proxies, each of
them with the power to appoint his substitute, and hereby authorizes each of
them to represent and to vote, cumulatively or otherwise as designated below,
all the shares of Class A Common Stock held of record by the undersigned on
___________, 1999, at the Annual Meeting of Stockholders to be held on
___________, 1999 or any adjournment thereof.
- --------------------------------------------------------------------------------
FOLD AND DETACH HERE
<PAGE> 106
Please mark your
vote as indicated
in this example. [X]
1. APPROVAL OF THE AMENDED CERTIFICATE
FOR [ ] AGAINST [ ] ABSTAIN [ ]
2. ELECTION OF DIRECTORS
FOR the nominee listed below WITHHOLD AUTHORITY
(Except as indicated to the contrary) (To vote for nominees listed below)
[ ] [ ]
Bradley C. Call David A. Reed David R. Carpenter Lloyd E. Ross
(Instructions: To withhold authority to vote for any nominee, write that
nominee's name in the space provided below.)
- --------------------------------------------------------------------------------
3. APPROVAL OF THE PERFORMANCE OBJECTIVES AND MAXIMUM AWARDS UNDER THE 1996
MANAGEMENT INCENTIVE COMPENSATION PLAN
FOR [ ] AGAINST [ ] ABSTAIN [ ]
4. APPROVAL OF AMENDMENTS TO THE 1996 STOCK OPTION PLAN FOR OFFICERS AND KEY
EMPLOYEES
FOR [ ] AGAINST [ ] ABSTAIN [ ]
5. APPROVAL OF THE AMENDED AND RESTATED 1996 NON-OFFICER DIRECTORS STOCK
OPTION PLAN
FOR [ ] AGAINST [ ] ABSTAIN [ ]
6. The proxies are authorized to vote in their discretion upon such other
business as may properly come before the meeting.
7. If you plan to attend the Annual Meeting, please check here: [ ]
PLEASE MARK, SIGN, DATE AND RETURN PROXY CARD PROMPTLY USING THE ENCLOSED
ENVELOPE.
Signature(s) DATED: , 1999
--------------------------------------- ----------------
Please sign exactly as your name appears on the proxy. When shares are held by
joint tenants, both must sign. When signing as attorney, executor,
administrator, trustee or guardian, please give full title as such. If a
corporation, please sign in full corporate name by president or other
authorized officer. If a partnership, please sign in partnership name by
authorized person.
- --------------------------------------------------------------------------------
[Arrow Up] FOLD AND DETACH HERE [Arrow Up]
<PAGE> 107
PROXY
PROXY CARD
(HOLDERS OF CLASS B COMMON STOCK)
PACIFICARE HEALTH SYSTEMS, INC.
THIS PROXY SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned holder of Class B Common Stock acknowledges receipt of a
copy of the Annual Report and the Proxy Statement, dated ___________, 1999,
and, revoking any proxy heretofore given, hereby constitutes and appoints
Messrs. Terry Hartshorn and Alan Hoops, and each of them, as proxies, each of
them with the power to appoint his substitute, and hereby authorizes each of
them to represent and to vote, cumulatively or otherwise as designated below,
all the shares of Class B Common Stock held of record by the undersigned on
__________, 1999, at the Annual Meeting of Stockholders to be held on
__________, 1999 or any adjournment thereof.
- -------------------------------------------------------------------------------
*FOLD AND DETACH HERE*
<PAGE> 108
Please mark
your votes as
indicated in [X]
this sample.
FOR AGAINST ABSTAIN
1. APPROVAL OF THE [ ] [ ] [ ] 2. The proxies are authorized
AMENDED CERTIFICATE to vote in their discretion
upon such other business as
may properly come before
the meeting.
3. If you plan to attend
the Annual Meeting,
please check here: [ ]
PLEASE MARK, SIGN, DATE AND
RETURN PROXY CARD PROMPTLY
USING THE ENCLOSED ENVELOPE.
Signature(s) _________________________________________ Dated: ___________, 1999
Please sign exactly as your name appears on the proxy. When shares are held by
joint tenants, both must sign. When signing as attorney, executor,
administrator, trustee or guardian, please give full title as such. If a
corporation, please sign in full corporate name by president or other authorized
officer. If a partnership, please sign in partnership name by authorized person.
- -------------------------------------------------------------------------------
FOLD AND DETACH HERE
<PAGE> 109
VOTING INSTRUCTIONS TO TRUSTEE
FOR THE ANNUAL MEETING OF SHAREHOLDERS -- ________, 1999
THE TRUSTEE SOLICITS THESE VOTING INSTRUCTIONS FROM PARTICIPANTS IN
THE PACIFICARE HEALTH SYSTEMS, INC. SAVINGS AND PROFIT-SHARING PLAN
WHO HAVE RIGHTS IN THE CLASS A COMMON STOCK
The undersigned Participant in the PacifiCare Health Systems, Inc. Savings and
Profit-Sharing Plan (the "Plan") hereby instructs Wells Fargo Bank ("Trustee"),
to vote all shares of Class A Common Stock of PacifiCare Health Systems, Inc.
(the "Company") allocated to the accounts of the undersigned under the Plan, and
to act in its discretion upon such other business as may properly come before,
and to represent the undersigned at the Annual Meeting of Shareholders of the
Company to be held on _______, 1999, or any adjournment thereof.
