<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 11-K
FOR ANNUAL REPORTS OF EMPLOYEE STOCK PURCHASE, SAVINGS
AND SIMILAR PLANS PURSUANT TO SECTION 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 000-21949
A. FULL TITLE OF THE PLAN AND THE ADDRESS OF THE PLAN, IF DIFFERENT FROM THAT
OF THE ISSUER NAMED BELOW:
THE PACIFICARE HEALTH SYSTEMS, INC. SAVINGS AND PROFIT-SHARING PLAN
B. NAME OF ISSUER OF THE SECURITIES HELD PURSUANT TO THE PLAN AND
THE ADDRESS OF ITS PRINCIPAL EXECUTIVE OFFICE:
PACIFICARE HEALTH SYSTEMS, INC.
3120 LAKE CENTER DRIVE
SANTA ANA, CA 92704
<PAGE> 2
Financial Statements and
Supplemental Schedules
The PacifiCare Health Systems, Inc.
Savings and Profit-Sharing Plan
Years ended December 31, 1998 and 1997
with Report of Independent Auditors
<PAGE> 3
The PacifiCare Health Systems, Inc.
Savings and Profit-Sharing Plan
Financial Statements and Supplemental Schedules
Years ended December 31, 1998 and 1997
CONTENTS
<TABLE>
<S> <C>
Report of Independent Auditors.......................................................1
Financial Statements
Statements of Net Assets Available for Benefits
with Fund Information..............................................................2
Statements of Changes in Net Assets Available for Benefits
with Fund Information..............................................................4
Notes to Financial Statements........................................................6
Supplemental Schedules
Line 27 (a) - Schedule of Assets Held for Investment Purposes.......................15
Line 27 (b) - Schedule of Loans or Fixed Income Obligations.........................19
Line 27 (d) - Schedule of Reportable Transactions...................................20
Signature Page......................................................................21
Exhibit Index.......................................................................22
Exhibit 23 -- Consent of Ernst & Young LLP..........................................23
</TABLE>
<PAGE> 4
Report of Independent Auditors
PacifiCare Health Systems, Inc. as
Plan Administrator for
The PacifiCare Health Systems, Inc.
Savings and Profit-Sharing Plan
We have audited the accompanying statements of net assets available for benefits
of The PacifiCare Health Systems, Inc. Savings and Profit-Sharing Plan as of
December 31, 1998 and 1997, and the related statements of changes in net assets
available for benefits for the years then ended. These financial statements are
the responsibility of the Plan's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the net assets available for benefits of The PacifiCare
Health Systems, Inc. Savings and Profit-Sharing Plan at December 31, 1998 and
1997, and the changes in its net assets available for benefits for the years
then ended, in conformity with generally accepted accounting principles.
Our audits were performed for the purpose of forming an opinion on the financial
statements taken as a whole. The accompanying supplemental schedules of assets
held for investment purposes and loans or fixed income obligations as of
December 31, 1998, and reportable transactions for the year then ended, are
presented for purposes of additional analysis and are not a required part of the
financial statements but are supplementary information required by the
Department of Labor's Rules and Regulations for Reporting and Disclosure under
the Employee Retirement Income Security Act of 1974. These supplemental
schedules are the responsibility of the Plan's management. The fund information
in the statements of net assets available for benefits and the statements of
changes in net assets available for benefits is presented for purposes of
additional analysis rather than to present the net assets available for benefits
and changes in net assets available for benefits of each fund. The supplemental
schedules and the fund information have been subjected to the auditing
procedures applied in our audits of the financial statements and, in our
opinion, are fairly stated in all material respects in relation to the financial
statements taken as a whole.
ERNST & YOUNG LLP
Los Angeles, California
June 23, 1999
<PAGE> 5
The PacifiCare Health Systems, Inc.
Savings and Profit-Sharing Plan
Statements of Net Assets Available for Benefits with Fund Information
December 31, 1998
<TABLE>
<CAPTION>
PUTNAM INVESTMENTS
------------------------------------------------------------------------
GROWTH AND GLOBAL MONEY
INCOME INCOME GROWTH VOYAGER MARKET
------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Investments, at fair value:
Mutual funds $ 23,343,783 $ 4,695,025 $ 16,390,175 $ 35,980,282 $ 4,254,354
Common stocks -- -- -- -- --
Corporate bonds -- -- -- -- --
U.S. securities -- -- -- -- --
Short-term income fund -- -- -- -- --
Participant loans
receivable -- -- -- -- --
------------------------------------------------------------------------
Total investments 23,343,783 4,695,025 16,390,175 35,980,282 4,254,354
Contributions receivable:
Employee -- -- -- -- --
Employer -- -- -- -- --
Dividends receivable -- -- -- -- --
Interest income receivable -- -- -- -- --
------------------------------------------------------------------------
Net assets available for benefits $ 23,343,783 $ 4,695,025 $ 16,390,175 $ 35,980,282 $ 4,254,354
========================================================================
</TABLE>
<TABLE>
<CAPTION>
MANAGED PACIFICARE PARTICIPANT CONTRIBUTIONS
ASSETS STOCK FUND LOANS RECEIVABLE TOTAL
------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Investments, at fair value:
Mutual funds $ -- $ -- $ -- $ -- $ 84,663,619
Common stocks 46,843,037 2,303,592 -- -- 49,146,629
Corporate bonds 3,302,186 -- -- -- 3,302,186
U.S. securities 25,640,224 -- -- -- 25,640,224
Short-term income fund 3,567,187 92,698 -- -- 3,659,885
Participant loans
receivable -- -- 2,486,259 -- 2,486,259
------------------------------------------------------------------------
Total investments 79,352,634 2,396,290 2,486,259 -- 168,898,802
Contributions receivable:
Employee -- -- -- 1,127,594 1,127,594
Employer -- -- -- 10,153,187 10,153,187
Dividends receivable 69,133 -- -- -- 69,133
Interest income receivable 449,999 -- -- -- 449,999
------------------------------------------------------------------------
Net assets available for benefits $ 79,871,766 $ 2,396,290 $ 2,486,259 $ 11,280,781 $180,698,715
========================================================================
</TABLE>
See accompanying notes.
