<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended March 31, 1996
--------------------------------------
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _________________ to _________________________
------------------------------
Commission File Number 0-14181
- -------------------------------------------------------------------------------
PACIFICARE HEALTH SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
Delaware 33-0064895
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification Number)
5995 Plaza Drive, Cypress, California 90630-5028
(Address of principal executive offices, including zip code)
(Registrant's telephone number, including area code) (714) 952-1121
- -------------------------------------------------------------------------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
--- ---
As of April 30, 1996, there were 12,367,508 shares of the Registrant's Class A
Common Stock, par value $0.01 per share, outstanding and 18,786,145 shares of
Class B Common Stock, par value $0.01 per share, outstanding.
1
<PAGE>
Part 1: FINANCIAL INFORMATION
Item 1: FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PacifiCare Health Systems, Inc.
Condensed Consolidated Balance Sheets
- --------------------------------------------------------------------------------------------------
March 31, September 30,
(Amounts in thousands, 1996 1995
except per share data) (Unaudited)
- --------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------
<S> <C> <C>
Assets
- --------------------------------------------------------------------------------------------------
Current assets:
Cash and equivalents $ 190,207 $ 279,145
Marketable securities 527,007 532,380
Receivables, net 140,778 112,408
Prepaid expenses 9,863 9,469
Deferred income taxes 27,910 28,207
- --------------------------------------------------------------------------------------------------
Total current assets 895,765 961,609
- --------------------------------------------------------------------------------------------------
Property, plant and equipment, net 99,172 99,276
Marketable securities -- restricted 24,072 23,108
Goodwill and intangible assets 297,738 295,794
Other assets 6,306 5,585
- --------------------------------------------------------------------------------------------------
$ 1,323,053 $ 1,385,372
- --------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------
Liabilities and Shareholders' Equity
Current liabilities:
Medical claims and benefits payable $ 335,700 $ 288,400
Accounts payable and accrued liabilities 141,039 149,203
Unearned premium revenue 31,011 195,413
Long-term debt due within one year 3,023 7,978
- --------------------------------------------------------------------------------------------------
Total current liabilities 510,773 640,994
- --------------------------------------------------------------------------------------------------
Long-term debt due after one year 10,105 11,949
Minority interest 392 405
Shareholders' equity:
Preferred shares, par value $1.00 per share; 20,000 shares
authorized; none issued - -
Class A common shares, par value $0.01 per share; 100,000
shares authorized; 12,368 and 12,331 issued at March 31,
1996 and September 30, 1995, respectively 124 123
Class B common shares, par value $0.01 per share; 100,000
shares authorized; 18,785 and 18,551 issued at March 31,
1996 and September 30, 1995, respectively 188 186
Additional paid-in capital 359,390 347,548
Unrealized gains on available-for-sale securities, net of taxes 3,011 4,944
Retained earnings 439,070 379,223
- --------------------------------------------------------------------------------------------------
Total shareholders' equity 801,783 732,024
- --------------------------------------------------------------------------------------------------
$ 1,323,053 $ 1,385,372
- --------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes.
2
<PAGE>
<TABLE>
<CAPTION>
PacifiCare Health Systems, Inc.
Consolidated Statements of Income (unaudited)
- --------------------------------------------------------------------------------------------------
Three months ended
March 31,
(Amounts in thousands, -----------------------------
except per share data) 1996 1995
- --------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------
<S> <C> <C>
Revenue:
Commercial premiums $ 467,742 $ 367,079
Government premiums (Medicare and Medicaid) 678,236 531,661
Other income 11,192 14,026
- --------------------------------------------------------------------------------------------------
Total operating revenue 1,157,170 912,766
- --------------------------------------------------------------------------------------------------
Expenses:
Health care services:
Medical services 455,558 348,743
Hospital services 396,809 309,775
Other services 112,760 91,331
- --------------------------------------------------------------------------------------------------
Total health care services 965,127 749,849
- --------------------------------------------------------------------------------------------------
Marketing, general and administrative expenses 147,771 124,095
Amortization of intangibles 2,307 1,374
- --------------------------------------------------------------------------------------------------
Operating income 41,965 37,448
Interest income 12,212 10,604
Interest expense (829) (2,010)
- --------------------------------------------------------------------------------------------------
Income before income taxes 53,348 46,042
Provision for income taxes 21,479 18,683
- --------------------------------------------------------------------------------------------------
Net income $ 31,869 $ 27,359
- --------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------
Weighted average common shares and equivalents
outstanding used to calculate earnings per share 31,758 28,601
- --------------------------------------------------------------------------------------------------
Earnings per share $ 1.01 $ 0.96
- --------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes.
3
<PAGE>
<TABLE>
<CAPTION>
PacifiCare Health Systems, Inc.
Consolidated Statements of Income (unaudited)
- --------------------------------------------------------------------------------------------------
Six months ended
March 31,
(Amounts in thousands, -----------------------------
except per share data) 1996 1995
- --------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------
<S> <C> <C>
Revenue:
Commercial premiums $ 898,816 $ 699,517
Government premiums (Medicare and Medicaid) 1,299,633 1,009,256
Other income 23,045 25,607
- --------------------------------------------------------------------------------------------------
Total operating revenue 2,221,494 1,734,380
- --------------------------------------------------------------------------------------------------
Expenses:
Health care services:
Medical services 877,891 671,227
Hospital services 767,505 589,042
Other services 214,440 165,879
- --------------------------------------------------------------------------------------------------
Total health care services 1,859,836 1,426,148
- --------------------------------------------------------------------------------------------------
Marketing, general and administrative expenses 280,028 237,286
Amortization of intangibles 4,581 2,632
- --------------------------------------------------------------------------------------------------
Operating income 77,049 68,314
Interest income 24,474 15,505
Interest expense (1,342) (3,694)
- --------------------------------------------------------------------------------------------------
Income before income taxes 100,181 80,125
Provision for income taxes 40,333 32,709
- --------------------------------------------------------------------------------------------------
Net income $ 59,848 $ 47,416
- --------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------
Weighted average common shares and equivalents
outstanding used to calculate earnings per share 31,635 28,414
- --------------------------------------------------------------------------------------------------
Earnings per share $ 1.89 $ 1.67
- --------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes.
4
<PAGE>
<TABLE>
<CAPTION>
PacifiCare Health Systems, Inc.
Consolidated Statements of Cash Flows (unaudited)
- --------------------------------------------------------------------------------------------------
Six months ended
March 31,
-----------------------------------
(Amounts in thousands) 1996 1995
- --------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------
<S> <C> <C>
Operating activities:
Net income $ 59,848 $ 47,416
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 11,505 10,059
Amortization of intangibles 4,581 2,632
Deferred income taxes 1,382 5,585
Loss on disposal of fixed assets 64 73
Provision for doubtful accounts 30 1,187
Other (17) 113
Changes in assets and liabilities, net of effects from
acquisitions:
Accounts receivable (27,480) (11,905)
Prepaid, intangible and other assets (1,040) (3,597)
Medical claims and benefits payable 46,629 9,184
Accounts payable and accrued liabilities (4,387) 5,389
Unearned premium revenue (165,204) 17,281
- --------------------------------------------------------------------------------------------------
Net cash flows provided by (used in) operating activities (74,089) 83,417
- --------------------------------------------------------------------------------------------------
Investing activities:
Purchase of property, plant and equipment (11,270) (10,640)
Acquisitions, net of cash acquired (5,741) (54,454)
Sale (purchase) of marketable securities 2,582 (104,307)
Purchase of marketable securities - restricted (964) (3,409)
- --------------------------------------------------------------------------------------------------
Net cash flows used in investing activities (15,393) (172,810)
- --------------------------------------------------------------------------------------------------
Financing activities:
Proceeds from issuance of common stock 7,498 199,404
Principal payments on long-term debt (6,954) (172,316)
Borrowings under long-term lines of credit - 83,335
- --------------------------------------------------------------------------------------------------
Net cash flows provided by financing activities 544 110,423
- --------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and equivalents (88,938) 21,030
Beginning cash and equivalents 279,145 192,609
- --------------------------------------------------------------------------------------------------
Ending cash and equivalents $ 190,207 $ 213,639
- --------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes.
5
<PAGE>
<TABLE>
<CAPTION>
PacifiCare Health Systems, Inc.
Consolidated Statements of Cash Flows (unaudited)
- --------------------------------------------------------------------------------------------------
(Amounts in thousands) Six months ended
March 31,
-----------------------------------
1996 1995
- --------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------
<S> <C> <C>
Supplemental cash flow information:
Cash paid during the period for:
Income taxes $ 36,247 $ 26,882
Interest $ 1,311 $ 2,236
- --------------------------------------------------------------------------------------------------
Supplemental schedule of noncash investing
and financing activities:
Tax benefit realized upon exercise of stock options $ 3,186 $ 1,840
Compensation awarded in Class B Common Stock $ 1,161 $ 1,024
Leases capitalized $ 155 $ 392
- --------------------------------------------------------------------------------------------------
Details of unrealized gains on available-for-sale securities:
Increase (decrease) in marketable securities $ (3,018) $ 91
Less increase (decrease) in deferred taxes (1,085) 52
- --------------------------------------------------------------------------------------------------
Increase (decrease) in shareholders' equity $ (1,933) $ 39
- --------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------
Details of businesses acquired in purchase transactions:
Fair value of assets acquired $ 9,264 $ 134,710
Less liabilities assumed or created, including
notes to seller 2,043 79,831
- --------------------------------------------------------------------------------------------------
Cash paid for acquisitions 7,221 54,879
Less cash acquired in acquisitions 1,480 425
- --------------------------------------------------------------------------------------------------
Net cash paid for acquisitions $ 5,741 $ 54,454
- --------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes.
6
<PAGE>
PACIFICARE HEALTH SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1996
(unaudited)
NOTE 1 - BASIS OF PRESENTATION
The interim condensed consolidated financial statements included herein
have been prepared by PacifiCare Health Systems, Inc. (the "Company") without
audit, pursuant to the rules and regulations of the Securities and Exchange
Commission (the "SEC"). Certain information and footnote disclosures, normally
included in the financial statements prepared in accordance with generally
accepted accounting principles, have been condensed or omitted pursuant to such
SEC rules and regulations; nevertheless, the management of the Company believes
that the disclosures herein are adequate to make the information presented not
misleading. It is suggested that these condensed consolidated financial
statements be read in conjunction with the consolidated financial statements and
notes thereto included in the Company's most recent Annual Report on Form 10-K,
filed with the SEC in November 1995. In the opinion of management, all
adjustments, consisting only of normal recurring adjustments necessary to
present fairly the consolidated financial position of the Company with respect
to the interim condensed consolidated financial statements, and the consolidated
results of its operations and its cash flows for the interim periods then ended,
have been included. The results of operations for the interim periods are not
necessarily indicative of the results for the full year.
NOTE 2 - ACQUISITIONS
During the six months ended March 31, 1996 and fiscal year 1995, the
Company made several acquisitions (the "Acquisitions"). In January 1996, the
Company acquired Psychology Systems, Inc., a California-based managed care
behavioral health and employee assistance program company with approximately
275,000 covered lives.
During fiscal year 1995, the Company made the following acquisitions: (i)
Preferred Solutions, a San Jose-based pharmacy benefit management company, in
January 1995; (ii) ValuCare, a Fresno-based health maintenance organization
("HMO"), with approximately 67,000 members in March 1995; and (iii) the
membership of Pacific Health Plans, a Washington-based HMO, with approximately
33,000 members in March 1995.
The total purchase price for the Acquisitions, including contingent
purchase payments, is expected to be approximately $131 million. Based on the
fair values of the assets and liabilities of the acquired companies, the
preliminary estimate of excess purchase price is approximately $128 million. A
final allocation of purchase price will be determined when appraisals and other
studies are completed and contingent purchase payments are determined. The
Acquisitions have been accounted for as purchases and the operating results of
each completed acquisition are included in the consolidated financial statements
from the date of purchase. Amortization of excess purchase price is made over a
period not to exceed forty years.