PLEASE CAREFULLY REVIEW THE ENCLOSED NOTICE TO PLAN PARTICIPANTS
BEFORE COMPLETING AND MAILING THIS CARD.
(CONTINUED AND TO BE SIGNED ON REVERSE SIDE.)
<PAGE> 110
Please mark
your vote as
indicated in [X]
this example
FOR AGAINST ABSTAIN
1. APPROVAL OF THE AMENDED CERTIFICATE [ ] [ ] [ ]
FOR the nominees WITHHOLD
listed below AUTHORITY
(Except as indicated (To vote for nominees
to the contrary) listed below)
2. ELECTION OF DIRECTORS [ ] [ ]
Bradley C. Call David A. Reed
David R. Carpenter Lloyd E. Ross
(Instruction: To withhold authority to vote for any nominee, write that
nominee's name in the space provided below)
- -----------------------------------------------------------------------
FOR AGAINST ABSTAIN
3. APPROVAL OF THE PERFORMANCE OBJECTIVES [ ] [ ] [ ]
AND MAXIMUM AWARDS UNDER THE 1996
MANAGEMENT INCENTIVE COMPENSATION PLAN
FOR AGAINST ABSTAIN
4. APPROVAL OF AMENDMENTS TO THE 1996 [ ] [ ] [ ]
STOCK OPTION PLAN FOR OFFICERS AND
KEY EMPLOYEES
FOR AGAINST ABSTAIN
5. APPROVAL OF THE AMENDED AND RESTATED 1996 [ ] [ ] [ ]
NON-OFFICER DIRECTORS STOCK OPTION PLAN
6. The Trustee may vote in its discretion upon such other business as may
properly come before the meeting.
7. If you plan to attend the Annual Meeting,
please check here. [ ]
IF THIS CARD IS PROPERLY EXECUTED, THE TRUSTEE WILL VOTE IN THE MANNER DIRECTED
HEREIN BY THE UNDERSIGNED STOCKHOLDER. IF NO DIRECTION IS MADE, THE TRUSTEE
WILL VOTE FOR PROPOSALS 1 THROUGH 6.
PLEASE MARK, SIGN, DATE AND RETURN PROXY CARD
PROMPTLY USING THE ENCLOSED ENVELOPE.
Signature(s)___________________________________________ DATED: ___________, 1999
Please sign exactly as your name appears on the proxy. When shares are held by
joint tenants, both must sign. When signing as attorney, executor,
administrator, trustee or guardian, please give full title as such. If a
corporation, please sign in full corporate name by president or other
authorized officer. If a partnership, please sign in partnership name by
authorized person.
- --------------------------------------------------------------------------------
FOLD AND DETACH HERE
<PAGE> 111
VOTING INSTRUCTIONS TO TRUSTEE
FOR THE ANNUAL MEETING OF SHAREHOLDERS -- _________, 1999
THE TRUSTEE SOLICITS THESE VOTING INSTRUCTIONS FROM PARTICIPANTS IN
THE PACIFICARE HEALTH SYSTEMS, INC. SAVINGS AND PROFIT-SHARING PLAN
WHO HAVE RIGHTS IN THE CLASS B COMMON STOCK
The undersigned Participant in the PacifiCare Health Systems, Inc. Savings and
Profit-Sharing Plan (the "Plan") hereby instructs Wells Fargo Bank ("Trustee"),
to vote all shares of Class B Common Stock of PacifiCare Health Systems, Inc.
(the "Company") allocated to the accounts of the undersigned under the Plan, and
to act in its discretion upon such other business as may properly come before,
and to represent the undersigned at the Annual Meeting of Shareholders of the
Company to be held on __________, 1999, or any adjournment thereof.
PLEASE CAREFULLY REVIEW THE ENCLOSED NOTICE TO PLAN PARTICIPANTS
BEFORE COMPLETING AND MAILING THIS CARD.
(CONTINUED AND TO BE SIGNED ON REVERSE SIDE.)
<PAGE> 112
Please mark
your vote as
indicated in [X]
this example
FOR AGAINST ABSTAIN
1. APPROVAL OF THE AMENDED CERTIFICATE [ ] [ ] [ ]
2. The Trustee may vote in its discretion upon such other business as may
properly come before the meeting.
3. If you plan to attend the Annual Meeting, please
check here. [ ]
IF THIS CARD IS PROPERLY EXECUTED, THE TRUSTEE WILL VOTE IN THE MANNER DIRECTED
HEREIN BY THE UNDERSIGNED STOCKHOLDER. IF NO DIRECTION IS MADE, THE TRUSTEE
WILL VOTE FOR PROPOSALS 1 THROUGH 3.
PLEASE MARK, SIGN, DATE AND RETURN PROXY CARD
PROMPTLY USING THE ENCLOSED ENVELOPE.
Signature(s)___________________________________________ DATED: ___________, 1999
Please sign exactly as your name appears on the proxy. When shares are held by
joint tenants, both must sign. When signing as attorney, executor,
administrator, trustee or guardian, please give full title as such. If a
corporation, please sign in full corporate name by president or other
authorized officer. If a partnership, please sign in partnership name by
authorized person.
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FOLD AND DETACH HERE