2
<PAGE> 6
The PacifiCare Health Systems, Inc.
Savings and Profit-Sharing Plan
Statements of Net Assets Available for Benefits with Fund Information
December 31, 1997
<TABLE>
<CAPTION>
PUTNAM INVESTMENTS
------------------------------------------------------------------------
GROWTH AND GLOBAL MONEY
INCOME INCOME GROWTH VOYAGER MARKET
------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Investments, at fair value:
Mutual funds $ 18,085,644 $ 3,155,533 $ 10,770,358 $ 25,356,228 $ 2,815,680
Common stocks -- -- -- -- --
Corporate bonds -- -- -- -- --
U.S. securities -- -- -- -- --
Short-term income fund -- -- -- -- --
Participant loans receivable -- -- -- -- --
------------------------------------------------------------------------
Total investments 18,085,644 3,155,533 10,770,358 25,356,228 2,815,680
Dividends receivable -- -- -- -- --
Interest income receivable -- -- -- -- --
------------------------------------------------------------------------
Net assets available for
benefits $ 18,085,644 $ 3,155,533 $ 10,770,358 $ 25,356,228 $ 2,815,680
========================================================================
</TABLE>
<TABLE>
<CAPTION>
MANAGED PARTICIPANT
ASSETS LOANS TOTAL
------------------------------------------
<S> <C> <C> <C>
Investments, at fair value:
Mutual funds $ -- $ -- $ 60,183,443
Common stocks 45,997,149 -- 45,997,149
Corporate bonds 3,804,191 -- 3,804,191
U.S. securities 24,083,538 -- 24,083,538
Short-term income fund 680,967 -- 680,967
Participant loans receivable -- 1,830,289 1,830,289
------------------------------------------
Total investments 74,565,845 1,830,289 136,579,577
Dividends receivable 63,381 -- 63,381
Interest income receivable 364,324 -- 364,324
------------------------------------------
Net assets available for
benefits $ 74,993,550 $ 1,830,289 $137,007,282
==========================================
</TABLE>
See accompanying notes.
3
<PAGE> 7
The PacifiCare Health Systems, Inc.
Savings and Profit-Sharing Plan
Statements of Changes in Net Assets Available for Benefits with Fund Information
Year ended December 31, 1998
<TABLE>
<CAPTION>
PUTNAM INVESTMENTS
---------------------------------------------------------------------------
GROWTH AND GLOBAL MONEY
INCOME INCOME GROWTH VOYAGER MARKET
---------------------------------------------------------------------------
Contributions:
<S> <C> <C> <C> <C> <C>
Employee $ 4,761,707 $ 1,263,458 $ 2,921,488 $ 6,771,133 $ 1,394,222
Employer 1,448,152 424,174 940,999 2,068,710 447,165
Net investment income:
Interest income -- -- -- -- --
Dividends 2,044,144 248,445 477,938 2,415,969 196,446
Net realized/unrealized
appreciation (depreciation) 828,355 (117,934) 2,888,828 4,148,395 --
---------------------------------------------------------------------------
Total additions 9,082,358 1,818,143 7,229,253 15,404,207 2,037,833
Benefit and withdrawal payments
to participants 2,512,977 364,857 1,535,469 3,509,834 1,462,954
Administration fees 135,417 27,118 89,268 196,513 27,239
Forfeitures taken -- -- -- -- 1,135,000
---------------------------------------------------------------------------
Total deductions 2,648,394 391,975 1,624,737 3,706,347 2,625,193
Net increase (decrease) before
interfund transfers 6,433,964 1,426,168 5,604,516 11,697,860 (587,360)
Interfund transfers (1,175,825) 113,324 15,301 (1,073,806) 2,026,034
---------------------------------------------------------------------------
Net increase 5,258,139 1,539,492 5,619,817 10,624,054 1,438,674
Net assets available for benefits:
Beginning of year 18,085,644 3,155,533 10,770,358 25,356,228 2,815,680
---------------------------------------------------------------------------
End of year $ 23,343,783 $ 4,695,025 $ 16,390,175 $ 35,980,282 $ 4,254,354
===========================================================================
</TABLE>
<TABLE>
<CAPTION>
MANAGED PACIFICARE PARTICIPANT CONTRIBUTIONS
ASSETS STOCK FUND LOANS RECEIVABLE TOTAL
--------------------------------------------------------------------------
Contributions:
<S> <C> <C> <C> <C> <C>
Employee $ 2,025,981 $ 532,378 $ -- $ 1,127,594 $ 20,797,961
Employer 6,546,155 73,973 -- 10,153,187 22,102,515
Net investment income:
Interest income 2,107,499 2,994 188,310 -- 2,298,803
Dividends 797,720 -- -- -- 6,180,662
Net realized/unrealized
appreciation (depreciation) 3,603,599 315,849 -- -- 11,667,092
--------------------------------------------------------------------------
Total additions 15,080,954 925,194 188,310 11,280,781 63,047,033
Benefit and withdrawal payments
to participants 7,272,815 19,112 196,100 -- 16,874,118
Administration fees 862,499 8,428 -- -- 1,346,482
Forfeitures taken -- -- -- -- 1,135,000
--------------------------------------------------------------------------
Total deductions 8,135,314 27,540 196,100 -- 19,355,600
Net increase (decrease) before
interfund transfers 6,945,640 897,654 (7,790) 11,280,781 43,691,433
Interfund transfers (2,067,424) 1,498,636 663,760 -- --
------------ ------------ ------------ ------------ ------------
Net increase 4,878,216 2,396,290 655,970 11,280,781 43,691,433
Net assets available for benefits:
Beginning of year 74,993,550 -- 1,830,289 -- 137,007,282
--------------------------------------------------------------------------
End of year $ 79,871,766 $ 2,396,290 $ 2,486,259 $ 11,280,781 $180,698,715
==========================================================================
</TABLE>
See accompanying notes.
