<PAGE>
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of
the Securities Exchange Act of 1934
Filed by the Registrant /X/
Filed by a Party other than the Registrant / /
Check the appropriate box:
/ / Preliminary Proxy Statement
/X/ Definitive Proxy Statement
/ / Definitive Additional Materials
/ / Soliciting Material Pursuant to Section 240.14a-11(c) or Section
240.142-12
PACIFICARE HEALTH SYSTEMS, INC.
- --------------------------------------------------------------------------------
(Name of Registrant as Specified In Its Charter)
PACIFICARE HEALTH SYSTEMS, INC.
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement)
Payment of Filing Fee (Check the appropriate box):
/X/ $125 per Exchange Act Rules 0-11(c)(1)(ii), 14a-6(i)(1), or 14a-6(j)(2)
/ / $500 per each party to the controversy pursuant to Exchange Act Rule
14a-6(i)(3)
/ / 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:*
------------------------------------------------------------------------
4) Proposed maximum aggregate value of transaction:
------------------------------------------------------------------------
* Set forth the amount on which the filing fee is calculated and state how it
was determined.
/ / 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 paid
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>
PACIFICARE HEALTH SYSTEMS, INC.
5995 PLAZA DRIVE
CYPRESS, CALIFORNIA 90630
(714) 952-1121
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD MARCH 1, 1995
TO THE SHAREHOLDERS OF PACIFICARE HEALTH SYSTEMS, INC.:
The Annual Meeting of Shareholders of PacifiCare Health Systems, Inc., a
Delaware corporation (the "Company"), will be held at the offices of the
Company, 5995 Plaza Drive, Cypress, California on Wednesday, March 1, 1995 at
10:00 a.m., Pacific Standard Time (P.S.T.), to vote upon the following matters:
(1) To elect four Directors of the Company;
(2) To approve the Second Amended and Restated 1989 Stock Option Plan for
Officers and Key Employees of PacifiCare Health Systems, Inc.;
(3) To approve performance objectives to, and maximum awards under, the
Company's Amended Long-Term Performance Incentive Plan, as amended;
(4) To approve performance objectives to, and maximum awards under, the
Company's Amended Management Incentive Compensation Plan, as amended; and
(5) To transact such other business as may properly come before the meeting
and any adjournment thereof.
The Proxy Statement is being mailed to the holders of both the Class A
Common Stock and Class B Common Stock. Only the holders of Class A Common Stock
are entitled to vote at the March 1, 1995 Annual Meeting of Shareholders and
will receive a Proxy Card. The Proxy Statement is being mailed to the holders of
the Class B Common Stock for informational purposes only.
The Board of Directors has fixed the close of business on January 3, 1995 as
the record date. Holders of record of the Class A Common Stock, as of that date,
are entitled to vote at the meeting. The Company invites the holders of both
classes of stock to attend the meeting in person.
TO THE HOLDERS OF CLASS A COMMON STOCK: Your attention is directed to the
accompanying Proxy Statement and Proxy Card. The Company invites you to attend
the meeting in person but if you are unable to be present, you are requested to
check the appropriate boxes, sign, date and return the enclosed Proxy Card as
promptly as possible so that your shares may be represented.
By order of the Board of Directors
Terry O. Hartshorn
CHAIRMAN OF THE BOARD
Cypress, California
January 26, 1995
<PAGE>
PROXY STATEMENT FOR
ANNUAL MEETING OF SHAREHOLDERS OF
PACIFICARE HEALTH SYSTEMS, INC.
TO BE HELD ON MARCH 1, 1995
APPROXIMATE DATE OF MAILING PROXY STATEMENT
AND PROXY TO SHAREHOLDERS
JANUARY 30, 1995
PROXY SOLICITATION
This Proxy Statement is furnished in connection with the solicitation of
proxies by the Board of Directors of PacifiCare-Registered Trademark- Health
Systems, Inc., a Delaware corporation (the "Company"), in the form of the
accompanying proxy card (the "Proxy Card"), to be used at the Annual Meeting of
Shareholders to be held on March 1, 1995 (the "Annual Meeting").
The Proxy Statement is being mailed to the holders of both the Class A
Common Shares, par value $0.01 per share, of the Company (the "Class A Common
Stock") and the Class B Common Shares, par value $0.01 per share, of the Company
(the "Class B Common Stock"). The Class A Common Stock together with the Class B
Common Stock shall hereinafter be referred to as the "Common Stock." Only the
holders of the Class A Common Stock are entitled to vote at the Annual Meeting
and will receive a Proxy Card. This Proxy Statement is being mailed to the
holders of the Class B Common Stock for informational purposes only.
TO THE HOLDERS OF CLASS A COMMON STOCK: It is important that your shares of
Class A Common Stock be represented at the Annual Meeting whether or not you
plan to attend. Accordingly, you are asked to sign and return the Proxy Card in
order to ensure that your shares of Class A Common Stock are voted. Shares
cannot be voted at the meeting unless the shareholder is represented by proxy or
is present in person.
The shares of Class A Common Stock represented by the proxy will be voted in
accordance with the specifications or other indications set forth on the Proxy
Card.
The shareholder appointing a proxy has the power to revoke the appointment
by a later appointment received by the Company, or by giving notice of
revocation to the Company in writing or in open meeting. Any vote taken prior to
a revocation is not affected by such revocation. A revocable appointment of
proxy is not revoked by the death or incompetency of the shareholder, unless,
before the vote is taken or the authority is otherwise exercised, written notice
of such death or incompetency is received by the Company from the executor or
administrator of the estate of such shareholder or from the fiduciary having
control of the shares in respect of which the proxy was appointed.
VOTING SECURITIES
On January 3, 1995 there were 12,258,233 shares of Class A Common Stock of
the Company issued and outstanding and entitled to vote. Only those shareholders
of record of the Class A Common Stock at the close of business on January 3,
1995 will be entitled to vote at the Annual Meeting. Each outstanding share of
Class A Common Stock is entitled to one vote on all matters properly brought
before the meeting. Except as described below with regard to cumulative voting
of Directors, a majority of shares voting is sufficient for adoption of the
matters requiring shareholder action. Abstentions and broker non-votes are
counted for purposes of determining the presence or absence of a quorum for the
transaction of business but shall neither be counted as affirmative nor negative
votes.
In the election of Directors, a shareholder may cumulate his votes for one
or more nominees, but only if, prior to the voting (a) such nominee(s) or
nominee's name(s) have been placed in nomination, and (b) the shareholder has
given notice at the meeting of his intention to cumulate his votes. If any one
shareholder has given such notice, all shareholders may cumulate their votes for
the nominees. If the voting for Directors is conducted by cumulative voting,
each share of Class A Common Stock will be entitled to a number of votes equal
to the number of Directors to be elected, which votes may be cast for a single
nominee or may be distributed among two or more nominees in such proportions as
the shareholder deems appropriate. The
<PAGE>
nominees receiving the highest number of affirmative votes shall be elected. If
no such notice is given, there will be no cumulative voting which means a simple
majority of shares voting may elect all of the Directors. In the event of
cumulative voting, the proxy solicited confers discretionary authority on the
proxies to cumulate votes so as to elect the maximum number of nominees.
ELECTION OF DIRECTORS
(ITEM 1 ON PROXY CARD)
Pursuant to the Company's Certificate of Incorporation, as amended (the
"Certificate of Incorporation"), members of the Board of Directors are divided
into three classes: Class I, Class II and Class III. The terms of the Directors
in each of these three classes are staggered and Directors in each of the three
classes hold office for a three-year term until their successors have been duly
elected and qualified. The number of authorized members of the Company's Board
of Directors is ten.
There are four nominees to be elected as Directors at the Annual Meeting. It
is the intention of the person(s) named in the Proxy Card to vote the proxies in
favor of the election of Directors of the four nominees named below unless the
authority is withheld in accordance with the instructions on the Proxy Card.
Three of the four nominees are presently Directors of the Company. In the event
the nominees named below refuse or are unable to serve as Directors (which is
not anticipated), the persons named as proxies reserve full discretion to vote
for any or all persons as may be nominated.
David Carpenter, David Reed and Lloyd Ross are standing for re-election as
Class III Directors at the Annual Meeting. If re-elected, Messrs. Carpenter,
Reed and Ross will serve as Class III Directors for a three-year term which
expires as of the 1998 Annual Meeting.
Pursuant to a favorable recommendation of the Company's Nominating
Committee, and by unanimous approval of the Board of Directors in January 1995,
Jean Bixby Smith was appointed as a Class I Director effective February 1, 1995
to fill a vacancy on the Company's Board of Directors. Ms. Smith replaces Eric
Benveniste, who resigned from the Company's Board of Directors effective
February 1, 1995. If elected at the Annual Meeting, Ms. Smith will serve as a
Class I Director for the remaining two-year term of a Class I Director which
expires as of the 1997 Annual Meeting.
Terry Hartshorn was re-elected and Alan Hoops was elected as Class I
Directors at the 1994 Annual Meeting, and are serving a three-year term which
expires as of the 1997 Annual Meeting.
Gary L. Leary and Warren E. Pinckert II were re-elected as Class II
Directors at the 1993 Annual Meeting, and are serving as Class II Directors for
a three-year term which expires as of the 1996 Annual Meeting.
Two vacancies on the Board of Directors currently exist due to Dennis
Strum's resignation from the Board of Directors effective February 1, 1995 and
the death of Samuel J. Tibbitts. The Board of Directors has not as yet
identified candidates to replace Dr. Strum and Mr. Tibbitts. Proxies cannot be
voted for a greater number of persons than the number of nominees.
2
<PAGE>
The following sets forth, as of the date hereof, information concerning the
four nominees for election as Directors of the Company.
<TABLE>
<CAPTION>
DIRECTOR POSITION WITH COMPANY (OTHER THAN AS A DIRECTOR), IF ANY;
NAME AND AGE SINCE PRESENT PRINCIPAL OCCUPATION FOR PAST FIVE YEARS
- ------------------------------ -------- --------------------------------------------------------------------------------
<S> <C> <C>
David R. Carpenter, 55........ 1989 Executive Vice President of Transamerica Corporation since 1993, Group Vice
President of Transamerica Corporation from 1990 through 1993, and Chairman
(since 1985), Chief Executive Officer (since 1984) and President (1982 to
1986) of Transamerica Occidental Life Insurance Company. Mr. Carpenter has
also been Chairman of the Board of Directors of UniHealth, Inc.* since 1994,
Compensation Committee Chairman of UniHealth since 1988, and serves as
Chairman on its Executive and Nominating Committees. Since 1985, Mr. Carpenter
has been Chairman of California Hospital Medical Center (a UniHealth
subsidiary) and its Executive Committee. Mr. Carpenter is Chairman of the
Compensation Committee and is a member of the Executive and Nominating
Committees.
David A. Reed, 61............. 1992 President and Chief Executive Officer of St. Joseph Health System, a non-profit
public benefit corporation owning and operating hospitals and other health
care service entities, since 1990. Mr. Reed served as President of Samaritan
Health Service, a multi-hospital company from 1979 to 1990. Mr. Reed is a
former chairman and speaker of the House of Delegates of the American Hospital
Association. Mr. Reed has been involved in health care administration for more
than 30 years.
Lloyd Ross, 53................ 1985 President and Chief Executive Officer of SMI Construction, Inc., a commercial
and industrial building company, since 1976. Mr. Ross is a member of the
Audit/Finance Committee.
Jean Bixby Smith, 56.......... 1995 President of Bixby Land Company since January 1984 and President of Alamitos
Land Company since March 1991, both of which are engaged in the development
and management of commercial and industrial real estate. Ms. Smith has also
been a Director of UniHealth since 1988.
<FN>
- ---------
* UniHealth, Inc. is the single largest holder of the Company's Class A and
Class B Common Stock.
</TABLE>
Among the committees of the Board of Directors are four standing committees:
(i) the Executive Committee; (ii) the Audit/Finance Committee; (iii) the
Compensation Committee; and (iv) the Nominating Committee. In June 1994, the
Board of Directors established the Executive Committee as a standing committee
of the Board with the members comprised solely of the Chairman of the Board, the
President and Chief Executive Officer of the Company and the chairman of each
standing committee of the Board. The members of the Executive Committee
currently are Messrs. Hartshorn, Hoops, Carpenter and Pinckert. The Executive
Committee has all of the powers and authority of the Board in the management of
the business and affairs of the Company. The Executive Committee held two
meetings during fiscal 1994. The Audit/ Finance Committee, comprised of Messrs.
Pinckert and Ross, meets with the Company's independent auditors, makes
recommendations to the Board of Directors concerning acceptance of the reports
of such
3
<PAGE>
auditors and the accounting policies and procedures of the Company and reviews
financial plans and operating results of the Company. The Audit/Finance
Committee held two meetings during fiscal 1994. The Compensation Committee,
comprised of Messrs. Carpenter, Pinckert and Ross, meets with management and
makes recommendations to the Board of Directors concerning: (i) officer and key
employee compensation; and (ii) contributions to be made by the Company to the
Company's employee benefit and performance incentive plans. The Compensation
Committee met seven times during fiscal 1994. The Compensation Committee has
formed a sub-committee (the "Sub-Committee") to deal with compensation issues
affected by Section 162(m) and the regulations promulgated thereunder ("Section
162(m)") of the Internal Revenue Code of 1986, as amended (the "Code").
Accordingly, the Sub-Committee also administers the Employee Plan (as defined
herein), the LTPIP (as defined herein) and the MICP (as defined herein). The
Sub-Committee is comprised of Messrs. Pinckert and Ross. The Nominating
Committee, comprised of Messrs. Carpenter, Hartshorn and Hoops, considers
candidates for the directorships of the Company which are or become vacant, and
makes recommendations to the Board of Directors concerning the nomination of
such candidates. The Nominating Committee does not consider nominees recommended
by shareholders of the Company. The Nominating Committee met once during fiscal
1994.
During fiscal 1994, the Board of Directors held eleven meetings. No
Director, except for Mr. Carpenter, attended fewer than 75 percent of the
aggregate of (a) the total number of meetings of the Board of Directors, and (b)
the total number of meetings held by all Committees of the Board on which they
served.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
The following table sets forth the names of those shareholders known to the
Company to be the beneficial owners (as defined under the Securities Exchange
Act of 1934, as amended (the "Exchange Act")) of more than 5 percent of the
Company's outstanding shares of Common Stock as of December 31, 1994.
<TABLE>
<CAPTION>
NAME AND ADDRESS AMOUNT AND NATURE OF PERCENT
TITLE OF CLASS OF BENEFICIAL OWNER BENEFICIAL OWNERSHIP OF CLASS
- -------------------- ------------------------------------------------------------ -------------------- --------
<S> <C> <C> <C>
Class A Common Stock UniHealth, Inc. 5,910,500 48.2%
4100 West Alameda Ave.
Burbank, CA 91505
Nicholas Applegate Capital Management 1,149,503(1) 9.4%
600 West Broadway
San Diego, CA 92101
Class B Common Stock UniHealth, Inc. 3,160,500 20.6%
Firstar Corporation 1,068,425(2) 7.0%
777 East Wisconsin Avenue
Milwaukee, WI 53202
Invista Capital Management 996,400(3) 6.5%
1500 Hub Tower, 699 Walnut Street
Des Moines, IA 50309
Massachusetts Financial Services 871,050(4) 5.7%
500 Boylston Street
Boston, MA 02116
Putnam Investment Management 1,248,918(5) 8.1%
One Post Office Square
Boston, MA 02109
<FN>
- ---------
(1) Number of shares beneficially owned by Nicholas Applegate Capital
Management, a registered investment advisor ("Nicholas Applegate"), as of
September 30, 1994 according to a Schedule 13F filed with the Securities
and Exchange Commission (the "SEC"). Nicholas Applegate may be deemed a
beneficial owner of shares of the Class A Common Stock under Rule 13d-3 of
the Exchange Act ("Rule 13d-3") as a result of its discretionary authority
to dispose of the shares on behalf of its clients.
</TABLE>
4
<PAGE>
<TABLE>
<S> <C>
(2) Number of shares beneficially owned by Firstar Corporation, a registered
investment advisor ("Firstar"), as of September 30, 1994 according to a
Schedule 13F filed with the SEC. Firstar may be deemed a beneficial owner
of shares of the Class B Common Stock under Rule 13d-3 as a result of its
discretionary authority to dispose of the shares on behalf of its clients.
(3) Number of shares beneficially owned by Invista Capital Management, a
registered investment advisor ("Invista"), as of September 30, 1994
according to a Schedule 13F filed with the SEC. Invista may be deemed a
beneficial owner of shares of the Class B Common Stock under Rule 13d-3 as
a result of its discretionary authority to dispose of the shares on behalf
of its clients.
(4) Number of shares beneficially owned by Massachusetts Financial Services, a
registered investment advisor ("Mass Financial Services"), as of September
30, 1994 according to a Schedule 13F filed with the SEC. Mass Financial
Services may be deemed a beneficial owner of shares of the Class B Common
Stock under Rule 13d-3 as a result of its discretionary authority to
dispose of the shares on behalf of its clients.
