<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:
[ ] PRELIMINARY PROXY STATEMENT
[ ] CONFIDENTIAL, FOR USE OF THE COMMISSION ONLY (AS PERMITTED BY
RULE 14a-6(e)(2))
[X] DEFINITIVE PROXY STATEMENT
[ ] DEFINITIVE ADDITIONAL MATERIALS
[ ] SOLICITING MATERIAL PURSUANT TO 240.14A-11(c) OR 240.14A-12
PACIFICARE HEALTH SYSTEMS, INC.
(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:
(2) AGGREGATE NUMBER OF SECURITIES TO WHICH TRANSACTION APPLIES:
(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):
(4) PROPOSED MAXIMUM AGGREGATE VALUE OF TRANSACTION:
(5) TOTAL FEE PAID:
[ ] 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:
(2) FORM, SCHEDULE OR REGISTRATION STATEMENT NO.:
(3) FILING PARTY:
(4) DATE FILED:
<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 June 22, 2000 at 10:00 a.m., Pacific Daylight Savings Time.
At the meeting, we will elect four Directors of PacifiCare for three-year
terms. Your Board has approved the four nominees for Directors and strongly
recommends that you vote "FOR" the election of the four Directors.
Attached is a proxy statement that provides you with a detailed description
of the reasons for the Board of Directors' recommendations. It also contains the
biographies of the four Director nominees.
A plurality of the shares of common stock is required to vote for the
election of the four Director nominees.
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,
/s/ ALAN R. HOOPS
Alan R. Hoops
President and Chief Executive Officer
<PAGE> 3
PACIFICARE HEALTH SYSTEMS, INC.
3120 LAKE CENTER DRIVE
SANTA ANA, CALIFORNIA 92704
(714) 825-5200
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD JUNE 22, 2000
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 June 22,
2000 at 10:00 a.m., Pacific Daylight Savings Time, to vote on the following
matters:
(1) To elect four Directors of PacifiCare for three-year terms; and
(2) To transact other business properly coming before the meeting.
Only stockholders who owned shares of our stock at the close of business on
May 12, 2000 are entitled to vote at the meeting and will receive a proxy card.
We invite all of our stockholders 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
/s/ ALAN R. HOOPS
Alan R. Hoops
President and Chief Executive Officer
Santa Ana, California
May 19, 2000
<PAGE> 4
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 or 401(k) Plan, you have certain voting rights in
PacifiCare's common stock.
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 June 22, 2000 at 10:00 a.m., Pacific Daylight Savings Time,
PacifiCare's stockholders will be asked to consider and vote on the following
matters:
(1) To elect four Directors of PacifiCare for three-year terms; and
(2) To transact other business properly coming before the meeting.
The proxy statement is being mailed to 401(k) Plan participants who have
rights in PacifiCare's common stock as of the close of business on May 12, 2000.
Wells Fargo Bank is the trustee of the 401(k) Plan and holds all shares of
PacifiCare's common stock allocated to the 401(k) Plan. The 401(k) Plan requires
the Trustee to solicit voting instructions from you and to vote your shares of
common stock in accordance with your instructions. Under the 401(k) 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 PacifiCare common stock allocated to your 401(k) 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
401(k) Plan. Accordingly, you should exercise your voting rights prudently.
CONFIDENTIAL INSTRUCTIONS
The attached proxy statement provides you with the biographies of the four
Director nominees. For your information, as explained in the attached proxy
statement, the Board of Directors recommends a vote:
"FOR" the election of the four Directors;
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 401(k) 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 COMMON STOCK ALLOCATED TO YOUR 401(k) 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 COMMON STOCK ALLOCATED TO YOUR 401(k)
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 COMMON STOCK ALLOCATED TO YOUR 401(k) PLAN ACCOUNT IN ACCORDANCE WITH
PACIFICARE'S BOARD OF DIRECTORS' RECOMMENDATIONS LISTED ABOVE.
<PAGE> 5
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 JUNE 20, 2000. YOUR PROMPT COOPERATION IS GREATLY APPRECIATED.
Dated: May 19, 2000
WELLS FARGO BANK (Trustee)
<PAGE> 6
PACIFICARE HEALTH SYSTEMS, INC.
3120 LAKE CENTER DRIVE
SANTA ANA, CALIFORNIA 92704
(714) 825-5200
PROXY STATEMENT
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Information About the Annual Meeting
Questions and Answers..................................... 1
Proposal -- Re-Election of Directors...................... 3
Company Information
Nominee Biographies....................................... 4
The Board of Directors.................................... 4
Security Ownership of Certain Beneficial Owners and
Management............................................. 6
Executive Officers and Directors Other Than Nominees...... 7
Executive Compensation.................................... 11
Option Grants in Last Fiscal Year......................... 14
Aggregated Option Exercises in Last Fiscal Year and Fiscal
Year-End Option Values................................. 16
Compensation of Directors................................. 18
Report of the Compensation Committee...................... 19
Performance Graph......................................... 23
Certain Relationships and Related Transactions............ 23
Compliance With Section 16(a) of the Securities Exchange
Act.................................................... 24
Relationship of Certified Public Accountants................ 24
Other Matters to Come Before the Annual Meeting............. 24
Stockholders' Proposals..................................... 24
</TABLE>
i
<PAGE> 7
PROXY STATEMENT FOR
ANNUAL MEETING OF STOCKHOLDERS OF
PACIFICARE HEALTH SYSTEMS, INC.
TO BE HELD ON JUNE 22, 2000
APPROXIMATE DATE OF MAILING PROXY STATEMENT
AND PROXY TO STOCKHOLDERS MAY 19, 2000
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 June 22, 2000.
This proxy statement is being mailed to the holders of PacifiCare's common
stock, par value $0.01 per share. Only the holders of common stock of record at
the close of business on May 12, 2000, 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 proxy card to ensure that your shares of 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 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 our stockholders to vote and provides you with information
on these issues so that you can make an informed decision.
When you sign the proxy card, you appoint David A. Reed and Terry O.
Hartshorn as your representatives at the meeting. At the meeting, Mr. Reed and
Mr. Hartshorn will vote the shares as instructed on the proxy card. This way
your shares 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. Reed and Mr. Hartshorn will vote your shares, under your proxy, in
accordance with their best judgment.
Q: WHAT AM I VOTING ON?
A: We are asking you to vote on:
The election of four Directors for three-year terms.
More information on the nominees for election to our Board is contained in
other sections of this proxy statement.
Q: WHO IS ENTITLED TO VOTE?
A: Only holders of PacifiCare common stock who owned their shares of stock as of
May 12, 2000 are entitled to vote at the meeting. On May 12, 2000, there were
35,186,000 shares of common stock issued and outstanding and entitled to vote.
If you hold common stock, you are welcome to attend the annual meeting.
<PAGE> 8
Q: HOW DO I VOTE MY SHARES?
A: You may vote by mail by signing your proxy card and mailing it in the
enclosed, prepaid and addressed envelope. If you mark your voting instructions
on the proxy card, your shares will be voted as you instruct. If you return a
signed proxy card but do not provide voting instructions, the shares will be
voted:
FOR the four named nominees;
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.
However, if you hold your shares in street name, you must request a legal proxy
from your stockbroker in order to vote at the meeting. Holding shares in "street
name" means you hold them in an account at a brokerage firm.
WE ENCOURAGE YOU TO EXAMINE YOUR PROXY CARD CLOSELY TO MAKE SURE YOU ARE
VOTING ALL OF YOUR SHARES IN PACIFICARE.
Q: WHAT DOES IT MEAN IF I RECEIVE MORE THAN ONE PROXY CARD?
A: If you receive two proxy cards 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. To change your vote, you may sign 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.
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 401(k) PLAN SHARES?
A: You will receive a separate voting instruction card for the shares allocated
to you under the PacifiCare 401(k) Plan. By completing the voting instruction
card, you provide voting instructions to Wells Fargo, the Plan's Trustee, for
the shares you hold through the 401(k) Plan.
If the Trustee does not receive voting instructions from you, the Trustee
may vote the shares allocated to you under PacifiCare's 401(k) Plan in the same
proportion as the shares voted by all other 401(k) Plan participants. If the
Trustee receives a signed but not voted voting instruction card, the Trustee
will vote the shares according to the Board's recommendations.
2
<PAGE> 9
Q: HOW MANY VOTES ARE NEEDED TO HOLD THE MEETING?
A: A majority of PacifiCare's outstanding shares as of May 12, 2000 must be
present at the meeting to hold the meeting and conduct business. This is called
a quorum. 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.
Q: HOW ARE VOTES COUNTED?
A: You may vote "for," "against" or "withheld" for all the nominees to
PacifiCare's Board of Directors. If you just sign your proxy card with no
further instructions, your shares will be counted as a vote FOR each Director.
Voting results are tabulated and certified by our transfer agent,
ChaseMellon Shareholder Services.
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. If a new nominee is selected, Mr. Reed and Mr.
Hartshorn's shares represented by proxies may be voted for a substitute nominee.
Proxies cannot be voted for more than four nominees.
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 June 30, 2000 Quarterly Report on Form 10-Q. We will
file that report with the Securities and Exchange Commission by the August 2000
deadline. You can get a copy by contacting our Investor Relations Department at
(714) 825-5950, 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.