The following table summarizes the unaudited pro forma consolidated results
of the Company as though the Acquisitions had occurred at the beginning of the
periods presented giving effect to the interest income foregone, the costs
associated with the integration of the operations into those of the Company and
the amortization of the excess of the purchase price over the fair value of the
assets acquired. The unaudited
7
<PAGE>
pro forma information is not necessarily indicative of the actual consolidated
results of operations that would have occurred had the Acquisitions occurred at
the beginning of the period and is not intended to be indicative of results
which may occur in the future.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------
(Unaudited) Three Months Ended Six Months Ended
(Amounts in thousands, March 31 March 31
except per share amounts) --------------------------------------------------------------
1996 1995 1996 1995
- ------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Premium revenue $ 1,146,781 $ 935,967 $ 2,201,624 $ 1,782,831
Total operating revenue $ 1,157,973 $ 950,327 $ 2,224,687 $ 1,809,165
Pretax income $ 53,259 $ 43,516 $ 99,961 $ 76,311
Net income $ 31,816 $ 25,642 $ 59,717 $ 44,719
Earnings per share $ 1.00 $ 0.90 $ 1.89 $ 1.57
- ------------------------------------------------------------------------------------------
</TABLE>
NOTE 3 - LONG-TERM DEBT
In November 1994, the Company established a $250 million revolving line of
credit with Bank of America National Trust and Savings Association and a
syndicate of banks (the "B of A Credit Line"). Interest on the B of A Credit
Line is payable at a rate per annum equal to the London Interbank Offered Rate
plus a margin. The B of A Credit Line matures November 30, 2000 and is subject
to, among other things, certain financial covenants, including a fixed charge
ratio and a leverage ratio. In November 1994, the Company borrowed $83 million
under the B of A Credit Line to pay the balance owed on the syndicated $130
million credit line with The Chase Manhattan Bank, N.A. The amount borrowed
under the B of A Credit Line was repaid in March 1995 from the proceeds of the
sale of common stock (see Note 4 - "Shareholders' Equity").
NOTE 4 - SHAREHOLDERS' EQUITY
In March 1996, the Shareholders of the Company approved an amendment (the
"Amendment") to the Company's Certificate of Incorporation, as amended (the
"Certificate of Incorporation") to increase the total number of authorized
shares of stock which the Company has the authority to issue to 220,000,000.
The Amendment increased the number of shares of the Class A Common Stock, par
value $0.01 per share (the "Class A Common Stock") which the Company is
authorized to issue from 30,000,000 to 100,000,000, increased the number of
shares of the Class B Common Stock, par value $0.01 per share (the "Class B
Common Stock") which the Company is authorized to issue from 60,000,000 to
100,000,000 and increased the total number of shares of preferred stock, par
value $1.00 per share (the "preferred stock"), which the Company is authorized
to issue from 10,000,000 to 20,000,000.
As of March 29, 1995, the Company completed a public offering of 5,175,000
shares of its Class B Common Stock, of which 3,000,000 shares were issued and
sold by the Company and 2,175,000 shares were sold by UniHealth, the largest
holder of the Company's Class A Common Stock. The sale of 4,500,000 shares of
the Class B Common Stock closed on March 23, 1995 with the sale of the
additional 675,000 shares of the Class B Common Stock occurring on
March 29, 1995 pursuant to the exercise of the underwriters' over-allotment
option.
The Company received net proceeds of approximately $197.6 million from the
sale of the 3,000,000 shares of Class B Common Stock after deducting
underwriting discounts and commissions and expenses of the offering payable by
the Company. The Company did not receive any of the proceeds from the sale of
shares of Class B Common Stock by UniHealth. The Company used approximately
$186.0 million of the net proceeds to repay the amount outstanding under its B
of A Credit Line and to replenish working capital used to pay for certain of the
Acquisitions (see Note 2 - "Acquisitions").
8
<PAGE>
In December 1994, the Company completed a public offering of 90,000 shares
of its Class B Common Stock to certain physician groups which currently contract
with the Company. Each group has entered into an irrevocable obligation to
purchase a fixed number of shares of the Class B Common Stock over a five year
period beginning May 1, 1996 at $64.88 per share.
NOTE 5 - CONTINGENCIES
The Company is involved in legal actions in the normal course of business,
some of which seek substantial monetary damages, including claims for punitive
damages which are not covered by insurance. Additionally, the Company's
government programs, including services provided to government employees, in the
normal course of its business, are subject to retrospective audits by the
respective regulating agencies. After review, including consultation with
counsel, management believes any ultimate liability in excess of amounts accrued
which could arise from audits or legal actions would not materially affect the
Company's consolidated financial position, results of operations or cash flows.
9
<PAGE>
Part I: FINANCIAL INFORMATION
Item 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following table presents membership data by region and by consumer type as
of the dates indicated.
<TABLE>
<CAPTION>
AT MARCH 31, 1996 AT MARCH 31, 1995
- -----------------------------------------------------------------------------------------------------------
Government Government
(Medicare & (Medicare &
MEMEBERSHIP DATA Commercial Medicaid) Total Commercial Medicaid Total
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
California 925,858 403,661 1,329,519 705,009 337,880 1,042,889
Florida 50,377 4,915 55,292 55,995 11,650 67,645
Oklahoma 111,766 22,352 134,118 112,107 14,332 126,439
Oregon 107,922 43,988 151,910 84,675 39,175 123,850
Texas 98,987 55,624 154,611 65,982 41,112 107,094
Washington 87,109 46,839 133,948 38,828 19,155 57,983
- -----------------------------------------------------------------------------------------------------------
Total membership 1,382,019 577,379 1,959,398 1,062,596 463,304 1,525,900
- -----------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
OPERATING STATISTICS MARCH 31, MARCH 31,
----------------------------------------------
1996 1995 1996 1995
- -----------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Medical loss ratio (health care services as a
percent of premium revenue)
Consolidated 84.2% 83.4% 84.6% 83.5%
Commercial 82.4% 81.1% 84.0% 81.4%
Government (Medicare and Medicaid) 85.5% 85.1% 85.0% 84.9%
Marketing, general and administrative expenses as a
percent of operating revenue 12.8% 13.6% 12.6% 13.7%
Operating income as a percent of operating revenue 3.6% 4.1% 3.5% 3.9%
Effective tax rate 40.3% 40.6% 40.3% 40.8%
- -----------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------
</TABLE>
RESULTS OF OPERATIONS
Three and Six Months Ended March 31, 1996
Compared to the
Three and Six Months Ended March 31, 1995
Total operating revenue increased 27 percent to $1.2 billion for the
three months ended March 31, 1996 from $0.9 billion for the same period in
the prior year. Enrollment growth in both the commercial and government
programs, offset slightly by decreases in commercial premium rates, provided
an increase in total operating revenue of $198 million. Membership growth is
expected to continue in both the commercial and
10
<PAGE>
government programs. However, fewer acquisitions, increased competition for
members and expected Medicaid disenrollment in California and Florida,
combined with a larger membership base are expected to cause the rate of
membership growth to decline from the rates experienced in both programs in
1995. In addition, approximately $42 million of the increase in total
operating revenue represents the incremental operations included in the three
months ended March 31, 1996 of the Acquisitions described in Note 2 of the
Notes to the Condensed Consolidated Financial Statements. The Company's
specialty managed care products and services and its joint venture medical
groups contributed the remainder of the increase in operating revenue.
Total operating revenue increased 28 percent to $2.2 billion for the six
months ended March 31, 1996 from $1.7 billion for the same period in the prior
year. Growth in both the commercial and government programs, a result of
enrollment gains, offset slightly by decreases in commercial premium rates,
provided an increase in total operating revenue of $393 million. In addition,
approximately $81 million of the increase in total operating revenue represents
the incremental operations included in the six months ended March 31, 1996 from
the Acquisitions. The Company's specialty managed care products and services
and its joint venture medical groups contributed the remainder of the increase.
For the three and six months ended March 31, 1996, commercial HMO premiums
increased $101 million and $199 million to $468 million and $899 million,
respectively, as compared to the same periods in the prior year. Commercial HMO
membership for March 31, 1996 increased approximately 319,000 or 30 percent to
1,382,000 members due to continued growth in California, Oregon, Texas and
Washington, as compared to March 31, 1995. The increase in membership includes
approximately 100,000 members acquired in California and Washington in fiscal
year 1995. Commercial HMO membership growth provided the increase in commercial
premiums, more than offsetting premium rate decreases averaging one to two
percent occurring in most markets. The effects of the Acquisitions described
above contributed $33 million and $66 million for the three and six months ended
March 31, 1996, respectively. The commercial specialty managed care products
and services and joint venture medical groups provided the remainder of the
increase in commercial premiums. The Company expects commercial premium rates
to remain flat or increase slightly from March 31, 1996 rates as competitive
pressures begin to ease.
Government premiums rose $146 million to $678 million and $290 million to
$1.3 billion for the three and six months ended March 31, 1996 from $532 million
and $1.0 billion in the same periods of fiscal year 1995. Enrollment gains,
primarily in the Medicare programs, accounted for 84 percent and 88 percent of
the increase for the three and six month period ended March 31, 1996,
respectively. The remainder of the premium increase is attributable to the
incremental effect of the Acquisitions and premium rate increases averaging two
percent for both periods. Effective January 1, 1996, the Company received an
average premium rate increase of approximately 5.6 percent from the Health Care
Financing Administration ("HCFA") for the areas in which the Company operates
its Medicare programs. HCFA rate increases were partially offset by reductions
in member paid supplemental premiums.
The increase in the commercial medical loss ratio (health care service
expense as a percent of premium revenue, the "medical loss ratio") for the three
and six months ended March 31, 1996 is primarily due to increased HMO health
care costs, combined with increased costs in the Company's specialty managed
care products and services, principally the preferred provider organization
("PPO") indemnity products. Compared to the same periods in the prior year, the
Company's HMOs are experiencing higher prescription drug costs and higher
capitation paid to physicians and hospitals, offset partially by a decrease in
inpatient hospital costs as the Company moves toward a more capitated
environment. Over the remainder of fiscal 1996, the commercial medical loss
ratio is expected to be comparable to the six months ended March 31, 1996 or
decrease slightly through lower costs from provider contract changes and a less
competitive premium pricing environment. The
11
<PAGE>
fiscal 1996 commercial medical loss ratio is expected to be higher than the 82.5
percent experienced in fiscal 1995 as the Company augments its traditional HMO
products with other managed care options, including its indemnity products.
The increase in the medical loss ratio for the government programs,
primarily in the three months ended March 31, 1996, reflects increased
capitation payments to physicians and hospitals combined with lower member
supplemental premiums and enhanced benefits provided to enrollees. These
increased costs are partially offset by January 1, 1996 HCFA premium rate
increases. The fiscal 1996 medical loss ratio for the government programs is
expected to be comparable to or slightly higher than the six months ended March
31, 1996 and prior year rates.
Marketing, general and administrative expenses increased $24 million to
$148 million for the three months ended March 31, 1996 from $124 million for
the same period in 1995. As a percentage of operating revenue, marketing,
general and administrative expenses decreased to 12.8 percent from 13.6 percent
for the quarter ended March 31, 1996. For the six months ended March 31, 1996
marketing, general and administrative expenses totaled $280 million, an increase
of $43 million over the same period in the prior year. As a percentage of
operating revenue marketing general and administrative expenses decreased to
12.6 percent from 13.7 percent for the same period in the prior year. These
decreases are primarily attributable to realizing the benefit of investments in
the Company's infrastructure which have proven adequate to support the growth in
membership. Marketing, general and administrative expenses determined as a
percentage of operating revenue for the remainder of fiscal 1996 are expected to
continue to be favorable compared to 1995 and consistent with the rate for the
current period as the Company continues to invest in its infrastructure and the
consolidation of its regional customer service centers.
Net income increased 17 percent to $32 million for the quarter ended March
31, 1996 compared to $27 million in the same period in the prior year. For the
six months ended March 31, 1996, net income increased 26 percent to $60 million
compared to $47 million for the same period in the prior year. Earnings per
share ("EPS") of $1.01 was 5 percent higher than the prior year's quarterly EPS
of $0.96. For the six months ended March 31, 1996, EPS increased 13 percent to
$1.89 from $1.67 for the same period in the prior year. These increases reflect
membership growth in both the commercial and government programs and lower
marketing, general and administrative costs.