(5) Number of shares beneficially owned by Putnam Investment Management, a
registered investment advisor ("Putnam"), as of September 30, 1994
according to a Schedule 13F filed with the SEC. Putnam may be deemed a
beneficial owner of shares of the Class B Common Stock under Rule 13d-3 as
a result of its discretionary authority to dispose of the shares on behalf
of its clients.
</TABLE>
UniHealth, Inc. ("UniHealth") is a California non-profit public benefit
corporation, which is the parent corporation in a multi-state health care
delivery system consisting of eleven non-profit medical centers and various
for-profit health care companies, including one company in the health
maintenance organization business. UniHealth has stated its intent to maintain a
significant interest in the Company as its single largest shareholder.
5
<PAGE>
SECURITY OWNERSHIP OF MANAGEMENT
The following table sets forth the number of shares of the Company's Common
Stock, which are beneficially owned as of December 31, 1994, by: (1) each of the
Directors and nominees of the Company; (2) the Named Executive Officers (as
defined herein); and (3) all Executive Officers (as defined in Section 3b-7 of
the Exchange Act) and Directors of the Company as a group.
<TABLE>
<CAPTION>
AMOUNT AND NATURE OF BENEFICIAL
OWNERSHIP(1)
-------------------------------------------
CLASS A CLASS B
COMMON STOCK(2) COMMON STOCK(3)
-------------------- --------------------
NUMBER PERCENT NUMBER PERCENT
NAME OF BENEFICIAL OWNER OF SHARES OF CLASS OF SHARES OF CLASS
- --------------------------------------------- --------- -------- --------- --------
<S> <C> <C> <C> <C>
Terry Hartshorn.............................. 224,000 1.8% 196,500 1.3%
Alan Hoops................................... 190,000 1.6% 197,517 1.3%
David R. Carpenter........................... 5,475 * 6,975 *
Gary L. Leary................................ 5,475 * 6,975 *
Warren E. Pinckert II........................ 15,275 * 8,491 *
David A. Reed................................ 300 * 700 *
Lloyd Ross................................... 11,875 * 12,775 *
Jean Smith................................... 230 * 225 *
Jeffrey Folick............................... 3,000 * 8,750 *
Richard Lipeles.............................. 86,250 * 70,441 *
Wayne Lowell................................. 21,300 * 24,172 *
Roger Taylor, M.D............................ -- * 3,000 *
All Executive Officers and Directors as a
group
(23 persons)................................ 629,705 5.1% 617,701 4.0%
<FN>
- ---------
*Less than 1 percent of class.
(1) Information with respect to the beneficial ownership is based on
information furnished to the Company by each person in this table. Each
shareholder included in the table has sole voting and dispositive power
with respect to the shares of Common Stock shown to be beneficially owned
by the shareholder. Most of the shareholders included in this table reside
in states having community property laws under which the spouse of the
shareholder, in whose name the securities are registered, may be entitled
to share in the management of their community property, which may include
the right to vote or dispose of the shares of Common Stock.
(2) Includes stock options of Class A Common Stock exercisable within 60 days
for the following named individuals and group, and number of shares: Mr.
Hartshorn, 89,000 shares; Mr. Hoops, 72,000 shares; Mr. Carpenter, 5,475
shares; Mr. Leary, 5,475 shares; Mr. Pinckert, 14,959 shares; Mr. Reed, 0
shares; Mr. Ross, 1,275 shares; Ms. Smith, 0 shares; Mr. Folick, 2,000
shares; Mr. Lipeles, 50,000 shares; Mr. Lowell, 16,500 shares; Dr. Taylor,
0 shares; and all Executive Officers and Directors as a group (23 persons),
303,209 shares.
(3) Includes options of Class B Common Stock exercisable within 60 days for the
following named individuals and group, and number of shares: Mr. Hartshorn,
111,500 shares; Mr. Hoops, 106,750 shares; Mr. Carpenter, 6,975 shares; Mr.
Leary, 6,975 shares; Mr. Pinckert, 8,175 shares; Mr. Reed, 500 shares; Mr.
Ross, 4,425 shares; Ms. Smith, 0 shares; Mr. Folick, 5,500 shares; Mr.
Lipeles, 38,450 shares; Mr. Lowell, 21,100 shares; Dr. Taylor, 3,000
shares; and all Executive Officers and Directors as a group (23 persons),
370,225 shares.
</TABLE>
6
<PAGE>
EXECUTIVE OFFICERS AND DIRECTORS OTHER THAN NOMINEES
The following table sets forth, as of the date hereof, information
concerning the Executive Officers and Directors other than nominees of the
Company.
<TABLE>
<CAPTION>
NAME AGE POSITION
- ------------------------------ --- --------------------------------------------------------------------------------
<S> <C> <C>
Terry Hartshorn............... 49 Chairman of the Board
Alan R. Hoops................. 47 Director, President and Chief Executive Officer
Gary L. Leary................. 59 Director
Warren E. Pinckert II......... 51 Director
Jeffrey Folick................ 47 Executive Vice President and Chief Operating Officer
Richard Lipeles............... 41 Executive Vice President
Wayne Lowell.................. 39 Executive Vice President, Chief Administrative Officer and Chief Financial
Officer
Roger Taylor, M.D............. 49 Executive Vice President and Chief Medical Officer
Patrick Feyen................. 38 Regional Vice President of the Southwest, President, PacifiCare of Oklahoma,
Inc. and President, PacifiCare of Texas, Inc.
I. David Kibbe................ 39 Regional Vice President of the Southeast and President, PacifiCare of Florida,
Inc.
Mary McWilliams............... 45 Regional Vice President of the Northwest, President, PacifiCare of Washington,
Inc. and President, PacifiCare of Oregon, Inc.
Jon Wampler................... 43 Regional Vice President of the West and President, PacifiCare of California
Joseph S. Konowiecki.......... 41 General Counsel and Secretary
Wanda Lee..................... 53 Senior Vice President, Corporate Human Resources
Fred V. Ryder................. 38 Senior Vice President and Corporate Controller
Craig Schub................... 39 Senior Vice President-Medicare and President,
Secure Horizons USA, Inc.
James Williams................ 48 Senior Vice President and Chief Information Officer
William Young................. 49 Senior Vice President, Corporate Marketing
John Ninomiya................. 34 Vice President, Health Data Analysis
</TABLE>
Terry O. Hartshorn has been a Director of the Company since 1985. Mr.
Hartshorn has been Chairman of the Board of Directors of the Company and
President and Chief Executive Officer of UniHealth since April 1993. Mr.
Hartshorn served as President and Chief Executive Officer of the Company from
1976 to April 1993, as Secretary and as a director of the Company from 1977 to
1981. Mr. Hartshorn has served as a Director of Homedco Group, Inc. since 1991,
a provider of home health care products and services. Mr. Hartshorn is a member
of the Executive and Nominating Committees.
Alan Hoops has been a Director of the Company since 1994. Mr. Hoops has been
President and Chief Executive Officer of the Company since April 1993. Mr. Hoops
served as Executive Vice President and Chief Operating Officer of the Company
from 1986 to April 1993, as Secretary of the Company from 1982 to April 1993, as
Senior Vice President of the Company from 1985 to 1986 and as Vice President,
Marketing and Planning of the Company from 1977 to 1985. Mr. Hoops is a member
of the Executive Committee.
Gary L. Leary has been a Director of the Company since 1989. Mr. Leary has
served as Executive Vice President and Chief Operating Officer of UniHealth
since April 1992, General Counsel of UniHealth since 1988, Director and member
of the Executive Committee of UniHealth since 1988, and Secretary of UniHealth's
board since November 1994. Mr. Leary has served as Corporate Counsel to
UniHealth and its predecessor since 1977.
Warren E. Pinckert II has been a Director of the Company since 1985. Mr.
Pinckert has been President, Chief Executive Officer and a Director of
Cholestech Corporation, a medical device manufacturing firm, since June 1993.
Mr. Pinckert served as Executive Vice President, Operations from 1991 to June
1993, Vice President of Finance and Business Development from 1989 to 1991, and
Secretary from 1989 to June 1993 of
7
<PAGE>
Cholestech Corporation. Mr. Pinckert served as Vice President and Chief
Financial Officer of Sunrise Medical, Inc., a medical device manufacturing
company, from 1983 to 1989. Mr. Pinckert is a certified public accountant, is a
member of the Compensation and Executive Committees and is Chairman of the
Audit/ Finance Committee.
Jeffrey Folick has been an Executive Vice President of the Company and the
Chief Operating Officer of the Company since December 1994. Since July 1992, Mr.
Folick served in various capacities for the Company, including Regional Vice
President of the West, President of PacifiCare of California ("PCC") and Chief
Operating Officer of PCC. Prior to joining PCC in July 1992, Mr. Folick served
as President of Secure Horizons from January 1991 to July 1992 and Vice
President Secure Horizons from December 1989 to December 1990.
Richard Lipeles has been Executive Vice President of the Company since April
1993. Mr. Lipeles served as Senior Vice President of the Company from 1985 to
April 1993 and as President of PCC from 1987 to April 1993. Mr. Lipeles has been
employed by the Company in various capacities since 1979.
Wayne Lowell has been Chief Administrative Officer of the Company since
December 1994, an Executive Vice President of the Company since April 1993 and
Chief Financial Officer of the Company since November 1986. Mr. Lowell served as
Senior Vice President of the Company from March 1992 to April 1993 and as
Treasurer of the Company from 1986 to April 1993. Mr. Lowell is a certified
public accountant.
Roger Taylor, M.D. has been Executive Vice President of the Company since
April 1993 and Chief Medical Officer of the Company since December 1992. Dr.
Taylor served as Senior Vice President of the Company from December 1992 to
April 1993. Prior to joining the Company, Dr. Taylor served as National Leader
for The Wyatt Company, a health care employee benefit consulting company, and as
a Senior Vice President of Equicor Inc., a general medical utilization review
company, prior to December 1990.
Patrick Feyen has been Regional Vice President of the Southwest, President
and Chief Executive Officer of PacifiCare of Oklahoma, Inc. ("PCOK") and
President and Chief Executive Officer of PacifiCare of Texas, Inc. ("PCTX")
since December 1994. Mr. Feyen served as Regional Vice President of the
Northwest from September 1994 to December 1994 and President and Chief Executive
Officer of PacifiCare of Oregon, Inc. ("PCOR") from 1993 to December 1994. Mr.
Feyen served as Vice President, Finance and Chief Financial Officer of PCOR from
1991 to 1993. Prior to joining PCOR, Mr. Feyen served as Vice President Finance
and Controller from 1990 to 1992 and Senior Administrator, Operations from 1989
to 1990 of Michigan Health Care Corporation, a provider of medical care and
mental health services in Detroit.
I. David Kibbe has been Regional Vice President of the Southeast and
President and Chief Executive Officer of PacifiCare of Florida, Inc. since
September 1994. Mr Kibbe served as President and Chief Executive Officer of PCOK
from 1991 to September 1994. Prior to joining PCOK, Mr. Kibbe was a Senior
Consultant at Towers Perrin, a consulting firm, from 1988 to 1991.
Mary McWilliams has been Regional Vice President of the Northwest since
September 1994, President of PCOR since December 1994 and has been President and
Chief Executive Officer of PacifiCare of Washington, Inc. since January 25,
1994. Prior to joining the Company, Ms. McWilliams served as Chief Executive
Officer of the Sisters of Providence Health Plans, a federally qualified health
maintenance organization in Oregon, from 1984 to January 1994.
Jon Wampler has been Regional Vice President of the West and President of
PCC since December 1994. Mr. Wampler served as Regional Vice President of the
Southwest and President of PCOK from September 1994 to December 1994 and served
as President of PCTX from August 1990 to December 1994. Prior to joining the
Company, Mr. Wampler served as Executive Director of Humana Health Care Plan of
Colorado, Inc. from July 1988 to August 1990.
Joseph S. Konowiecki has been General Counsel since October 1989 and
Secretary of the Company since April 1993. Mr. Konowiecki served as Assistant
Secretary from 1989 to April 1993. Mr. Konowiecki has been a partner of
Konowiecki & Rank, a law partnership including a professional corporation, or
its predecessor, since 1980 and has over sixteen years of practice in business,
corporate and health care law.
8
<PAGE>
Wanda Lee has been Senior Vice President, Corporate Human Resources of the
Company since March 1993. From 1989 to March 1993, Ms. Lee was Vice President of
Human Resources of FHP, Inc., a southern California-based managed care
organization. Ms. Lee was Vice President, Human Resources and Administration of
Denny's Incorporated, a division of TW Services, from 1974 to 1989.
Fred V. Ryder has been Senior Vice President of the Company since November
1994 and Corporate Controller and Chief Accounting Officer from 1987. Mr. Ryder
served as Vice President from December 1990 to November 1994. Mr. Ryder is a
certified public accountant.
Craig Schub has been Senior Vice President-Medicare since December 1994 and
President of Secure Horizons USA, Inc. since April 1993. Mr. Schub served as
Senior Vice President, Secure Horizons of California from 1992 to 1993, Vice
President, Secure Horizons of Northern California from 1991 to 1992 and Director
Corporate Planning from 1990 to 1991. Prior to joining the Company, Mr. Schub
served as Director of Market Development and Communications for the Travelers
Health Network from 1988 to 1990.
James Williams has been Senior Vice President and Chief Information Officer
since June 1993. Prior to joining the Company, Mr. Williams served as Senior
Vice President, Information Services of Sanwa Bank California from August 1992
to May 1993 and Senior Vice President, Retail Systems Department of Security
Pacific Automation Company from May 1988 through August 1992.
William Young has been Senior Vice President, Corporate Marketing since
February 1994. Prior to joining the Company, Mr. Young served as Division
President Blue Cross/Blue Shield from 1992 to 1994, as Vice President, Lincoln
National Life Insurance Company from 1990 to 1992 and as President, MetLife
HealthCare Network, southeast and Vice President of marketing and sales from
1985 to 1990.
John Ninomiya has been Vice President, Health Data Analysis of the Company
since 1990. Mr. Ninomiya served as Director, Health Data Analysis of the Company
from 1988 to 1990 and has been employed with the Company in various capacities
since 1986.
Each Executive Officer of the Company is elected or appointed by the Board
of Directors of the Company 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 the Company by or on behalf of such
Directors, except to the extent that such information appears in its records.
9
<PAGE>
COMPENSATION OF EXECUTIVE OFFICERS
The following table sets forth for the fiscal years ended September 30,
1994, 1993 and 1992, the compensation for services in all capacities to the
Company of those persons who were during the fiscal year ended September 30,
1994: (i) the chief executive officer; and (ii) the other four most highly
compensated executive officers of the Company (collectively, the "Named
Executive Officers").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM COMPENSATION
ANNUAL -----------------------
COMPENSATION SECURITIES
NAME AND ------------------ UNDERLYING LTPIP ALL OTHER
PRINCIPAL POSITION YEAR SALARY BONUS(1) OPTIONS(2) PAYOUTS(3) COMPENSATION(4)
- -------------------------------------------------------------- ---- -------- -------- ---------- ---------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Alan Hoops, 1994 $442,803 $405,000 65,000 $ 334,200 $ 56,728
President and CEO 1993 $344,380 $300,000 15,000 $ 280,200 $ 17,178
1992 $283,882 $303,574 0 $ 239,700 $ 21,841
Jeffrey Folick, 1994 $264,904 $165,000 94,000 $ 138,000 $ 36,156
Exec. Vice President 1993 $209,487 $151,200 5,000 $ 110,400 $ 13,482
and COO 1992 $154,769 $ 85,850 4,000 $ 52,565 $ 14,697
Richard Lipeles, 1994 $344,876 $229,425 38,800 $ 208,715 $ 42,981
Exec. Vice President 1993 $290,362 $212,800 10,000 $ 176,282 $ 11,114
1992 $234,861 $193,052 0 $ 146,182 $ 17,920
Wayne Lowell, 1994 $243,079 $162,925 37,000 $ 155,213 $ 31,729
Exec. Vice President, 1993 $212,194 $159,390 6,400 $ 138,880 $ 12,203
CAO and CFO 1992 $187,787 $182,478 12,000 $ 124,250 $ 17,111
Roger Taylor, M.D., 1994 $268,896 $181,212 37,000 $ 132,084 $120,588(5)
Exec. Vice President 1993 $199,047 $130,002 50,000 $ 0 $174,597(6)
and CMO 1992 -- -- -- -- --
<FN>
- ---------
(1) The amounts shown in this column include payments made pursuant to the
Amended Management Incentive Compensation Plan, as amended, of the Company
(the "MICP") and include amounts awarded and accrued during the fiscal year
in which they were earned but paid in the following fiscal year.
(2) Includes both Class A Common Stock and Class B Common Stock, as adjusted to
reflect the stock dividend in June 1992 of one share of Class B Common
Stock for each share of Class A Common Stock then outstanding (the "June
1992 Stock Dividend").
(3) Includes amounts awarded and accrued during the fiscal year in which they
were earned but paid in the following fiscal year. Please refer to
"Long-Term Performance Incentive Plan Awards in Last Fiscal Year."