4
<PAGE> 8
The PacifiCare Health Systems, Inc.
Savings and Profit-Sharing Plan
Statements of Changes in Net Assets Available for Benefits with Fund Information
Year ended December 31, 1997
<TABLE>
<CAPTION>
PUTNAM INVESTMENTS
---------------------------------------------------------------------------
GROWTH AND GLOBAL MONEY
INCOME INCOME GROWTH VOYAGER MARKET
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Contributions:
Employee $ 785,255 $ 180,917 $ 633,134 $ 1,317,933 $ 931,688
Employer 2,270,371 517,467 1,794,340 3,834,572 414,468
Net investment income:
Interest income -- -- -- -- --
Dividends 2,298,505 192,095 1,917,370 1,494,178 140,794
Net realized/unrealized
appreciation (depreciation) 937,784 45,128 (759,992) 3,425,064 6,620
------------ ------------ ------------ ------------ ------------
Total additions 6,291,915 935,607 3,584,852 10,071,747 1,493,570
Benefit and withdrawal payments
to participants 1,479,968 227,897 910,625 1,909,510 1,404,692
Administration fees 16,126 3,665 10,743 21,831 3,719
------------ ------------ ------------ ------------ ------------
Total deductions 1,496,094 231,562 921,368 1,931,341 1,408,411
------------ ------------ ------------ ------------ ------------
Net increase (decrease) before
interfund transfers 4,795,821 704,045 2,663,484 8,140,406 85,159
Interfund transfers 804,245 (101,411) 288,841 (499,933) 241,669
------------ ------------ ------------ ------------ ------------
Net increase 5,600,066 602,634 2,952,325 7,640,473 326,828
Net assets available for benefits:
Beginning of year 12,485,578 2,552,899 7,818,033 17,715,755 2,488,852
------------ ------------ ------------ ------------ ------------
End of year $ 18,085,644 $ 3,155,533 $ 10,770,358 $ 25,356,228 $ 2,815,680
============ ============ ============ ============ ============
</TABLE>
<TABLE>
<CAPTION>
MANAGED PARTICIPANT
ASSETS LOANS TOTAL
------------ ------------ ------------
<S> <C> <C> <C>
Contributions:
Employee $ 4,183,075 $ -- $ 8,032,002
Employer 2,063,875 -- 10,895,093
Net investment income:
Interest income 1,867,766 164,676 2,032,442
Dividends 964,702 -- 7,007,644
Net realized/unrealized
appreciation (depreciation) 9,606,412 -- 13,261,016
------------ ------------ ------------
Total additions 18,685,830 164,676 41,228,197
Benefit and withdrawal payments
to participants 7,528,343 175,767 13,636,802
Administration fees 396,410 -- 452,494
------------ ------------ ------------
Total deductions 7,924,753 175,767 14,089,296
------------ ------------ ------------
Net increase (decrease) before
interfund transfers 10,761,077 (11,091) 27,138,901
Interfund transfers (1,156,554) 423,143 --
------------ ------------ ------------
Net increase 9,604,523 412,052 27,138,901
Net assets available for benefits:
Beginning of year 65,389,027 1,418,237 109,868,381
------------ ------------ ------------
End of year $ 74,993,550 $ 1,830,289 $137,007,282
============ ============ ============
</TABLE>
See accompanying notes.
5
<PAGE> 9
The PacifiCare Health Systems, Inc.
Savings and Profit-Sharing Plan
Notes to Financial Statements
December 31, 1998
1. DESCRIPTION OF PLAN
GENERAL
The PacifiCare Health Systems, Inc. Savings and Profit-Sharing Plan (the
"Plan"), effective July 1, 1985, as amended, is a defined contribution
profit-sharing plan that covers employees of PacifiCare Health Systems, Inc. and
subsidiaries (the "Company"), and is subject to the Employee Retirement Income
Security Act of 1974 ("ERISA"). The Plan was amended and restated in its
entirety effective February 19, 1998 to establish a new investment fund that
invests primarily in shares of the Company's Class B Common Stock, to include
certain subsidiaries as sponsoring employers of the Plan, and to comply with
certain amendments and changes to the Internal Revenue Code (the "Code"). As
amended and restated, the Plan is intended to comply with Code sections 401,
401(k) and 402(a), and is also an eligible individual account plan as defined in
ERISA Section 407(d)(3), and provides for the acquisition and holding of
qualifying employer securities, as defined in ERISA Section 401(d)(5). The
assets of the following plans sponsored by subsidiaries of the Company were
transferred into the Plan: PacifiCare of Washington, Inc., 401(k) Plan effective
November 1, 1996; Preferred Solutions, Inc. 401(k) Plan, and D.P.A. Employees
Investment Plan and Trust effective January 1, 1996. Employees are fully vested
in contributions relating to these plans.
The following description of the Plan provides only general information.
Participants should refer to the Plan agreement for a more complete description
of the Plan's provisions.
CONTRIBUTIONS AND BENEFITS
Employees are eligible to make contributions to the Plan after 12 months of
employment with 1,000 hours of service.