LIQUIDITY AND CAPITAL RESOURCES
The Company's working capital as of March 31, 1996 was $385 million, an
increase of $64 million from September 30, 1995. The increase in working
capital is primarily attributable to a decrease in unearned premiums and an
increase in accounts receivable, offset by increases in medical claims payable.
The increase in receivables is primarily attributable to increased provider and
government receivables as well as growth in membership. Unearned premium
revenue decreased $164 million primarily because the April 1996 HCFA Medicare
premium payment was not received in advance. These changes contributed to a
decrease in cash and the use of cash in operations of $74 million.
The Company believes that its current capital resources, which include the
$250 million B of A Credit Line are adequate to fund existing HMO operations,
the introduction of new products and services and the continued development of
its health care related businesses (see Note 3 - "Long-Term Debt" for a summary
of the terms of the B of A Credit Line).
In March 1995, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
Of," which requires impairment losses to be recorded on long-lived assets used
in
12
<PAGE>
operations when indicators of impairment are present and the undiscounted cash
flows estimated to be generated by those assets are less than the assets'
carrying amount. The statement also addresses the accounting for long-lived
assets that are expected to be disposed of. The Company will adopt SFAS No. 121
on October 1, 1996 and, based on current circumstances, does not believe the
effect of the adoption will be material.
In October 1995, the FASB issued SFAS No. 123, "Accounting for Stock-Based
Compensation," which provides an alternative to Accounting Principles Board
("APB") Opinion No. 25, "Accounting for Stock Issued to Employees." SFAS No.
123 encourages, but does not require recognition of compensation expense for
grants of stock, stock options and other equity instruments to employees based
on the fair value. The statement also allows companies to continue to measure
compensation cost using the intrinsic value method of accounting prescribed by
APB Opinion No. 25. While recognition for employee stock-based compensation is
not mandatory, SFAS No. 123 requires companies that choose not to adopt the new
fair value accounting rules to disclose pro forma net income and earnings per
share under the new method. The Company intends to continue with the intrinsic
value based method prescribed by APB Opinion No. 25 and make proforma
disclosures of net income and EPS, as if the fair value based method of
accounting defined in SFAS No. 123 had been applied beginning on October 1,
1996.
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
The statements contained in this Management's Discussion and Analysis of
Financial Condition and Results of Operations concerning future premium pricing
levels, future medical loss ratio levels, the Company's ability to control
healthcare and marketing, general and administrative costs and all other
statements that are not historical facts are forward looking statements. Actual
results may differ materially from those projected in the forward looking
statements, which statements involve risks and uncertainties. The Company's
ability to expand is affected by increasing competition not only in product
choices but also in the number of competitors in the Company's service areas.
Certain large employer groups and other purchasers of commercial health care
services continue to demand minimal premium rate increases or reductions in
premium rates while limiting the number of choices offered to employees. In
addition, securing cost effective contracts with additional physicians remains
difficult due to competition among HMOs for physician contracts. The Company's
profitability depends, in part, on its ability to maintain effective control
over health care costs while providing members with quality care. Factors such
as health care reform, which could result in premium rate decreases by
government agencies, levels of utilization of health care services, new
technologies, hospital costs, major epidemics, natural disasters and numerous
other external influences may affect the Company's operating results. The
Company's expectations for the future are based on current information and
evaluation of external influences. Changes in any one factor could materially
impact the Company's expectations related to premium rates, benefits offered,
membership growth, the medical loss ratio and as a result, profitability and
therefore affect the forward looking statements included in these reports. In
addition, past financial performance is not necessarily a reliable indicator of
future performance, and investors should not use historical performance to
anticipate results or future period trends. Shareholders are also directed to
the other risks discussed in other documents filed by the Company with the SEC.
13
<PAGE>
Part II. OTHER INFORMATION
Item 1: Legal Proceedings
None
Item 2: Changes in Securities
None
Item 3: Defaults Upon Senior Securities
None
Item 4: Submission of Matters to a Vote of Security Holders
The Annual Meeting of Shareholders (the "Annual Meeting") of PacifiCare Health
Systems, Inc. was held on March 6, 1996 at the Company's corporate office in
Cypress, California. The following matters were addressed at the meeting:
ELECTION OF DIRECTORS
Gary L. Leary and Warren E. Pinckert II were duly elected to the Board of
Directors as Class II directors at the Annual Meeting for a three year term.
Terry Hartshorn, Alan Hoops, David Reed, Lloyd Ross and Jean Bixby Smith are
directors whose terms of office continued after the Annual Meeting.
The votes of the holders of 10,173,783 shares of Class A Common Stock were cast
"FOR" the election of the two directors of the Company. The votes "FOR"
represent approximately 82 percent of all shares of Class A Common Stock
outstanding and entitled to vote and 100 percent of all shares voted.
PROPOSAL TO APPROVE AN AMENDMENT TO THE COMPANY'S CERTIFICATE OF INCORPORATION,
AS AMENDED, TO INCREASE THE TOTAL NUMBER OF SHARES WHICH THE COMPANY HAS THE
AUTHORITY TO ISSUE.
This proposal sought approval of an amendment to the Company's Certificate of
Incorporation which would increase the total number of shares of stock which the
Company has the authority to issue to 220,000,000. The Amendment increases the
total number of shares of Class A Common Stock which the Company is authorized
to issue from 30,000,000 to 100,000,000, increases the total number of shares of
Class B Common Stock which the Company is authorized to issue from 60,000,000 to
100,000,000 and increases the total number of shares of preferred stock, which
the Company is authorized to issue from 10,000,000 to 20,000,000.
The votes of the holders of 7,420,615 shares of Class A Common Stock were cast
"FOR" the proposal to amend the Company's Certificate of Incorporation to
increase the total number of shares the Company is authorized to issue, the
votes of holders of 1,193,975 shares of Class A Common Stock were cast "AGAINST"
and the holders of 16,357 shares of Class A Common Stock "ABSTAINED" from
voting. The votes "FOR" represents approximately 60 percent of all shares of
Class A Common Stock outstanding and entitled to vote and 73 percent of all
shares voted.
14
<PAGE>
PROPOSAL TO APPROVE THE AMENDED 1992 NON-OFFICER DIRECTORS STOCK OPTION PLAN OF
PACIFICARE HEALTH SYSTEMS, INC.
This proposal sought shareholder approval of the Amended 1992 Non-Officer
Directors Stock Option Plan of PacifiCare Health Systems, Inc. (the "Directors
Plan"). The Directors Plan supersedes the existing 1992 Non-Officer Directors
Stock Option Plan of PacifiCare Health Systems, Inc. and provides for the
automatic and immediate acceleration of the vesting of all non-qualified stock
options ("NQSOs") granted under the Directors Plan upon the occurrence of a
change of control, as long as the NQSOs have been held for at least six months.
The votes of the holders of 9,667,538 shares of Class A Common Stock were cast
"FOR" the proposal to approve the Directors Plan, the votes of holders of
488,744 shares of Class A Common Stock were cast "AGAINST" and the holders of
20,537 shares of Class A Common Stock "ABSTAINED" from voting. The votes "FOR"
represents approximately 78 percent of all shares of Class A Common Stock
outstanding and entitled to vote and 95 percent of all shares voted.
Item 5: Other Information
On January 12 1996, Fred V. Ryder, Senior Vice President and Corporate
Controller of the Company resigned. Wayne B. Lowell, Executive Vice
President, Chief Administrative Officer and Chief Financial Officer has
assumed the Corporate Controller responsibilities.
Item 6: Exhibits and Reports
a) Exhibit Index
Exhibit 3.1 Certificate of Incorporation, as amended
Exhibit 10.1 Amended 1992 Non-Officer Directors Stock Option
Plan of PacifiCare Health Systems, Inc.
Exhibit 10.2 PacifiCare Health Systems, Inc., Amended Non-
Employee Director Compensation and Retirement Plan
Exhibit 11A Computation of Net Income per Share of Common
Stock - Primary
Exhibit 11B Computation of Net Income per Share of Common
Stock - Fully Diluted
Exhibit 27 Financial Data Schedules
b) No reports on Form 8K were filed during the quarter for which this
report is filed.
15
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PACIFICARE HEALTH SYSTEMS, INC.
(Registrant)
Date: ?? By: /s/ Alan Hoops
------------------------ --------------------------
Alan Hoops
President,
Chief Executive Officer
and Director
Date: ?? By: /s/ Wayne Lowell
------------------------ --------------------------
Wayne Lowell
Executive Vice President,
Chief Administrative Officer and
Chief Financial Officer
16
<PAGE>
EXHIBIT 3.1
CERTIFICATE OF INCORPORATION
OF
PACIFICARE HEALTH SYSTEMS OF DELAWARE, INC.
ARTICLE I
The name of this Corporation is:
PacifiCare Health Systems of Delaware, Inc.
ARTICLE II
The address of its registered office in the State of Delaware is 306
South State Street in the City of Dover, County of Kent. The name of its
registered agent at such address is United States Corporation Company.
ARTICLE III
The nature of business or purposes to be conducted or promoted is to
engage in any lawful act or activity for which corporations may be organized
under the General Corporation Law of Delaware.
ARTICLE IV
A. PacifiCare Health Systems of Delaware, Inc. ("Corporation") is
authorized to issue two classes of shares of stock to be designated,
respectively, "Common Shares" and "Preferred Shares." The total number of
shares of stock which the Corporation shall have authority to issue is thirty
million (30,000,000). The total number of Common Shares which the Corporation
shall have authority to issue is twenty million (20,000,000) shares, and the par
value of each such Common Share shall be one dollar ($1.00). The total number
of Preferred Shares which the Corporation shall have authority to issue is ten
million (10,000,000) shares and the par value of each such Preferred Share shall
be one dollar ($1.00).
B. The holders of Common Shares shall have the following rights and
preferences, subject to the rights and preference of holders of Preferred
Shares, as determined by the Board of Directors pursuant to paragraph D of this
Article:
(1) To receive such dividends as the Board of Directors elects
to distribute:
(2) To have voting rights and powers; and
<PAGE>
(3) In the event of any voluntary or involuntary liquidation,
dissolution or winding up of the Corporation, to receive an equal
distribution of the remaining assets and funds of the Corporation.
C. The Board of Directors is hereby authorized to issue the
Preferred Shares in one or more series, each series to be appropriately
designated by a distinguishing letter or title, prior to the issue of any shares
thereof.
D. The Board of Directors is hereby authorized to fix or alter the
dividend rights, dividend rate, conversion rights, voting rights, rights and
terms of redemption (including sinking fund provisions, if any), the redemption
price or prices, and the liquidation preferences of any wholly unissued series
of Preferred Shares, and the number of shares constituting any such unissued
series and the designation thereof, or any of them, and to increase or decrease
the number of shares of any series subsequent to the issue of shares of that
series, but not below the number of shares of such series than outstanding. In
case the number of shares of any series shall be so decreased, the shares
constituting such decrease shall resume the status which they had prior to the
adoption of the resolution originally fixing the number of shares of such
series.
ARTICLE V
The initial number of Directors of the Corporation shall be five (5).
The number of Directors may hereafter be fixed from time to time by By-Law or
amendment duly adopted by the Board of Directors, provided, however, that the
number of Directors shall not be more than nine, nor less than five.
ARTICLE VI
A. The Board of Directors shall be and is divided into three
classes, Class I, Class II and Class III. The number of Directors in each class
shall be the whole number contained in the quotient arrived at by dividing the
authorized number of Directors by three, and if a fraction is also contained in
such quotient then if such fraction is one-third (1/3) the extra Director shall
be a member of Class I and if the fraction is two-thirds (2/3) one of the extra
Directors shall be a member of Class I and the other shall be a member of Class
II. Each Director shall serve for a term ending on the date of the third annual
meeting following the annual meeting at which such Director was elected;
provided, however, that the Directors appointed in Article VII herein to Class I
shall serve for a term ending on the date of the third annual meeting next
following February 25, 1985, the Directors appointed in Article VII herein to
Class II shall serve for a term ending on the date of the second annual meeting
next following February 25, 1985, and the Directors appointed in Article VII
herein to Class III shall serve for a term ending on the date of the first
annual meeting next following February 25, 1985.