In fiscal 1994 and 1993, 40 percent of the payments made under the Amended
Long-Term Performance Incentive Plan, as amended (the "LTPIP"), were paid
out in stock and 60 percent of the payments made under the LTPIP were paid
out in cash. For the Named Executive Officers the cash portion equaled:
$200,553 and $168,120 for Mr. Hoops; $82,846 and $66,255 for Mr. Folick;
$125,288 and $105,679 for Mr. Lipeles; $93,165 and $83,328 for Mr. Lowell;
and $79,270 and $0 for Dr. Taylor for fiscal 1994 and 1993, respectively.
For the Named Executive Officers the stock portion equaled: 2,113 and 2,767
shares of Class B Common Stock for Mr. Hoops; 872 and 1,090 shares of Class
B Common Stock for Mr. Folick; 1,319 and 1,741 shares of Class B Common
Stock for Mr. Lipeles; 981 and 1,372 shares of Class B Common Stock for Mr.
Lowell; and 835 and no shares of Class B Common Stock for Dr. Taylor for
fiscal 1994 and 1993, respectively. For each Named Executive Officer, the
shares of Class B Common Stock were valued at $63.25 per share (the fair
market value of the Class B Common Stock at the time of payment) for
payments made in fiscal 1994 and at $40.50 per share (the fair market value
of the Class B Common Stock at the time of payment) for payments made in
fiscal 1993.
</TABLE>
10
<PAGE>
<TABLE>
<S> <C>
(4) Amounts in this column include contributions by the Company to the
PacifiCare Health Systems, Inc. Savings and Profit Sharing Plan (the
"Profit Sharing Plan"). All employees of the Company who have completed 12
months of continuous service and have worked at least 1,000 hours are
eligible to participate in the Profit Sharing Plan. The Company contributed
the following amounts for each employee:
(a) An amount equal to two percent of their annual salary. For the Named
Executive Officers this amount equaled: $3,000, $4,717 and $13,113 for Mr.
Hoops; $5,484, $4,069 and $4,406 for Mr. Folick; $3,424, $4,292 and
$9,192 for Mr. Lipeles; and $4,564, $3,152 and $8,383 for Mr. Lowell
for fiscal 1994, 1993 and 1992, respectively. For Dr. Taylor this
amount equaled $3,000 for fiscal 1994. Dr. Taylor became eligible for
the Profit Sharing Plan in December 1993.
(b) An amount equal to one half of the compensation deferred by each
employee up to three percent of the employee's annual compensation.
For the Named Executive Officers this amount equaled: $4,500, $4,497
and $8,728 for Mr. Hoops; $4,096, $3,750 and $4,511 for Mr. Folick;
$4,500, $2,268 and $8,728 for Mr. Lipeles; and $4,500, $4,497 and
$8,728 for Mr. Lowell for fiscal 1994, 1993 and 1992, respectively.
This amount equaled $4,500 for Dr. Taylor who became eligible for the
Profit Sharing Plan in December 1993.
(c) A discretionary amount, determined solely at the discretion of the
Board of Directors, from the Company's current or accumulated earnings
which is generally based upon a percentage of pretax income. This
amount equaled $4,440 for each of Messrs. Hoops, Folick, Lipeles and
Lowell and Dr. Taylor for fiscal 1994; and $4,434 and $4,266 for each
of Messrs. Hoops, Folick, Lipeles and Lowell for fiscal 1993 and 1992,
respectively.
(d) Includes amounts contributed by the Company pursuant to the Statutory
Restoration Plan of the Company (the "Statutory Restoration Plan").
For the Named Executive Officers this amount equaled: $44,506 and
$3,410 for Mr. Hoops; $21,854 and $1,108 for Mr. Folick; $30,335 and
$0 for Mr. Lipeles; $17,943 and $0 for Mr. Lowell; and $14,848 and
$3,900 for Dr. Taylor for fiscal 1994 and 1993, respectively. The
Statutory Restoration Plan allows participants to defer the portion of
their pay that otherwise would be limited by the Company's Profit
Sharing Plan and to receive excess matching contributions,
profit-sharing contributions and discretionary contributions in the
same percentages as those provided by the Profit Sharing Plan. Senior
Vice Presidents and above are eligible to participate in the Statutory
Restoration Plan.
(e) An amount equal to premiums paid by the Company for term life
insurance for all employees. For the Named Executive Officers this
amount equaled: $288 for Messrs. Hoops, Folick, Lipeles and Lowell and
Dr. Taylor.
(5) Amount includes $97,952 paid in moving expenses to Dr. Taylor.
(6) Amount includes $88,200 paid as a sign-on bonus and $82,329 paid in moving
expenses to Dr. Taylor.
</TABLE>
11
<PAGE>
OPTION GRANTS IN LAST FISCAL YEAR
The following table sets forth for the fiscal year ended September 30, 1994,
the stock options granted to the Company's Named Executive Officers pursuant to
the Amended and Restated 1989 Stock Option Plan for Officers and Key Employees
of PacifiCare Health Systems, Inc., as amended (the "Employee Plan").
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
VALUE AT
INDIVIDUAL GRANTS ASSUMED ANNUAL RATES
------------------------------------------------------------- OF STOCK PRICE
NUMBER OF % OF TOTAL OPTIONS EXERCISE APPRECIATION
SECURITIES GRANTED TO OR FOR OPTION TERM
UNDERLYING EMPLOYEES BASE PRICE EXPIRATION ----------------------
NAME OPTIONS(1) IN FISCAL YEAR PER SHARE(2) DATE 5% 10%
- -------------------- ---------- ------------------ ------------ ------------ ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Alan Hoops
Class B(3)...... 25,000 4.3% $40.500 12/15/03 $ 636,976 $1,614,350
Class B(4)...... 40,000 6.8% $40.500 12/15/03 $1,019,162 $2,582,960
Jeffrey Folick
Class B(3)...... 9,000 1.5% $40.500 12/15/03 $ 229,311 $ 581,166
Class B(3)...... 15,000 2.5% $53.750 03/19/04 $ 507,222 $1,285,501
Class B(3)...... 50,000 8.5% $50.250 07/16/04 $1,580,645 $4,005,980
Class B(4)...... 20,000 3.4% $40.500 12/15/03 $ 509,581 $1,291,480
Richard Lipeles
Class B(3)...... 13,800 2.3% $40.500 12/15/03 $ 351,611 $ 891,121
Class B(4)...... 25,000 4.2% $40.500 12/15/03 $ 636,976 $1,614,350
Wayne Lowell
Class B(3)...... 12,000 2.0% $40.500 12/15/03 $ 305,749 $ 774,888
Class B(4)...... 25,000 4.2% $40.500 12/15/03 $ 636,976 $1,614,350
Roger Taylor, M.D.
Class B(3)...... 12,000 2.0% $40.500 12/15/03 $ 305,749 $ 774,888
Class B(4)...... 25,000 4.2% $40.500 12/15/03 $ 636,976 $1,614,350
</TABLE>
<TABLE>
<S> <C> <C> <C>
<CAPTION>
Change in total market value of Company at assumed annual rates of
stock price appreciation for 10 years(5) 5% 10%
- ------------------------------------------------------------------------------------------ ------------ --------------
<S> <C> <C> <C>
Class A, 12,249,033 shares outstanding, $79.188 per share
at 9/30/94......................................................................... $610,012,962 $1,545,892,614
Class B, 15,291,879 shares outstanding, $75.000 per share
at 9/30/94......................................................................... $721,273,540 $1,827,848,764
<FN>
- ---------
(1) Only non-qualified stock options ("NQSOs") were granted in fiscal 1994
pursuant to the Employee Plan. No incentive stock options or stock
appreciation rights were granted in fiscal 1994. The date of grant for the
NQSOs was December 15, 1993, except for two of the grants to Mr. Folick of
15,000 and 50,000 options of which the date of grant was March 15 and July
15, 1994, respectively. To the extent not already exercisable and not
expired, the NQSOs may, at the absolute discretion of the plan committee,
become exercisable upon the merger or consolidation of the Company into
another corporation, or the acquisition by another corporation of all or
substantially all of the Company's assets or 80 percent or more of the
Company's then outstanding voting stock, or the liquidation or dissolution
of the Company unless provision is made for an assumption of the NQSO or a
substitution therefor of a new option by a successor corporation or a
parent or subsidiary of such corporation.
(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 the Company, out of the sale proceeds, an amount equal to the exercise
price plus all applicable withholding taxes.
(3) These NQSOs granted to the Named Executive Officers become exercisable in
four cumulative installments of 25 percent of the shares on the first
anniversary of the date of grant and in subsequent installments of 25
percent on each anniversary of the date of grant.
</TABLE>
12
<PAGE>
<TABLE>
<S> <C>
(4) These NQSOs granted to the Named Executive Officers become exercisable at
the earlier of seven years from the date of grant or when the Company
achieves a specified pretax operating profit from non-commercial and
non-Medicare operations and from commercial and Medicare operations from
the Company's business units other than California, Oklahoma, Oregon and
San Antonio.
(5) The dollar amounts in this table are the result of calculations at the 5
and 10 percent rates used to determine the potential realizable value of
the stock options in the above table and therefore are not intended to
forecast possible future appreciation, if any, of the Company's stock
prices. No assurances can be given that the stock prices will appreciate at
these rates or experience any appreciation at all.
</TABLE>
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR END OPTION VALUES
The following table sets forth information with respect to the Named
Executive Officers concerning the exercise of options during fiscal 1994 and
unexercised options held as of the end of fiscal 1994.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
SHARES UNDERLYING UNEXERCISED IN-THE-
ACQUIRED OPTIONS AT FY-END (#) MONEY OPTIONS AT FY-END ($)
ON VALUE --------------------------- ---------------------------
NAME EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ------------------------------------------------- -------- ---------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Alan Hoops
Class A...................................... 0 $ 0 72,000 0 $ 5,274,536 $ 0
Class B...................................... 0 $ 0 96,750 76,250 $ 6,650,188 $2,658,750
Jeffrey Folick
Class A...................................... 0 $ 0 1,000 3,000 $ 70,813 $ 194,689
Class B...................................... 4,000 $ 175,750 2,250 100,750 $ 112,875 $2,877,625
Richard Lipeles
Class A...................................... 0 $ 0 50,000 0 $ 3,650,650 $ 0
Class B...................................... 16,000 $ 887,000 42,500 46,300 $ 2,812,500 $1,616,100
Wayne Lowell
Class A...................................... 20,000 $1,010,625 16,000 3,000 $ 1,138,508 $ 185,814
Class B...................................... 15,600 $ 671,450 22,000 44,800 $ 1,476,750 $1,627,350
Roger Taylor, M.D.
Class A...................................... 0 $ 0 0 0 $ 0 $ 0
Class B...................................... 0 $ 0 0 87,000 $ 0 $3,126,000
</TABLE>
LONG-TERM PERFORMANCE INCENTIVE PLAN
AWARDS IN LAST FISCAL YEAR
The following table sets forth the LTPIP Awards for the fiscal year ended
September 30, 1994 for the Company's Named Executive Officers:
<TABLE>
<CAPTION>
ESTIMATED FUTURE PAYOUTS UNDER
PERFORMANCE OR NON-STOCK PRICE-BASED PLANS(1)
OTHER PERIOD UNTIL ------------------------------
NAME MATURATION OR PAYOUT THRESHOLD TARGET MAXIMUM
- -------------------------------------------------------- -------------------- --------- -------- --------
<S> <C> <C> <C> <C>
Alan Hoops.............................................. January 1997 $0 $213,842 $427,684
Jeffrey Folick.......................................... January 1997 $0 $101,641 $203,281
Richard Lipeles......................................... January 1997 $0 $127,513 $255,026
Wayne Lowell............................................ January 1997 $0 $ 90,553 $181,105
Roger Taylor, M.D....................................... January 1997 $0 $ 71,809 $143,617
<FN>
- ---------
(1) Incentive compensation under the LTPIP is based on the achievement of
performance objectives established by the Sub-Committee, and approved by
the shareholders of the Company, measured over a three year performance
period. The performance objectives for this performance period are based on
increases in shareholders' equity and increases in revenue of non-core
businesses. Prior to the commencement of services for this performance
period, the Sub-Committee established, in writing, minimum targets for
return on shareholders' equity which must be achieved before the
measurement for
</TABLE>
13
<PAGE>
<TABLE>
<S> <C>
increasing revenue is applied, maximum targets above which no additional
awards will be earned and the formula for computing each participant's
award if such target is achieved. Payouts under the LTPIP are based on the
average three-year annual base salary for the calendar year of the Named
Executive Officer for the performance cycle. Estimated payouts assume a 5.5
percent increase in base salary per calendar year over the performance
cycle. Please refer to the "Summary Compensation Table" for payouts under
the LTPIP for fiscal 1994. Payments made under the LTPIP will be made in a
cash portion and a stock portion. It is anticipated that the cash portion
will equal 60 percent of the LTPIP award and the stock portion will equal
40 percent of the LTPIP award. The stock portion will be valued at the fair
market value of the stock at the time the LTPIP award is made. See "The
Proposals-Approval of Performance Objectives To, and Maximum Awards Under,
The Amended Long-Term Performance Incentive Plan, as amended" for a
description of the modifications to the LTPIP.
</TABLE>
EMPLOYMENT AGREEMENTS
The Company has entered into employment agreements with the Named Executive
Officers. Each agreement continues until the death, disability, misconduct or
written notice of termination by either the Company or the Named Executive
Officer. The agreements provide that each Named Executive Officer is entitled to
his base salary, participation in all employee benefit programs, reimbursement
for business expenses and participation in the MICP and LTPIP of the Company.
The agreements also contain provisions that entitle each of the Named Executive
Officers to receive severance benefits which are payable if the officer's
employment with the Company is terminated for various reasons, including death,
disability and termination following a change of ownership or control of the
Company. Under the employment agreements for Messrs. Hoops and Folick, a change
of ownership or control would result from: (i) 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 the Company and the ownership interest of the voting
common stock owned by UniHealth is less than or equal to the ownership interest
of the voting common stock of such individual, entity or group; (ii) any
transaction in which the Company sells substantially all of its material assets;
(iii) a dissolution or liquidation of the Company; or (iv) the Company becomes a
non-publicly held company. Under the employment agreements for Messrs. Lipeles
and Lowell and Dr. Taylor, a change of ownership or control would result from
any merger, consolidation or sale of the Company, which reduces the voting
interest of UniHealth below 51 percent, any transaction in which the Company
sells substantially all of its material assets, or the Company becoming
non-publicly held.
In the event one of the above officers is terminated by the Company (other
than for incapacity, disability, habitual neglect or gross misconduct) within 24
months of a change in ownership or control, the employment agreements provide
for: (i) payment of base salary and certain benefits for 36 months in the case
of Mr. Hoops, 24 months in the case of Mr. Folick and 12 months in the case of
Mr. Lipeles, Mr. Lowell and Dr. Taylor; (ii) payment of benefits under the
Company's MICP and LTPIP deemed to have accrued as of termination in the case of
Messrs. Lipeles and Lowell and Dr. Taylor; and (iii) annual payments under the
MICP and the LTPIP for a period of 36 months for Mr. Hoops and 24 months for Mr.
Folick. The contingent liability for severance payments that the Company would
be required to make under the employment agreements (excluding amounts which may
be payable under incentive plans and the value of certain benefits) would be
$1,375,200 to Mr. Hoops, $559,600 to Mr. Folick, $352,200 to Mr. Lipeles,
$252,200 to Mr. Lowell and $279,700 to Dr. Taylor.
14
<PAGE>
NOTWITHSTANDING ANYTHING TO THE CONTRARY SET FORTH IN ANY OF THE COMPANY'S
PREVIOUS OR FUTURE FILINGS UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR THE
SECURITIES EXCHANGE ACT OF 1934, AS AMENDED, THAT MIGHT INCORPORATE FUTURE
FILINGS, INCLUDING THIS PROXY STATEMENT, IN WHOLE OR IN PART, THE FOLLOWING
REPORT AND THE PERFORMANCE GRAPH SHALL NOT BE INCORPORATED BY REFERENCE INTO ANY
SUCH FILINGS.
REPORT OF THE COMPENSATION COMMITTEE
The compensation policies of PacifiCare Health Systems, Inc. (the "Company")
are structured to link the compensation of the executive officers of the Company
with enhanced shareholder value. Through the establishment of short- and
long-term incentive plans, the Company seeks to align the financial interests of
the executive officers with those of its shareholders. This linkage is evidenced
by shareholder returns that have exceeded the peer group performance reported in
this proxy on a one, three, and five-year interval.
EXECUTIVE COMPENSATION PHILOSOPHY
In designing its compensation programs, the Company follows the belief that
compensation should seek to reflect the value created for shareholders while
supporting the business strategies and long-range plans of the Company and the
markets the Company serves. In doing so, the compensation programs reflect the
following themes:
A compensation program that stresses the Company's financial
performance and individual performance.
An annual incentive plan, which generates a portion of compensation
based on the achievement of specific performance goals, with superior
performance resulting in total annual cash compensation at approximately
the 75th percentile of competitive levels of companies with a similar
business structure, size, and marketplace orientation.