Participants may elect to defer the receipt of a portion (in whole percentages
not less than 2%, nor more than 12%) of their compensation (deferred savings
account). All employees were limited to a contribution of $10,000 and $9,500 in
1998 and 1997, respectively, by Code Section 402(g). If any participant's
compensation deferral for a year exceeds the maximum allowable for that year,
the excess contribution is returned to the Company and then paid to the
participant as taxable compensation. Furthermore, Code Section 401(k) and the
Plan limit the amount certain highly compensated individuals may contribute,
based on amounts contributed by lower compensated individuals.
6
<PAGE> 10
The PacifiCare Health Systems, Inc.
Savings and Profit-Sharing Plan
Notes to Financial Statements (continued)
1. DESCRIPTION OF PLAN (CONTINUED)
CONTRIBUTIONS AND BENEFITS (CONTINUED)
The Company makes annual mandatory contributions to participants' accounts equal
to 2% of all eligible compensation paid (profit-sharing account). Each
participant's profit-sharing account is credited with an amount equal to 2% of
his or her eligible compensation received during the year.
The Company also contributes a matching amount on behalf of each participant
equal to 50% of the amount of compensation deferred by each participant to a
maximum of 3% of the participant's eligible compensation (matching account).
The Company may also contribute an additional amount (discretionary
profit-sharing account) at its sole discretion, as determined by the Company's
Board of Directors, based on the financial success of the Company. The Company
contributed $9,300,000 for the year ended December 31, 1998 and zero in 1997.
The Company's discretionary contribution is allocated to active participants'
accounts in proportion to their eligible compensation. Pursuant to this
allocation, eligible compensation was limited to $81,000 in 1998 and 1997,
respectively.
Participants are immediately and fully vested in their 2% profit-sharing account
and deferred savings account. Participants vest in their matching account and
discretionary profit-sharing account at the rate of 10% per year for the first
four years of service and 20% per year for the next three years of service.
Participants become fully vested in their matching account in the event of
death, disability or reaching normal retirement age. Forfeited balances of
terminated participants' nonvested accounts are used to reduce future Company
contributions. The balance of forfeited nonvested accounts was $350,512 and
$1,306,289 as of December 31, 1998 and 1997, respectively.
The income of the Plan, together with any gains or losses in the value of the
investments, increase or decrease participants' accounts proportionately based
on the relationship of their account balances to total account balances.
7
<PAGE> 11
The PacifiCare Health Systems, Inc.
Savings and Profit-Sharing Plan
Notes to Financial Statements (continued)
1. DESCRIPTION OF PLAN (CONTINUED)
CONTRIBUTIONS AND BENEFITS (CONTINUED)
No amounts are payable prior to the participant's normal retirement, death,
disability or termination of employment. In cases of termination, the
participant may elect to defer payment until five years after the normal
retirement date, age 65. Retirement and disability payments greater than $5,000
may be paid in a lump sum, an annuity, or in substantially equal installments.
All payments less than $5,000 will be paid in a lump sum.
Although it has not expressed any intent to do so, the Company has the right
under the Plan to discontinue its contributions at any time and to terminate the
Plan subject to the provisions of ERISA. In the event of Plan termination,
participants will become 100% vested in their accounts. The fully vested
accounts would become payable as determined by the Administrative Committee.
PARTICIPANT LOANS
Plan participants may borrow, as a loan from their accumulated contributions, a
minimum of $1,000 and up to a maximum of the lesser of $50,000 or 50% of their
vested account balance. Loan terms generally range from 1 to 5 years or up to 10
years for hardship circumstances as defined by the Plan. The loans are secured
by the balance in the participant's account and bear interest at 2% above the
current prime rate. Principal and interest is paid ratably through biweekly
payroll deductions.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
VALUATION OF INVESTMENTS
Investments in mutual funds are carried at fair value based on the quoted market
price of the underlying investments.
Quoted market prices are used to value common stocks, corporate bonds and U.S.
securities.
8
<PAGE> 12
The PacifiCare Health Systems, Inc.
Savings and Profit-Sharing Plan
Notes to Financial Statements (continued)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
VALUATION OF INVESTMENTS (CONTINUED)
Investments in participating units in Wells Fargo Bank's (formerly First
Interstate Bank) short-term income fund are stated at redemption price which
approximates cost. Purchases and sales of investments are reflected on the trade
dates.
Participant loans are recorded at cost, which approximates fair value at
December 31, 1998 and 1997.
INVESTMENT INCOME
Interest and dividends are recorded as earned. Realized and unrealized net
investment gains or losses are recorded based on the cost of units held by the
Plan and fluctuations in the fair value of the underlying investments.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.
3. ADMINISTRATION OF PLAN ASSETS
The assets of the Plan are administered by the Plan's Administrative Committee,
appointed by the Company's Board of Directors, with the assistance of the
Trustees, Putnam Investments ("Putnam") and Wells Fargo Bank ("Wells Fargo").
Under the trust agreement, the Trustees hold the trust assets and make payments
as directed by the Administrative Committee. Discretion as to investment
decisions for the Plan's profit-sharing and discretionary profit-sharing
accounts lies with the Administrative Committee, which is assisted by an
investment advisor. Effective June 1, 1995, participants are permitted to direct
the investment of their deferred savings and matching accounts among investment
options selected by the Administrative Committee (see Note 4). The Plan pays all
administrative expenses.
9
<PAGE> 13
The PacifiCare Health Systems, Inc.
Savings and Profit-Sharing Plan
Notes to Financial Statements (continued)
4. INVESTMENT OPTIONS
The individual accounts of each participant are held and invested by the
Trustees, Wells Fargo and Putnam, in one or more of the following investments in
accordance with the investment options selected by the participant or the
Company, as appropriate (seven options in 1998, six in 1997).
PUTNAM GROWTH AND INCOME FUND
Funds are invested in shares of a registered investment company that invests in
U.S. and foreign common stocks that offer potential capital growth, current
income or both.