RE-ELECTION OF DIRECTORS
(ITEM 1 ON PROXY CARD)
Members of the Board of Directors are divided into three classes: Class I,
Class II and Class III with four Directors in each class. 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 current number of authorized members of
PacifiCare's Board of Directors is 10. Through an amendment to PacifiCare's
bylaws, the authorized number of Directors was reduced to 10 from 12.
PacifiCare's certificate of incorporation requires that once the total number of
Directors is 10, the number of Directors in each Class shall be changed such
that four Directors will be in Class I and three Directors will be in each of
Class II and III.
The terms of the Class I Directors are expiring at the annual meeting. Alan
R. Hoops, Gary L. Leary, Warren E. Pinckert II and David A. Reed are standing
for re-election as Class I Directors at the annual meeting. Craig T. Beam and
Richard M. Burdge, currently Class I Directors, are retiring from the Board and
will not stand for re-election at the annual meeting. Mr. Reed is currently a
Class II Director and Mr. Pinckert is currently a Class III Director. The Board
reclassified Mr. Pinckert from a Class III Director and Mr. Reed from a Class II
Director to Class I Directors to comply with PacifiCare's certificate of
incorporation. If re-elected, Messrs. Hoops, Leary, Pinckert and Reed will serve
as Class I Directors for a three-year term which expires at the 2003 annual
meeting. If elected, Mr. Pinckert will no longer be a Class III Director and Mr.
Reed will no longer be a Class II Director. Each of the nominees are presently
Directors of PacifiCare and has agreed to serve if elected. Mr. Hoops and Mr.
Anderson each have agreed that they will resign as Directors upon appointment of
a new CEO and President to succeed Mr. Hoops. If Mr. Hoops resigns before
3
<PAGE> 10
the annual meeting, Mr. Hoops will not stand for re-election and the Board will
appoint a successor to fill the vacancy created by Mr. Hoops' resignation. Our
Board intends for such successor to stand for re-election at the annual meeting.
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, 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>
PRESENT POSITION WITH COMPANY (OTHER THAN AS A DIRECTOR),
DIRECTOR NAME AND AGE DIRECTOR SINCE IF ANY; PRINCIPAL OCCUPATION FOR PAST FIVE YEARS
--------------------- -------------- -----------------------------------------------------------------
<S> <C> <C>
Alan R. Hoops, 52........ 1994 Alan R. Hoops has been Chief Executive Officer of PacifiCare
since 1993. Mr. Hoops has served as PacifiCare's President since
November 1999, and previously served as President from 1993 to
1998. He served as Chairman of the Board from January 1999
through November 1999.
Gary L. Leary, 65........ 1989 On May 1, 1999, Mr. Leary retired from all of his positions with
UniHealth Foundation, except as General Counsel. On April 15,
2000, Mr. Leary retired from his position as General Counsel of
UniHealth Foundation. Mr. Leary served as a Director of UniHealth
Foundation from June through December 1998. He also served as an
Executive Vice President and President of the UniHealth
Foundation from 1998 through May 1999. He continues to be a
Director of several subsidiaries of the UniHealth Foundation. Mr.
Leary was an Executive Vice President and General Counsel of
UniHealth, the foundation's predecessor, from 1992 to 1998. Mr.
Leary is a member of the Governance and Nominating and Real
Estate Committees.
Warren E. Pinckert II, 1985 Mr. Pinckert has been a Director, President and Chief Executive
56..................... Officer of Cholestech Corporation, a medical device manufacturing
firm, since 1993. Mr. Pinckert is a member of the Compensation
Committee and is Chairman of the Audit, Finance and Ethics
Committee. Mr. Pinckert is a certified public accountant.
David A. Reed, 67........ 1992 David A. Reed has been Chairman of the Board since November 1999.
Mr. Reed currently is the President of DAR Consulting Group and
served as past chairman of the American Hospital Association. Mr.
Reed has served as a Director of In-Vitro International since
1996. Mr. Reed is Chairman of the Executive Committee.
</TABLE>
DIRECTORS CONTINUING IN OFFICE UNTIL THE 2001 ANNUAL MEETING. Jack R.
Anderson, Terry O. Hartshorn and Jean Bixby Smith are Class III Directors. Their
terms expire as of the 2001 Annual Meeting.
DIRECTORS CONTINUING IN OFFICE UNTIL 2002 ANNUAL MEETING. Bradley C. Call,
David R. Carpenter and Lloyd E. Ross are Class II Directors. Their terms expire
as of the 2002 Annual Meeting.
THE BOARD OF DIRECTORS
BOARD MEETINGS
During 1999, the Board held seven meetings. Except for Mr. Anderson, Mr.
Ross and Mr. Carpenter, 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.
During 1999, the Special Opportunities Committee approved a transaction to
purchase shares of PacifiCare common stock
4
<PAGE> 11
owned by UniHealth Foundation. Mr. Carpenter was a member of the Special
Opportunities Committee and is the Chairman and CEO of UniHealth Foundation.
Because of Mr. Carpenter's relationship with UniHealth Foundation, Mr. Carpenter
did not attend, at the request of the committee, meetings of the Special
Opportunities Committee at which the stock repurchase transaction was discussed.
COMMITTEES OF THE BOARD
This table presents the committees of PacifiCare's Board of Directors, the
members of such committees, the number of committee meetings held by each such
committee during 1999 and the functions performed by such committees.
<TABLE>
<CAPTION>
NUMBER OF
NAME OF COMMITTEE MEETINGS
AND MEMBERS IN 1999 FUNCTIONS OF THE COMMITTEE
- ------------------------------------- --------- --------------------------
<S> <C> <C>
EXECUTIVE............................ 7 - Evaluates strategic alliances and transactions,
Bradley C. Call - Implements and monitors strategic direction of
David R. Carpenter PacifiCare,
Terry O. Hartshorn - Provides leadership and oversight of PacifiCare,
David A. Reed* and
- Performs all of the functions of the Board of
Directors that can be delegated to a committee
between meetings of the Board.
AUDIT, FINANCE and ETHICS............ 9 - Confers with independent auditors,
Bradley C. Call - Makes recommendations to the Board concerning
Warren E. Pinckert II* acceptance of the reports of such auditors and
Lloyd E. Ross accounting policies and procedures,
- Reviews financial plans and operating results,
and
- Oversees PacifiCare's Ethics and Internal Audit
Programs.
COMPENSATION......................... 11 - Establishes compensation for the five most highly
Richard M. Burdge(1) compensated executive officers, including the chief
David R. Carpenter* executive officer,
Lloyd E. Ross - Reviews recommendations for compensation for
David A. Reed presidents of subsidiary operating units and
executive
officers with salaries in excess of $250,000, and
- Administers and determines contributions to the
employee benefit plans and performance incentive
plan.
GOVERNANCE AND NOMINATING............ 3 - Evaluates the performance of each Board member
Terry O. Hartshorn* and committee,
Gary L. Leary - Reviews the composition of the Board and
Lloyd E. Ross structure of each committee, and
- Recommends to the Board new Director nominees for
Jean Bixby Smith the Board.
The Governance and Nominating Committee does not
consider nominees recommended by stockholders of
PacifiCare.
REAL ESTATE.......................... 3 - Reviews leases, acquisitions and dispositions of
Craig T. Beam(1) real property, and
Gary L. Leary - Makes recommendations to the Board concerning
Jean Bixby Smith* significant real property transactions.
SPECIAL OPPORTUNITIES................ 15 - Evaluates strategic alliances and transactions.
Craig T. Beam - This committee was dissolved in 1999.
David R. Carpenter
David A. Reed*
Lloyd E. Ross
</TABLE>
- ---------------
* Chairperson
(1) Retiring upon expiration of their term at the annual meeting.
5
<PAGE> 12
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
This table shows the beneficial ownership of PacifiCare common stock as of
May 1, 2000 by: (i) each stockholder that we know is the beneficial owner of
more than 5 percent of the common stock; (ii) each director and nominee for
director, (iii) each executive officer named in the summary compensation table;
and (iv) all directors and executive officers as a group.
AMOUNT AND NATURE OF SHARES BENEFICIALLY OWNED
<TABLE>
<CAPTION>
NUMBER PERCENT OF
OF SHARES RIGHT TO OUTSTANDING
NAME OWNED(1) ACQUIRE(2) SHARES
---- --------- ---------- -----------
<S> <C> <C> <C>
UniHealth Foundation(3).................................. 6,194,500 -- 17.6
Capital Group International, Inc.(4)..................... 4,615,910 -- 13.1
Sanford C. Bernstein & Co., Inc.(5)...................... 3,719,675 -- 10.6
Vanguard/Windsor Funds, Inc -- Windsor Fund(6)........... 2,619,300 -- 7.4
The Prudential Insurance Company of America(7)........... 2,556,061 -- 7.3
Wellington Management Company, LLP(8).................... 2,437,700 -- 6.9
David A. Reed............................................ 1,000 16,250 *
Terry O. Hartshorn....................................... 167,732 118,750 *
Alan R. Hoops............................................ 245,723 409,250 1.8
Jack R. Anderson(9)...................................... 402,937 29,008 1.2
Craig T. Beam............................................ 1,030 21,250 *
Richard M. Burdge, Sr.(10)............................... 89,981 23,405 *
Bradley C. Call.......................................... 1,000 21,250 *
David R. Carpenter....................................... 1,000 44,300 *
Gary L. Leary............................................ 1,000 44,300 *
Warren E. Pinckert II.................................... 632 39,300 *
Lloyd E. Ross............................................ 1,000 32,900 *
Jean Bixby Smith......................................... 230 25,750 *
Bradford A. Bowlus....................................... 669 116,000 *
Richard E. Badger........................................ 447 33,307 *
Linda M. Lyons, M.D. .................................... 436 101,100 *
All Directors and Executive Officers as a group(11) (32
persons)............................................... 923,340 1,717,372 7.2
</TABLE>
- ---------------
* Less than one percent.