A long-term incentive plan that is designed to reward and retain
executive officers over the long-term and is linked to return on equity
and revenue growth.
The Compensation Committee (the "Committee") met seven times during the 1994
fiscal year to review and set the compensation of the executive officers of the
Company consistent with the foregoing philosophy. The Committee retains the
services of consulting firms which provide independent expertise on executive
compensation matters to advise it on trends and issues related to the Company's
executive compensation program.
EXECUTIVE COMPENSATION COMPONENTS
The Company'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 slightly below
the competitive amounts paid to executive officers of companies with a similar
business structure, size, and marketplace orientation. Salaries of executive
officers in excess of $150,000 are reviewed by the Committee on an annual basis.
ANNUAL INCENTIVE COMPENSATION. Under the Amended Management Incentive
Compensation Plan, as amended (the "MICP"), annual incentive awards are granted
upon the achievement by the executive officers of performance objectives
established by a sub-committee of the Committee (the "Sub-Committee") and
approved by the shareholders of the Company at the March 2, 1994 Annual
Shareholders Meeting. The financial measure for the 1994 fiscal year was growth
in earnings per share and was stated in terms of minimum, target and maximum
goals. Business Units specific financial measures, in addition to the earnings
per share financial measure, were established for some executive officers under
the MICP. Achievement of each goal corresponds to an award equal to a specified
percentage of an executive officer's salary as determined at the beginning of
each fiscal year.
LONG-TERM PERFORMANCE INCENTIVE PLAN. The Company provides a long-term
performance incentive plan (the "LTPIP") that is linked to the long-term
performance of the Company as measured by return on equity (weighted 80 percent)
and revenue growth of non-core business (weighted 20 percent) for the
15
<PAGE>
1994-1996 cycle. The LTPIP opportunity is measured against the achievement of
financial criteria established by the Sub-Committee for a three-year period. A
new performance period of three years starts each year, so that after
participating in the plan for three years, an executive officer is participating
in three separate plans at the same time. The financial measures for the
1993-1995 cycle are average return on equity (weighted 80 percent) and revenue
growth of non-core business (weighted 20 percent), which are stated in terms of
minimum, target and maximum goals. The financial measures for the 1992-1994
cycle were average return on equity (weighted 80 percent) and total company
revenue growth (weighted 20 percent), which were stated in terms of minimum,
target and maximum goals. Achievement of each goal corresponds to an award equal
to a specified percentage of an executive officer's salary as determined at the
beginning of each performance period. 40 percent of the payments under the LTPIP
are made in the form of Company stock and 60 percent in the form of cash.
STOCK OPTIONS. Executive officers are eligible to receive periodic grants
of non-qualified stock options, incentive stock options, stock payments (in lieu
of cash compensation payments other than base salary) and stock appreciation
rights (collectively, the "Awards") pursuant to the Amended and Restated 1989
Stock Option Plan of Officers and Key Employees of PacifiCare Health Systems,
Inc. (the "Employee Plan"). The Awards are intended to retain and motivate
executive officers to improve long-term stock market performance. Awards are
granted at the fair market value of the underlying common stock at the date of
grant. Stock options, generally, vest in installments over multiple years. To
date, only non-qualified stock options have been granted pursuant to this plan.
Prior to granting Awards, the Sub-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.
1994 ACTIONS
In fiscal 1994, the Committee established the Sub-Committee to deal with
compensation issues affected by Section 162(m) ("Section 162(m)") of the
Internal Revenue Code of 1986, as amended. Accordingly, the Sub-Committee also
administers the Employee Plan, the MICP and the LTPIP.
During 1994, the Committee requested that its consultants review the
Committee's choice of comparative industry compensation data, which it uses for
performance and compensation comparisons. The Committee has emphasized that use
of comparative compensation data should be periodically reviewed and updated
consistent with the Company's growth and strategic business plans.
Also in 1994, the Committee requested management to review and analyze the
use of return on equity versus earnings per share as a performance objective for
the LTPIP. This analysis was used by the Sub-Committee to change the performance
objective for the three year performance period beginning with fiscal 1995 from
return on equity and revenue of non-core business to earnings per share. This
action is reflected in the approval being sought from the Company's shareholders
to modify the performance objective for the LTPIP.
Additionally, the Sub-Committee modified the performance objectives of the
MICP to include, in addition to earnings per share, performance objectives based
on general and administrative costs as a percentage of revenue. This action is
reflected in the approval being sought from the Company's shareholders to modify
the performance objectives for the MICP.
The Sub-Committee also adopted changes to the Employee Plan. Approval of a
restated and amended Employee Plan are described in a separate section of this
proxy statement. See "The Proposals-Approval of the Second Amended and Restated
1989 Stock Option Plan for Officers and Key Employees."
In December 1994, in response to recent amendments to proposed regulations
promulgated under Section 162(m), which now require that for salary-based
performance plans to be excluded from the $1 million pay cap imposed by Section
162(m), a maximum dollar award be adopted for such plans, the Sub-Committee
established a maximum award of $1,000,000 which can be paid under any awards
granted under the MICP or the LTPIP. The establishment of maximum awards for
both the MICP and the LTPIP allows payouts under both the MICP and the LTPIP to
be excluded from the $1 million pay cap.
16
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CEO COMPENSATION
Alan Hoops, the President and Chief Executive Officer of the Company,
received an annual base salary of $375,000 in calendar year 1993. As a result of
a review of salaries of peer companies and in recognition of Mr. Hoops'
performance in the capacity as President and Chief Executive Officer since April
1993, the Committee increased Mr. Hoops' salary to $450,000 in January 1994.
Mr. Hoops earned $405,000 in MICP compensation for fiscal 1994 performance,
the maximum incentive award under the 1994 MICP, for surpassing the maximum
performance goal for earnings per share specified in the 1994 MICP. The
Sub-Committee increased, beginning with fiscal 1994, the target and maximum
opportunity for Mr. Hoops under the MICP.
For the 1992-1994 LTPIP performance cycle, Mr. Hoops earned $334,200 in
LTPIP compensation of which 40 percent was paid in the form of the Company's
Class B Common Stock and 60 percent was paid in cash. Mr. Hoops received the
maximum LTPIP award for surpassing the maximum goals of return on equity and
growth in total Company revenue.
Mr. Hoops received non-qualified stock options to purchase 25,000 shares of
the Company's Class B Common Stock at $40.50 per share (the fair market value of
the stock at the time of grant). The options vest 25 percent per year following
the first year of grant. Mr. Hoops also received non-qualified stock options to
purchase 40,000 shares of Class B Common Stock at $40.50 per share (the fair
market value of the stock at the time of grant). These options become
exercisable at the earlier of seven years from the date of grant or when the
Company achieves a specified pre-tax operating profit from non-commercial and
non-Medicare operations and from commercial and Medicare operations from the
Company's business units other than California, Oklahoma, Oregon and San
Antonio.
The foregoing report has been furnished by:
David R. Carpenter, CHAIRMAN
Warren E. Pinckert II
Lloyd Ross
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PERFORMANCE GRAPH
The following graph demonstrates the performance of the cumulative total
return to the shareholders of the Company's Class A Common Stock during the
previous five years in comparison to the cumulative total return on the Standard
& Poor's Health Care Composite Index and the Standard & Poor's 500 Stock Index.
TOTAL SHAREHOLDERS' RETURN
PACIFICARE HEALTH SYSTEMS, INC.
INDEXED / CUMULATIVE RETURNS
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
BASE
PERIOD RETURN RETURN RETURN RETURN RETURN
COMPANY / INDEX NAME 1989 1990 1991 1992 1993 1994
- ------------------------- ------ ------ ------ ------ ------ ------
PacifiCare Health
Systems, Inc............ 100 59.00 109.00 316.00 303.01 633.47
Standard & Poor's
Index................... 100 90.76 119.04 132.20 149.39 154.89
Health Care Composite.... 100 110.40 162.96 156.19 134.56 162.90
</TABLE>
This total shareholders return model assumes reinvested dividends.
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COMPENSATION OF DIRECTORS
CASH COMPENSATION
Directors who are not full-time employees of the Company or UniHealth
receive, as compensation for their services, an annual retainer of $20,000,
$1,000 for each Board of Directors meeting attended and $1,000 for each Board
Committee meeting attended not to exceed $2,000 per day on any day in which
multiple Board and/or committee meetings are attended, except for the Chairman
of the Board and Chairmen of Committees who receive an additional 50 percent of
the amount paid for attendance at meetings for each Board Committee meeting
attended, not to exceed $3,000 per day on any day in which multiple Board and/or
committee meetings are attended. Terry Hartshorn, the Chairman of the Board of
Directors, receives an annual base salary of $132,250 as compensation for his
services. Mr. Hartshorn also receives benefits under the Company's benefit
plans, including the MICP and the LTPIP, similar to those which other executive
officers of the Company are entitled. In the event Mr. Hartshorn is terminated
by the Company (other than for incapacity, disability, habitual neglect or gross
misconduct) within 24 months of a change in ownership or control, his employment
agreement provides for payment of his base salary, certain benefits and payment
of benefits under the Company's MICP and LTPIP for a period equal to the longer
of the remaining term of his employment agreement or 24 months following the
effective date of termination. The Chairman of the Board and the Company's
Directors are all entitled to reimbursement expenses incurred in attending Board
of Directors and Board Committee meetings.
RETIREMENT PLAN
A non-qualified retirement plan has been established for Directors who are
not full-time employees of the Company or UniHealth. Upon retirement, each such
Director shall receive an annual amount equal to the average annual retainer for
the preceding three-year period, provided five years of service as a Director
have been completed.
STOCK OPTION PLAN
THE DIRECTORS PLAN
In fiscal 1994, eligible Directors were granted NQSOs pursuant to the 1992
Non-Officer Directors Stock Option Plan of PacifiCare Health Systems, Inc. (the
"Directors Plan"). Non-officer Directors of the Company, who were not eligible
to receive awards under the Employee Plan, were eligible to receive NQSOs under
the Directors Plan. The Company's Class B Common Stock are the shares of stock
subject to the Directors Plan and no more than 140,000 shares of Class B Common
Stock are subject to NQSOs granted under the Directors Plan. If a NQSO granted
under the Directors Plan expires or is terminated or cancelled, the shares of
Class B Common Stock subject to NQSOs shall be added to the shares of Class B
Common Stock otherwise available for issuance pursuant to NQSOs granted under
the Directors Plan. The Directors Plan provides for adjustments in the number
and kind of shares subject to said plan, and to outstanding NQSOs in the event
of a reorganization, merger, consolidation, recapitalization, reclassification,
stock split, stock dividend or combination of shares, extraordinary cash or
non-cash dividends declared on outstanding shares of Class B Common Stock or
other similar transactions.
Seven Directors of the Company were eligible to participate in the Directors
Plan during fiscal 1994. Eligible Directors are automatically granted NQSOs to
purchase 2,000 shares of Class B Common Stock on December 31 of each year;
provided that, during the twelve month period preceding December 31, the
optionee Director served on the Board of Directors and was not eligible to
receive awards under the Employee Plan. All NQSOs granted pursuant to the
Directors Plan are subject to the terms of the Directors Plan.
The per share exercise price of the shares of Class B Common Stock subject
to any NQSO granted under the Directors Plan is 100 percent of the fair market
value of the shares on the date of grant. NQSOs granted under the Directors Plan
vest in four cumulative installments of 25 percent of the shares of Class B
Common Stock covered by each NQSO beginning on the first anniversary of the date
of the grant.
NQSOs granted under the Directors Plan may not be exercised after the
earlier of: (i) the expiration of ten years and one day from the date the NQSO
was granted; (ii) the expiration of eight months from the time the optionee
voluntarily or involuntarily ceases to serve as a Director of the Company; (iii)
the expiration of
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one year from the date of the Optionee's cessation to continue to serve as a
Director of the Company by reason of disability or death; or (iv) on the
effective date of (a) the liquidation or dissolution of the Company, or (b) a
change of control event.
Messrs. Carpenter, Leary, Pinckert, Reed and Ross were each automatically
granted NQSOs to purchase 2,000 shares of Class B Common Stock pursuant to the
Directors Plan during fiscal 1994.
CERTAIN TRANSACTIONS
The Company and its subsidiaries purchased health care services from
hospitals owned and managed by UniHealth totaling $61,497,000 for the fiscal
year ended September 30, 1994. Under the terms of a management arrangement with
UniHealth, the Company paid $831,000 for management fees, payroll processing
services and other services in the fiscal year ended September 30, 1994. At
September 30, 1994, $251,000 was payable to UniHealth.
UniHealth purchased health care coverage from the Company and its
subsidiaries in the amount of $10,050,000 for the fiscal year ended September
30, 1994. Amounts receivable from UniHealth were $1,000,000 at September 30,
1994.
Joseph S. Konowiecki, the Secretary and General Counsel of the Company, is
the sole shareholder of Joseph S. Konowiecki, Inc., a California professional
corporation, which is a partner of the law firm of Konowiecki & Rank. The
Company purchased legal services from Konowiecki & Rank in the amount of
$3,137,888 for the fiscal year ended September 30, 1994. The amount payable to
Konowiecki & Rank at September 30, 1994 was $248,000.
In April 1984, the Company extended a loan in the amount of $300,000 to Mr.
Hartshorn in exchange for a promissory note payable to the Company. The note was
secured by a trust deed on Mr. Hartshorn's residence and was payable in monthly
installments at a rate of six percent per annum. The principal amount of the
loan was reduced through debt forgiveness in the amount of $15,000 per year for
five years commencing in March 1990. The remaining principal was due and was
paid in March 1994.
COMPLIANCE WITH SECTION 16(A) OF THE SECURITIES EXCHANGE ACT
Section 16(a) of the Exchange Act requires the Company's Executive Officers
and Directors, and persons who own more than 10 percent of a registered Class of
the Company's equity securities to file reports of ownership on Forms 3, 4 and 5
with the SEC. Officers, Directors and greater than 10 percent shareholders are
required by SEC regulation to furnish the Company with copies of all Forms 3, 4
and 5 they file.
Based solely on the Company's review of the copies of such forms it has
received and written representations from certain reporting persons that they
were not required to file Forms 5 for specified fiscal years, the Company
believes that all of its Executive Officers, Directors and greater than 10
percent beneficial owners complied with all filing requirements applicable to
them with respect to transactions during fiscal 1994.
THE PROPOSALS
APPROVAL OF THE SECOND AMENDED AND RESTATED 1989
STOCK OPTION PLAN FOR OFFICERS AND KEY EMPLOYEES
(ITEM 2 ON PROXY CARD)
The Board of Directors proposes that the shareholders approve the Second
Amended and Restated 1989 Stock Option Plan for Officers and Key Employees of
PacifiCare Health Systems, Inc. (the "Amended Employee Plan"). The following is
a summary of the material provisions of the Amended Employee Plan; it should,
however, be read in conjunction with, and is qualified in its entirety by
reference to, the complete text of the Amended Employee Plan which is attached
hereto as Exhibit A.
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DESCRIPTION OF THE EMPLOYEE PLAN
Under the Employee Plan, which was approved by the shareholders at the 1992
Special Meeting of Shareholders with amendments being approved at the 1994
Annual Meeting of Shareholders, incentive stock options, NQSOs (together, the
"Options") and stock appreciation rights ("SARs") may be granted to officers and
key employees of the Company or its subsidiaries with respect to the Class A and
Class B Common Stock of the Company. References to Common Stock (except as
otherwise indicated) refer to or include both Class A and Class B Common Stock.
In addition, under the Employee Plan, the Company may grant shares of Class B
Common Stock in lieu of cash compensation ("Stock Payments"). The Options
together with the SARs and the Stock Payments (and upon the effectiveness of the
amendments, Stock Payments shall include shares of Class B Common Stock being
granted as an incentive to employment with the Company) shall hereinafter be
referred to as the "Awards."
In December 1994, the Sub-Committee amended and restated the Employee Plan
and adopted it in the form of the Amended Employee Plan. The Amended Employee
Plan is subject to shareholder approval. The following description of the
Employee Plan shall apply to the Amended Employee Plan, except where otherwise
described below.
The Employee Plan is administered by the Sub-Committee, which consists of
two members of the Board of Directors, each of whom are both "disinterested
persons" as that term is defined in Rule 16b-3 promulgated under the Exchange
Act and "outside directors" as defined for purposes of Section 162(m). The Sub-
Committee possesses absolute discretion in determining to whom Awards may be
granted, the types of Awards granted, the number of shares of Common Stock
subject to Awards and the terms and conditions of such Awards, consistent with
the Employee Plan; provided however that currently, no participant may receive
NQSOs or SARs for more than 100,000 shares during any fiscal year. The
Sub-Committee also has the power to interpret the Employee Plan, and the Awards
granted pursuant thereto, and to adopt such rules as may be necessary to
interpret, regulate or administer the Employee Plan.