PUTNAM INCOME FUND
Funds are invested in shares of a registered investment company that invests in
a variety of government and corporate debt securities, preferred stocks and
dividend-paying common stocks.
PUTNAM GLOBAL GROWTH FUND
Funds are invested in shares of a registered investment company that invests in
common stocks traded in securities markets located in a number of foreign
countries and in the United States.
PUTNAM VOYAGER FUND
Funds are invested in shares of a registered investment company that invests in
common stocks of companies that Putnam Management believes have potential for
capital appreciation that is significantly greater than that of the market
averages.
PUTNAM MONEY MARKET FUND
Funds are invested in shares of a registered investment company that invests in
bank certificates of deposit, bankers' acceptances, commercial paper, short-term
corporate obligations, short-term municipal obligations, U.S. government
securities and U.S. Treasury or U.S. repurchase agreements.
10
<PAGE> 14
The PacifiCare Health Systems, Inc.
Savings and Profit-Sharing Plan
Notes to Financial Statements (continued)
4. INVESTMENT OPTIONS (CONTINUED)
MANAGED ASSETS
Assets managed by a company that specializes in the management of conservative,
balanced portfolios using high quality stocks and short- to intermediate-term
fixed income securities.
PACIFICARE STOCK FUND
In 1998, the Plan was amended to offer participants the opportunity to invest in
Class B common stock of the Company.
Participants may change their investment options once a quarter for investments
in the deferred savings and the matching accounts. However, investments in the
profit-sharing and discretionary profit-sharing accounts are restricted to the
Managed Assets investment vehicle.
5. INVESTMENTS
During 1998 and 1997, the Plan held investments managed by an investment
management company that invested in common stocks, corporate and foreign bonds
and U.S. government securities in addition to participating units in Wells Fargo
Bank's short-term income fund based upon the guidance provided by the investment
advisor.
Investments in participating units in Wells Fargo's short-term income fund held
by the Trustee for the Plan at December 31, 1998 and 1997, were $3,659,885 and
$680,967 (at cost, which approximates fair value), respectively.
11
<PAGE> 15
The PacifiCare Health Systems, Inc.
Savings and Profit-Sharing Plan
Notes to Financial Statements (continued)
5. INVESTMENTS (CONTINUED)
Investments in Wells Fargo's short-term income fund are party-in-interest
transactions with the Trustee for which a statutory exemption exists. Purchases,
sales and income related to these investments during the years ended December
31, 1998 and 1997, were as follows:
<TABLE>
<CAPTION>
REINVESTED
YEAR ENDED INTEREST
DECEMBER 31, PURCHASES SALES INCOME
------------ -----------------------------------------------------
<S> <C> <C> <C>
1998 $84,394,642 $81,365,811 $ 136,120
=====================================================
1997 $39,130,427 $38,834,325 $ 61,677
=====================================================
</TABLE>
The Plan's investments (including investments bought, sold and held during the
year) appreciated in fair value by $11,667,092 and $13,261,016 during 1998 and
1997, respectively, as follows:
<TABLE>
<CAPTION>
NET APPRECIATION
(DEPRECIATION) IN FAIR
VALUE DURING YEAR
---------------------------------
1998 1997
------------ ------------
<S> <C> <C>
Investments at fair value as determined by
quoted market prices:
Common stocks $ 3,587,077 $ 9,245,565
Corporate bonds (4,768) (4,107)
U.S. government securities 337,139 364,954
Putnam mutual funds 7,747,644 3,654,604
------------ ------------
Net change in fair value $ 11,667,092 $ 13,261,016
============ ============
</TABLE>
12
<PAGE> 16
The PacifiCare Health Systems, Inc.
Savings and Profit-Sharing Plan
Notes to Financial Statements (continued)
6. INCOME TAX STATUS
The Plan has received a determination letter from the Internal Revenue Service
dated January 25, 1996, stating that the Plan is qualified, in form, under
Section 401(a) of the Code and, therefore, the related trust is exempt from
taxation. Once qualified, the Plan is required to operate in conformity with the
Code to maintain its qualification. The Plan Administrator believes the Plan is
being operated in compliance with the applicable requirements of the Code and,
therefore, believes that the Plan is qualified and the related trust is tax
exempt. Subsequent amendments have been structured to, and are intended to,
maintain the Plan's tax qualified status.
7. RECONCILIATION TO FORM 5500
Net assets available for benefits and benefit payments as recorded in these
financial statements differ from amounts reported in the Company's Form 5500 as
filed with the Department of Labor. In these financial statements, pursuant to
generally accepted accounting principles, accrued benefits payable of $686,008
and $1,539,467 at December 31, 1998 and 1997, respectively, are not recognized
until paid.
8. YEAR 2000 (UNAUDITED)
The Company has implemented a Year 2000 compliance program to address all major
computing information systems, networks, desktop systems, infrastructure and
critical information supply chains. In addition, the Company is verifying that
all date fields and calculations used in critical business processes will be
Year 2000 compliant. As part of this program the Company is also addressing
external Year 2000 related risks which arise from the Year 2000 readiness of
third parties with whom the Company and the Plan maintain ongoing relationships.
As part of its Year 2000 compliance program, the Company is contacting
third-party vendors, provider and hospital networks, business partners,
contractors, and service providers to assess their level of Year 2000 readiness.
In some cases, the Company is requiring reasonable assurance with respect to
Year 2000 compliance. The priority is to assess the readiness of providers and
13
<PAGE> 17
The PacifiCare Health Systems, Inc.