(1) Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission and generally includes voting or
investment power with respect to securities. The percentage of beneficial
ownership is based on 35,184,000 shares of common stock outstanding as of
May 1, 2000.
(2) Shares that can be acquired through stock option exercises through July 1,
2000.
(3) UniHealth Foundation is a California nonprofit public benefit corporation.
The address of UniHealth Foundation is 5959 Topanga Canyon Boulevard,
Woodland Hills, California 91367.
(4) Based on information contained in a report on Schedule 13-G filed with the
Securities and Exchange Commission or SEC on February 10, 2000. The address
of Capital Group International, Inc. is 11100 Santa Monica Boulevard, Los
Angeles, California 90025.
(5) Based on information contained in a report on Schedule 13-G filed with the
SEC on February 9, 2000. The address of Sanford C. Bernstein & Co., Inc. is
767 Fifth Avenue, New York, New York 10153.
(6) Based on information contained in a report on Schedule 13-G/A filed with
the SEC on February 1, 2000. The address of Vanguard/Windsor Funds, Inc. --
Windsor Fund is Post Office Box 2600, Valley Forge, Pennsylvania 19428.
6
<PAGE> 13
(7) Based on information contained in a report on Schedule 13-G filed with the
SEC on February 7, 2000. The address of The Prudential Insurance Company of
America is 751 Broad Street, Newark, New Jersey 07102-3777.
(8) Based on information contained in a report on Schedule 13-G/A filed with
the SEC on February 11, 2000. The address of Wellington Management Company,
LLP is 75 State Street, Boston, Massachusetts 02109.
(9) Includes 169,526 shares of common stock held by Mr. Anderson's spouse. Mr.
Anderson disclaims beneficial ownership of these shares.
(10) Includes 15,610 shares of common stock held by Mr. Burdge's spouse and
11,136 shares of common stock held by trusts of which Mr. Burdge's
relatives are beneficiaries. Mr. Burdge disclaims beneficial ownership of
these shares.
(11) In addition to the officers and directors named in this table, 17 other
executive officers are members of the group.
EXECUTIVE OFFICERS AND DIRECTORS OTHER THAN NOMINEES
The following table shows PacifiCare's Executive Officers and Directors
other than the Director nominees:
<TABLE>
<CAPTION>
DIRECTORS AGE TITLE
- --------- --- -----
<S> <C> <C>
Terry O. Hartshorn........................ 55 Director
Jack R. Anderson.......................... 75 Director
Bradley C. Call........................... 57 Director
David R. Carpenter........................ 61 Director
Warren E. Pinckert II..................... 56 Director
Lloyd E. Ross............................. 59 Director
Jean Bixby Smith.......................... 62 Director
RETIRING DIRECTORS
- ------------------
Craig T. Beam............................. 44 Director
Richard M. Burdge......................... 73 Director
CORPORATE EXECUTIVE OFFICERS
- ----------------------------
Joseph S. Konowiecki...................... 47 Executive Vice President, General Counsel and
Secretary
Robert N. Franklin........................ 56 Senior Vice President, Public Affairs
John E. Kao............................... 38 President and Chief Executive Officer, PacifiCare
Ventures Division and Senior Vice President,
Corporate Development
Mary C. Langsdorf......................... 40 Interim Chief Financial Officer, Senior Vice
President, Finance and Corporate Controller
Wanda A. Lee.............................. 59 Senior Vice President, Corporate Human Resources
HEALTH PLANS DIVISION EXECUTIVE OFFICERS
- ----------------------------------------
Bradford A. Bowlus........................ 44 President and Chief Executive Officer
Richard E. Badger......................... 50 Regional Vice President, Western Region and
President and Chief Executive Officer, PacifiCare
of California
James W. Cassity.......................... 48 Regional Vice President, Southwest Region and
President and Chief Executive Officer,
PacifiCare of Texas, Inc. and PacifiCare of
Oklahoma, Inc.
Val C. Dean, M.D. ........................ 51 Regional Vice President, Central Region, and
President and Chief Executive Officer, PacifiCare
of Colorado, Inc.
</TABLE>
7
<PAGE> 14
<TABLE>
<CAPTION>
HEALTH PLANS DIVISION EXECUTIVE OFFICERS AGE TITLE
---------------------------------------- --- -----
<S> <C> <C>
Ace M. Hodgin Jr., M.D. .................. 44 Regional Vice President, Desert Region and
President and Chief Executive Officer, PacifiCare
of Arizona, Inc.
Christopher P. Wing....................... 42 Regional Vice President, Northwest Region and
President and Chief Executive Officer,
PacifiCare of Washington, Inc.
Ronald M. Davis........................... 40 Senior Vice President and Chief Administrative
Officer
W. Joseph Arbanas......................... 55 Senior Vice President, Human Resources
Katherine F. Feeny........................ 47 Senior Vice President, Secure Horizons Sales and
Marketing
Maria Z. Fitzpatrick...................... 42 Interim Chief Information Officer and Vice
President, Information Technology
James A. Frey II.......................... 33 Senior Vice President, Operations
Mitchell J. Goodstein..................... 48 Senior Vice President, Health Care Economics
Richard J. LaBrecque...................... 56 Senior Vice President, Individual, Small and
Mid-Size Account Sales and Marketing
Linda M. Lyons, M.D. ..................... 50 Senior Vice President, Health Services and Chief
Medical Officer
David A. Taaffe........................... 47 Senior Vice President, National Account Sales and
Marketing
</TABLE>
Terry O. Hartshorn has been a Director of PacifiCare since 1985. His
current term expires in 2001. Mr. Hartshorn served as Chairman of PacifiCare's
Board from 1993 to 1998. Mr. Hartshorn was President and Chief Executive Officer
of UniHealth, the predecessor of UniHealth Foundation, from 1993 to February
1997. Mr. Hartshorn is a Director of Professional Bancorp Inc., a bank holding
company, and BuyMedical.com, an e-commerce portal for healthcare purchasing and
materials management. Mr. Hartshorn is Chairman of the Governance and Nominating
Committee and a member of the Executive Committee.
Jack R. Anderson has been a Director of PacifiCare since 1997. His current
term expires in 2001. Mr. Anderson has agreed to resign from the Board upon
appointment of a new CEO and President. Mr. Anderson was a Director of FHP
International Corporation from 1994 until February 1997 when 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. Mr. Beam is
retiring upon the expiration of his term at the annual meeting. 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 1998. Mr. Beam is a member of the Real Estate Committee.
Richard M. Burdge, Sr. has been a Director since 1997. Mr. Burdge is
retiring upon the expiration of his term at the annual meeting. Mr. Burdge was a
Director of FHP from 1994 until February 1997 when FHP was acquired by
PacifiCare. Mr. Burdge retired in 1984 as Executive Vice President of CIGNA
Corporation, a position he held from 1982 to 1984. Mr. Burdge is a member of the
Compensation Committee.
Bradley C. Call has been a Director since 1997. His current term expires in
2002. Since 1998, Mr. Call has been a Director, President and Chief Executive
Officer of Stellex Aerospace, Inc., a privately held aerospace component
manufacturing firm with multiple plant operations throughout the U.S. Mr. Call
has been a Director of UniHealth Foundation since 1998, and served as Director
of UniHealth from 1995 to 1998. Mr. Call is a member of the Executive and Audit,
Finance and Ethics Committees.
David R. Carpenter has been a Director of PacifiCare since 1989. His
current term expires in 2002. Since 1998, Mr. Carpenter has served as Chairman
and CEO of UniHealth Foundation. From February 1997 through December 1997, Mr.
Carpenter served as Chairman, President and CEO of UniHealth. Since 1997,
8
<PAGE> 15
Mr. Carpenter has also served as Chairman and CEO of Paradigm Partners
International, LLC. Mr. Carpenter is a Director of Employee Solutions, Inc. and
Sales Media, Inc. Mr. Carpenter is Chairman of the Compensation Committee and a
member of the Executive Committee.
Lloyd E. Ross has been a Director of PacifiCare since 1985. His current
term expires in 2002. Mr. Ross is Managing Partner of InverMex, L.P. From 1996
to 1997, Mr. Ross served as Vice President/Division Manager of SMI Corporation,
a division of ARB, Inc., a commercial and industrial building company and as
President/CEO of SMI Construction from 1961 to 1996. Mr. Ross is a Director of
the Southern California Water Company. Mr. Ross is a member of the Audit,
Finance and Ethics, Compensation, Real Estate and Governance and Nominating
Committees.
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 1994 and
President of Alamitos Land Company since 1991, both of which are engaged in the
development and management of commercial and industrial real estate. Ms. Smith
has also been a Director and Vice President of UniHealth Foundation since 1998.
Ms. Smith is a member of PacifiCare's Governance and Nominating Committee and
Chairperson of the Real Estate Committee.
Joseph S. Konowiecki became an Executive Vice President in November 1999,
and has been General Counsel of PacifiCare since 1989 and Secretary of
PacifiCare since 1993. Mr. Konowiecki has been a partner of Konowiecki & Rank
LLP, including a professional corporation, or its predecessor, since 1980 and
has over 21 years of practice in business, corporate and health care law.