B. In the event of any increase or decrease in the authorized number
of Directors, (1) each Director then serving as such shall nevertheless continue
as a Director of the
2
<PAGE>
class of which he is a member until the expiration of his current term, or his
prior death, resignation or removal, and (2) the newly created or eliminated
Directorships resulting form such increase shall be apportioned by the Board of
Directors to such class or classes as shall, so far as possible, bring the
number of Directors in the respective classes into conformity with the formula
in this Article, as applied to the new authorized number of Directors.
C. Notwithstanding any of the foregoing provisions of this Article,
each Director shall serve until his successor is elected and qualified or until
his death, resignation or removal. A Director shall not be removed from office
prior to the expiration of his term except by the affirmative vote or written
consent of not less than sixty-six and two-thirds percent (66 2/3%) of the total
votes entitled to be cast in an election of Directors or by the unanimous vote
of the remaining members of the Board of Directors. Should a vacancy occur or
be created, the remaining Directors (even though less than a quorum) may fill
the vacancy for the full term of the class in which the vacancy occurs or is
created.
ARTICLE VII
The names and addresses of the initial Directors of the Corporation,
and the class to which each is hereby appointed, are as follows:
Name Address Class
---- ------- -----
Samuel J. Tibbitts 5400 Orange Avenue I
Suite 220
Cypress, CA 90630
Ronald Young 5400 Orange Avenue II
Suite 220
Cypress, CA 90630
Frank K. McDougall 5400 Orange Avenue III
Suite 220
Cypress, CA 90630
Terry Hartshorn 5400 Orange Avenue I
Suite 220
Cypress, CA 90630
Alan Hoops 5400 Orange Avenue II
Suite 220
Cypress, CA 90630
3
<PAGE>
ARTICLE VIII
A. In addition to the requirements of any applicable statute, the
affirmative vote or written consent of not less than sixty-six and two-thirds
percent (66 2/3%) of the total votes entitled to be cast in an election of
Directors attributable to stock owned by persons other than a Control Person (as
hereinafter defined), considered for purposes of this Article as one class,
shall be required for approval or authorization of any Business Transaction (as
hereinafter defined) between the Corporation and any Control Person; provided,
however, that such additional voting requirement shall not be applicable if:
(1) The Business Transaction was approved by a two-thirds vote
of the Board of Directors of the Corporation prior to the acquisition by
the Control Person, together with its Affiliates and Associates (as
hereinafter defined), of stock of the Corporation, which, in the aggregate,
bears the rights to ten percent (10%) or more of the total votes entitled
to be cast in an election of Directors; or
(2) The Business Transaction was approved by a two-thirds vote
of the Board of Directors of the Corporation after the acquisition by the
Control Person, together with its Affiliates and Associates, of stock of
the Corporation, which, in the aggregate, bears the rights to ten percent
(10%) or more of the total votes entitled to be cast in an election of
Directors, and such acquisition by such Control Person and its Affiliates
and Associates was unanimously approved by the Board of Directors of the
Corporation; or
(3) The Business Transaction is solely between the Corporation
and another corporation, fifty percent (50%) or more of the voting stock of
which is owned by the Corporation and none of which is owned by a Control
Person, and each holder of stock of the Corporation receives the same type
of consideration in proportion to his holdings; or
(4) Both of the following are satisfied:
(a) the cash or fair market value of the property,
securities or other consideration to be received per share in the
Business Transaction by holders of the stock of the Corporation is not
less than the higher of (i) the highest price per share (including
brokerage commissions, soliciting dealers' fees, dealer-management
compensation, and other expenses, including, but not limited to,
newspapers advertisements, printing and attorney's fees) paid by such
Control Person in acquiring any of its holdings of the Corporation's
stock, or (ii) the highest per share market price of the stock of the
Corporation during the 3-month period immediately preceding the date
of the proxy statement described in (c) below; and
4
<PAGE>
(b) a proxy statement responsive to the requirements of the
Securities Exchange Act of 1934 shall be mailed to public stockholders
of the Corporation for the purpose of soliciting stockholder approval
of such Business Transaction and shall contain at the front thereof,
in a prominent place, any recommendations as to the advisability (or
inadvisability) of the Business Transaction which the Continuing
Directors, or any of them, may choose to state, and, if deemed
advisable by a majority of the Continuing Directors, an opinion of a
reputable investment banking firm as to the fairness (or unfairness)
of the terms of such Business Transaction, from the point of view of
the remaining public stockholders of the Corporation (such investment
banking firm to be selected by a majority of the Continuing Directors
and to be paid a reasonable fee for their services by the Corporation
upon receipt of such opinion).
B. For purposes of this Article:
(1) The term "Control Person" shall mean and include any
individual, corporation, partnership or other person or entity which,
together with its Affiliates and Associates, "beneficially owns" (as
this term is defined on the date on which this Article becomes
effective in Rule 13d-3 of the General Rules and Regulations under the
Securities Exchange Act of 1934) in the aggregate, stock of the
Corporation, which bears the rights to ten percent (10%) or more of
the total votes entitled to be cast in an election of Directors, and
any Affiliate or Associate (as those terms are defined on the date of
which this Article is adopted in Rule 12b-2 of the General Rules and
Regulations under the Securities Exchange Act of 1934) of any such
individual, corporation, partnership or other person or entity;
(2) The term "Business Transaction" shall mean (a) any
merger or consolidation of the Corporation with or into a Control
Person, (b) any sale, lease, exchange, transfer or other disposition,
including without limitation a mortgage or any other security device,
of all or any Substantial Part (as hereinafter defined) of the assets
of the Corporation (including without limitation any voting securities
of a subsidiary) or of a subsidiary, to a Control Person, (c) any
merger or consolidation of a Control Person with or into the
Corporation or a subsidiary of the Corporation, (d) any sale, lease,
exchange, transfer or other disposition of all or any Substantial Part
(as hereinafter defined) of the assets of a Control Person to the
Corporation or a subsidiary of the Corporation, (e) the issuance of
any securities of the Corporation or a subsidiary of the Corporation
to a Control Person, (f) the acquisition by the Corporation or a
subsidiary of the Corporation of any securities of a Control Person,
(g) any reclassification or recapitalization (including any reverse
stock split) involving stock of the Corporation, consummated within
five (5) years after a Control Person becomes a Control Person, (h)
any plan or proposal by a Control Person for the dissolution or
liquidation of the Corporation, and (i) any agreement, contract or
other
5
<PAGE>
arrangement providing for any of the transactions described in this
definition of Business Transaction;
(3) The term "Continuing Director" shall mean any director
who was elected by the public stockholders of the Corporation prior to
the acquisition by the Control Person, together with its Affiliates
and Associates, in the aggregate, of stock of the Corporation, which
bears the rights to ten percent (10%) or more of the total votes
entitled to be cast in an election of Directors, or a person
recommended to succeed a Continuing Director by a majority of
Continuing Directors;
(4) The term "Substantial Part" shall mean more than ten
percent (10%) of the total assets of the Corporation in question as of
the end of its most recent fiscal year ending prior to the time that
the termination is being made;
(5) Without limitation, any stock of the Corporation which
any Control Person has the right to acquire at any time pursuant to
any agreement, or upon exercise of conversion rights, warrants or
options, or otherwise, shall be deemed outstanding and beneficially
owned by such Control Person for purposes of this Article only;
(6) For the purposes of subparagraph 4 of paragraph A of
this Article, the phrase, "other consideration to be received" shall
include, without limitation, stock of the Corporation retained by its
existing public stockholders in the event of a Business Transaction
with such Control Person in which the Corporation is the surviving
corporation;
C. The provisions set forth in this Article shall not be
repealed or amended in any respect or in any manner, including any merger
or consolidation of the Corporation with any corporation, unless the
surviving corporation's Certificate of Incorporation contains an Article to
the same effect as this Article, except by the affirmative vote or written
consent of not less than sixty-six and two-thirds (66 2/3%) of the total
votes entitled to be cast in an election of Directors attributable to stock
owned by persons other than a Control Person.
D. A majority of the Continuing Directors shall have the power
and duty to determine for purposes of this Article on the basis of
information known to them:
(1) Whether any proposed transaction is a Business
Transaction and within the scope of this Article;
(2) Whether a stockholder is a Control Person;
6
<PAGE>
(3) For the purposes of subparagraph 4 of paragraph A, the
per share market value to be paid to stockholders in the Business
Transaction and the highest per share price paid by the Control Person
in acquiring any of its holdings of the Corporation's stock.
ARTICLE IX
The name and mailing address of the incorporator of the Corporation is
as follows:
Victoria C. Phelps
LATHAM & WATKINS
555 South Flower Street
Los Angeles, CA 90071
The powers of the incorporator shall terminate upon the filing of this
Certificate of Incorporation.
ARTICLE X
In furtherance and not in limitation of the powers conferred by
statute, the Board of Directors is expressly authorized to make, alter or repeal
the By-Laws of the Corporation.
ARTICLE XI
Election of Directors need not be by written ballot unless the By-Laws
of the Corporation shall so provide.
I, THE UNDERSIGNED, being the sole incorporator hereinbefore named,
for the purpose of forming a corporation pursuant to the General Corporation Law
of the State of Delaware, do make this certificate, herein declaring and
certifying that this is my act and deed and the facts herein stated are true,
and accordingly have hereunto set my hand this 25th day of February, 1985.
/s/ Victoria C. Phelps
---------------------------------------------
Victoria C. Phelps
Incorporator
7
<PAGE>
CERTIFICATE OF AMENDMENT
OF
CERTIFICATE OF INCORPORATION
PACIFICARE HEALTH SYSTEMS, INC., a corporation organized and existing
under and by virtue of the General Corporation Law of the State of Delaware,
does hereby certify:
FIRST: That the Board of Directors of PacifiCare Health Systems, Inc.
by unanimous written consent duly adopted resolutions setting forth proposed
amendments to the Certificate of Incorporation. The resolutions setting forth
the proposed amendments are as follows:
RESOLVED, that the authorized Common Shares of this Corporation be,
and they hereby are, split two for one, effective March 13, 1985.
RESOLVED FURTHER, that Section A of Article IV of the Certificate of
Incorporation of this corporation be amended to read as follows:
"PacifiCare Health Systems, Inc. is authorized to issue two classes of
shares of stock to be designated, respectively, "Common Shares" and
"Preferred Shares." The total number of shares of stock which the
Corporation shall have authority to issue is thirty million (30,000,000).
The total number of Common Shares which the Corporation shall have
authority to issue is twenty million (20,000,000) shares, and the par value
of each such Common Share shall be fifty cents ($.50). The total number of
Preferred Shares which the Corporation shall have authority to issue is ten
million (10,000,000) shares and the par value of each such Preferred Share
shall be one dollar ($1.00)."
RESOLVED, that Article VI of the Certificate of Incorporation of this
Corporation be amended to read as follows:
"Each Director shall serve until his successor is elected and qualified or
until his death, resignation or removal. A Director shall not be removed
from office prior to the expiration of his term, except that a Director may
be removed from office with or without cause prior to the expiration of his
term by the affirmative vote or written consent of not less than sixty-six
and two-thirds percent (66 2/3%) of the total votes entitled to be cast in
an election of Directors and that a Director may be removed from office
prior to the expiration of his term by the unanimous vote of the remaining
members of the Board of Directors if such Director has been declared of
unsound mind by an order of court or convicted of a felony. Should a
vacancy occur or be created, the remaining Directors (even though less than
a quorum) may fill the vacancy for the full term of the Directorship in
which the vacancy occurs or is created."
<PAGE>
RESOLVED, that Section A of Article VIII of the Certificate of
Incorporation of this corporation be amended to read as follows:
"In addition to requirements of any applicable statute, the
affirmative vote or written consent of not less than sixty-six and two-
thirds percent (66 2/3%) of the total votes entitled to be cast in an
election of Directors, considered for purposes of this Article as one
class, shall be required for approval or authorization of any Business
Transaction (as hereinafter defined) between the Corporation and any
Control Person (as hereinafter defined); provided, however, that such
additional voting requirement shall not be applicable if:"
RESOLVED, that Section C of Article VIII of the Certificate of
Incorporation of this Corporation be amended to read as follows:
"C. The provisions set forth in this Article shall not be repealed or
amended in any respect or in any manner, including any merger or
consolidation of the Corporation with any corporation, unless the surviving
corporation's Certificate of Incorporation contains an Article to the same
effect as this Article, except by the affirmative vote or written consent
of not less than sixty-six and two-thirds percent (66 2/3%) of the total
votes entitled to be cast in an election of Directors."