Savings and Profit-Sharing Plan
Notes to Financial Statements (continued)
8. YEAR 2000 (UNAUDITED) (CONTINUED)
other third parties with which the Company electronically exchanges data or
interacts. Because the Company does not control the products, services, or
systems of providers, vendors or customers, the Company cannot ensure their Year
2000 compliance. The Company is developing business process contingency plans in
order to mitigate the impact of potential Year 2000 non-compliance by providers,
vendors and customers.
9. SUBSEQUENT EVENTS
CONTRIBUTION AND BENEFIT CHANGES
Effective January 1, 1999, the Company implemented five contribution and benefit
changes to the Plan: (i) the Company increased mandatory annual contributions to
participants' accounts from 2% to 3% (profit-sharing account), (ii) the Company
increased maximum participant contributions (subject to IRS limits) from 12% to
15%, (iii) the Company shortened the vesting schedule from seven years to four
years, (iv) the Company increased the number of investment options from seven
funds to nine funds, and (v) employees are eligible to participate in the Plan
on the first of the month after completing 75 days of service.
TRANSFER OF ASSETS FROM THE FHP SAVINGS PLAN AND FHP MONEY PURCHASE PENSION PLAN
On February 14, 1997, the Company acquired FHP International Corporation. On
December 31, 1998, FHP terminated the FHP Money Purchase Pension Plan and the
assets from the pension plan were transferred to the Plan. On April 1, 1999,
assets and liabilities attributable to the FHP employees contained in the FHP
Savings Plan were transferred to the Plan. As a result of the transfers from the
pension plan and the FHP Savings Plan, assets totaling $85,129,175 were
transferred to the Plan. Former FHP Savings Plan participants are eligible to
participate and are subject to all Plan benefit and contribution policies.
COMBINATION OF CLASS A AND CLASS B COMMON STOCK
At the Company's June 24, 1999 annual meeting, the Company's Class A and Class B
common stockholders approved an amended and restated certificate of
incorporation. The amended and restated certificate combined and reclassified
the Company's Class A and Class B common stock into a single class of voting
common stock. Management believes that this transaction will not have a material
impact on the Plan.
14
<PAGE> 18
Supplemental Schedules
<PAGE> 19
PacifiCare Health Systems, Inc.
Savings and Profit-Sharing Plan
EIN: 33-0064895 Plan: 001
Line 27(a) - Schedule of Assets Held for Investment Purposes
December 31, 1998
<TABLE>
<CAPTION>
SHARES OR CURRENT
PAR VALUE IDENTITY OF ISSUE COST VALUE
- --------------------------------------------------------------------------------------
<S> <C> <C> <C>
MUTUAL FUNDS
1,139,277 Putnam Growth and Income Fund* $ 21,023,893 $ 23,343,783
678,472 Putnam Income Fund Class A #A04* 4,755,335 4,695,025
1,316,480 Putnam Global Growth Fund Class A* 14,092,563 16,390,175
1,641,436 Putnam Voyager Fund Class A* 28,410,482 35,980,282
4,254,354 Putnam Money Market Fund Class A* 4,254,354 4,254,354
---------------------------
TOTAL MUTUAL FUNDS 72,536,627 84,663,619
COMMON STOCKS
28,000 American Greetings Corp. Class A 821,525 1,149,750
27,800 American Home Products Corp. 1,031,748 1,567,225
21,700 Amoco Corp. 1,104,522 1,299,288
23,250 Aon Corp. 529,133 1,287,469
19,900 AT&T Corp. 1,250,884 1,507,425
15,050 Bankamerica Corp. New 1,157,002 904,881
14,300 Baxter International Inc. 863,704 919,669
18,700 Bestfoods 898,572 995,775
34,500 Burlington Northern Santa Fe Corp. 774,028 1,181,625
15,500 Citigroup Inc. 1,050,516 770,156
10,000 Consolidated Natural Gas Co. 510,921 540,000
16,000 Diageo PLC - Spons ADR 694,813 740,000
17,600 Elf Aquitaine Spons ADR 873,752 996,600
39,100 Entergy Corp. 1,125,960 1,216,988
16,400 First Union Corp. 787,789 997,325
30,000 Fleet Financial Group Inc. 1,037,838 1,340,625
34,700 Fort James Corp. 1,412,739 1,388,000
20,100 Gannett Corp. 593,104 1,296,450
20,500 Hewlett Packard Co. 1,185,253 1,400,406
29,132 Household International Inc. 668,263 1,154,356
6,500 International Business Machines Corp. 280,746 1,198,438
12,200 Loews Corp. 1,125,837 1,198,650
8,300 Magna International Inc. Class A 576,125 514,600
38,200 Masco Corp. 565,796 1,098,250
18,200 Mattel Inc. 588,383 427,700
23,758 MCI Worldcom Inc. 514,478 1,704,637
17,640 National City Corp. 1,084,201 1,278,900
</TABLE>
15
<PAGE> 20
PacifiCare Health Systems, Inc.