The Awards under the Employee Plan may be granted in the form of incentive
stock options ("ISOs") qualifying under Section 422 of the Code, NQSOs and SARs,
Stock Payments or any combination thereof. SARs compensate holders for an
increase in the value of the Common Stock during the period commencing with the
granting of the SAR until such right is exercised. A SAR may be granted either
in connection with or independently of an Option. The number of shares of Common
Stock available for Awards under the Employee Plan, as currently in effect, may
not exceed one and one-half percent (1 1/2%) of the shares of Common Stock
outstanding on the last day of the previous fiscal year, and the maximum number
of ISOs available under the Employee Plan is 1,800,000. There is no limitation
on the number of shares of Common Stock subject to SARs which are unrelated to
Options, other than the per participant limit. The Amended Employee Plan will
increase the number of shares of Class A and Class B Common Stock available
under the Amended Employee Plan and would limit the number of NQSOs or SARs
available for grant to any participant of the Employee Plan to 200,000 shares
during any fiscal year. For a complete description of the changes to the
Employee Plan contained in the Amended Employee Plan see "Amended Employee
Plan."
The Sub-Committee may approve a payment in Class B Common Stock to any
employee who otherwise may be entitled to a cash payment, other than base
salary, such as in a payment under one of the performance incentive programs of
the Company. After the effectiveness of the Amended Employee Plan, the
Sub-Committee may approve a payment in Class B Common Stock to an employee as an
incentive to employment with the Company. In the event Class B Common Stock is
issued in lieu of such a cash compensation payment or as an employment
incentive, the Class B Common Stock will be valued at its fair market value on
the date of payment. A Stock Payment will be evidenced by a written instrument
or granted pursuant to a written performance plan adopted by the Sub-Committee.
The per share exercise price of the Common Stock subject to an Option shall
not be less than 100 percent of the fair market value of such Common Stock on
the date of grant. If an Option consists of an ISO granted to an individual or
entity already owning more than 10 percent of the total combined voting power of
the Company, or of any subsidiary or parent thereof (a "10% Shareholder"), the
per share exercise price for the Common Stock subject to such ISO shall not be
less than 110 percent of the fair market value of the Common Stock on the date
of grant.
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Except as the Sub-Committee may otherwise provide, no Option may be
exercised within the first year after it has been granted. Additionally, ISOs
must be exercised within the earlier of: (i) 10 years after being granted
(within five years, if granted to a 10% Shareholder); (ii) three months after an
employee's termination for any reason, except in the case of death or
disability; or (iii) one year after an employee's death or disability, whichever
occurs first.
The Sub-Committee may provide that Options and SARs will terminate upon the
merger of the Company with or into another corporation or the acquisition of the
Company by another corporation which acquires substantially all of the Company's
assets or 80 percent or more of the Company's voting securities (a "Change of
Control Event"). The Sub-Committee may also accelerate the exercisability of
certain Options and SARs prior to the occurrence of a Change of Control Event.
SARs unrelated to Options may be granted at any time. SARs related to NQSOs
may be granted either at the time such Options are granted or at any time
thereafter. SARs related to an ISO may only be granted at the time the ISO is
granted. All SARs which are granted to persons subject to Section 16(b) of the
Exchange Act may not be exercised any time prior to six months after the grant
of such SAR. SARs related to Options, however, are exercisable only when and to
the extent the related Options are exercisable. Upon the exercise of an SAR
related Option, the holder will be entitled to receive the difference between
the exercise price per share of the Option and the fair market value of a share
of Common Stock on the date of exercise multiplied by the number of shares
subject to the SAR. Upon the exercise of an SAR not related to an Option, the
holder will be entitled to receive the difference between the fair market value
of a share of Common Stock on the date of exercise of the SAR and the fair
market value of a share of Common Stock on the date of grant multiplied by the
number of shares subject to the SAR. Upon the exercise of an SAR, payment shall
be made in cash or, in the discretion of the Sub-Committee, in whole shares of
Common Stock.
Only officers and key employees of the Company are eligible for Awards
granted under the Employee Plan. After the effectiveness of the Amended Employee
Plan, consultants to the Company would be eligible to receive Awards, other than
ISOs, under the Amended Employee Plan. The number of eligible participants of
the Employee Plan, as of the date hereof, totals approximately 100 of the key
employees or officers of the Company. Directors of the Company who are not
officers or key employees of the Company may not be granted Awards under the
Employee Plan. Within these parameters, the Sub-Committee may adopt any other
rules to govern eligibility for Awards.
An exercisable Award is exercisable by written notice to the Secretary or
Chief Financial Officer of the Company, and in the case of Options, the notice
must be accompanied by the full purchase price of the Common Stock. The purchase
price may be paid in cash, or with the consent of the Sub-Committee, by tender
of shares of any Class of the Company's Common Stock owned by the optionee or
through a cashless exercise of Options or any combination thereof. Shares of any
Class of the Company's Common Stock tendered in exercise of Options are valued
at their fair market value on the date of delivery to the Company. Upon the
exercise of an SAR, the holder thereof is entitled to a cash payment or, at the
Sub-Committee's election, the transfer of Common Stock, valued at the
appreciated amount of the Company's Common Stock, or a combination of cash and
Common Stock.
During fiscal 1994, the following individuals and groups were granted NQSOs
under the Employee Plan: Mr. Hoops, 65,000 shares; Mr. Folick, 94,000 shares;
Mr. Lipeles, 38,800 shares; Mr. Lowell, 37,000 shares; and Dr. Taylor, 37,000
shares; all Executive Officers as a group (23 persons), 466,000 shares; and all
employees who are not Executive Officers as a group, 262,700 shares. The
aggregated market value of the Common Stock underlying outstanding Awards as of
December 31, 1994 was $48,600,225.
REASONS FOR PROPOSAL
The purposes of the Employee Plan are to further the growth, development and
financial success of the Company by providing incentives to certain of its
executive and other key employees and consultants who have been or will be given
responsibility for the management or administration of the Company's business
affairs, by assisting them to become owners of capital stock of the Company and
thus to benefit directly from
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its growth, development and financial success and to enable the Company to
obtain and retain the services of the type of professional, technical and
managerial employees and consultants considered essential to the long-range
success of the Company.
Permitting consultants to be eligible to participate in the Amended Employee
Plan allows the Company to attract and retain key persons in roles other than as
employees or officers of the Company. Increasing the pool of available shares
and the limit on the number of shares which can underlie grants in addition to
permitting Stock Payments as an incentive to employment will allow the Company
to remain competitive in the health care industry with respect to bonuses and
will provide the Company with the ability to retain key personnel.
THE AMENDED EMPLOYEE PLAN
Under the Employee Plan, Section 3.1 provides that only officers and key
employees are eligible to receive awards under the Employee Plan. In addition,
Section 2.1 of the Employee Plan states that the maximum number of NQSOs or SARs
available for grant to any participant during any fiscal year shall not exceed
100,000. Section 2.1 also provides that the aggregate number of shares of Class
A and Class B Common Stock available for Awards granted under the Employee Plan
for each fiscal year, on and after October 1, 1992, shall not exceed one and
one-half percent (1 1/2%) of the outstanding shares of Common Stock of the
Company as of the last day of the previous fiscal year. Sections 1.27 and 3.3
permits grants of shares of Class B Common Stock in lieu of cash compensation
other than base salary.
The Sub-Committee has approved the Amended Employee Plan. The Amended
Employee Plan amends Sections 1.14 (now Section 1.13), 1.27, 2.1 and 3.3 of the
Employee Plan. The Amended Employee Plan would provide that: (i) "Stock
Payments" include both grants of shares of Class B Common Stock in lieu of cash
compensation other than base salary and grants of shares of Class B Common Stock
to employees as an incentive to employment with the Company; (ii) the inclusion
of consultants to the persons eligible to participate in the Amended Employee
Plan; (iii) an increase in the limit on the number of options and SARs available
for grant to any participant of the Amended Employee Plan from 100,000 shares to
200,000 shares during any fiscal year; and (iv) an increase of the limit on the
aggregate number of shares of Common Stock which may be subject to awards
granted during any fiscal year beginning with October 1994 from one and one-half
percent (1 1/2%) of the aggregate outstanding shares of Class A and Class B
Common Stock of the Company as of the last day of the previous fiscal year to
two percent (2%) of the aggregate outstanding shares of Class A and Class B
Common Stock of the Company as of the last day of the previous fiscal year.
The effectiveness of the Amended Employee Plan is subject to approval of the
shareholders holding a majority of the Company's shares of Class A Common Stock
represented in person or by proxy at the Annual Meeting. The Amended Employee
Plan is being submitted for shareholder approval in order to satisfy Rule 16b-3
promulgated under the Exchange Act.
FEDERAL INCOME TAX CONSEQUENCES
Set forth below is a description of the federal income tax consequences
under the Code of the grant and exercise of the benefits awarded under the
Amended Employee Plan.
NON-QUALIFIED STOCK OPTION. There will be no federal income tax
consequences to either the employee or the Company on the grant of a NQSO. On
the exercise of a NQSO, the employee will have taxable ordinary income equal to
the excess of the fair market value of the shares of Common Stock received on
the exercise date over the option price of the shares. The Company will be
entitled to a tax deduction in an amount equal to such excess, provided the
Company complies with applicable withholding or reporting rules. Any ordinary
income realized by an employee upon exercise of a NQSO will increase his tax
basis in the Common Stock thereby acquired. Upon the sale of Common Stock
acquired by exercise of a NQSO, employees will realize long-term or short-term
capital gain or loss depending upon their holding period for such stock.
An employee who surrenders shares of Common Stock in payment of the exercise
price of a NQSO will not recognize gain or loss on his surrender of such shares,
but will recognize ordinary income on the exercise of the NQSO as described
above. Of the shares received in such an exchange, that number of shares equal
to
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the number of shares surrendered will have the same tax basis and capital gains
holding period as the shares surrendered. The balance of the shares received
will have a tax basis equal to their fair market value on the date of exercise
and the capital gains holding period will begin on the date of exercise.
If the Company delivers cash (in lieu of fractional shares) or shares of
Common Stock to an employee pursuant to a cashless exercise program, the
employee will recognize ordinary income equal to the cash paid and the fair
market value as of the date of exercise of any shares delivered to him. An
amount equal to any such ordinary income will be deductible by the Company,
provided it complies with applicable withholding requirements.
INCENTIVE STOCK OPTIONS. Under the Code, an employee will not realize
taxable income by reason of the grant or the exercise of an ISO, although the
employee will have a tax preference item in the year of exercise for purposes of
the alternative minimum tax equal to the amount by which the fair market value
of the shares of Common Stock received on the date of exercise exceeded the
option price and the Company will not be entitled to any deduction. If an
employee exercises an ISO and does not dispose of the shares within two years
from the date the option was granted or within one year from the date shares
were transferred to the employee, the entire gain, if any, realized upon
disposition will be taxable to the employee as long-term capital gain. If an
employee sells or exchanges the shares within such one-year or two-year period
in a manner so as to violate the holding period requirements (a "disqualifying
disposition"), the employee generally will realize ordinary income in the year
of disposition, and, provided the Company complies with applicable withholding
or reporting requirements, the Company will receive a corresponding deduction,
in an amount equal to the excess of (1) the lesser of (a) the amount realized on
the sale or exchange and (b) the fair market value of the shares on the date of
option exercise over (2) the option price. Any additional gain realized on the
sale or exchange will be long-term or short-term capital gain. If the
disposition is by gift and violates the holding period requirements, the amount
of the employee's ordinary income, and the Company's deduction, is equal to the
fair market value of the shares on the date of exercise less the option price.
An employee who surrenders shares of Common Stock as payment of the exercise
price of his ISO generally will not recognize gain or loss on his surrender of
such shares. The surrender of shares previously acquired upon exercise of an ISO
in payment of the exercise price of another ISO will be a disqualifying
disposition of such stock if the ISO holding period requirements described above
have not been satisfied.
Under the proposed Treasury Regulations, all of the shares received by an
employee upon such stock exchange exercise will be subject to the ISO holding
period requirements. Of those shares, a number of shares equal to the number of
shares of Common Stock surrendered by the employee (the "Exchange Shares") will
have the same tax basis for capital gains purposes (increased by any ordinary
income recognized as a result of any disqualifying disposition of the
surrendered shares if they were ISO shares) and the same capital gains holding
period as the shares surrendered. For purposes of determining ordinary income
upon a subsequent disqualifying disposition of the Exchange Shares, the amount
paid for such shares will be deemed to be the fair market value of the shares
surrendered. The balance of the shares received by the employee will have a tax
basis (and a deemed purchase price) of zero and a capital gains holding period
beginning on the date of exercise. The ISO holding period for all shares will be
the same as if the option had been exercised for cash.
If the Company delivers cash (in lieu of fractional shares) or shares of
Common Stock to an employee pursuant to a cashless exercise program, the
employee will recognize ordinary income in an amount equal to the cash paid and
the fair market value as of the date of exercise of any shares delivered to him.
An amount equal to any such ordinary income will be deductible by the Company.
An ISO that is exercised by the employee more than three months after the
employee retires will be treated as a NQSO for federal income tax purposes.
SARS. There will be no federal income tax consequences to either the
employee or the Company on the grant of an SAR or during the period that the SAR
remains outstanding. On the exercise of an SAR, the amount that the employee is
paid, whether in Common Stock or cash, is taxable to the employee as ordinary
income and the Company is entitled to a corresponding deduction, provided it
complies with applicable
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withholding requirements. Upon the sale of Common Stock acquired by exercise of
an SAR, the employee will realize long-term or short-term capital gain or loss,
depending upon his holding period for such stock, with the tax basis in the
Common Stock being the ordinary income realized upon exercise.
STOCK PAYMENTS. An employee who receives a payment of stock will have
compensation income equal to the fair market value of the stock received and the
Company will have a deduction in the same amount.
PARACHUTE PAYMENTS. The exercise of any portion of an option that is
accelerated, as a result of a change in control or a similar event, may cause
payments with respect to such accelerated options to be treated as "parachute
payments" as defined in the Code. Any such parachute payments may be non-
deductible to the Company in whole or in part and may subject the employee to a
non-deductible 20 percent federal excise tax on all or a portion of such
payment.
ERISA. The Amended Employee Plan is not subject to any provisions of the
Employee Retirement Income Security Act of 1974 and is not required to be
qualified under Section 401(a) of the Code.
APPROVAL OF PERFORMANCE OBJECTIVES TO,
AND MAXIMUM AWARDS UNDER, THE AMENDED
LONG-TERM PERFORMANCE INCENTIVE PLAN, AS AMENDED
(ITEM 3 ON THE PROXY CARD)
The Board of Directors proposes that the shareholders approve the LTPIP
Modifications (as defined below). The following is a summary of the material
provisions of the Amended Long-Term Performance Incentive Plan, as amended (the
"LTPIP"), and the LTPIP Modifications.
DESCRIPTION OF THE LTPIP
The LTPIP was adopted by the Board of Directors of the Company in 1988 and
amended in March and December 1993 and approved by the shareholders at the 1994
Annual Meeting of Shareholders. In December 1994, the Sub-Committee approved
modifications to the LTPIP (the "LTPIP Modifications"), subject to shareholder
approval. For a detailed discussion of the LTPIP Modifications, see
"Modifications to the LTPIP" below.
The LTPIP is administered by the Sub-Committee. The LTPIP limits the
constituency of the Sub-Committee to Directors who are considered outside
directors for purposes of Section 162(m). Under the terms of the LTPIP, all
Executive Officers of the Company or any subsidiary of the Company are eligible
for participation. Additionally, any officer or full-time employee of the
Company or any subsidiary of the Company as are determined by the Sub-Committee
to have a direct, significant, and measurable impact on the attainment of the
Company's or subsidiary's long-term growth and profitability objectives shall be
eligible to participate in the LTPIP. Within these parameters, the Sub-Committee
shall have total discretion to determine which participants are eligible to
receive awards under the LTPIP, which may be in the form of cash, Common Stock
of the Company, or a combination of both. The number of eligible participants in
the LTPIP, as of the date hereof, totals approximately 100 of the key employees
of the Company.
Incentive compensation is based on the achievement of performance objectives
established by the Sub-Committee measured over a three year performance period.
Until further notice and resubmission to shareholders for approval (and after
approval of the LTPIP Modifications), the performance objective will be based on
increases in earnings per share. Prior to the commencement of services for each
performance period, the Sub-Committee will establish, in writing, minimum
targets for earnings per share below which no awards will be earned, maximum
targets above which no additional awards will be earned, and the formula for
computing each participant's award if such target is achieved.
Under the LTPIP, if the Sub-Committee determines that the established
targets are no longer suitable due to changes in circumstances affecting the
Company, the Sub-Committee will have sole discretion during the performance
period to modify these targets; provided, however, that no such adjustment will
decrease the minimum target applicable to an Executive Officer or otherwise have
the potential effect of increasing the amount of compensation payable to an
Executive Officer upon the attainment of the original targets.
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Under the terms of the LTPIP, the Sub-Committee may not adjust individual
awards to reflect an overall evaluation of performance at the end of each
performance period. However, the LTPIP permits the Sub-Committee to make
additional awards ("Discretionary Incentive Awards") to participants, including
Executive Officers, who are determined by the Sub-Committee to have positively
impacted directly on the attainment of the performance objectives established by
the Committee.