SECOND: That the required number of stockholders of the Corporation
have duly approved and adopted the foregoing amendments.
THIRD: That said amendments were duly adopted in accordance with the
provisions of Section 242 of the General Corporation Law of the State of
Delaware.
IN WITNESS WHEREOF, PacifiCare Health Systems, Inc. has caused this
certificate to be signed by Terry Hartshorn, its President, and attested by Alan
Hoops, its Secretary this 19th day of May, 1985.
PACIFICARE HEALTH SYSTEMS, INC.
By /s/ Terry Hartshorn
------------------------------------------------
Terry Hartshorn, President
ATTEST:
/s/ Alan R. Hoops
- --------------------------------------
Alan Hoops, Secretary
2
<PAGE>
FILING OF CERTIFICATE OF OWNERSHIP AND MERGER
WHEREAS, a proposal has been presented to and considered by this Board
pursuant to which this Corporation would change its legal domicile from
California to Delaware by means of a downstream merger of this Corporation into
PHSD, a newly-formed Delaware subsidiary corporation, but without any change in
the name, business, management, location of the principal executive office,
capitalization, assets or liabilities of the continuing enterprise, or any
interruption in or change in the place or manner of trading of its outstanding
shares, and pursuant to which PHSD, the surviving corporation, would issue the
Common Stock of PHSD to the holders of the Common Stock of this Corporation, in
a one-for-one exchange for the Common Stock of this Corporation, all as more
fully described in the draft Certificate of Ownership and Merger of PacifiCare
Health Systems (the "Merger Certificate") (attached hereto) and the Certificate
of Incorporation and Bylaws of PHSD, presented to and considered by this Board;
NOW, THEREFORE, BE IT RESOLVED, that this Board of Directors hereby
approves the proposed reincorporation merger, the resulting changes in the
charter documents of this Corporation, and the application of Delaware law,
rather than California law, to this Corporation;
BE IT FURTHER RESOLVED that, pursuant to the Merger Certificate, PHSD
issue the Common Stock of PHSD to the holders of the Common Stock of this
Corporation in a one-for-one exchange for the Common Stock of this Corporation;
BE IT FURTHER RESOLVED that the President and Secretary of this
Corporation are directed to execute the Merger Certificate on behalf of this
Corporation; and
BE IT FURTHER RESOLVED that the action taken by the officers and
employees of this Corporation, previously and hereafter, in furtherance of the
plan of reincorporation in Delaware are hereby expressly adopted, ratified and
approved;
BE IT FURTHER RESOLVED, that upon the merger of this Corporation into
PHSD the name of PHSD be changed from "PacifiCare Health Systems of Delaware,
Inc." to "PacifiCare Health Systems, Inc." pursuant to Section 253(b) of the
General Corporation Law of Delaware.
<PAGE>
CERTIFICATE OF OWNERSHIP AND MERGER
OF
PACIFICARE HEALTH SYSTEMS
This certificate of ownership and merger is filed by PacifiCare Health
Systems, a California corporation, in accordance with Section 253(a) of the
General Corporation Law of Delaware, for purpose of merging PacifiCare Health
Systems into PacifiCare Health Systems of Delaware, Inc., a Delaware
corporation.
OWNERSHIP
PacifiCare Health Systems owns one hundred percent (100%) of the
outstanding Common Stock of PacifiCare Health Systems of Delaware, Inc.
PacifiCare Health Systems of Delaware, Inc. has no Preferred Stock outstanding.
RESOLUTION OF PACIFICARE HEALTH SYSTEMS
BOARD OF DIRECTORS TO MERGE
The Board of Directors of PacifiCare Health Systems have, by written
consent on February 25, 1985, resolved to merge PacifiCare Health Systems into
PacifiCare Health Systems of Delaware, Inc. The resolution, which is attached,
provides for the pro rata issuance of the Common Stock of PacifiCare Health
Systems of Delaware, Inc. to the holders of the Common Stock of PacifiCare
Health Systems.
CHANGE OF NAME
The Board of Directors of PacifiCare Health Systems have, by written
consent on February 25, 1985, resolved that upon the merger of PacifiCare Health
Systems into PacifiCare Health Systems of Delaware, Inc., the name of PacifiCare
Health Systems of Delaware, Inc. be changed from "PacifiCare Health Systems of
Delaware, Inc." to "PacifiCare Health Systems, Inc." pursuant to Section 253(b)
of the General Corporation Law of Delaware.
APPROVAL BY MAJORITY
OF PACIFICARE HEALTH SYSTEMS SHAREHOLDERS
The holders of a majority of the outstanding shares of Common Stock of
PacifiCare Health Systems have, by written consent on February 25, 1985, in lieu
of formal voting at a special shareholder meeting pursuant to Section 228(c) of
the General Corporation Law of Delaware, unanimously approved the merger of
PacifiCare Health Systems into PacifiCare Health Systems of Delaware, Inc.
<PAGE>
IN WITNESS WHEREOF, the undersigned have executed this certificate
this 25th day of February, 1985.
/s/ Terry Hartshorn
---------------------------------------------
Terry Hartshorn
President
/s/ Alan R. Hoops
---------------------------------------------
Alan Hoops
Secretary
Each of the undersigned declares under penalty of perjury that the
matters set forth in the foregoing certificate are true to their personal
knowledge.
EXECUTED at Cypress, California on February 25, 1985.
/s/ Terry Hartshorn
---------------------------------------------
Terry Hartshorn
President
/s/ Alan R. Hoops
---------------------------------------------
Alan Hoops
Secretary
2
<PAGE>
STATE OF CALIFORNIA
COUNTY OF Orange
--------------------
On this 21st day of February, 1985, before me, the undersigned, a
notary public in and for the State of California, personally appeared Terry
Hartshorn and Alan Hoops, known to me to be the President and Secretary,
respectively, of PacifiCare Health Systems, a California corporation.
WITNESS my hand and official seal.
(Seal)
/s/ M. Hanna
---------------------------------------------
M. Hanna Notary Public in and for
for State of California
3
<PAGE>
AMENDMENT TO
CERTIFICATE OF INCORPORATION OF
PACIFICARE HEALTH SYSTEMS, INC.
The undersigned certify that:
1. They are president and secretary, respectively, of PacifiCare Health
Systems, Inc., a Delaware corporation.
2. The following amendment to the Certificate of Incorporation has been
approved by the board of directors of the corporation.
Article Twelve is added to read in full as set forth below:
"ARTICLE TWELVE
No Director shall be personally liable to the corporation or any
stockholder for monetary damages for breach of fiduciary duty as a
director, except for any matter in respect of which such director
shall be liable under Section 174 of Title 8 of the Delaware Code
(relating to the Delaware General Corporation Law) or any amendment
thereto or successor provision thereto or shall be liable by reason
that, in addition to any and all other requirements for such
liability, he (i) shall have breached his duty of loyalty to the
corporation or its stockholders, (ii) shall not have acted in good
faith or, in failing to act, shall not have acted in good faith, (iii)
shall have acted in a matter involving intentional misconduct or a
knowing violation of law or, in failing to act, shall have acted in a
manner involving intentional misconduct or a knowing violation of law
or, (iv) shall have derived an improper personal benefit. Neither the
amendment nor repeal of this Article Twelve, nor the adoption of any
provision of the Certificate of Incorporation inconsistent with this
Article Twelve, shall eliminate or reduce the effect of this Article
Twelve in respect of any matter occurring or any cause of action, suit
or claim that, but for this Article Twelve would accrue or arise,
prior to such amendment, repeal or adoption of an inconsistent
provision."
3. The amendment was approved by the required vote of the shareholders in
accordance with Section 242 of the General Corporation Law. 83.5% of the
shareholders entitled to vote with respect to the amendment, voted in favor of
the amendment.
/s/ Terry Hartshorn
---------------------------------------------
Terry Hartshorn, President
<PAGE>
/s/ Alan Hoops
---------------------------------------------
Alan Hoops, Secretary
Each of the undersigned declares under penalty of perjury that the statements
contained in the foregoing certificate are true and correct of his own
knowledge, and that this declaration was executed on February 17, 1988, at
Cypress, California.
/s/ Terry Hartshorn
---------------------------------------------
Terry Hartshorn
/s/ Alan Hoops
---------------------------------------------
Alan Hoops
2
<PAGE>
CERTIFICATE OF AMENDMENT
OF
CERTIFICATE OF INCORPORATION
OF
PACIFICARE HEALTH SYSTEMS, INC.,
A DELAWARE CORPORATION
PACIFICARE HEALTH SYSTEMS, INC., a corporation organized and existing under
and by virtue of the General Corporation Law of the State of Delaware, does
hereby certify:
FIRST: That the Board of Directors of PacifiCare Health Systems, Inc. at a
duly held meeting adopted resolutions setting forth proposed amendments to the
Certificate of Incorporation. The resolutions setting forth the proposed
amendments are as follows:
RESOLVED, that it is advisable and in the best interests of this
Corporation that paragraphs A and B of Article IV of the Certificate of
Incorporation of this Corporation be amended and restated to read in their
entirety as follows:
"A. PacifiCare Health Systems, Inc. ("Corporation") is
authorized to issue three classes of shares of stock to be designated,
respectively, "Class A Common Shares," "Class B Common Shares" and
"Preferred Shares." The total number of shares of stock which the
Corporation shall have authority to issue is one hundred million
(100,000,000). The total number of Class A Common Shares which the
Corporation shall have authority to issue is thirty million
(30,000,000) shares, and the par value of each such Class A Common
Share shall be one cent ($.01). The total number of Class B Common
Shares which the Corporation shall have authority to issue is sixty
million (60,000,000) shares, and the par value of each such Class B
Common Share shall be one cent ($.01). The total number of Preferred
Shares which the Corporation shall have authority to issue is ten
million (10,000,000) shares, and the par value of each such Preferred
Share shall be one dollar ($1.00).
Upon the Amendment to the Certificate of Incorporation becoming
effective pursuant to the General Corporation Law of the State of
Delaware (the "Effective Time"), and without any further action on the
part of the Corporation or its shareholders, each whole Common Share
of the Corporation, par value $.50 (the "Old Common Share"), then
issued (including shares held in the treasury of the Corporation, if
any) shall automatically be reclassified, changed and converted into
one fully paid and nonassessable Class A Common Share and certificates
previously representing Old Common Shares shall be deemed to represent
the same number of Class A Common Shares.
B. The powers, preferences and rights of the holders of Class A
Common Shares and Class B Common Shares (collectively the "Common
Shares"), and the
<PAGE>
qualifications, limitations or restrictions thereof, shall be in all
respects identical, except as otherwise required by law or expressly
provided in this Certificate of Incorporation, as amended, and subject
to the powers, preferences and rights of the holders of Preferred
Shares, as determined by the Board of Directors pursuant to paragraph
D of this Article IV.
1. DIVIDENDS.
Dividends may be declared and paid to the holders of the
Class A Common Shares and the Class B Common Shares in cash,
property, or other securities of the Corporation out of any funds
legally available therefor. If and when dividends on the Class A
Common Shares and the Class B Common Shares are declared payable
from time to time by the Board of Directors, whether payable in
cash, in property or in securities of the Corporation, the
holders of the Class A Common Shares and the holders of the Class
B Common Shares shall be entitled to share equally, on a per
share basis, in such dividends, except that, dividends or other
distributions payable on the Common Shares in Common Shares shall
be made to all holders of Common Shares and may be made (i) in
Class B Common Shares to the record holders of Class A Common
Shares and to the record holders of Class B Common Shares, (ii)
in Class A Common Shares to the record holders of Class A Common
Shares and in Class B Common Shares to the record holders of
Class B Common Shares or (iii) in any other authorized class or
series of capital stock to the holders of both classes of Common
Shares.