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 International Corporation.
John E. Kao has been President and CEO of PacifiCare Ventures Division
since April 2000 and Senior Vice President, Corporate Development since 1998.
Mr. Kao served as Vice President, Corporate Development from 1997 through 1998
and Chief Financial Officer, Secure Horizons USA from 1998 through April 2000.
From 1995 to February 1997, Mr. Kao was Vice President, Corporate Development
for FHP International Corporation. Prior to joining FHP, Mr. Kao held numerous
positions with Bank of America.
Mary C. Langsdorf has served as Interim Chief Financial Officer since
September 1999. She has been Senior Vice President, Finance since January 1999
and PacifiCare's Corporate Controller since 1996. From 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 1993. From 1984 to 1993, Ms. Lee was Vice President of Human
Resources of FHP.
Bradford A. Bowlus joined PacifiCare in 1994 and became President and CEO
of PacifiCare's Health Plans Division in October 1999. He served as Regional
Vice President, Western Region and President and CEO of PacifiCare of California
or "PCC" from 1997 through October 1999. From 1994 through 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.
Richard E. Badger has been Regional Vice President, Western Region and
President and CEO of PacifiCare of California since November 1999. Mr. Badger
served as Regional Vice President, Desert Region and President and CEO of
PacifiCare of Arizona, Inc. from 1998 to November 1999. Mr. Badger served as
President of PacifiCare of Northern California from 1993 to 1998.
James W. Cassity was appointed Regional Vice President, Southwest Region
and President and CEO of PacifiCare of Texas, Inc. and PacifiCare of Oklahoma,
Inc., on March 20, 2000. From June 1997 through September 1999, Mr. Cassity
served as President Central Division, Prudential HealthCare, a national
healthcare company, and as Vice President, Prudential HealthCare, from August
1996 through June 1997.
Val C. Dean, M.D. was appointed Regional Vice President, Central Region and
President and CEO of PacifiCare of Colorado on May 1, 2000. Dr. Dean served as
Chief Operating Officer of PacifiCare of Colorado, formerly FHP of Colorado,
from August 1994 through May 1, 2000. Dr. Dean also served as Senior Medical
Director of FHP of Colorado from January 1993 through February 1997.
9
<PAGE> 16
Ace M. Hodgin Jr., M.D. has been Regional Vice President, Desert Region and
President and CEO of PacifiCare of Arizona since November 1999. Dr. Hodgin
served as Vice President, Health Services of PacifiCare of Arizona from 1997 to
November 1999, and Medical Director of PacifiCare of Arizona from 1994 to 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 1994 to 1997, Mr. Wing served in various capacities for
PacifiCare, including President and CEO of PacifiCare of Utah, Inc., Senior Vice
President, Health Services of PCC and Vice President, General Manager of PCC.
Ronald M. Davis became Senior Vice President and Chief Administrative
Officer of PacifiCare's Health Plans Division in October 1999. He was Senior
Vice President, Corporate Operations from 1995 to October 1999. Mr. Davis served
as Senior Vice President, Operations of PCC from 1993 to 1995.
W. Joseph Arbanas has been Senior Vice President, Human Resources since
January 2000. From 1998 through December 1999, Mr. Arbanas served as a Senior
Business Consultant, Organization Development of PacifiCare. He served as Vice
President, Human Resources of PCC from 1997 to 1998 and as Vice President,
Organization and Human Resources of PacifiCare from 1995 to 1997.
Katherine F. Feeny has been Senior Vice President, Secure Horizons Sales
and Marketing since January 2000. From August through December 1999, Ms. Feeny
served as Vice President, Sales and Marketing of Secure Horizons of California
and from 1995 to 1997, as Regional Sales Director, Secure Horizons of
California.
Maria Z. Fitzpatrick has been Interim Chief Information Officer since March
2000. From August 1996 through March 2000, Ms. Fitzpatrick served as Vice
President, Information Technology-Systems Development. Prior to joining
PacifiCare, Ms. Fitzpatrick served in various capacities with Bank of America,
National Trust and Savings Association.
James A. Frey II has been Senior Vice President, Operations since January
2000. Mr. Frey served as President, PacifiCare of Nevada, Inc. from April
through December 1999, as Vice President of Operations, Desert Region from 1997
to April 1999 and as Director of Regulatory Affairs, Desert Region from 1996 to
1997.
Mitchell J. Goodstein currently serves as Senior Vice President, Health
Care Economics. Mr. Goodstein was Regional Vice President, Southeast Region and
President of PacifiCare of Florida, Inc. from 1995 to 1997. Prior to joining
PacifiCare, Mr. Goodstein served as the Chief Executive Officer of HMO
California, a licensed health care service plan, from 1992 to 1995.
Richard J. LaBrecque has been Senior Vice President, Individual, Small and
Mid-Size Account Sales and Marketing since January 2000. From September 1999
through December 1999, Mr. LaBrecque served as Vice President, Sales, National
Accounts for PacifiCare. Before joining PacifiCare, Mr. LaBrecque was National
Vice President, Sales for Prudential HealthCare from 1995 through August 1999.
Linda M. Lyons, M.D. has been Senior Vice President, Health Services since
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 1986 to 1996.
David A. Taaffe has been Senior Vice President, National Account Sales and
Marketing since January 2000. Prior to joining PacifiCare, Mr. Taaffe was Vice
President of Sales for the east coast for Prudential HealthCare from 1997
through 1999. From 1994 through 1997, he served as Vice President of Sales for
Prudential's Southern California operations.
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.
10
<PAGE> 17
EXECUTIVE COMPENSATION
The following table shows the compensation paid to Alan Hoops, who served
as Chief Executive Officer of PacifiCare during 1999, and the other most highly
compensated executive officers of PacifiCare (collectively, the Named Executive
Officers, or "NEOs") for the years ended December 31, 1999, 1998 and 1997.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
ANNUAL COMPENSATION COMPENSATION
------------------------------------ ---------------------
OTHER ANNUAL SECURITIES LTIP ALL OTHER
SALARY BONUS COMPENSATION UNDERLYING PAYOUTS COMPENSATION
NAME AND PRINCIPAL POSITION YEAR (1) (2) (3) OPTIONS (4) (5)
--------------------------- ---- -------- ---------- ------------ ---------- -------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Alan R. Hoops..................... 1999 $920,000 $1,104,995 $521,998 160,000 $298,996 $ 58,994
CEO, Corporate President 1998 $893,078 $1,161,001 $553,708 15,000 $ -- $ 47,983
1997 $860,000 $ -- $ 80,000 445,000 $ -- $120,497
Jeffrey M. Folick(6).............. 1999 $600,000 $ 564,957 $225,983 50,000 $176,176 $ 51,794
Executive Vice President,
Corporate 1998 $597,115 $ 621,000 $248,400 12,500 $ $ 44,762
1997 $575,000 $ -- $ -- 310,000 $ -- $ 93,325
Bradford A. Bowlus................ 1999 $501,923 $ 449,856 $143,954 140,000 $ 75,504 $ 79,507
President and CEO, Health Plans 1998 $363,463 $ 253,681 $ 40,589 10,000 $ -- $269,037
Division 1997 $235,385 $ -- $ 195,000 $ 76,667 $129,166
Richard E. Badger................. 1999 $318,076 $ 294,261 $ -- 80,000 $ 50,441 $ 65,715
Regional Vice President, 1998 $256,846 $ 178,875 $ 35,775 39,365 $ -- $ 77,670
Western Region, Health Plans
Division 1997 $220,000 $ -- $ -- 46,500 $ 99,700 $ 21,306
Linda M. Lyons, M.D............... 1999 $300,000 $ 349,161 $ -- 45,000 $ 65,613 $ 49,647
Senior Vice President Health 1998 $305,307 $ 190,365 $ 45,688 10,000 $ -- $ 81,965
Services, Health Plans Division 1997 $275,000 $ -- $ -- 164,400 $ -- $ 56,677
Robert B. Stearns(7).............. 1999 $450,000 $ 279,002 $111,601 30,000 $ -- $107,835
Executive Vice President 1998 $216,347 $ 245,044 $ 98,018 275,000 $ -- $172,597
and CFO 1997 $ -- $ -- $ -- -- $ -- $ --
</TABLE>
- ---------------
(1) 1998 salaries included one extra pay period because of year-end payroll
timing. Base salaries for 1998 were as follows:
<TABLE>
<S> <C> <C> <C>
Alan R. Hoops.............. $860,000 Richard E. Badger.......... $265,000
Jeffrey M. Folick.......... $575,000 Linda M. Lyons, M.D. ...... $294,000
Bradford A. Bowlus......... $350,000 Robert B. Stearns.......... $450,000
</TABLE>
(2) The amounts shown in this column include payments made pursuant to
PacifiCare's annual incentive plan and include amounts awarded and accrued
during the fiscal years earned, but paid in the following fiscal year.
Portions of the 1999 and 1998 bonuses were attributable to incentives where
executive officers received bonuses in excess of the maximum payable under
the annual incentive plan for the achievement of maximum performance
objectives. Bonuses awarded under these incentives are payable in
installments over a three-year period. To receive each installment, the
executive officer must be employed by 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 annual bonus. The Corporate CEO may also defer all or a portion of his
salary. Amounts deferred are converted into units of PacifiCare's common
stock. The number of stock units converted is equal to the amount of bonus
or salary deferred, multiplied by a risk premium, then divided by the price
of PacifiCare's common stock. The common stock price used is determined by
PacifiCare's Compensation Committee based on the closing price of the common
stock on the Nasdaq National Market. Distributions are made in shares of
common stock.