The establishment of awards for Executive Officers shall be subject to, and
contingent upon, shareholder approval of the material terms of the performance
objective. For this purpose, the material terms shall include: (i) a general
description of the business criteria on which the performance objective is
based; and (ii) either the maximum amount of the compensation to be paid, or the
formula used to calculate the amount of compensation if such performance
objective is obtained, and may exclude the precise targets below which no
compensation will be paid, or above which no additional awards will be made.
Absent a change in the material terms of the performance objective, the Company
will be required to obtain reapproval of the material terms of the performance
objectives from the shareholders on the fifth year following the year in which
the shareholders previously approved such terms.
Executive Officers receive compensation under the LTPIP based on a formula.
Under the LTPIP, as currently in effect, the maximum compensation which an
Executive Officer may receive under any award granted under the LTPIP is based
solely upon the formula used to determine the Executive Officer's compensation
under the LTPIP. Pursuant to this formula, an Executive Officer will receive
between 10 percent and 45 percent of base salary (depending upon the level of
the Executive Officer) if the minimum targeted earnings per share is achieved.
The percentage of base salary increases to an amount between 20 percent and 90
percent (depending upon the level of the Executive Officer) if the maximum
targeted earnings per share is achieved. After adoption of the LTPIP
Modifications, the maximum award set by the Sub-Committee which an Executive
Officer may receive pursuant to any award under the LTPIP shall be $1,000,000.
If the performance objectives are satisfied, the Sub-Committee shall certify
in writing, prior to the payment of any performance award, that such objectives
were satisfied.
Awards under the LTPIP which are based on achieving certain performance
objectives, the amount of which are determined by formula, will qualify as
performance based compensation, assuming shareholder approval of the LTPIP
Modifications is obtained. However, the Discretionary Incentive Awards will not
qualify as performance based compensation for purposes of Section 162(m) and may
be subject to the $1 million deduction limitation.
REASON FOR PROPOSAL
In an effort to continue to comply with the provisions of Section 162(m) and
the regulations promulgated thereunder to qualify the compensation payable under
the LTPIP to the chief executive officer and the four other most highly
compensated officers of the Company ("the "Covered Employees"), the LTPIP
Modifications are being submitted to the shareholders for approval at the Annual
Meeting. Shareholder approval shall be a condition to the Company being able to
exclude compensation payable to Covered Employees under the LTPIP from the $1
million deduction limitation.
MODIFICATIONS TO THE LTPIP
Shareholders are being requested to approve the change in performance
objectives from increases in return on equity and increases in revenue of
non-core business to earnings per share. In addition, the shareholders are being
requested to approve the maximum award of $1,000,000 which an Executive Officer
may receive pursuant to any award under the LTPIP based on the formula described
above.
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APPROVAL OF PERFORMANCE OBJECTIVES TO,
AND MAXIMUM AWARDS UNDER, THE MANAGEMENT
INCENTIVE COMPENSATION PLAN, AS AMENDED
(ITEM 4 ON PROXY CARD)
The Board of Directors proposes that the shareholders approve the MICP
Modifications (as defined below). The following is a summary of the material
provisions of the Amended Management Incentive Compensation Plan, as amended
(the "MICP"), and the MICP Modifications.
DESCRIPTION OF THE MICP
The MICP was adopted by the Board of Directors of the Company in March 1993
and amended in December 1993, and approved by the shareholders at the 1994
Annual Meeting of Shareholders. In December 1994, the Sub-Committee approved
modifications to the MICP (the "MICP Modifications"), subject to shareholder
approval. For a detailed discussion of the MICP Modifications, see
"Modifications to the MICP" below.
The MICP is administered by the Sub-Committee. The MICP limits the
constituency of the Sub-Committee to Directors who are considered outside
directors for purposes of Section 162(m). Under the terms of the MICP, all
Executive Officers of the Company or any subsidiary of the Company are eligible
for participation. Additionally, any officer or full-time employee of the
Company or any subsidiary of the Company as are determined by the Sub-Committee
to have a direct, significant, and measurable impact on the attainment of the
Company's or subsidiary's annual growth and profitability objectives shall be
eligible to participate in the MICP. Within these parameters, the Sub-Committee
shall have total discretion to determine which participants are eligible to
receive awards under the MICP. The number of eligible participants of the MICP,
as of the date hereof, totals approximately 100 of the key employees of the
Company.
Incentive compensation is based on the achievement of performance objectives
established by the Sub-Committee for each plan year. Until further notice and
resubmission to shareholders for approval, the performance objectives will be
based on: (i) increases in earnings per share; and (ii) general and
administrative costs as a percentage of revenue (after approval of the MICP
Modifications). Prior to the commencement of services for each plan year, the
Sub-Committee will establish, in writing, minimum targets for the earnings per
share performance objective which must be achieved in order for any award to be
earned, maximum targets above which no additional awards will be earned, and the
formula for computing each participant's award if such target is achieved. For
fiscal 1995, the Company has also established a targeted range for general and
administrative costs as a percentage of revenue to adjust awards under the MICP.
If general and administrative costs as a percentage of revenue at the end of
fiscal 1995 exceeds this target, bonuses will be reduced by a specified
percentage. If general and administrative costs as a percentage of revenue equal
the target, no adjustment will be made to awards under the MICP. If general and
administrative costs as a percentage of revenue are lower than the target,
awards under the MICP will be increased by a specified percentage.
Under the MICP, if the Sub-Committee determines that the established targets
are no longer suitable due to changes in circumstances affecting the Company,
the Sub-Committee will have sole discretion during the plan year to modify these
targets; provided, however, that no such adjustment will decrease the minimum
target applicable to an Executive Officer, or otherwise have the potential
effect of increasing the amount of compensation payable to an Executive Officer
upon the attainment of the original targets.
Under the terms of the MICP, the Sub-Committee may not adjust individual
awards to reflect an overall evaluation of performance at the end of each plan
year. However, the MICP permits the Sub-Committee to make additional awards
(also referred to as "Discretionary Incentive Awards") to participants,
including Executive Officers, who are determined by the Sub-Committee to have
positively impacted directly on the attainment of the performance objectives
established by the Sub-Committee.
Under the terms of the MICP, the establishment of awards for Executive
Officers shall be subject to, and contingent upon, shareholder approval of the
material terms of the performance objectives. For this purpose, the material
terms shall include: (i) a general description of the business criteria on which
the performance objective is based; and (ii) either the maximum amount of the
compensation to be paid, or the
27
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formula used to calculate the amount of compensation if such performance
objective is obtained, and may exclude the precise targets below which no
compensation will be paid, or above which no additional awards will be made.
Absent a change in the material terms of the performance objectives, the Company
will be required to obtain reapproval of the material terms of the performance
objectives from the shareholders on the fifth year following the year in which
the shareholders previously approved such terms.
Executive Officers receive compensation under the MICP based on a formula.
Under the MICP, as currently in effect, compensation which an Executive Officer
may receive under any award granted under the MICP is based solely upon the
formula used to determine the Executive Officer's compensation under the MICP.
Pursuant to this formula, an Executive Officer will receive between 10 percent
and 45 percent of base salary (depending upon the level of the Executive
Officer) if the minimum targeted earnings per share is achieved. The percentage
of base salary increases to an amount between 20 percent and 90 percent
(depending upon the level of the Executive Officer) if the maximum targeted
earnings per share is achieved. After adoption of the MICP Modifications, the
maximum compensation set by the Sub-Committee which an Executive Officer may
receive pursuant to any award under the MICP shall be $1,000,000.
If the performance objectives are satisfied, the Sub-Committee shall certify
in writing, prior to the payment of any performance award, that such objectives
were satisfied.
Awards under the MICP which are based on achieving certain performance
objectives, the amount of which are determined by formula, will qualify as
performance based compensation, assuming shareholder approval of the MICP
Modifications is obtained. However, the Discretionary Incentive Awards will not
qualify as performance based compensation for purposes of the Section 162(m) and
may be subject to the $1 million deduction limitation.
REASON FOR PROPOSAL
In an effort to continue to comply with the provisions of Section 162(m) and
the proposed regulations promulgated thereunder to qualify the compensation
payable under the MICP to Covered Employees, the MICP Modifications are being
submitted to the shareholders for approval at the Annual Meeting. The approval
by shareholders shall be a condition to the Company being able to exclude
compensation payable to Covered Employees under the MICP from the $1 million
deduction limitation.
MODIFICATIONS TO THE MICP
Shareholders are being requested to approve performance objectives, in
addition to increases in earnings per share. The additional performance
objective is general and administrative costs as a percentage of revenue. In
addition, the shareholders are being requested to approve the maximum award of
$1,000,000 which an Executive Officer may receive pursuant to any award under
the MICP based on the formula described above.
RELATIONSHIP OF CERTIFIED PUBLIC ACCOUNTANTS
The Board of Directors selects the independent certified public accountants
for the Company each year. Ernst & Young has acted in this capacity since 1984
and is expected to continue for the current fiscal year.
In connection with its audit functions, Ernst & Young audited the Company's
consolidated financial statements for the fiscal years ended September 30, 1992,
1993 and 1994.
Representatives of Ernst & Young are expected to attend the Annual Meeting,
may make a statement if they so desire, and will be available to respond to
appropriate questions. If possible, such questions should be submitted in
writing to the Company, at least 10 days prior to the Annual Meeting, at 5995
Plaza Drive, Cypress, CA 90630, Attention: Mr. Wayne Lowell, Chief Financial
Officer.
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 shareholders
which would be presented at the Annual Meeting. However, if any other business
should come before the meeting for shareholder action, the persons acting under
proxies in the enclosed Proxy Card will vote thereon in accordance with their
best judgment.
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SHAREHOLDERS PROPOSALS
Shareholders desiring to submit proposals for consideration by the
shareholders at the 1996 Annual Meeting of Shareholders are advised that their
proposals must be received by the Company no later than September 30, 1995 in
order to be eligible for inclusion in the Company's Proxy Statement and form of
proxy relating to that meeting.
COST OF SOLICITATION
The cost of soliciting proxies in the accompanying form will be borne by the
Company. In addition to solicitations by mail, directors, officers and regular
employees of the Company may solicit proxies in person or by telephone. No
compensation, other than their regular compensation, will be paid to them for
such solicitation. The Company may reimburse banks, brokers, nominees and other
fiduciaries for postage and reasonable clerical expenses incurred by them in
forwarding the proxy material to principals.
NOTE: UPON WRITTEN REQUEST OF ANY SHAREHOLDER ENTITLED TO RECEIVE THIS PROXY
STATEMENT, THE COMPANY WILL PROVIDE, WITHOUT CHARGE, A COPY OF ITS ANNUAL REPORT
ON FORM 10-K AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION. ANY SUCH
REQUEST SHOULD BE ADDRESSED TO THE COMPANY AT 5995 PLAZA DRIVE, CYPRESS,
CALIFORNIA 90630, ATTENTION: INVESTOR RELATIONS DEPARTMENT. THE REQUEST MUST
INCLUDE REPRESENTATION BY THE SHAREHOLDER THAT, AS OF JANUARY 3, 1995, SAID
SHAREHOLDER WAS A SHAREHOLDER OF THE COMPANY ON SUCH DATE.
By order of the Board of Directors
Joseph S. Konowiecki
SECRETARY
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EXHIBIT A
SECOND AMENDED AND RESTATED
1989 STOCK OPTION PLAN
FOR OFFICERS AND KEY EMPLOYEES
OF
PACIFICARE HEALTH SYSTEMS, INC.
PacifiCare Health Systems, Inc., a corporation organized under the laws of
the State of Delaware (the "Company"), hereby adopts this Second Amended and
Restated 1989 Stock Option Plan for Officers and Key Employees of PacifiCare
Health Systems, Inc. (the "Plan"), subject to shareholder approval. The purposes
of this Plan are as follows:
(1) To further the growth, development and financial success of the
Company by providing additional incentives to certain of its officers and
other key employees who have been or will be given responsibility for the
management or administration of the Company's business affairs.
(2) To enable the Company to obtain and retain the services of the type
of professional, technical and managerial personnel considered essential to
the long-range success of the Company by providing and offering them an
opportunity to become owners of capital stock.
ARTICLE I
DEFINITIONS
Whenever the following terms are used in this Plan, they shall have the
meaning specified below unless the context clearly indicates to the contrary.
Section 1.1--Act
"Act" shall mean the Securities Exchange Act of 1934, as amended.
Section 1.2--Amended Plan
"Amended Plan" shall mean the Amended and Restated 1989 Stock Option Plan
for Officers and Key Employees of PacifiCare Health Systems, Inc., as amended.
Section 1.3--Award
"Award" shall mean an Incentive Stock Option, Non-Qualified Stock Option, a
Stock Appreciation Right, a Stock Payment, or any combination thereof, granted
under the Plan.
Section 1.4--Board
"Board" shall mean the Board of Directors of the Company.
Section 1.5--Chief Financial Officer
"Chief Financial Officer" shall mean the Chief Financial Officer of the
Company.
Section 1.6--Class A Common Stock
"Class A Common Stock" shall mean the Class A Common Stock of the Company,
par value $.01 per share.
Section 1.7--Class B Common Stock
"Class B Common Stock" shall mean the Class B Common Stock of the Company,
par value $.01 per share.
Section 1.8--Code
"Code" shall mean the Internal Revenue Code of 1986, as amended.
Section 1.9--Committee
"Committee" shall mean the Committee of the Board of Directors of the
Company as defined in Section 7.1 hereof.
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Section 1.10--Common Stock
"Common Stock" shall mean either or both, as the context requires, the Class
A Common Stock and the Class B Common Stock.
Section 1.11--Company
"Company" shall mean PacifiCare Health Systems, Inc.
Section 1.12--Director
"Director" shall mean a member of the Board.
Section 1.13--Employee
"Employee" shall mean any employee (as defined in accordance with the
Treasury Regulations and Revenue Rulings then applicable under Section 3401(c)
of the Code) of the Company, or of any corporation which is then a Subsidiary or
a consultant who is providing bona fide services to the Company, whether such
employee is so employed, or such consultant is retained, at the time this Plan
is adopted or becomes so employed or retained subsequent to the adoption of this
Plan.
Section 1.14--Fair Market Value
The "Fair Market Value" of a share of the Company's Common Stock on the date
such determination is made shall mean: (i) the closing price of such share on
the principal exchange on which the shares of Common Stock are then trading, if
any, on such date, or, if shares of such stock were not traded on such date,
then on the next preceding trading day during which a sale occurred; or (ii) if
such stock is not traded on an exchange but is quoted on NASDAQ or a successor
quotation system, (1) the last sale price (if the stock is then listed as a
National Market Issue under the NASD National Market System), or (2) the mean
between the closing representative bid and asked prices (in all other cases) for
the stock on such date as reported by NASDAQ or such successor quotation system;
or (iii) if such stock is not publicly traded on an exchange and not quoted on
NASDAQ or a successor quotation system, the mean between the closing bid and
asked prices for the stock on such date as determined in good faith by the
Committee; or (iv) if the Company's Common Stock is not publicly traded, the
fair market value established by the Committee acting in good faith.
Section 1.15--Incentive Stock Option
"Incentive Stock Option" shall mean an Option which qualifies under Section
422 of the Code and which is designated as an Incentive Stock Option by the
Committee.
Section 1.16--NASDAQ
"NASDAQ" shall mean the National Association of Securities Dealers Inc.
Automated Quotation System.
Section 1.17--Non-Qualified Stock Option
"Non-Qualified Stock Option" shall mean an Option which is not an Incentive
Stock Option and which is designated as a Non-Qualified Stock Option by the
Committee.
Section 1.18--Officer
"Officer" shall mean an officer of the Company (including, without
limitation, the Chairman and Vice Chairman of the Board) or any corporation
which is then a Subsidiary, whether such Officer becomes an Officer at the time
this Plan is adopted or subsequent to the adoption of the Plan.
Section 1.19--Option
"Option" shall mean an option to purchase shares of the Class A Common Stock
or Class B Common Stock of the Company, granted under the Plan. "Options"
includes both Incentive Stock Options and Non-Qualified Stock Options.
Section 1.20--Parent Corporation
"Parent Corporation" shall mean any corporation in an unbroken chain of
corporations ending with the Company if each of the corporations other than the
Company then owns stock possessing 50 percent or more of the total combined
voting power of all classes of stock in one of the other corporations in such
chain.
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Section 1.21--Participant
"Participant" shall mean an Officer or Employee who is selected by the
Committee to receive an award.
Section 1.22--Plan
"Plan" shall mean this Second Amended and Restated 1989 Stock Option Plan
for Officers and Key Employees of PacifiCare Health Systems, Inc.
Section 1.23--Pronouns
The masculine pronoun shall include the feminine and neuter and the singular
shall include the plural, where the context so indicates.
Section 1.24--Regulations
"Regulations" shall mean final, temporary or proposed regulations
promulgated under the Code.
Section 1.25--Secretary
"Secretary" shall mean the Secretary of the Company.