2. DISTRIBUTION ON DISSOLUTION, ETC.
Upon any liquidation, dissolution or winding up of the
Corporation, whether voluntary or involuntary, the remaining net
assets of the Corporation shall, after payment in full of the
liquidation preference, if any, of any outstanding Preferred
Shares, be distributed pro rata to the holders of the Class A
Common Shares and the Class B Common Shares in accordance with
their respective rights and interests.
3. VOTING RIGHTS
(a) At each annual or special meeting of the shareholders,
each holder of Class A Common Shares shall be entitled to one (1)
vote in person or by proxy for each Class A Common Share standing
in his name on the stock transfer records of the Corporation in
connection with the election of directors and all other actions
submitted to a vote of shareholders; holders of Class B Common
Shares shall not vote on any
2
<PAGE>
matters except as otherwise provided by this Certificate of
Incorporation, as amended, and the General Corporation Law of the
State of Delaware.
(b) The holders of Class B Common Shares shall be entitled
to vote separately as a group only with respect to (i) proposals
to change the par value of the Class B Common Shares, (ii)
amendments to this Certificate of Incorporation that alter or
change the powers, preference or special rights of the holders of
Class B Common Shares so as to affect them adversely, and (iii)
such other matters as may require separate group voting under
this Certificate of Incorporation, as amended, and the General
Corporation Law of the State of Delaware.
(c) The number of authorized Class B Common Shares may be
increased or decreased (but not below the number of shares then
outstanding) by the affirmative vote of the holders of a majority
of the Class A Common Shares.
4. CONVERSION
(a) All outstanding Class B Common Shares may be converted
into Class A Common Shares on a share-for-share basis by the
Board of Directors if, as a result of the existence of the Class
B Common Shares, either the Class A Common Shares or Class B
Common Shares is or both are excluded from trading on the New
York Stock Exchange, the American Stock Exchange and all other
principal national securities exchanges then in use and also is
excluded from quotation on the National Association of Securities
Dealers Automated Quotation ("NASDAQ") National Market System and
other comparable national quotation systems then in use. In
making such determination, the Board of Directors may
conclusively rely on any information or documentation available
to it, including filings made with the Securities and Exchange
Commission, any stock exchange, the National Association of
Securities Dealers, Inc. or any other governmental or regulatory
agency or any written instrument purporting to be authentic.
(b) All outstanding Class B Common Shares shall be
converted into Class A Common Shares on a share-for-share basis
if at any time the number of outstanding Class A Common Shares,
as reflected on the stock transfer records of the Corporation,
falls below ten percent (10%) of the aggregate number of
outstanding Class A Common Shares and of Class B Common Shares.
For purposes of the immediately preceding sentence, any Common
Shares repurchased and held as treasury shares or canceled by the
Corporation shall no longer be deemed "outstanding" from and
after the date of repurchase.
3
<PAGE>
(c) In the event of any conversion of the Class B Common
Share pursuant to subparagraph 4(a) or 4(b), certificates which
formerly represented outstanding shares of Class B Common Shares
will thereafter be deemed to represent a like number of shares of
Class A Common Shares and all authorized Common Shares shall
consist of only Class A Common Shares.
5. CLASS B COMMON SHARE PROTECTION PROVISION.
(a) If, after the Effective Time, any person or group
acting in concert acquires beneficial ownership of shares
representing 10% or more of the then issued and outstanding Class
A Common Shares (excluding the number of shares beneficially
owned by such person or group before the Effective Time and other
than upon the issuance or sale by the Corporation, by operation
of law, including a merger, consolidation or reorganization of a
beneficial owner, by will or the laws of descent and
distribution, by gift or by foreclosure of a bona fide loan), and
such person or group (a "Significant Shareholder") does not own
an equal or greater percentage of the Class B Common Shares
acquired after the record date for the first issuance of Class B
Common Shares (the "Dividend Date"), such Significant Shareholder
must, within a ninety (90) day period beginning the day after
becoming a Significant Shareholder, make a public cash tender
offer in compliance with all applicable laws and regulations to
acquire additional Class B Common Shares as provided in this
subparagraph B(5) of Article IV (a "Class B Protection
Transaction").
(b) In each Class B Protection Transaction, the Significant
Shareholder must make a public tender offer to acquire that
number of Class B Common Shares determined by (i) multiplying the
percentage of outstanding Class A Common Shares beneficially
owned by such Significant Shareholder and acquired after the
Effective Time by such Significant Shareholder by the total
number of shares of Class B Common Shares outstanding on the date
of such person or group became a Significant Shareholder, and
(ii) subtracting therefrom the total number of shares of Class B
Common Shares beneficially owned on such date and acquired after
the Dividend Date of such Significant Shareholder (including
shares acquired on such date at or prior to the time such person
or group became a Significant Shareholder). The Significant
Shareholder must acquire all of such shares validly tendered;
provided, however, that if the number of Class B Common Shares
tendered to the Significant Shareholder exceeds the number of
shares required to be acquired pursuant to the formula set forth
in this subparagraph 5(b), the number of Class B Common Shares
acquired from each tendering holder shall be pro rata in
4
<PAGE>
proportion to the total number of Class B Common Shares tendered
by all tendering holders.
(c) The offer price for any Class B Common Shares required
to be purchased by the Significant Shareholder pursuant to this
subparagraph B(5) shall be the greater of (i) the highest price
per share paid by the Significant Shareholder for any Class A
Common Share in the six month period ending on the date such
person or group became a Significant Shareholder or (ii) the
highest bid price of a Class A Common Share or Class B Common
Share on the NASDAQ National Market System (or such other
exchange or quotation system as is then the principal trading
market for such shares) on the date such person or group became a
Significant Shareholder or (iii) the highest bid price of a Class
A Common Share or Class B Common Share on the NASDAQ National
Market System (or such other exchange or quotation system as is
then the principal trading market for such shares) on the date
preceding the date the Significant Shareholder makes the tender
offer required by this subparagraph B(5). For purposes of
subparagraph B(5)(d) below, the applicable date for the
calculations required by clauses (i) and (ii) of the preceding
sentence shall be the date on which the Significant Shareholder
becomes required to engage in a Class B Protection Transaction.
In the event that the Significant Shareholder has acquired Class
A Common Shares in the six month period ending on the date such
person or group becomes a Significant Shareholder for
consideration other than cash, the value of such consideration
per Class A Common Share shall be as determined in good faith by
the Board of Directors.
(d) A Class B Protection Transaction shall also be required
to be effected by any Significant Shareholder each time that the
Significant Shareholder acquires beneficial ownership of the next
higher integral multiple of 5% (e.g., 15%, 20%, 25%, etc.) of the
outstanding Class A Common Shares after the Effective Time (other
than upon the issuance or sale by the Corporation, by operation
of law, including a merger, consolidation or reorganization of a
beneficial owner, by will or the laws of descent and
distribution, by gift, or by foreclosure of a bona fide loan) if
such Significant Shareholder does not then own an equal or
greater percentage of the Class B Common Shares acquired after
the Dividend Date. Such Significant Shareholder shall be
required to make a public tender offer to acquire that number of
Class B Common Shares prescribed by the formula set forth in
subparagraph B(5)(b) above, and must acquire all shares validly
tendered or a pro rata portion thereof, as specified in
subparagraph B(5)(b), at the price determined pursuant to
subparagraph B(5)(c) above.
5
<PAGE>
(e) If any Significant Shareholder fails to make an offer
required by this subparagraph B(5) of Article IV, or to purchase
shares validly tendered and not withdrawn (after proration, if
any), such Significant Shareholder shall not be entitled to vote
any Class A Common Shares beneficially owned by such Significant
Shareholder unless and until such requirements are complied with
or unless and until all Class A Common Shares causing such offer
requirement to be effective are no longer beneficially owned by
such Significant Shareholder.
(f) The Class B Protection Transaction requirement shall
not apply to any increase in percentage ownership of Class A
Common Shares resulting solely from a change in the total amount
of Class A Common Shares outstanding, provided that any
acquisition after such change which resulted in any person or
group owning ten percent (10%) or more of the Class A Common
Shares (excluding in the case of the numerator but not the
denominator of the calculation of such percentage, Class A Common
Shares held by such Significant Shareholder immediately after the
Effective Time) shall be subject to any Class B Protection
Transaction requirement that would be imposed with respect to a
Significant Shareholder pursuant to this subparagraph B(5) of
Article IV.
(g) All calculations with respect to percentage ownership
of issued and outstanding shares of either class of Common Shares
will be based upon the numbers of issued and outstanding shares
reported by the Corporation on the last to be filed of (i) the
corporation's most recent annual report on Form 10-K, (ii) its
most recent Quarterly Report on Form 10-Q, or (iii) its most
recent Current Report on Form 8-K.
(h) For purposes of this subparagraph B(5) of this Article
IV, the term "person" means a natural person, corporation,
partnership, trust, association, government, or political
subdivision, agency or instrumentality of a government, or other
entity. "Beneficial ownership" shall be determined pursuant to
Rule 13d-3 promulgated under the Securities Exchange Act of 1934,
as amended (the "1934 Act"), or any successor regulation. The
formation or existence of a "group" shall be determined pursuant
to Rule 13d-5(b) under the 1934 Act or any successor regulation.
6. MERGER OR CONSOLIDATION
In the event of a merger or consolidation of the Corporation with
or into another entity (whether or not the Corporation is the
surviving entity), the holders of Class B Common Shares shall be
entitled to receive the same per share
6
<PAGE>
consideration as the per share consideration, if any, received by any
holder of the Class A Common Shares in such merger or consolidation.
7. SPLITS, SUBDIVISIONS, ETC.
If the Corporation shall in any manner split, subdivide or
combine the outstanding Class A Common Shares or Class B Common
Shares, the outstanding shares of the other such class of Common
Shares shall be proportionally subdivided or combined in the same
manner and on the same basis as the outstanding shares of the other
class of Common Shares have been split, subdivided or combined.
8. NO PREEMPTIVE RIGHTS.
No holder of Class A Common Shares or Class B Common Shares
shall, by reason of such holding, have any preemptive right to
subscribe to any additional issue of stock of any class or series of
the Corporation or to any security of the Corporation convertible into
such stock.
9. CONSIDERATION FOR SALE OF SHARES.
The Board of Directors shall have the power to issue and sell all
or any part of any class of stock herein or hereafter authorized to
such persons, firms, associations or corporations, and for such
consideration as the Board of Directors shall from time to time, in
its discretion, determine, whether or not greater consideration could
be received upon the issue or sale of the same number of shares of
another class, and as otherwise permitted by law.
10. CONSIDERATION FOR PURCHASE OF SHARES.
The Board of Directors shall have the power to purchase any class
of stock herein or hereafter authorized from such persons, firms,
associations or corporations, and for such consideration as the Board
of Directors shall from time to time, in its discretion, determine,
whether or not less consideration could be paid upon the purchase of
the same number of shares or another class, and as otherwise permitted
by law.
SECOND: That the required number of stockholders of the Corporation have
duly approved and adopted the foregoing amendments.
THIRD: That said amendments were duly adopted in accordance with the
provisions of Section 242 of the General Corporation Law of the State of
Delaware.
7
<PAGE>
IN WITNESS WHEREOF, PacifiCare Health Systems, Inc. has caused this
certificate to be signed by Samuel J. Tibbitts, its Chairman of the Board and
attested by Joseph S. Konowiecki, its Assistant Secretary this 4th day of June,
1992.
PACIFICARE HEALTH SYSTEMS, INC.