Savings and Profit-Sharing Plan
EIN: 33-0064895 Plan: 001
Line 27 (a) - Schedule of Assets Held for Investment Purposes (continued)
December 31, 1998
<TABLE>
<CAPTION>
SHARES OR CURRENT
PAR VALUE IDENTITY OF ISSUE COST VALUE
- --------------------------------------------------------------------------------------
<S> <C> <C> <C>
COMMON STOCKS (CONTINUED)
44,000 Nordstrom Inc. $ 1,180,123 $ 1,526,250
28,976 PacifiCare Health Systems Class B* 2,033,880 2,303,592
32,100 Philip Morris Companies Inc. 690,372 1,717,350
30,400 Praxair Inc. 1,308,848 1,071,600
11,400 Providian Financial Corp. 166,463 855,000
28,000 Raytheon Co. Class B 1,242,876 1,491,000
1,511 Raytheon Co. Class A 78,934 78,100
18,200 SBC Communications Inc. 446,723 975,975
17,500 Schlumberger Ltd. 1,298,704 811,562
26,600 Shell Tran & Trade PLC NY SH 933,509 989,187
53,700 Sherwin Williams Co. 1,642,523 1,577,437
18,900 Torchmark Corp. 702,945 667,406
43,500 USX Marathon Group 1,430,235 1,310,437
790 Waddell & Reed Financial Inc. 16,029 18,713
3,404 Waddell & Reed Financial Inc.Class B 68,859 79,143
31,080 Washington Mutual Inc. 402,100 1,192,695
32,500 Williams Cos Inc. 887,784 1,013,594
11,800 Xerox Corp. 584,860 1,392,400
---------------------------
TOTAL COMMON STOCKS 38,223,399 49,146,629
CORPORATE BONDS
500,000 Banc One Corp. 7.00% due 3/25/02 502,410 522,935
325,000 Bankamerica Corp. 7.50% due 10/15/02 347,038 345,339
200,000 BP America Inc. 9.375% due 11/01/00 222,228 214,726
300,000 British Telecom 9.375% due 2/15/99 329,091 301,251
175,000 CNA Financial Corp. 6.25% due 11/15/03 170,436 174,060
400,000 Consolidated Rail 9.75% due 6/01/00 446,680 422,132
500,000 Ford Motor Credit Corp. 6.625% due 6/30/03 513,415 520,560
500,000 International Lease 5.75% due 1/15/99 503,090 500,070
300,000 Mobil Corp. 7.25% due 3/15/99 295,272 301,113
---------------------------
TOTAL CORPORATE BONDS 3,329,660 3,302,186
</TABLE>
16
<PAGE> 21
PacifiCare Health Systems, Inc.
Savings and Profit-Sharing Plan
EIN: 33-0064895 Plan: 001
Line 27 (a) - Schedule of Assets Held for Investment Purposes (continued)
December 31, 1998
<TABLE>
<CAPTION>
SHARES OR CURRENT
PAR VALUE IDENTITY OF ISSUE COST VALUE
- --------------------------------------------------------------------------------------
<S> <C> <C> <C>
U.S. GOVERNMENT SECURITIES
300,000 Federal National Mtg. Assoc. 8.25% due
12/18/00 $ 317,156 $ 317,814
300,000 FHLMC Multiclass Mtg. 5.75% due 4/15/11 277,781 299,904
77,908 FHLMC Multiclass Mtg. 6.70% due 8/15/05 78,809 78,101
200,000 FNMA REMIC 92-193GB 7.00% due 1/25/06 209,625 202,218
264,519 FNMA REMIC 93-15E 6.75% due 1/25/05 272,072 264,353
213,228 FNMA REMIC 93-82C 6.00% due 7/25/15 212,762 212,827
99,645 GNMA II Pool #210419 8.00% due 4/20/17 105,126 104,062
62,921 GNMA Pool #255800 9.00% due 7/15/18 65,989 67,699
26,936 GNMA Pool #284915 9.00% due 3/15/20 28,620 28,948
357,140 GNMA Pool #291100 9.00% due 5/15/20 379,238 383,812
175,591 GNMA Pool #310888 9.00% due 6/15/21 188,047 188,593
193,455 GNMA Pool #311088 9.00%due 7/15/21 207,843 207,780
302,915 GNMA Pool #311458 8.00% due 6/15/22 312,192 315,695
196,364 GNMA Pool #319100 8.00% due 5/15/22 203,482 204,648
184,254 GNMA Pool #319134 8.50% due 4/15/22 189,091 195,942
42,861 GNMA Pool #320086 8.00% due 7/15/22 45,340 44,670
259,762 GNMA Pool #323135 8.00% due 6/15/22 270,396 270,721
312,918 GNMA Pool #328105 8.00% due 8/15/22 329,151 326,120
74,424 GNMA Pool #330100 7.50% due 2/15/23 76,052 76,796
115,526 GNMA Pool #342434 7.50% due 1/15/23 114,551 119,208
207,682 GNMA Pool #342515 9.00% due 3/15/23 218,585 221,914
835,591 GNMA Pool #346659 7.00% due 7/15/23 859,614 855,169
54,538 GNMA Pool #370508 7.00% due 2/15/09 52,289 55,927
285,794 GNMA Pool #371046 8.50% due 2/15/24 305,799 303,119
74,578 GNMA Pool #390623 9.00% due 5/15/24 77,282 79,566
335,672 GNMA Pool #284405 8.00% due 12/15/19 348,469 351,321
469,829 GNMA Pool #311581 8.00% due 11/15/22 494,495 489,651
420,521 GNMA Pool #327245 8.00% due 8/15/22 439,839 438,263
185,751 GNMA Pool #308018 8.50% due 4/15/21 194,980 197,882
188,399 GNMA Pool #392802 9.25% due 12/15/24 200,409 201,605
4,700,000 U.S. Treasury Note 6.625% due 4/30/02 4,731,614 4,973,211
2,000,000 U.S. Treasury Note 5.875% due 2/15/04 2,013,437 2,110,620
3,000,000 U.S. Treasury Note 6.25% due 2/15/07 3,321,094 3,290,640
</TABLE>
17
<PAGE> 22
PacifiCare Health Systems, Inc.