11
<PAGE> 18
(4) Includes amounts awarded and accrued under PacifiCare's Long-Term
Performance Incentive Plan during the years earned, but paid in the
following year. In 1999 and 1997, 60 percent of the awards were paid in cash
and 40 percent of the awards were paid in shares of PacifiCare common stock.
The shares of common stock distributed were valued at $45.13 per share in
1999 and $72.88 per share in 1997 (the fair market values of the common
stock at the time the payments were awarded). No awards were made under the
long-term plan to the NEOs for 1998. Payments under the long-term plan to
the NEOs were as follows:
<TABLE>
<CAPTION>
1999 1997
---------------------- ----------------------
NUMBER NUMBER
CASH PAID OF SHARES CASH PAID OF SHARES
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Alan R. Hoops..................... $179,398 2,650 $ -- --
Jeffrey M. Folick................. $105,706 1,561 $ -- --
Bradford A. Bowlus................ $ 45,302 669 $46,060 420
Richard E. Badger................. $ 30,265 447 $59,837 547
Linda M. Lyons, M.D. ............. $ 39,368 581 $ -- --
</TABLE>
PacifiCare suspended the long-term plan in 1997. When the long-term plan
was suspended in 1997, three performance cycles remained outstanding. The
payment made for the 1997 to 1999 cycle, represented by the "1999" column
above, was the last performance cycle.
(5) Amounts in this column include contributions by PacifiCare to the PacifiCare
Health Systems, Inc. Savings and Profit-Sharing Plan or 401(k) Plan and
miscellaneous fringe benefits. All PacifiCare employees who have completed
3 1/2 months of continuous service are eligible to participate in the 401(k)
Plan.
(a) PacifiCare contributed amounts equal to three percent of annual
salaries in 1999 and two percent in 1998 and 1997, up to a specified
maximum amount. For the NEOs, these contributions were:
<TABLE>
<CAPTION>
1999 1998 1997
------ ------ ------
<S> <C> <C> <C>
Alan R. Hoops.................................... $4,800 $3,200 $3,200
Jeffrey M. Folick................................ $4,800 $3,200 $3,200
Bradford A. Bowlus............................... $4,800 $3,200 $3,200
Richard E. Badger................................ $4,800 $3,200 $3,200
Linda M. Lyons, M.D. ............................ $4,800 $3,200 $2,115
Robert B. Stearns................................ $4,800 $ -- $ --
</TABLE>
(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>
1999 1998 1997
------ ------ ------
<S> <C> <C> <C>
Alan R. Hoops.................................... $4,800 $4,800 $4,750
Jeffrey M. Folick................................ $4,800 $4,800 $4,750
Bradford A. Bowlus............................... $4,800 $4,800 $6,409
Richard E. Badger................................ $4,800 $4,800 $4,750
Linda M. Lyons, M.D. ............................ $4,800 $4,800 $3,730
Robert B. Stearns................................ $4,800 $ -- $ --
</TABLE>
12
<PAGE> 19
(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>
1999 1998 1997
------ ------ ------
<S> <C> <C> <C>
Alan R. Hoops.................................... $3,159 $2,997 $3,494
Jeffrey M. Folick................................ $3,159 $2,997 $3,494
Bradford A. Bowlus............................... $3,159 $2,997 $3,494
Richard E. Badger................................ $3,159 $2,997 $3,494
Linda M. Lyons, M.D. ............................ $3,159 $2,997 $ 423
Robert B. Stearns................................ $3,159 $ -- $ --
</TABLE>
(d) Includes amounts contributed by PacifiCare pursuant to the Statutory
Restoration Plan of PacifiCare. The Statutory Restoration Plan allows
participants to defer the portion of their pay that otherwise would be
deferred under the 401(k) Plan, but for statutory limitations, and to
receive excess matching contributions, profit-sharing contributions and
discretionary contributions in the same percentages as those provided
by the 401(k) 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>
1999 1998 1997
------- ------- -------
<S> <C> <C> <C>
Alan R. Hoops................................. $33,600 $25,077 $48,844
Jeffrey M. Folick............................. $26,400 $21,856 $40,766
Bradford A. Bowlus............................ $30,859 $12,642 $ --
Richard E. Badger............................. $14,851 $ 9,558 $ 5,337
Linda M. Lyons, M.D. ......................... $12,398 $ 6,977 $13,192
Robert B. Stearns............................. $17,793 $ -- $ --
</TABLE>
(e) Includes premiums paid by PacifiCare for term life insurance for all
employees. For each of the NEOs, these amounts were $290 for 1999, 1998
and 1997. Also includes additional insurance premiums paid by
PacifiCare for Mr. Hoops totaling $2,802 for 1997 and for Mr. Folick
totaling $1,532 for 1997.
(f) Includes amounts paid by PacifiCare for excess sick time and vacation
time accrued. For the NEOs, these amounts were:
<TABLE>
<CAPTION>
1999 1998 1997
------- ---- -------
<S> <C> <C> <C>
Alan R. Hoops.................................... $ -- $-- $53,783
Jeffrey M. Folick................................ $ -- $-- $35,959
Bradford A. Bowlus............................... $20,192 $-- $ 3,349
Richard E. Badger................................ $ 5,385 $-- $ --
Linda M. Lyons, M.D. ............................ $ 5,769 $-- $ --
Robert B. Stearns................................ $30,780 $-- $ --
</TABLE>
(g) Includes amounts paid by PacifiCare for personal financial services.
For the NEOs, these amounts were:
<TABLE>
<CAPTION>
1999 1998 1997
------- ------- ------
<S> <C> <C> <C>
Alan R. Hoops.................................. $12,345 $11,619 $3,334
Jeffrey M. Folick.............................. $12,345 $11,619 $3,334
Bradford A. Bowlus............................. $15,157 $17,452 $ --
Richard E. Badger.............................. $12,930 $ -- $ --
Linda M. Lyons, M.D. .......................... $18,431 $13,701 $ --
</TABLE>
13
<PAGE> 20
(h) Includes amounts paid by PacifiCare for relocation expenses. For the
NEOs, these amounts were:
<TABLE>
<CAPTION>
1999 1998 1997
------- -------- -------
<S> <C> <C> <C>
Bradford A. Bowlus........................... $ -- $227,656 $88,249
Richard E. Badger............................ $19,500 $ 26,825 $ --
Linda M. Lyons, M.D. ........................ $ -- $ 50,000 $16,927
Robert B. Stearns............................ $14,100 $ 47,500 $ --
</TABLE>
(i) Includes amounts paid by PacifiCare as sign-on bonuses. For the NEOs,
these amounts were:
<TABLE>
<CAPTION>
1999 1998 1997
---- -------- -------
<S> <C> <C> <C>
Bradford A. Bowlus.............................. $-- $ -- $24,175
Richard E. Badger............................... $-- $ 30,000 $ --
Linda M. Lyons, M.D. ........................... $-- $ -- $20,000
Robert B. Stearns............................... $-- $125,000 $ --
</TABLE>
(j) In connection with his relocation to California in 1998, PacifiCare
loaned $125,000 to Mr. Stearns. According to the terms of his severance
agreement, Mr. Stearns is not required to repay any outstanding
principal or interest on the loan. Of this total, $25,000 plus accrued
interest was included in All Other Compensation for 1999. The balance
will be forgiven in 2000.
(6) Mr. Folick retired as Executive Vice President and Interim President and
Chief Executive Officer, PacifiCare Special Products Division, effective
April 4, 2000.
(7) Mr. Stearns resigned as Executive Vice President and Chief Financial Officer
effective September 15, 1999. His effective termination date was December
13, 1999. The options granted to Mr. Stearns in 1999 expired on his
effective termination date.
OPTION GRANTS IN LAST FISCAL YEAR
The following table provides information on stock options granted in 1999
to PacifiCare's NEOs pursuant to PacifiCare's 1996 Stock Option Plan for
Officers and Key Employees, as amended.
<TABLE>
<CAPTION>
PERCENT
NUMBER OF OPTIONS
SECURITIES GRANTED TO EXERCISE OR
UNDERLYING EMPLOYEES BASE PRICE EXPIRATION GRANT DATE
NAME OPTIONS(1) IN 1999 PER SHARE(2) DATE PRESENT VALUE(3)
---- ---------- ---------- ------------ ---------- ----------------
<S> <C> <C> <C> <C> <C>
Alan R. Hoops(4).................. 60,000 2.7 $71.59 4/22/09 $2,519,160
100,000 4.4 $45.31 11/5/09 $2,564,010
Jeffrey M. Folick(5).............. 50,000 2.2 $71.59 4/22/09 $1,756,334
Bradford A. Bowlus................ 40,000 1.8 $71.59 4/22/09 $1,405,067
100,000 4.4 $45.31 11/5/09 $2,223,205
Richard E. Badger................. 15,000 0.7 $75.38 3/8/09 $ 543,482
65,000 2.9 $45.31 11/5/09 $1,445,083
Linda M. Lyons, M.D. ............. 10,000 0.4 $71.59 4/22/09 $ 351,267
35,000 1.5 $45.31 11/5/09 $ 778,122
Robert B. Stearns(6).............. 30,000 1.3 $71.59 4/22/09 $1,053,800
</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>
37,252,000 shares outstanding, $53.00 per share at 12/31/99.... $1,241,884,000 $3,147,160,000
</TABLE>
- ---------------
(1) Only nonqualified stock options were granted in 1999 pursuant to the
employee stock option plan. These options generally become exercisable in
four cumulative annual installments of 25 percent on each anniversary of the
date of grant, except for Mr. Hoops as described below. No incentive stock
options or stock appreciation rights were granted in 1999. Options that have
been held for six months, and not
14
<PAGE> 21
already exercisable or expired automatically, become exercisable if there is
a "Change of Control." Under the employee stock option 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 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 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
Securities Exchange Act of 1934) 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 Foundation is less than or equal
to the ownership interest of the voting common stock of such
individual, entity or group;
(e) a dissolution or liquidation of PacifiCare; or
(f) PacifiCare becomes a non-publicly held company.