/s/ Samuel J. Tibbitts
--------------------------------------------------
Samuel J. Tibbitts
Chairman of the Board
ATTEST:
/s/ Joseph S. Konowiecki
- ----------------------------------
Joseph S. Konowiecki
Assistant Secretary
8
<PAGE>
CERTIFICATE OF AMENDMENT OF
THE CERTIFICATE OF INCORPORATION OF
PACIFICARE HEALTH SYSTEMS, INC.,
A DELAWARE CORPORATION
PACIFICARE HEALTH SYSTEMS, INC., a corporation organized and existing under
and by virtue of the General Corporation Law of the State of Delaware, does
hereby certify:
FIRST: That the Board of Directors of PacifiCare Health Systems, Inc. at a
duly held meeting adopted a resolution setting forth a proposed amendment to the
Certificate of Incorporation. The resolution setting forth the proposed
amendment is as follows:
RESOLVED, that the Board of Directors deems it advisable and in the best
interests of the Company that Article V of the Certificate of Incorporation be
amended and restated to read in its entirety as follows:
"The number of Directors of the Corporation shall be ten. The number
of Directors may hereafter be fixed from time to time by bylaw or
amendment duly adopted by the Board of Directors, provided, however,
that the number of Directors shall not be more than eleven nor less
than five."
SECOND: That the required number of stockholders of the Company have duly
approved and adopted the foregoing amendment.
THIRD: That said amendment was duly adopted in accordance with the
provisions of Section 242 of the General Corporation Law of the State of
Delaware.
IN WITNESS WHEREOF, PacifiCare Health Systems, Inc. has caused this
certificate to be signed by Alan R. Hoops, its president and attested by Joseph
S. Konowiecki this 2nd day of March 1994.
PACIFICARE HEALTH SYSTEMS, INC.
/s/ Alan R. Hoops
--------------------------------------------------
Alan R. Hoops, President
ATTEST:
/s/ Joseph S. Konowiecki
- -----------------------------------------
Joseph S. Konowiecki, Secretary
<PAGE>
CERTIFICATE OF AMENDMENT OF
CERTIFICATE OF INCORPORATION OF
PACIFICARE HEALTH SYSTEMS, INC.,
A DELAWARE CORPORATION
PACIFICARE HEALTH SYSTEMS, INC., a corporation organized and existing under
and by virtue of the General Corporation Law of the State of Delaware, does
hereby certify:
FIRST: That the Board of Directors of PacifiCare Health Systems, Inc., at
a duly held meeting adopted a resolution setting forth a proposed amendment to
the Certificate of Incorporation. The resolution setting forth the proposed
amendment is as follows:
RESOLVED, that the Board of Directors deems it advisable and in the best
interests of the Company that paragraph "A" of Article IV of the Certificate of
Incorporation be amended and restated to read in its entirety as follows:
"PacifiCare Health Systems, Inc. ("Corporation") is authorized to issue
three classes of shares of stock to be designated, respectively, "Class A
Common Shares," "Class B Common Shares" and "Preferred Shares." The total
number of shares of stock which the Corporation shall have authority to
issue is two hundred twenty million (220,000,000). The total number of
Class A Common Shares which the Corporation shall have authority to issue
is one hundred million (100,000,000), and the par value of each such Class
A Common Share shall be one cent ($0.01). The total number of Class B
Common Shares which the Corporation shall have authority to issue is one
hundred million (100,000,000), and the par value of each such Class B
Common Share shall be one cent ($0.01). The total number of Preferred
Shares which the Corporation shall have the authority to issue is twenty
million (20,000,000), and the par value of each such Preferred Share shall
be one dollar ($1.00)."
SECOND: That the required number of stockholders of the Corporation have
duly approved and adopted the foregoing amendment.
THIRD: That said amendment was duly adopted in accordance with the
provisions of Section 242 of the General Corporation Law of the State of
Delaware.
IN WITNESS WHEREOF, PacifiCare Health Systems, Inc. has caused this
certificate to be signed by Alan R. Hoops, its president, and attested by Joseph
S. Konowiecki, its secretary, this sixth day of March, 1996.
PACIFICARE HEALTH SYSTEMS, INC.
/s/ Alan Hoops
--------------------------------------------------
Alan R. Hoops, President
ATTEST:
/s/ Joseph S. Konowiecki
- -----------------------------------------
Joseph S. Konowiecki, Secretary
<PAGE>
EXHIBIT 10.1
AMENDED 1992 NON-OFFICER DIRECTORS
STOCK OPTION PLAN
OF
PACIFICARE HEALTH SYSTEMS, INC.
1. PURPOSE. The Amended 1992 Non-Officer Directors Stock Option Plan
(the "Plan") of PacifiCare Health Systems, Inc., a Delaware corporation (the
"Company"), is intended to promote the best interests of the Company and its
stockholders by strengthening the Company's ability to attract and retain the
services of experienced and knowledgeable non-officer directors and to provide
additional incentive for such directors to continue to work for the best
interests of the Company and its stockholders. The options granted hereunder
are not intended to qualify under Section 422 of the Internal Revenue Code of
1986, as amended (the "Code"), as Incentive Stock Options.
2. AMOUNT AND SOURCE OF STOCK. The shares of stock subject to options
shall be shares of the Company's Class B Common Stock, par value $0.01 per share
(the "Shares"). The total number of Shares which may be the subject of options
granted pursuant to the Plan shall be limited so that the total number of Shares
issued upon the exercise of options granted under the Plan shall not exceed
140,000, subject to adjustment as provided in paragraph 11 of the Plan. In the
event that any option granted hereunder expires or is terminated or canceled
prior to its exercise in full for any reason, the Shares subject to such option
shall be added to the Shares otherwise available for issuance pursuant to the
exercise of options under the Plan.
3. ADMINISTRATION OF THE PLAN.
(a) The Plan shall be administered by a committee of the Board of
Directors of the Company (the "Board") comprised of two or more members of the
Board, selected by the Board (the "Committee"). 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 respective option agreements 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 have no
authority with respect to the selection from among the eligible individuals to
whom options are to be granted (any such individual being hereinafter referred
to as the "optionee" or the "holder") or the number or maximum number of Shares
subject to any option that is granted to an eligible individual. The selection
of optionees and the number of Shares subject to each option shall be determined
in accordance with paragraph 4 of the Plan.
(b) The Committee shall act by a majority of its members in office.
The Committee may act either by vote at a meeting or by a memorandum or other
written instrument signed by a majority of the Committee.
1
<PAGE>
(c) 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 optionees, the Company and all other interested
persons. No member of the Committee shall be personally liable for any action,
determination or interpretation made in good faith with respect to 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.
4. ELIGIBILITY. All non-officer directors of the Company, who are not
eligible to receive options under the Second Amended and Restated 1989 Stock
Option Plan for Officers and Key Employees of the Company, as amended (the
"1989 Plan"), shall be eligible to receive options hereunder (the "Eligible
Directors"). The Committee shall, subject to the applicable limits of the Plan,
automatically grant each Eligible Director annually options to purchase 2,000
Shares on the 31st day of December in each calendar year (the "Date of Grant")
commencing December 31, 1992; provided that the optionee shall not have been
eligible to receive options under the 1989 Plan for all or any part of the
preceding 12-month period and shall have served on the Board the entire
preceding 12-month period. If additional Eligible Directors are hereafter
appointed to the Board, the Committee shall, subject to the applicable limits of
the Plan, automatically grant each such person an annual option to purchase
2,000 Shares on the 31st day of December in each calendar year (the "Date of
Grant") commencing with the first December 31st following the date on which such
director was appointed; so long as the director is then eligible for the
granting of options pursuant to this Plan and has not been eligible to receive
options under the 1989 Plan for all of the preceding 12-month period, and, such
director shall have served on the Board the entire preceding 12-month period.
If the number of Shares which may be the subject of options under the Plan is
not sufficient to make all automatic grants required to be made pursuant to the
Plan on the applicable date, the number of Shares subject to the options granted
to each director shall be reduced on a pro rata basis.
5. OPTION PRICE. The exercise price for the Shares purchasable under any
option granted hereunder shall be an amount equal to 100 percent of the fair
market value of the Shares subject to option under the Plan on the Date of
Grant. For purposes of the Plan, the "fair market value" of the Shares on a
given date shall be based upon: (i) the closing price per share of the Shares
on the principal exchange on which the Shares are then trading, if any, on such
date, or, if the Shares were not traded on such date, then on the next preceding
trading day during which a sale occurred; or (ii) if the Shares are not traded
on an exchange but are quoted on the National Association of Securities Dealers
Automatic Quotation System ("Nasdaq") or a successor quotation system, (1) the
last sales price (if the Shares are then listed as a National Market Issue under
the NASD National Market System) or (2) the mean
2
<PAGE>
between the closing representative bid and asked prices (in all other cases) for
the Shares on such date as reported by Nasdaq or such successor quotation
system; or (iii) if the Shares are 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 Shares on such date as determined in good faith by
the Committee; or (iv) if the Shares are not publicly traded, the fair market
value established by the Committee acting in good faith.
6. TERMS AND CONDITIONS OF OPTIONS; VESTING.
(a) Subject to paragraphs 6(b), (c) and (d), and paragraphs 8, 9
and 15, each option granted on the Date of Grant shall become exercisable in
four cumulative installments as follows:
(i) The first installment shall consist of 25 percent of the
Shares covered by the option and shall become exercisable on the first
anniversary of the Date of Grant.
(ii) The second installment shall consist of 25 percent of the
Shares covered by the option and shall become exercisable on the second
anniversary of the Date of Grant.
(iii) The third installment shall consist of 25 percent of
the Shares covered by the option and shall become exercisable on the third
anniversary of the Date of Grant.
(iv) The fourth installment shall consist of all remaining Shares
covered by the option and shall become exercisable on the fourth
anniversary of the Date of Grant.
(b) No portion of an option which is unexercisable at Termination of
Directorship (as defined in paragraph 8) shall thereafter be exercisable.
(c) The installments provided for in this paragraph 6 are cumulative.
Each such installment which becomes exercisable pursuant to paragraph 6(a) shall
remain exercisable until such installment becomes unexercisable under paragraph
8.
(d) Subject to paragraph 15, the grant of options by the Committee
shall be effective as of the Grant Date; provided, however, that no option
granted hereunder shall be exercisable unless and until the holder shall enter
into an individual option agreement with the Company that shall set forth the
terms and conditions of such option. Each such agreement shall expressly
incorporate by reference the provisions of this Plan (a copy of which shall be
made available for inspection by the optionee during normal business hours at
the principal office of the Company) and shall state that in the event of any
inconsistency between the provisions hereof and the provisions of such
agreement, the provisions of this Plan shall govern.
7. EXERCISE OF OPTIONS.
3
<PAGE>
(a) During the lifetime of the optionee, only he, his guardian or
legal representative may exercise an option granted to him, or any portion
thereof. After the death of the optionee, any exercisable portion of an option
may, prior to the time when such option becomes unexercisable under paragraph 8,
be exercised by his personal representative or by any person empowered to do so
under the deceased optionee's will or under the applicable laws of descent and
distribution.
(b) At any time and from time to time prior to when any exercisable
option or exercisable portion thereof becomes unexercisable under paragraph 8,
such option or portion thereof may be exercised in whole or in part; provided,
however, that the Company shall not be required to issue fractional shares and
the number of shares for which an option may be partially exercised shall be not
less than 100 shares.
(c) An exercisable option, or any exercisable portion thereof, may be
exercised solely by delivery to the Secretary or Chief Financial Officer of the
Company or their respective offices of all of the following prior to the time
when such option or such portion becomes unexercisable under the Plan:
(i) Notice in writing signed by the optionee or other person
then entitled to exercise such option or portion, stating that such option
or portion is exercised, such notice complying with all applicable rules
established by the Committee;
(ii) (A) Full payment (in cash or by check) for the shares with
respect to which such option or portion is hereby exercised;
(B) With the consent of the Committee, shares of any class
of the Company's stock owned by the optionee duly endorsed for
transfer to the Company with a fair market value (as determinable
under paragraph 5) 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
optionee for more than six months at the time they are delivered);
(C) With the consent of the Committee, any other form of cashless
exercise permitted under paragraph 7(d) hereof; or
(D) Any combination of the consideration provided in the foregoing
subsections (A), (B) and (C);
(iii) Such representations and documents as the Committee, in
its absolute discretion, deems necessary or advisable to effect compliance
with all applicable provisions of the Securities Act of 1933, as amended,
and any other federal or state securities laws or regulations. The
Committee may, in its absolute discretion, also take whatever additional
actions it deems appropriate to effect such compliance including,
4
<PAGE>
without limitation, placing legends on share certificates and issuing stop
transfer orders to transfer agents and registrars; and
(iv) In the event that the option or portion thereof shall be
exercised by any person or persons other than the optionee, appropriate
proof of the right of such person or persons to exercise the option or
portion thereof.