Section 1.26--Stock Appreciation Right
"Stock Appreciation Right" or "Right" shall mean a right granted pursuant to
Article VI of the Plan to receive an amount of cash or, in the discretion of the
Committee, a number of shares of Class A Common Stock or Class B Common Stock of
the Company or a combination of shares of Class A Common Stock or Class B Common
Stock and cash, based on the increase in the Fair Market Value of the shares of
Class A Common Stock or Class B Common Stock subject to the right.
Section 1.27--Stock Payment
"Stock Payment" shall mean a payment in shares of Class B Common Stock
valued at the Fair Market Value at the time of the payment: (i) to replace all
or any portion of the compensation, other than base salary, that would otherwise
become payable to a Participant in cash; or (ii) to encourage employment with
the Company for employees.
Section 1.28--Subsidiary
"Subsidiary" shall mean any corporation in an unbroken chain of corporations
beginning with the Company if each of the corporations other than the last
corporation in the unbroken chain then owns stock possessing 50 percent or more
of the total combined voting power of all classes of stock in one of the other
corporations in such chain.
Section 1.29--Termination of Employment
"Termination of Employment" shall mean: (i) the time when the Participant
ceases to be an Employee or Officer of the Company or a Subsidiary for any
reason, including, but not limited to, a termination by resignation, discharge,
death or retirement, and with respect to a Participant who is a consultant, the
time when such consultant is no longer retained by the Company or any Subsidiary
of the Company, but excluding terminations where there is a simultaneous
reemployment or reappointment of the Participant as an Employee or Officer by
the Company or a Subsidiary; or (ii) with respect to a Participant who is an
Employee or Officer of a Subsidiary, the time when such Subsidiary ceases to be
a Subsidiary of the Company. The Committee, in its absolute discretion, shall
determine the effect of all other matters and questions relating to Termination
of Employment, including, but not limited to, the question of whether a
Termination of Employment resulted from a discharge for good cause, and all
questions of whether particular leaves of absence constitute Terminations of
Employment; provided, however, that, with respect to Incentive Stock Options, a
leave of absence shall constitute a Termination of Employment if, and to the
extent that, such leave of absence interrupts employment for the purposes of
Section 422(a)(2) of the Code.
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ARTICLE II
SHARES SUBJECT TO PLAN
Section 2.1--Shares Subject to Plan
The shares of stock subject to Awards shall be shares of the Company's Class
A Common Stock and shares of the Company's Class B Common Stock. The aggregate
number of such shares which may be subject to Options and Rights granted under
the Plan, prior to October 1, 1992 shall not exceed 805,558 shares of Common
Stock, subject to adjustment as provided herein including, but not limited to,
adjustments for dividends consisting of one share of Class B Common Stock for
one share of Class A Common Stock; and with respect to each fiscal year prior to
October 1, 1994 but subsequent to October 1, 1992, the aggregate number of
shares of Common Stock which may be subject to Awards granted during such year
shall not exceed one and one-half percent (1 1/2%) of the outstanding shares of
Common Stock of the Company as of the last day of the previous fiscal year,
subject to adjustment as provided herein. With respect to each fiscal year, on
and after October 1, 1994, the aggregate number of shares of Common Stock which
may be subject to Awards granted during such year shall not exceed two percent
(2%) of the aggregate outstanding shares of Class A and Class B Common Stock of
the Company as of the last day of the previous fiscal year, subject to
adjustment as provided herein. To the extent permissible under Rule 16b-3 of the
Act, any shares of Common Stock available to be subject to Awards granted during
a fiscal year and not made subject to Awards shall be added to the aggregate
number of shares of Common Stock available for Awards in succeeding fiscal
years. The maximum number of Incentive Stock Options available for grant under
the Plan shall be 1,800,000, subject to adjustment as provided herein.
The maximum number of Non-Qualified Stock Options or Stock Appreciation
Rights available for grant to any Participant during any fiscal year shall not
exceed 200,000, subject to adjustment as provided herein. If any Award, expires
or is terminated or cancelled without having been fully exercised, the number of
shares subject to such Award but as to which such Award was not exercised prior
to its expiration or cancellation may again be granted hereunder, subject to the
limitations contained herein, provided, however, that, in the case of the
cancellation or termination of a Non-Qualified Stock Option or Stock
Appreciation Right in the same fiscal year that such Non-Qualified Stock Option
or Stock Appreciation Right was granted, both the cancelled or terminated
Non-Qualified Stock Option or Stock Appreciation Right and the newly granted
Non-Qualified Stock Option or Stock Appreciation Right shall be counted in
determining whether the recipient has received the maximum number of such Awards
permitted under the Plan.
Section 2.2--Limitation on Incentive Stock Option Exercise
The aggregate Fair Market Value (determined as of the time the Option is
granted) of the shares subject to Incentive Stock Options which may first become
exercisable by any Officer or key Employee in any calendar year (under the Plan
and all other incentive stock option plans of the Company, any Subsidiary and
any Parent Corporation) shall not exceed $100,000.
Section 2.3--Changes in Company's Shares
In the event that the outstanding shares of Class A Common Stock or Class B
Common Stock of the Company are hereafter changed into or exchanged for a
different number or kind of shares or other securities of the Company, or
(subject to Section 8.2 hereof) of another corporation, by reason of
reorganization, merger, consolidation, recapitalization, reclassification, stock
split, stock dividend or combination of shares, or in the event of extraordinary
cash or non-cash dividends being declared with respect to outstanding shares of
Class A Common Stock or Class B Common Stock or similar transactions,
proportionate adjustments shall be made by the Committee in the number and kind
of shares which are subject to Awards, including adjustments of the limitations
contained herein on the maximum number and kind of shares which may be subject
to Awards under the Plan.
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ARTICLE III
GRANTING OF AWARDS
Section 3.1--Eligibility
Any Officer or key Employee of the Company or of any corporation which is
then a Subsidiary shall be eligible to be granted Awards, except as otherwise
provided herein.
Section 3.2--Qualifications of Incentive Stock Options
No Incentive Stock Option shall be granted unless such Option, when granted,
qualifies as an "incentive stock option" under Section 422 of the Code.
Section 3.3--Stock Payments
The Committee may approve Stock Payments of Class B Common Stock valued at
the Fair Market Value at the time of payment to an Employee or Officer: (i) for
all or any portion of the compensation, other than base salary, that would
otherwise become payable to an Employee or Officer in cash; or (ii) as an
incentive to employment with the Company. Each Stock Payment will be evidenced
by a written instrument signed by the Participant or granted pursuant to a
written performance plan adopted by the Committee and may include any other
terms and conditions consistent with the Plan as the Committee may in its
discretion determine.
Section 3.4--Granting of Awards
(a) The Committee shall from time to time, in its absolute discretion:
(i) Determine which Employees are key Employees and select from among
the Officers or key Employees (including those to whom Awards have been
previously granted under the Plan) such of them as in its opinion should be
granted Awards;
(ii) Determine the number of shares to be subject to such Awards granted
to such selected Officer or key Employees, and determine whether such Awards
are to be Incentive Stock Options, Non-Qualified Stock Options, Stock
Payments, Stock Appreciation Rights or any combination thereof; and
(iii) Determine the terms and conditions of such Awards, consistent with
the Plan.
(b) Upon the selection of an Officer or key Employee to be granted an Award,
the Committee shall, by resolution, set forth the terms and conditions of the
Award, instruct the Secretary or Chief Financial Officer to issue such Award
and, in the case of a grant of an Option, specify in the resolution whether such
Option is intended to be an Incentive Stock Option or a Non-Qualified Stock
Option; provided, however, that in the event no such specification is made in
such resolutions, the Committee will be deemed to have specified that such
Option is intended to be a Non-Qualified Stock Option; provided further,
however, that in the event such specification, whether explicit or implicit, is
inconsistent with terms set forth in such resolutions for such Option, then such
specification shall be deemed of no force or effect, and the Committee will be
deemed to have made a specification which is consistent with such terms. The
Committee may, in its discretion and on such terms as it deems appropriate,
require as a condition on the grant of a Non-Qualified Stock Option to a
Participant that the Participant surrender for cancellation some or all of the
unexercised Non-Qualified Stock Options which have been previously granted to
him. A Non-Qualified Stock Option, the grant of which is conditioned upon such
surrender, may have an option price lower (or higher) than the option price of
the surrendered Non-Qualified Stock Option, may cover the same (or a lesser or
greater) number of shares as the surrendered Non-Qualified Stock Option, may
contain such other terms as the Committee deems appropriate and shall be
exercisable in accordance with its terms, without regard to the number of
shares, price, option period or any other term or condition of the surrendered
Non-Qualified Stock Option.
(c) Awards may not be granted by the Committee to Directors who are not
Officers or key Employees of the Company.
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ARTICLE IV
TERMS OF OPTIONS
Section 4.1--Option Price
The exercise price per share of the shares subject to each Option shall be
set by the Committee; provided, however, that the exercise price per share shall
be not less than 100 percent of the Fair Market Value of such shares on the date
such Option is granted; provided further, that, in the case of an Incentive
Stock Option, the exercise price per share shall be not less than 110 percent of
the Fair Market Value of such shares on the date such Option is granted in the
case of an individual then owning (within the meaning of Section 425(d) of the
Code) more than 10 percent of the total combined voting power of all classes of
stock of the Company, any Subsidiary or any Parent Corporation.
Section 4.2--Commencement of Exercisability
(a) Except as the Committee may otherwise provide, no Option may be
exercised in whole or in part during the first year after such Award is granted.
(b) Subject to the provisions of Sections 2.2, 4.2(a), 4.2(c) and 8.5,
Options shall become exercisable at such times and in such installments (which
may be cumulative) as the Committee shall provide in the terms of each
individual Option; provided, however, that by a resolution adopted after an
Option is granted the Committee may, on such terms and conditions as it may
determine to be appropriate and subject to Sections 4.2(a), 4.2(c) and 8.5,
accelerate the time at which such Option or any portion thereof may be
exercised.
(c) No portion of an Option which is unexercisable at Termination of
Employment shall thereafter become exercisable.
Section 4.3--Expiration of Options
(a) No Incentive Stock Option may be exercised to any extent by anyone after
the first to occur of the following events:
(i) The expiration of ten years from the date the Incentive Stock Option
was granted; or
(ii) In the case of a Participant owning (within the meaning of Section
425(d) of the Code), at the time the Incentive Stock Option was granted,
more than 10 percent of the total combined voting power of all classes of
stock of the Company, any Subsidiary or any Parent Corporation, the
expiration of five years from the date the Incentive Stock Option was
granted; or
(iii) Except in the case of any Participant who is disabled, the
expiration of three months from the date of the Participant's Termination of
Employment for any reason other than such participant's death, unless the
Participant dies within said three-month period; or
(iv) In the case of a Participant who is disabled, the expiration of one
year from the date of the Participant's Termination of Employment for any
reason other than such Participant's death, unless the Participant dies
within said one-year period; or
(v) The expiration of one year from the date of the Participant's death.
For purposes of this Section 4.3, "disabled" shall mean a medically
determinable physical or mental impairment which has lasted or can be expected
to last for a continuous period of not less than 12 months and which renders the
Participant substantially unable to function as an Officer or Employee of the
Company or a Subsidiary.
(b) Subject to the provisions of Section 4.3(a), the Committee shall
provide, in the terms of each individual Option, when such Option expires and
becomes unexercisable; and (without limiting the generality of the foregoing)
the Committee may provide in the terms of individual Options that said Options
expire immediately upon a Termination of Employment for any reason.
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<PAGE>
Section 4.4--Employment of Participant
Nothing in this Plan or in any Stock Option Agreement, Stock Appreciation
Right Agreement or in any written instrument or written performance plan related
to Stock Payments hereunder shall confer upon any Participant any right to
continue in the employ of, or be retained by the Company or any Subsidiary or
shall interfere with or restrict in any way the rights of the Company and
Subsidiaries, which are hereby expressly reserved, to discharge any Participant,
or to terminate the services of any consultant, at any time for any reason
whatsoever, with or without good cause.
ARTICLE V
EXERCISE OF AWARDS
Section 5.1--Person Eligible to Exercise
During the lifetime of the Participant, only he, his guardian or legal
representative may exercise an Award granted to him, or any portion thereof
(unless, in the case of an Award which is an Incentive Stock Option, such
exercise would disqualify such Option as an Incentive Stock Option). After the
death of the Participant, any exercisable portion of an Award may, prior to the
time when such portion becomes unexercisable under Article IV or Section 8.2, be
exercised by his personal representative or by any person empowered to do so
under the deceased Participant's will or under the then applicable laws of
descent and distribution.
Section 5.2--Partial Exercise
At any time and from time to time prior to the time when any exercisable
Award or exercisable portion thereof becomes unexercisable under Article IV or
Section 8.2, such Award or portion thereof may be exercised in whole or in part;
provided, however, that the Company shall not be required to issue fractional
shares and the Committee may, by the terms of the Award, require any partial
exercise to be with respect to a specified minimum number of shares.
Section 5.3--Manner of Exercise
An exercisable Award, or any exercisable portion thereof, may be exercised
solely by delivery to the Secretary or Chief Financial Officer or their
respective offices of all of the following prior to the time when such Award or
such portion becomes unexercisable under Section 4.3 or Section 8.2:
(a) Notice in writing by the Participant or other person then entitled
to exercise such Award or portion, stating that such Award or portion is
exercised, such notice complying with all applicable rules established by
the Committee;
(b) (i) With respect to the exercise of Options, full payment (in cash
or by check) for the shares with respect to which such Option or portion is
thereby exercised;
(ii) With the consent of the Committee, shares of any Class of the
Company's Common Stock owned by the Participant duly endorsed for
transfer to the Company with a Fair Market Value (as determinable under
Section 1.14) on the date of delivery equal to the aggregate Option price
of the shares with respect to which such Option or portion is thereby
exercised (which shares shall be owned by the Participant for more than
six months at the time they are delivered);
(iii) With the consent of the Committee (and provided the use of the
following procedure by a Participant would not violate Rule 16(b) under
the Act), delivery to the Company of (x) irrevocable instructions to
deliver the stock certificates representing the shares for which the
Option is being exercised directly to a broker, and (y) instructions to
the broker to sell such shares and promptly deliver to the Company the
portion of the sole proceeds equal to the aggregate Option exercise
price;
(iv) With the consent of the Committee, any other form of cashless
exercise permitted under Section 5.4 hereof; or
(v) Any combination of the consideration provided in the foregoing
subsections (i), (ii), (iii) and (iv).
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(c) Such representations and documents as the Committee, in its absolute
discretion, deems necessary or advisable to effect compliance with all
applicable provisions of the Securities Act of 1933, as amended, and any
other federal or state securities laws or regulations. The Committee may, in
its absolute discretion, also take whatever additional actions it deems
appropriate to effect such compliance including, without limitation, placing
legends on share certificates and issuing stop-transfer orders to transfer
agents and registrars; and
(d) In the event that the Award or portion thereof shall be exercised
pursuant to Section 5.1 by any person or persons other than the Participant,
appropriate proof of the right of such person or persons to exercise the
Award or portion thereof.
Section 5.4--Cashless Exercise Procedures
The Company, in its sole discretion, may establish procedures whereby a
Participant, subject to the requirements of Rule 16b-3 under the Act, Regulation
T issued by the Board of Governors of the Federal Reserve System pursuant to the
Act, federal income tax laws, and other federal, state and local tax and
securities laws, can exercise an Option or a portion thereof without making a
direct payment of the Option price to the Company. If the Company so elects to
establish a cashless exercise program, the Company shall determine, in its sole
discretion and from time to time, such administrative procedures and policies as
its deems appropriate and such procedures and policies shall be binding on any
participant wishing to utilize the cashless exercise program.
Section 5.5--Conditions to Issuance of Stock Certificates
The shares of stock issuable and deliverable upon the exercise of an Award,
or any portion thereof, may be either previously authorized but unissued shares
or issued shares which have then been reacquired by the Company. The Company
shall not be required to issue or deliver any certificate or certificates for
shares of stock purchased upon the exercise of any Award or portion thereof or
upon a Stock Payment prior to fulfillment of all of the following conditions:
(a) The admission of such shares to listing on all stock exchanges on
which such class of stock is then listed;
(b) The completion of any registration or other qualification of such
shares under any state or federal law or under the rulings or regulations of
the Securities and Exchange Commission or any other governmental regulatory
body, which the Committee shall, in its absolute discretion, deem necessary
and advisable;
(c) The obtaining of any approval or other clearance from any state or
federal governmental agency which the Committee shall, in its absolute
discretion, determine to be necessary or advisable;
(d) The payment to the Company of all amounts which it is required to
withhold under federal, state or local law in connection with the exercise
of the Award or grant of a Stock Payment; and
(e) The lapse of such reasonable period of time following the exercise
of the Award as the Committee may establish from time to time for reasons of
administrative convenience.
Section 5.6--Rights as Stockholders
The holders of Awards shall not be, nor have any of the rights or privileges
of, stockholders of the Company in respect of any shares receivable upon the
exercise of any part of an Award unless and until certificates representing such
shares have been issued by the Company to such holders.