(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 1999 were in accordance with Statement of Financial
Accounting Standards No. 123, as follows:
(a) Expected Volatility -- The standard deviation of the continuously
compounded rates of return calculated on PacifiCare's average daily
common stock price over a period of time immediately preceding the
grant and equal in length to the expected term of the option until
exercise. The volatility was 52 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 ranged from
approximately five to six 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 term of the
grant.
(d) Expected Term until Exercise -- The expected term of the option grants
ranged from two to four years. Expected terms were calculated based on
the historical average number of years executive officers exercise
options, after the options vest.
(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 options to purchase 100,000 shares of common stock vest 25 percent per
year following the first year of grant if the stock price reaches $60.00 per
share. If the $60.00 stock price is not reached, the options that did not
vest and an additional 25 percent of the options will vest on the next
anniversary of the date
15
<PAGE> 22
of grant if the $60.00 stock price is reached before the anniversary of the
date of grant. If the options have not vested by the fifth anniversary of
the date grant, then all of the options shall immediately vest on that date.
(5) Mr. Folick's options will continue to vest through December 31, 2000. He
will be able to exercise his vested stock options through December 31, 2001.
(6) The options granted to Mr. Stearns in 1999 expired on December 13, 1999, his
effective termination date.
(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.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION VALUES
The following table provides information for NEO options exercised during
1999, and unexercised options held as of December 31, 1999.
<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............. 40,000 $3,178,850 390,500 427,500 $2,063,875 $768,750
Jeffrey M. Folick......... 15,000 $ 513,538 300,375 243,125 $ 96,250 --
Bradford A. Bowlus........ -- -- 103,500 250,000 -- $768,750
Richard E. Badger......... 21,375 $ 543,000 19,716 132,774 -- $499,688
Linda M. Lyons, M.D. ..... 1,100 $ 22,000 91,100 147,200 -- $269,063
Robert B. Stearns......... -- -- 125,000 -- -- --
</TABLE>
EMPLOYMENT AGREEMENTS
PacifiCare has entered into employment agreements with Mr. Bowlus, Mr.
Badger and Dr. Lyons. Each agreement continues until the death, disability,
misconduct or written notice of termination by either PacifiCare or the NEO. The
agreements provide that Mr. Bowlus, Mr. Badger and Dr. Lyons are entitled to his
or her base salary, participation in all employee benefit programs,
reimbursement for business expenses and participation in PacifiCare's annual
incentive plan and employee stock option plan. The agreements also contain
provisions that entitle Messrs. Bowlus and Badger and Dr. Lyons to receive
severance benefits, 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 Foundation 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 Mr. Bowlus or Mr. Badger is terminated by PacifiCare (other
than for incapacity, disability, habitual neglect or gross misconduct) within 24
months of a change of control or is terminated without cause, the employment
agreements provide for payment of base salary and certain benefits for 24
months, and
16
<PAGE> 23
payment of benefits under PacifiCare's annual incentive plan that 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 that may be payable under incentive plans and the
value of certain benefits) would be approximately $1,220,400 to Mr. Bowlus and
$798,000 to Mr. Badger.
In the event Dr. Lyons is terminated by PacifiCare without cause, her
employment agreement provides for payment over a period of 18 months of an
amount equal to: (i) one and 1/2 times her current salary, (ii) one and 1/2
times her average annual incentive bonus, (iii) 18 months of automobile
allowance, and (iv) continuation of certain benefits. If Dr. Lyons is terminated
(other than for incapacity, disability, habitual neglect or gross misconduct)
within 24 months of a change of control, her employment agreement provides for
payment in a lump sum of an amount equal to: (i) two times her current salary,
(ii) two times her average annual incentive bonus, (iii) a prorated annual
incentive plan bonus, (iv) 24 months of the cost of COBRA benefits, and (v) 24
months of automobile allowance. The contingent liability for severance payments
that PacifiCare would be required to make under Dr. Lyons' employment agreement
(excluding amounts that may be payable under incentive plans and the value of
certain benefits) would be approximately $689,000, if Dr. Lyons was
involuntarily terminated and $618,000 if Dr. Lyons was terminated upon a change
of control.
If Messrs. Bowlus or Badger or Dr. Lyons are terminated without cause or
within 24 months of a change of control, each of them will be eligible to
receive outplacement services and have the ability to exercise all vested
options for one year.
Mr. Folick entered into an agreement with PacifiCare, that provides
compensation for him upon retirement. Through December 31, 2000, Mr. Folick will
receive salary, will be eligible to participate in certain employee benefit
plans and his stock options will continue to vest in accordance with their
terms. From January 1, 2001 through December 31, 2001, Mr. Folick will be able
to exercise his vested stock options and will receive continued health care
coverage. As of December 31, 2000, all other employee benefits will cease and he
will not receive any additional compensation. Mr. Folick will receive
approximately $487,000 in compensation through December 31, 2000. If Mr. Folick
is employed by a competitor of PacifiCare before December 31, 2000, we will
reduce his compensation by the amount he receives from the competitor.
Mr. Hoops entered into an amended employment agreement, that continues
until the earlier of a change of control or March 31, 2001. Upon termination,
Mr. Hoops will retire as Chief Executive Officer and President of PacifiCare. If
a change of control has not occurred on or before March 31, 2001, Mr. Hoops will
become a consultant to PacifiCare. Through March 31, 2001 or upon a change of
control, Mr. Hoops will receive salary, will be eligible to participate in
PacifiCare's benefit programs, including PacifiCare's annual incentive plan and
employee stock option plan, and will be reimbursed for business expenses. The
agreement also contains provisions that entitle Mr. Hoops to receive severance
benefits, payable if his 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.
If Mr. Hoops is terminated for reasons other than incapacity, disability,
habitual neglect or gross misconduct, he will receive an amount equal to: (i) 36
months of his current salary, (ii) three times his average bonus under the
annual incentive plan, (iii) continuation of health benefits, (iv) 36 months of
his automobile allowance, (v) outplacement services and (vi) the ability to
exercise all vested stock options for one year. Mr. Hoops will receive the
severance benefits over a period of 36 months. If Mr. Hoops becomes a
consultant, he will receive compensation similar to the benefits he would
receive if he were involuntarily terminated. We estimate that this expense will
not exceed approximately $6.3 million. Upon a change of control, Mr. Hoops will
receive a lump sum payment consisting of (i) three times his existing base
salary; (ii) three times his average annual incentive plan bonus for the last
two years; (iii) a prorated target bonus; (iii) an amount equal to 36 months of
continued medical, dental and vision coverage; (v) outplacement benefits; and
(vi) 36 months of his automobile allowance. Mr. Hoops will also receive an
amount to cover any excise tax penalty. In addition, Mr. Hoops' stock options
will automatically vest upon a change of control and Mr. Hoops will have one
year to exercise his options. We estimate that this expense will not exceed
approximately $6.3 million plus a prorated target bonus.
17
<PAGE> 24
If, while receiving severance payments following their involuntary
termination, any NEO (except Mr. Folick and Mr. Stearns, as described herein) is
employed by a competitor, their severance payments will be reduced by an amount
equal to the payment received from the competitor.
Mr. Stearns entered into a separation agreement with PacifiCare that
provides for Mr. Stearns to receive salary and an auto allowance for a period of
24 months, and outplacement services. Mr. Stearns will also be able to exercise
his vested stock options for one year after the effective date of his employment
termination, which was December 13, 1999. In addition, Mr. Stearns received an
award under the annual incentive plan for 1999, and the $125,000 loan that we
provided him in connection with his relocation was forgiven. Mr. Stearns is not
eligible to participate in any other employee benefit plans of PacifiCare. If,
while receiving his severance payments, Mr. Stearns is employed by a competitor
of PacifiCare, we may reduce his severance by the amount he receives from the
competitor.
Upon a change of control (as defined in the employee stock option plan) and
if a minimum per share consideration is being paid for the transaction, each of
the NEOs, except Mr. Badger, will receive a cash payment for each unexercised
premium priced option equal to the difference between (x) 110 percent of the
price per share at which the PacifiCare common stock is sold in the change of
control transaction and (y) the exercise price of the premium priced option. If
the per share consideration equals or exceeds $115 per share, the executive
officers will not receive a cash payment. The exercise price for one-half of the
premium priced options outstanding is $92.50 per share. The exercise price for
the balance is $114.00 per share. For the NEOs as a group, cash payments under
this program may range from approximately $5,000 to $24 million.