Savings and Profit-Sharing Plan
EIN: 33-0064895 Plan: 001
Line 27 (a) - Schedule of Assets Held for Investment Purposes (continued)
December 31, 1998
<TABLE>
<CAPTION>
SHARES OR CURRENT
PAR VALUE IDENTITY OF ISSUE COST VALUE
- --------------------------------------------------------------------------------------
<S> <C> <C> <C>
U.S. GOVERNMENT SECURITIES (CONTINUED)
3,500,000 U.S. Treasury Note 6.375% due 8/15/02 $ 3,504,844 $ 3,691,415
1,000,000 U.S. Treasury Note 6.50% due 5/15/05 1,058,906 1,095,940
3,000,000 U.S. Treasury Note 7.25% due 8/15/04 3,239,531 3,374,070
--------------------------
TOTAL U.S. GOVERNMENT SECURITIES 24,944,510 25,640,224
SHORT-TERM INCOME FUND
3,659,885 Wells Fargo Bank Short-term Income Fund* 3,659,885 3,659,885
PARTICIPANT LOANS
2,486,259 Participant loans 8% to 11/% through 2005 -- 2,486,259
-------------
TOTAL INVESTMENTS $ 168,898,802
=============
</TABLE>
- -------------
*Investment with a party-in-interest.
18
<PAGE> 23
PacifiCare Health Systems, Inc.
Savings and Profit-Sharing Plan
EIN: 33-0064895 Plan: 001
Line 27 (b) - Schedule of Loans or Fixed Income Obligations
Year ended December 31, 1998
<TABLE>
<CAPTION>
AMOUNT RECEIVED UNPAID DESCRIPTION OF LOAN
ORIGINAL DURING REPORTING YEAR BALANCE AT --------------------------------- AMOUNT OVERDUE
AMOUNT OF --------------------- END OF DATE OF LOAN INTEREST ---------------------
OBLIGOR LOAN PRINCIPAL INTEREST YEAR LOAN MATURITY RATE PRINCIPAL INTEREST
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Martha Sanchez $ 3,000 $ 184 $ 57 $ 1,616 07/20/95 08/17/00 10.75% $ 461 $ 110
Mary F. Hardy 8,479 409 353 8,070 11/28/97 12/19/02 10.50% 969 554
Melissa R. Webber 7,500 821 194 5,015 02/20/97 03/16/00 10.25% 1,731 299
Fe A. Templado 10,000 432 266 9,147 08/11/97 08/29/02 10.50% 1,305 689
Daidre A. Streeter 1,783 158 55 1,625 05/15/98 05/20/01 10.50% 190 50
Diana L. Palmer 1,438 47 61 1,228 02/05/96 01/12/06 10.50% 76 68
Luisa V. Ferguson 3,350 613 383 2,737 04/08/97 04/25/02 10.25% 322 143
Ellen K. Dunno 4,030 504 215 2,762 09/24/96 10/11/01 10.25% 306 94
Misty D. Dunphy 6,000 67 196 5,933 12/16/97 01/04/08 10.50% 253 423
Cindy L. Haven 3,000 -- -- 2,545 07/13/95 07/14/05 11.00% 258 278
</TABLE>
19
<PAGE> 24
PacifiCare Health Systems, Inc.
Savings and Profit-Sharing Plan
EIN: 33-0064895 Plan: 001
Line 27 (d) - Schedule of Reportable Transactions
Year ended December 31, 1998
<TABLE>
<CAPTION>
CURRENT
VALUE OF
ASSET ON
IDENTITY OF PURCHASE SELLING COST OF TRANSACTION NET GAIN
PARTY INVOLVED DESCRIPTION OF ASSETS PRICE PRICE ASSET DATE (LOSS)
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Category (iii) - Series of transactions in excess of 5% of plan assets:
Wells Fargo Bank(1) Short-term income fund $84,394,642 $ -- $84,394,642 $84,394,642 $ --
-- 81,365,811 81,365,811 81,365,811 --
Putnam Investments(1) Growth and Income 8,538,908 -- 8,538,908 8,538,908 --
-- 4,109,123 3,598,371 3,939,578 169,545
Global Growth 4,862,837 -- 4,862,837 4,862,837 --
-- 2,131,848 1,972,295 1,923,689 208,159
Voyager Class A 11,318,707 -- 11,318,707 11,318,707 --
-- 4,843,048 3,936,519 4,555,237 287,811
Money Market Class A 4,567,934 -- 4,567,934 4,567,934 --
-- 3,131,674 3,131,674 3,131,674 --
</TABLE>
- ------------
(1) Trustee for the Plan and, therefore, a party-in-interest for which
statutory exemption exists.
There were no category (i), (ii) or (iv) reportable transactions during 1998.
20
<PAGE> 25
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Administrative Committee of the Plan has duly caused this annual report to be
signed on its behalf by the undersigned hereunto duly authorized.
THE PACIFICARE HEALTH SYSTEMS, INC.
SAVINGS AND PROFIT-SHARING PLAN
DATE: June 29, 1999 BY: /s/ MARY C. LANGSDORF
------------------------------------
Mary C. Langsdorf
Senior Vice President of Finance
and Corporate Controller
(Principal Accounting Officer)
21
<PAGE> 26
EXHIBIT INDEX
Exhibit 23 Consent of Independent Auditors
22
<PAGE> 1
EXHIBIT 23
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration
Statement (Form S-8 number 333-21713) and related Prospectus pertaining to the
1996 Stock Option Plan for Officers and Key Employees and the related Prospectus
pertaining to the 1996 Non-Officer Directors Stock Option Plan of PacifiCare
Health Systems, Inc. and in the Registration Statement (Form S-8 No. 333-48377)
and related Prospectus pertaining to the 1997 Premium Priced Stock Option Plan
and the related Prospectus pertaining to the Amendment and Restatement of The
PacifiCare Health Systems, Inc. Savings and Profit-Sharing Plan of PacifiCare
Health Systems, Inc. of our report dated June 23, 1999 with respect to the
financial statements and supplemental schedules of The PacifiCare Health
Systems, Inc. Savings and Profit-Sharing Plan included in this Annual Report
on Form 11-K for the year ended December 31, 1998.
Ernst & Young LLP
Los Angeles, California
June 23, 1999
23