Section 5.7--Transfer Restrictions
The Committee, in its absolute discretion, may impose such restrictions on
the transferability of the shares receivable upon the exercise of an Award or
upon the grant of a Stock Payment, as it deems appropriate. Any such restriction
shall be set forth in the respective Stock Option Agreement or Stock
Appreciation Right Agreement and may be, and in the case of a Stock Payment will
be, referred to on the certificates evidencing such shares. The Committee may
require the Participant to give the Company prompt notice of any disposition of
shares of stock, acquired by exercise of an Incentive Stock Option, within two
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<PAGE>
years from the date of granting such Option or one year after the transfer of
such shares to such Participant. The Committee may direct that the certificates
evidencing shares acquired by exercise of an Award refer to such requirement to
give prompt notice of disposition.
ARTICLE VI
STOCK APPRECIATION RIGHTS
Section 6.1--Conditions to Grant of Rights
The Committee may approve the grant of Rights related or unrelated to
Options to Participants, subject to the following terms and conditions:
A Stock Appreciation Right may be granted: (i) at any time if
unrelated to an Option; (ii) either at the time of grant, or at
any time thereafter during the option term if related to a
Non-Qualified Stock Option; or (iii) only at the time of grant if
related to an Incentive Stock Option.
Section 6.2--Rights Granted in Connection with Options
(a) A Stock Appreciation Right granted in connection with an Option will
require the holder of the related Option, upon exercise of the Stock
Appreciation Right, to surrender such Option, or any portion thereof to the
extent unexercised, with respect to the number of shares as to which such Stock
Appreciation Right is exercised, and will entitle the holder to receive payment
of an amount computed pursuant to Section 6.2(c). Upon the exercise of a Stock
Appreciation Right, the number of shares subject to exercise under the related
Option shall be automatically reduced by the number of shares represented by the
Option or portion thereof surrendered. Upon the exercise of an Option, the
number of shares subject to the related Stock Appreciation Right shall be
automatically reduced by the number of shares with respect to which the Option
was exercised.
(b) Subject to Section 6.4(b) and (c), a Stock Appreciation Right granted in
connection with an Option hereunder will be exercisable at such time or times,
and only to the extent that a related Option is exercisable, and will not be
transferable except to the extent that such related Option may be transferable.
A Stock Appreciation Right granted in connection with an Incentive Stock Option
shall be exercisable only if the Fair Market Value of a share of Common Stock of
the Company on the date of exercise exceeds the purchase price per share of
Common Stock specified in the related Option.
(c) Upon the exercise of a Stock Appreciation Right related to an Option,
the Option holder will be entitled to receive payment of an amount determined by
multiplying:
(i) The difference obtained by subtracting the purchase price of a share
of the Class A Common Stock or a share of the Class B Common Stock specified
in the related Option from the Fair Market Value of a share of the Class A
Common Stock or Class B Common Stock, as the case may be, on the date of
exercise of such Stock Appreciation Right, by
(ii) The number of shares of Class A Common Stock or the number of
shares of Class B Common Stock as to which such Stock Appreciation Right has
been exercised.
Section 6.3--Rights Granted Unrelated to Options
The Committee may grant Stock Appreciation Rights unrelated to Options to
Participants. The amount payable upon exercise of such a Stock Appreciation
Right shall be determined in accordance with Section 6.2(c), except that "Fair
Market Value of a share of Class A Common Stock or a share of the Class B Common
Stock, as the case may be on the date of the grant of the Stock Appreciation
Right" shall be substituted for "purchase price of a share of the Class A Common
Stock or a share of Class B Common Stock specified in the related Option."
Section 6.4--Form of Payment; Conditions
(a) Payment of the amount determined under Sections 6.2(c) or 6.3 shall be
made solely in cash or alternatively, at the sole discretion of the Committee,
may be made solely in whole shares of Class A Common Stock or Class B Common
Stock in a number determined at their Fair Market Value on the date of
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<PAGE>
exercise of the Stock Appreciation Right, or in a combination of cash and shares
as the Committee deems advisable. If the Committee decides to make full payment
in shares of Class A Common Stock or Class B Common Stock, and the amount
payable results in a fractional share, payment for the fractional share will be
made in cash.
(b) The Committee may, at the time a Stock Appreciation Right is granted,
impose such conditions on the exercise of the Stock Appreciation Right as may be
required to satisfy the requirements of Rule 16b-3 under the Act (or any other
comparable provisions in effect at the time or times in question).
(c) No Stock Appreciation Right granted to a Participant subject to Section
16(b) of the Act may be exercised before six months after the date of grant.
ARTICLE VII
ADMINISTRATION
Section 7.1--Duties and Powers of Committee
(a) The Plan shall be administered by a committee of the Board consisting of
two or more members of the Board, selected by the Board, all of which members
shall be both a "Disinterested Person" as defined in Rule 16b-3(c)(2)(i) (or any
successor provision) promulgated under the Act, and an "Outside Director" as
defined for purposes of Section 162(m) (or any successor provision) of the Code
and the Regulations promulgated thereunder. It shall be the duty of the
Committee to conduct the general administration of the Plan in accordance with
its provisions. The Committee shall have the power to interpret the Plan and the
Awards and to adopt such rules for the administration, interpretation and
application of the Plan as are consistent therewith and to interpret, amend or
revoke any such rules. The Committee shall in its absolute discretion determine
whether to grant Non-Qualified Stock Options, Incentive Stock Options, Stock
Payments and/or Stock Appreciation Rights; provided that in the case of the
granting of Incentive Stock Options, any such interpretations and rules in
regard to Incentive Stock Options shall be consistent with the purposes of the
Plan to grant "incentive stock options" within the meaning of Section 422 of the
Code.
(b) No Award granted hereunder shall be exercisable unless and until
evidenced by a written Stock Option Agreement, Stock Appreciation Right
Agreement or a written instrument related to a Stock Payment, if applicable,
which shall be executed by the participant and an authorized Officer of the
Company and which shall contain such terms and conditions as the Committee shall
determine, consistent with the Plan. Each such agreement shall expressly
incorporate by reference the provisions of this Plan (a copy of which shall be
made available for inspection by the Participant during normal business hours at
the principal office of the Company) and shall state that in the event of any
inconsistency between the provisions hereof and the provisions of such
agreement, the provisions of this Plan shall govern. Stock Option Agreements
evidencing Incentive Stock Options shall contain such terms and conditions as
may be necessary to qualify such Options as "incentive stock options" under
Section 422 of the Code.
Section 7.2--Majority Rule
The Committee shall act by a majority of its members in office. The
Committee may act either by vote at a meeting or by a memorandum or other
written instruments signed by a majority of the Committee.
Section 7.3--Compensation; Professional Assistance; Good Faith Actions
Members of the Committee shall not receive compensation for their services
as members but all expenses and liabilities they incur in connection with the
administration of the Plan shall be borne by the Company. The Committee may,
with the approval of the Board, employ attorneys, consultants, accountants,
appraisers, brokers or other persons. The Committee, the Company and its
Officers and Directors shall be entitled to rely upon the advice, opinions or
valuations of any such persons. All actions taken and all interpretations and
determinations made by the Committee in good faith shall be final and binding
upon all Participants, the Company and all other interested persons. No member
of the Committee shall be personally liable for any action, determination or
interpretation made in good faith with respect to the Plan or the Options and
all members of the Committee shall be fully protected by the Company in respect
to any such action, determination or interpretation.
A-10
<PAGE>
ARTICLE VII
MISCELLANEOUS PROVISIONS
Section 8.1--Adjustments in Outstanding Awards
In the event that the outstanding shares of the stock subject to Rights or
Options are changed into or exchanged for a different number or kind of shares
of the Company or other securities of the Company or (subject to Section 8.2
hereof) of another corporation by reason of reorganization, merger,
consolidation, recapitalization, reclassification, stock split, stock dividend
or combination of shares, or in the event of extraordinary cash or non-cash
dividends being declared with respect to outstanding shares of Common Stock or
similar transactions, the Committee shall make an appropriate and equitable
adjustment in the number and kind of shares as to which all outstanding Rights
or Options, or portions thereof then unexercised, shall be exercisable, to the
end that after such event the Participant's proportionate interest shall be
maintained as before the occurrence of such event. Such adjustment in an
outstanding Right or Option or the unexercised portion of the Right or Option
(except for any change in the aggregate price resulting from rounding-off of
share quantities or prices) and with any necessary corresponding adjustment in
the exercise price per share (or, with respect to Rights granted without
Options, the Fair Market Value per share on the date the Right was granted);
provided, however, that, in the case of Incentive Stock Options, each such
adjustment shall be made in such manner as not to constitute a "modification"
within the meaning of Section 425(h)(3) of the Code; provided, further, that
each such adjustment shall be made in such manner as not to constitute: (i) a
"material modification" to any Award intended to qualify for treatment as an
"existing binding contract" in each case within the meaning of Section
162(m)(4)(D) of the Code; or (ii) a cancellation and reissuance of Non-Qualified
Stock Option or Stock Appreciation Right for purposes of 162(m) of the Code, or
the Regulations promulgated thereunder to the extent that such reissuance would
result in the grant of such Awards in excess of the maximum permitted to be
granted to any Participant in any fiscal year. Any such adjustment made by the
Committee shall be final and binding upon all Participants, the Company and all
other interested persons.
Section 8.2--Merger, Consolidation, Acquisition, Liquidation or Dissolution
In its absolute discretion, and on such terms and conditions as it deems
appropriate, the Committee may provide by terms of any Award that such Award
cannot be exercised after the merger or consolidation of the Company into
another corporation, the acquisition by another corporation of all or
substantially all of the Company's assets or 80 percent or more of the Company's
then outstanding voting stock or the liquidation or dissolution of the Company;
and if the Committee so provides, it may, in its absolute discretion and on such
terms and conditions as it deems appropriate, also provide, either by terms of
such Award or by a resolution adopted prior to the occurrence of such merger,
consolidation, acquisition, liquidation or dissolution, that, for some period of
time prior to such event, such Award shall be exercisable as to all shares
covered thereby, notwithstanding anything to the contrary in Section 4.2(a),
Section 4.2(b) and/or any vesting provisions of such Award.
Section 8.3--Awards Not Transferable
No Award or interest or right therein or part thereof, excluding Stock
Payments, shall be liable for the debts, contracts or engagements of the
Participant or his successors in interest or shall be subject to disposition by
transfer, alienation, anticipation, pledge, encumbrance, assignment or any other
means whether such disposition be voluntary or involuntary or by operation of
law by judgment, levy, attachment, garnishment or any other legal or equitable
proceedings (including bankruptcy) and any attempted disposition thereof shall
be null and void and of no effect; provided, however, that nothing in this
Section 8.3 shall prevent transfers by will or by the applicable laws of descent
and distribution.
Section 8.4--Withholding Tax Liability
(a) A holder of an Award granted hereunder may elect to deliver shares to
the Company or have the Company withhold shares otherwise issuable upon the
exercise of an Award in order to satisfy federal and state withholding tax
liability (a "share withholding election"), provided: (i) the Board or, if so
designated, the Committee, shall not have revoked its advance approval of the
holder's share withholding election; and (ii) the share withholding election is
made on or prior to the date on which the amount of withholding tax
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<PAGE>
liability is determined (the "Tax Date"). Notwithstanding the foregoing, a
holder whose transactions in Common Stock are subject to Section 16(b) of the
Act may make a share withholding election only if the following additional
conditions are met: (i) the withholding is made at least six months after the
date of the grant of the Award; and (ii) either (x) the share withholding
election is irrevocably made at least six months in advance of the withholding,
or (y) the share withholding election and the share withholding take place
during the period beginning on the third business day following the date of
release of the Company's quarterly or annual financial results and ending on the
twelfth business day following such date.
(b) A share withholding election shall be deemed made when written notice of
such election, signed by the holder of the Award, has been delivered or
transmitted by registered or certified mail to the Secretary or Chief Financial
Officer of the Company at its then principal office. Delivery of said notice
shall constitute an irrevocable election to have shares withheld.
(c) Upon exercise of an Award by a holder, the Company shall transfer the
total number of shares of Class A Common Stock or Class B Common Stock of the
Company subject to the Award to the holder on the date of exercise, less any
shares the holder elects to withhold.
(d) If a Participant disposes of shares acquired pursuant to an Incentive
Stock Option in any transaction considered to be a disqualifying transaction
under Sections 421 and 422 of the Code, the Participant must give the Company
written notice of such transfer and the Company shall have the right to deduct
any taxes required by law to be withheld from any amounts otherwise payable to
the Participant.
Section 8.5--Amendment, Suspension or Termination of the Plan
The Plan may be wholly or partially amended or otherwise modified, suspended
or terminated at any time or from time to time by the Board, but no amendment
may be awarded that is not subject to the approval of the stockholders of the
Company if stockholder approval would be required under Section 162(m) of the
Code, Section 422 of the Code, Rule 16b-3 under the Act or any other law or rule
of any governmental authority, stock exchange or other self-regulatory
organization to which the Company is subject. Neither the amendment, suspension
nor termination of the Plan shall, without the consent of the holder of the
Award, alter or impair any rights or obligations under any Award heretofore
granted. No Award may be granted during any period of suspension nor after
termination of the Plan, and in no event may any Award be granted under this
Plan after the expiration of ten years from the date the Plan is approved by the
Company's stockholders under Section 8.6.
Section 8.6--Approval of Plan by Stockholders
The Plan will be submitted for the approval of the Company's stockholders
within 12 months after the date of the Board's initial adoption of the Plan.
Awards may be granted prior to such stockholder approval; provided, however,
that such Awards shall not be exercisable prior to the time when the Plan is
approved by the stockholders; provided further, that if such approval has not
been obtained at the end of said 12 month period, all Awards previously granted
under the Plan shall thereupon be cancelled and become null and void.
Notwithstanding the foregoing, if the Plan is not approved, the Amended Plan and
options previously granted under the Amended Plan will continue in full force
and effect.
Section 8.7--Effect of Plan Upon Other Incentive and Compensation Plans
The adoption of this Plan shall not affect any other compensation or
incentive plan in effect for the Company or any Subsidiary. Nothing in this Plan
shall be construed to limit the right of the Company or any Subsidiary:
(i) to establish any other forms of incentives or compensation for
Officers or Employees of the Company or any Subsidiary; or
(ii) to grant or assume Awards otherwise than under this Plan in
connection with any proper corporate purpose, including, but not limited to,
the grant or assumption of options or stock appreciation rights in
connection with the acquisition by purchase, lease, merger, consolidation or
otherwise, of the business, stock or assets of any corporation, firm or
association.
Section 8.8--Titles
Titles are provided herein for convenience only and are not to serve as a
basis for interpretation or construction of the Plan.
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<PAGE>
PROXY CARD PACIFICARE HEALTH SYSTEMS, INC.
THIS PROXY SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned holder of Class A Common Stock acknowledges
receipt of a copy of the Annual Report and the Proxy Statement, dated
January 26, 1995, and, revoking any proxy heretofore given, hereby
constitutes and appoints Messrs. Terry Hartshorn and Alan Hoops, and
each of them, as proxies, each of them with the power to appoint his
substitute, and hereby authorizes each of them to represent and to
vote, cumulatively or otherwise as designated below, all the shares of
Class A Common Stock held of record by the undersigned on January 3,
1995, at the Annual Meeting of Shareholders to be held on March 1,
1995 or any adjournment thereof.
<TABLE>
<S> <C> <C> <C> <C> <C>
1. ELECTION OF DIRECTORS / / FOR the nominees listed / / WITHHOLD AUTHORITY
(EXCEPT AS INDICATED TO THE CONTRARY) TO VOTE FOR ALL
BELOW
</TABLE>
David Carpenter David Reed Lloyd Ross Jean Bixby Smith
(INSTRUCTION: TO WITHHOLD AUTHORITY TO VOTE FOR ANY NOMINEE, WRITE THE
NOMINEE'S NAME IN THE SPACE PROVIDED BELOW.)
----------------------------------------------------------------------
2. APPROVAL OF THE SECOND AMENDED AND RESTATED 1989 STOCK OPTION PLAN
FOR OFFICERS AND KEY EMPLOYEES
/ / FOR / / AGAINST
3. APPROVAL OF PERFORMANCE OBJECTIVES TO, AND MAXIMUM AWARDS UNDER,
THE AMENDED LONG-TERM PERFORMANCE INCENTIVE PLAN, AS AMENDED
/ / FOR / / AGAINST
<PAGE>
4. APPROVAL OF PERFORMANCE OBJECTIVES TO, AND MAXIMUM AWARDS UNDER,
THE AMENDED MANAGEMENT INCENTIVE COMPENSATION PLAN, AS AMENDED
/ / FOR / / AGAINST
5. The proxies are authorized to vote in their discretion upon such
other business as may properly come before the meeting.
6. If you plan to attend the Annual Meeting, please check here: / /
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.
------------------------------
Signature
------------------------------
Signature (if held jointly)
DATED: _______________ ,1995
PLEASE MARK, SIGN, DATE AND RETURN PROXY CARD PROMPTLY USING THE
ENCLOSED ENVELOPE.