COMPENSATION OF DIRECTORS
Cash Compensation. Directors who are not full-time employees of PacifiCare
receive, as compensation for their services, an annual retainer of $25,000,
$1,200 for each PacifiCare Board 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 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 each committee meeting attended. Directors are also
reimbursed for usual and customary travel expenses. In 2000, the Board of
Directors suspended the program that required each Director to own a minimum
amount of PacifiCare common stock. PacifiCare does not have a retirement plan
for non-employee directors.
David Reed became Chairman of the Board on November 1, 1999. We pay Mr.
Reed $250,000 annually for his services as Chairman. Mr. Reed also receives fees
for attendance at Board meetings and meetings of Board Committees. Mr. Reed
received a stock option grant under the employee stock option plan on November
5, 1999 for 25,000 shares of PacifiCare common stock, with an exercise price of
$45.31 per share. The options vest 33 1/3 percent per year beginning one year
from the date of grant, or 100 percent upon retirement, whichever occurs
earlier.
Stock Option Plan. Under PacifiCare's Amended and Restated 1996 Non-Officer
Directors Stock Option Plan, non-officer Directors of PacifiCare who are not
eligible to receive awards under the employee stock option plan are
automatically granted nonqualified stock options to purchase 5,000 shares of
common stock on June 30 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 stock option plan. The Directors Stock Option
Plan also provides for the automatic grant of nonqualified stock options to
purchase 10,000 shares of common stock upon being elected to the Board of
Directors. Currently, no more than 390,000 shares of common stock are available
for nonqualified stock options under the Directors Plan.
The exercise price of the shares of common stock subject to any
nonqualified stock option granted under the Directors Stock Option Plan is 100
percent of the fair market value of the underlying common stock on the date of
grant. Nonqualified stock options granted under the Directors Plan vest
immediately on the grant date. The underlying common stock, however, may not be
sold within the first six months of the grant date.
18
<PAGE> 25
Nonqualified stock options granted under the Directors Stock Option Plan
may not be exercised after the earlier of:
(a) the expiration of 10 years and one day from the date the
nonqualified stock option was granted;
(b) the expiration of one year from the time the optionee voluntarily
ceases to serve as a director of PacifiCare; and
(c) 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 Stock Option Plan provides for an automatic and
immediate acceleration of the vesting of all nonqualified stock options granted
under the Directors Stock Option Plan that have been held for at least six
months upon the occurrence of a Change of Control (as defined in the employee
stock options plan).
During 1999, the non-officer Directors were granted nonqualified stock
options under the Directors Stock Option Plan as follows (except as indicated
for Mr. Reed and Mr. Hartshorn):
<TABLE>
<CAPTION>
NUMBER OF SECURITIES EXERCISE OR BASE
NAME GRANT DATE UNDERLYING OPTIONS PRICE PER SHARE
---- ---------- -------------------- ----------------
<S> <C> <C> <C>
David A. Reed, Chairman.......................... 06/30/99 5,000 $71.94
11/05/99(1) 25,000 $45.31
Terry O. Hartshorn, Vice Chairman................ 06/30/99(1) 5,000 $71.94
11/05/99 10,000 $45.31
Jack R. Anderson................................. 06/30/99 5,000 $71.94
11/05/99 10,000 $45.31
Craig T. Beam.................................... 06/30/99 5,000 $71.94
11/05/99 10,000 $45.31
Richard M. Burdge................................ 06/30/99 5,000 $71.94
11/05/99 10,000 $45.31
Bradley C. Call.................................. 06/30/99 5,000 $71.94
11/05/99 10,000 $45.31
David R. Carpenter............................... 06/30/99 5,000 $71.94
11/05/99 10,000 $45.31
Gary L. Leary.................................... 06/30/99 5,000 $71.94
11/05/99 10,000 $45.31
Warren E. Pinckert II............................ 06/30/99 5,000 $71.94
11/05/99 10,000 $45.31
Lloyd E. Ross.................................... 06/30/99 5,000 $71.94
11/05/99 10,000 $45.31
Jean Bixby Smith................................. 01/28/99 5,000 $70.38
06/30/99 5,000 $71.94
11/05/99 10,000 $45.31
</TABLE>
- ---------------
(1) Mr. Reed and Mr. Hartshorn received these stock option grants under the
employee stock option plan.
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 1999, the Compensation Committee of PacifiCare's Board of Directors
consisted of Mr. Burdge, Mr. Carpenter, Mr. Pinckert and Mr. Ross. No member of
our Committee was an employee of PacifiCare or
19
<PAGE> 26
any of its subsidiaries during 1999. 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.
Our Committee has overall responsibility for PacifiCare's executive
compensation policies and practices. Our functions include:
- establishing and periodically reviewing PacifiCare's executive
compensation philosophy to assure that it
1. is effective in attracting, motivating and retaining key officers,
2. aligns compensation to business strategy and performance,
3. is consistent with sound competitive practices, and
4. is administered in the stockholders' best interest;
- reviewing and administering PacifiCare's compensation practices, policies
and plans;
- annually evaluating the performance of the Chief Executive Officer;
- reviewing and approving the compensation and benefits for the Chief
Executive Officer, the four other top five highest paid executive
officers of PacifiCare and reviewing recommendations for the compensation
and benefits of each president of a strategic business unit and any
officer that has a base salary in excess of $250,000; and
- making recommendations regarding the compensation of directors.
Our Committee retains the services of nationally recognized consulting
firms that provide independent expertise on executive compensation matters to
advise it on trends and issues related to PacifiCare's executive compensation
programs.
Our 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 that we believe are
integrated with the business strategies and long-range plans of PacifiCare, are
consistent with the markets PacifiCare serves and coincide with the interests of
PacifiCare's stockholders. In doing so, our compensation programs reflect the
following themes:
- A compensation program that stresses PacifiCare's financial performance
as well as individual performance.
- Base salary levels consistent with those of companies of similar business
structure, size and marketplace orientation.
- A bonus plan based on the achievement of specific corporate and
individual performance goals, with superior performance resulting in
total annual cash compensation equal to or above the 75th percentile of
compensation paid by companies with a similar business structure, size,
complexity, and marketplace orientation.
- A long-term bonus plan designed to reward and retain key personnel over
the long-term and be linked to increases in stockholder value.
- Stock option plans that use increases in stockholder value to reward and
help retain executive officers.
- A competitive benefit program that meets the needs of PacifiCare's
employees and is both economical and easy to administer.
20
<PAGE> 27
EXECUTIVE COMPENSATION COMPONENTS
PacifiCare's executive compensation program is based on four 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 the amount 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, performance
and tenure.
Annual Incentive Compensation. PacifiCare's annual incentive plan pays
bonuses to our executives upon achievement of predetermined performance
objectives established by the Committee and approved by PacifiCare's
stockholders. The primary performance objective for 1999 at the corporate level
was growth in earnings per share. Business unit financial performance
objectives, in addition to earnings per share, were established for some
executive officers under the annual plan. For each performance objective
minimum, target and maximum goals are determined. Achievement of each goal
corresponds to a bonus equal to a percentage of an executive officer's salary as
determined at the beginning of each fiscal year. The maximum amount that may be
awarded to any one participant under the annual incentive plan, as approved by
stockholders in 1999, is $2 million.
Stock Options. Under PacifiCare's stock option plan for executive officers
and employees, executive officers are eligible to receive periodic grants of
stock options, stock grants, stock awards (instead of cash compensation payments
other than base salary) and stock appreciation rights. To date, only
non-qualified stock options have been granted pursuant to the employee stock
option plan. Awards are intended to retain and motivate executive officers to
improve long-term stock performance. Stock options 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. Before 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 our executive officers participate in the Amended 1997
Premium Priced Stock Option Plan, as amended. 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 vested during 1999 when
PacifiCare's common stock reached a price of $92.50 per share and expire in
2007. The remaining fifty percent vest if the common stock price reaches $114.00
per share by 2002 and will expire if the targeted stock price is not achieved.
If the options vest, they will expire in 2007.
Benefit Plans. PacifiCare also makes available to its executive officers a
broad range of benefit programs, that are available to employees generally,
including life and disability insurance and a savings and profit-sharing plan or
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 compensation plan under which executive officers may defer all or
a portion of their bonuses into units of PacifiCare common stock. In addition,
under the stock unit plan, the CEO may defer all or a portion of his base
salary. 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 common stock at a price of the 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
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 tax laws for qualified plans. PacifiCare provides matching
contributions up to a certain percentage and profit-sharing contributions to
this plan.
21
<PAGE> 28
1999 ACTIONS
In 1999, the Committee reviewed and recommended approval by the full Board
of its charter. In addition, the Committee reviewed PacifiCare's executive
compensation philosophy and requested that its consultant review the Committee's
choice of comparative industry compensation data, which it uses for compensation
comparisons. Based upon this review, the Committee decided to continue to use
the same comparative survey material that it used in 1998. 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.
The last performance cycle for PacifiCare's suspended long-term incentive
plan ended in 1999. Awards for this last performance cycle were granted by the
Committee in the first quarter of this year.
POLICY ON DEDUCTIBILITY OF COMPENSATION
Section 162(m) and the regulations promulgated thereunder 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 stock option plan, the
annual bonus plan, the premium priced plan and has obtained stockholder approval
for each of these plans. The Committee believes that PacifiCare is in
substantial compliance with Section 162(m) and intends to continue to
substantially comply with the requirements of Section 162(m) to the extent such
compliance is practicable and in the best interest of PacifiCare and its
stockholders.
CEO COMPENSATION
During 1999, the Committee focused on succession planning for the chief
executive officer of PacifiCare. At the conclusion of this process, Alan Hoops,
PacifiCare's' Chief Executive Officer, agreed that he would not retire until the
earlier of March 31, 2001 or if there were a change of control of PacifiCare.
Mr. Hoops also agreed to participate with the board of directors in conducting a
search for a new chief executive officer.
As part of this process, the Executive Committee reviewed Mr. Hoops'
existing employment agreement and agreed to modify the agreement to address
succession and retirement issues. A description of Mr. Hoops' modified agreement
is located in the executive compensation section of the proxy statement.
During 1999, Mr. Hoops earned a base salary of $920,000. Mr. Hoops also
earned a $1.1 million bonus under the annual incentive plan. The Committee set
Mr. Hoops' bonus performance objectives for 1999 based upon achieving a
predetermined earnings per share and selected strategic objectives. Mr. Hoops
received a bonus equal to 120 percent of his base salary out of a maximum
opportunity of 150 percent of his base salary. Mr. Hoops' salary for 2000 was
not increased by the Committee.
Mr. Hoops received a stock option grant during 1999 to purchase 60,000
shares of PacifiCare common stock at an exercise price of $71.59 per share (the
fair market value of the stock at the time of grant) and another stock option
grant to purchase 100,000 shares of common stock at an exercise price of $45.31
per share (the fair market value of the stock at the time of grant). The options
to purchase 60,000 shares of common stock vest 25 percent per year following the
first year of grant. The options to purchase 100,000 shares of common stock vest
25 percent per year following the first year of grant if the stock price reaches
$60.00 per share. If the $60.00 stock price is not reached, the options that did
not vest and an additional 25 percent of the Options will vest on the next
anniversary of the date of grant if the $60.00 stock price is reached before the
anniversary of the date of grant. If the options have not vested by the fifth
anniversary of the date of grant, then all of the options shall immediately vest
on that date.
The foregoing report has been furnished by:
David R. Carpenter, Chairman
Richard M. Burdge
Warren E. Pinckert II
Lloyd Ross
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<PAGE> 29
PERFORMANCE GRAPH
The following performance graph compares the performance of the cumulative
total return to the stockholders of PacifiCare's common stock for the previous
year and PacifiCare's Class B common stock (prior to conversion into common
stock) during the four years prior to 2000 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 HEALTH CARE-500 S&P 500 INDEX
--------------------- --------------- -------------
<S> <C> <C> <C>
Sep-94 100 100 100
Sep-95 91 143 130
Sep-96 115 187 156
Dec-96 114 196 169
Dec-97 70 282 225
Dec-98 106 406 290
Dec-99 71 373 350
</TABLE>
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
PacifiCare and its subsidiaries purchased health care services from various
medical service organizations owned by UniHealth Foundation totaling $63 million
for the year ended December 31, 1999. UniHealth Foundation purchased health care
coverage from PacifiCare and its subsidiaries in the amount of $0.2 million for
the year ended December 31, 1999.
We contract with Joseph S. Konowiecki, a professional corporation, for his
services as Executive Vice President, General Counsel and Secretary of
PacifiCare. For these services, we pay his professional corporation $132,000 per
year. Mr. Konowiecki also receives an automobile allowance and a cellular
telephone. In addition, Mr. Konowiecki is eligible to participate in the
employee stock option plan and the Premium Priced Stock Option Plan. During
1999, he received two nonqualified stock option awards. He received 15,000
options with an exercise price of $71.59 per share, and 35,000 options with an
exercise price of $45.31 per share. As of January 7, 2000, Mr. Konowiecki held
162,500 vested nonqualified stock options at a weighted average exercise price
of $65.73 per share.
The contract has an indefinite term. If the contract is terminated for
reasons other than Mr. Konowiecki's incapacity, disability or misconduct, Mr.
Konowiecki's professional corporation will receive its annual fee for two years.
In addition, Mr. Konowiecki will have the right to exercise all of his vested
options within one year of the date of termination. However, if following
involuntary termination, Mr. Konowiecki is retained on a similar basis by any of
our competitors, the termination payments are reduced by amounts equal to the
payments received from the competitor.
Further, if this contract is terminated within 24 months following a change
of control of PacifiCare, Mr. Konowiecki's professional corporation will receive
its annual fee for two years. Upon a change of control
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<PAGE> 30
(as defined in the employee stock option plan) all of Mr. Konowiecki's
nonqualified options will automatically vest and become fully exercisable. In
addition, Mr. Konowiecki will receive the cash payment on his premium priced
stock options similar to the cash payment the NEOs will receive. The maximum
cash payment to Mr. Konowiecki could be approximately $2 million.
During 1999, we paid Konowiecki & Rank LLP, a law partnership, $9 million
in legal fees. Mr. Konowiecki's professional corporation is a partner of the
firm, and receives income through the partnership.
COMPLIANCE WITH SECTION 16(a) OF THE SECURITIES EXCHANGE ACT
PacifiCare believes that during 1999, all filings with the SEC 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 Jack R. Anderson,
John E. Kao, Mitchell J. Goodstein and Eric D. Sipf each did not file a report
for one transaction on a timely basis. Once discovered, these oversights were
promptly corrected.
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: 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 us to consider including a proposal in our 2001 proxy
statement, you must deliver it to PacifiCare's Investor Relations department no
later than December 31, 2000. Proposals should be submitted in writing to,
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
2001 annual meeting of stockholders notifies the PacifiCare of such matter prior
to April 4, 2001, 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 common stock, including preparation, assembly, printing and mailing
of this proxy statement, the proxy and any additional information furnished to
its stockholders. Copies of the solicitation materials will be furnished to
banks, brokerage houses, fiduciaries and custodians holding in their names
shares of common stock beneficially owned by others to forward to such
beneficial owners. PacifiCare may reimburse persons representing beneficial
owners of 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 ChaseMellon Shareholder
Services. No additional compensation will be paid to Directors, officers or
employees for such services.
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<PAGE> 31
NOTE: ON 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 AS FILED WITH THE SEC. ANY SUCH REQUEST SHOULD BE ADDRESSED TO
INVESTOR RELATIONS, 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 MAY 12, 2000, SAID STOCKHOLDER WAS
A STOCKHOLDER OF PACIFICARE ON SUCH DATE.
By order of the Board of Directors
/s/ Joseph S. Konowiecki
Joseph S. Konowiecki
Secretary
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<PAGE> 32
PROXY
PROXY CARD
PACIFICARE HEALTH SYSTEMS, INC.
THIS PROXY SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned holder of common stock acknowledges receipt of a copy of
the Annual Report and the proxy statement, dated May 19, 2000, and, revoking any
proxy heretofore given, hereby constitutes and appoints Messrs. David Reed and
Terry Hartshorn, and each of them, as proxies, 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 PacifiCare
common stock held of record by the undersigned on May 12, 2000, at the Annual
Meeting of Stockholders to be held on June 22, 2000 or any adjournment thereof.
FOLD AND DETACH HERE
<PAGE> 33
Please mark your
vote as indicated
in this example. [X]
1. ELECTION OF DIRECTORS
FOR the nominee listed below [ ]
WITHHOLD AUTHORITY [ ]
Except as indicated to the contrary) (To vote for nominees listed below)
Alan R. Hoops Gary L. Leary Warren E. Pinckert II David A. Reed
Instructions: To withhold authority to vote for any nominee, write that
nominee's name in the space provided below.)
2. The proxies are authorized 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: , 2000
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]
34
<PAGE> 34
VOTING INSTRUCTIONS TO TRUSTEE
FOR THE ANNUAL MEETING OF STOCKHOLDERS -- JUNE 22, 2000
THE TRUSTEE SOLICITS THESE VOTING INSTRUCTIONS FROM PARTICIPANTS IN THE
PACIFICARE HEALTH SYSTEMS, INC. SAVINGS AND PROFIT-SHARING PLAN WHO HAVE RIGHTS
IN THE COMMON STOCK
The undersigned Participant in the PacifiCare Health Systems, Inc. Savings and
Profit-Sharing Plan or 401(k) Plan hereby instructs Wells Fargo Bank, as
Trustee, to vote all shares of PacifiCare common stock allocated to the accounts
of the undersigned under the 401(k) 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 Stockholders of the Company to be held on June 22, 2000,
or any adjournment thereof.
PLEASE CAREFULLY REVIEW THE ENCLOSED NOTICE TO 401(K) PLAN PARTICIPANTS
BEFORE COMPLETING AND MAILING THIS CARD.
(CONTINUED AND TO BE SIGNED ON REVERSE SIDE.)
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<PAGE> 35
Please mark
your vote as
indicated in [X]
this example
FOR [ ] AGAINST [ ] ABSTAIN [ ]
1. ELECTION OF DIRECTORS
Alan R. Hoops Gary L. Leary Warren E. Pinckert II David A. Reed
(Instruction: To withhold authority to vote for any nominee, write that
nominee's name in the space provided below)
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 2.
PLEASE MARK, SIGN, DATE AND RETURN PROXY CARD PROMPTLY USING THE ENCLOSED
ENVELOPE.
Signature(s)__________________________________________ DATED: ___________, 2000.
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
36