(d) The Company, in its sole discretion, may establish procedures
whereby an optionee, to the extent permitted by and subject to the requirements
of Rule 16b-3 under the Securities Exchange Act of 1934 (the "Exchange Act"),
Regulation T issued by the Board of Governors of the Federal Reserve System
pursuant to the Exchange Act, federal income tax laws, and other federal, state
and local tax and securities laws, can exercise an option or a portion thereof
without making a direct payment of the option price to the Company. If the
Company so elects to establish a cashless exercise program, the Company shall
determine, in its sole discretion and from time to time, such administrative
procedures and policies as it deems appropriate provided such procedures and
policies are consistent with those of any cashless exercise program established
pursuant to the 1989 Plan. Such procedures and policies shall be binding on any
optionee wishing to utilize the cashless exercise program.
8. EXPIRATION OF OPTIONS. No option may be exercised to any extent by
anyone after the first to occur of the following events:
(a) The expiration of 10 years and one day from the date the option
was granted; or
(b) The expiration of eight months from the time the optionee shall
voluntarily or involuntarily cease to continue to serve as a director of the
Company (a "Termination of Directorship"), unless such Termination of
Directorship results from his death or disability; or
(c) The expiration of one year from the date of the optionee's
Termination of Directorship by reason of his disability; or
(d) The expiration of one year from the date of optionee's death.
For purposes of this paragraph 8, "disability" shall mean a medically
determinable physical or mental impairment which has lasted or can be expected
to last for a continuous period of not less than 12 months and which renders a
director substantially unable to function as a director of the Company. Nothing
contained herein or in any option agreement shall be construed to confer on any
optionee any right to continue as a director of the Company.
9. ACCELERATION OF VESTING UPON A CHANGE OF CONTROL. Notwithstanding
anything to the contrary in Section 8 and/or any vesting provisions of any
option, any option which has
5
<PAGE>
been held for at least six months shall become exercisable immediately upon the
effective date of a "Change of Control." As used in this Section 9, the term
"Change of Control" shall mean the occurrence of any of the following: (i) a
business combination effectuated through the merger or consolidation of the
Company with or into another entity where the Company is not the Surviving
Organization; (ii) any business combination effectuated through the merger or
consolidation of the Company with or into another entity where the Company is
the Surviving Organization and such business combination occurred with an entity
whose market capitalization prior to the transaction was greater than 50 percent
of the Company's market capitalization prior to the transaction; (iii) the sale
in a transaction or series of transactions of all or substantially all of the
Company's assets; (iv) any "person" or "group" (within the meaning of Sections
13(d) and 14(d) of the Exchange Act) other than UniHealth, a California
nonprofit public benefit corporation ("UniHealth"), acquires beneficial
ownership (within the meaning of Rule 13d-3 of the Exchange Act), directly or
indirectly, of 20 percent or more of the voting common stock of the Company and
the beneficial ownership of the voting common stock of the Company owned by
UniHealth at that date is less than or equal to the beneficial ownership
interest of voting securities attributable to such other person or group; (v) a
dissolution or liquidation of the Company; or (vi) the Company ceases to be
subject to the reporting requirements of the Exchange Act as a result of a
"going private transaction" (within the meaning of the Exchange Act). For
purposes hereof, "Surviving Organization" shall mean any entity where the
majority of the members of such entity's board of directors are persons who were
members of the Company's board of directors prior to the merger, consolidation
or other business combination and the senior management of the surviving entity
includes all of the individuals who were the Company's executive management (the
Company's chief executive officer and those individuals who report directly to
the Company's chief executive officer) prior to the merger, consolidation or
other business combination and such individuals are in at least comparable
positions with such entity. The Committee may make such determinations and
interpretations and adopt such rules and conditions as it, in its absolute
discretion, deems appropriate in connection with a Change in Control and
acceleration of exercisability. All such determinations and interpretations by
the Committee shall be conclusive. Each optionee shall receive at least 10
days' notice prior to the effective date of the Change of Control that their
options will be exercisable upon the effective date of the Change of Control and
the officers of the Company shall make adequate provisions to permit all
optionees to exercise their options as of the effective date of the Change of
Control.
10. NON-TRANSFERABILITY OF OPTIONS. No option or interest or right
therein or part thereof shall be liable for the debts, contracts or engagements
of the optionee or his successors in interest or shall be subject to disposition
by transfer, alienation, anticipation, pledge, encumbrance, assignment or any
other means whether such disposition be voluntary or involuntary or by operation
of law or judgment, levy, attachment, garnishment or any other legal or
equitable proceedings (including bankruptcy) and any attempted disposition
thereof shall be null and void and of no effect; provided, however, that nothing
in this paragraph 10 shall prevent transfers by will or by the applicable laws
of descent and distribution.
6
<PAGE>
11. ADJUSTMENTS UPON CERTAIN EVENTS.
(a) In the event that the outstanding shares of Class B Common Stock
of the Company are hereafter changed into or exchanged for a different number or
kind of shares or other securities of the Company, or of another corporation, by
reason of reorganization, merger, consolidation, recapitalization,
reclassification, stock split, stock dividend or combination of shares, or in
the event of extraordinary cash or non-cash dividends being declared with
respect to the outstanding shares of Class B Common Stock or other similar
transactions, proportionate adjustments shall be made by the Committee in the
number and kind of shares for the purchase of which options may be granted
(including adjustments of the limitation on the maximum number and kind of
shares which may be issued on exercise of options), which adjustments shall be
consistent with comparable adjustments made pursuant to the corresponding
provision in the 1989 Plan.
(b) In the event that the outstanding shares of Class B Common Stock
of the Company are hereafter changed into or exchanged for a different number or
kind of shares or other securities of the Company, or of another corporation, by
reason of reorganization, merger, consolidation, recapitalization,
reclassification, stock split, stock dividend or combination of shares, or in
the event of extraordinary cash or non-cash dividends being declared with
respect to the outstanding shares of Class B Common Stock or other similar
transactions, the Committee shall make proportionate adjustments in the number
and kind of shares as to which all outstanding options, or portions thereof then
unexercised, shall be exercisable, to the end that after such event the
optionee's proportionate interest shall be maintained as before the occurrence
of such event. Such adjustments shall be consistent with comparable adjustments
made pursuant to the corresponding provision in the 1989 Plan. Such adjustment
in an outstanding option shall be made without change in the total price
applicable to the option or the unexercised portion of the option (except for
any change in the aggregate price resulting from rounding-off of share
quantities or prices) and with any necessary corresponding adjustment in option
price per share. Any such adjustment made by the Committee shall be final and
binding upon all optionees, the Company and all other interested persons.
12. GENERAL RESTRICTIONS.
(a) The Shares issuable and deliverable upon the exercise of any
option, 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 purchased upon the exercise of any option or portion
thereof prior to fulfillment of all of the following conditions:
(i) The admission of such Shares to listing on all stock
exchanges on which such class of stock is then listed;
(ii) The completion of any registration or other qualification of
such Shares under any state or federal law or under the rulings or regulations
of the Securities and Exchange Commission or any other governmental regulatory
body, which the Committee shall, in its absolute discretion, deem necessary or
advisable;
(iii) The obtaining of any approval or other clearance from
any state or federal governmental agency which the Committee shall, in its
absolute discretion, determine to be necessary or advisable;
7
<PAGE>
(iv) The payment to the Company of all amounts which it is
required to withhold under federal, state or local law in connection with the
exercise of the option; and
(v) The lapse of such reasonable period of time following the
exercise of the option as the Committee may establish from time to time for
reasons of administrative convenience.
(b) The holders of options shall not be, nor have any of the rights
or privileges of, stockholders of the Company in respect of any Shares
receivable upon the exercise of any part of an option unless and until
certificates representing Shares have been issued by the Company to such
holders.
13. WITHHOLDING TAX LIABILITY.
(a) A holder of an option granted hereunder may elect to deliver
Shares to the Company or have the Company withhold shares otherwise issuable
upon the exercise of an option in order to satisfy federal, state and local
withholding tax liability (a "share withholding election"), provided: (i) the
Board or, if so designated, the Committee, shall not have revoked its advance
approval of the holder's share withholding election; and (ii) the share
withholding election is made on or prior to the date on which the amount of
withholding tax liability is determined (the "Tax Date"). Notwithstanding the
foregoing, a holder whose transactions in 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 option; and (ii) either (x) the share
withholding election is irrevocably made at least six months in advance of the
withholding, or (y) the share withholding election and the share withholding
take place during the period beginning on the third business day following the
date of release of the Company's quarterly or annual financial results and
ending on the twelfth business day following such date.
(b) A share withholding election shall be deemed made when written
notice of such election, signed by the holder, has been delivered or transmitted
by registered or certified mail to the Secretary or Chief Financial Officer of
the Company at its then principal office. Delivery of said notice shall
constitute an irrevocable election to have Shares withheld.
(c) Upon exercise of an option by a holder, the Company shall
transfer the total number of Shares subject to the option to the holder on the
date of exercise, less any Shares the holder elects to withhold.
14. 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; provided that: (i) the Board may
not amend or modify the Plan more than once in any six month period other than
to comport with changes in the Code, the Employee Retirement Income Security
Act, or the rules promulgated thereunder; and (ii) no amendment without the
approval of the stockholders of the Company shall be made if stockholder
approval would be required under Section 422 of the Code, Rule 16b-3 under the
Exchange 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 option, alter or impair any rights or obligations
under any option theretofore granted. No option may be granted during any
period of suspension nor after termination of the Plan, and in no event may any
option be granted under this Plan after the expiration of 10 years from the date
the Plan is approved by the Company's stockholders under paragraph 15.
15. APPROVAL OF PLAN BY STOCKHOLDERS. This Plan will be submitted for the
approval of the Company's stockholders within 12 months after the date of the
Board's initial adoption of the Plan. Options
8
<PAGE>
may be granted prior to such stockholder approval; provided, however, that such
options 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 options previously granted under the
Plan shall thereupon be canceled and become null and void.
9
<PAGE>
EXHIBIT 10.2
PACIFICARE HEALTH SYSTEMS, INC.
AMENDED NON-EMPLOYEE DIRECTOR
COMPENSATION AND RETIREMENT PLAN
PacifiCare Health Systems, Inc., a corporation organized under the laws of
the State of Delaware (the "Company"), hereby adopts this Amended Non-employee
Director Compensation and Retirement Plan.
1. PURPOSE OF THE AMENDED PLAN
The purpose of this Amended Plan is to enhance the growth, development and
financial success of the Company and its ability to attract and retain the
services of qualified and experienced Non-employee Directors by providing such
Non-employee Directors annual cash compensation, retirement benefits and stock
options, subject to the conditions and limitations of this Amended Plan.
2. DEFINITIONS
When used herein, the following terms shall have the respective meanings
set forth below:
(a) "Affiliate" shall mean any corporation or entity which directly, or
indirectly through one or more intermediaries, controls, is controlled by, or is
under common control with the Company. Affiliates of the Company shall include
UniHealth and its affiliates.
(b "Amended Plan" means this Amended Non-employee Director Compensation
and Retirement Plan, as it may be amended from time to time, which amends and
supersedes the Plan.
(c) "Annual Retainer" means the retainer compensation established by the
Board and paid to a qualified Non-employee Director pursuant to Section 4
hereof.
(d) "Board" means the Board of Directors of the Company.
(e) "Board Meeting Fee" shall mean the fee established by the Board and
paid to each Non-employee Director for attending a meeting of the Board pursuant
to Section 5 hereof.
(f) "Class B Common Stock" shall mean the Class B Common Stock of the
Company, par value $.01 per share.
(g) "Committee Meeting Fee" shall mean the fee established by the Board
and paid to each Non-employee Director for attending a meeting of any committee
of the Board pursuant to Section 5 hereof.
-1-
<PAGE>
(h) "Company" means PacifiCare Health Systems, Inc., a Delaware
corporation, and any successor corporation.
(i) "Director" means any person who is duly elected or appointed to the
Board.
(j) "Employee" means any full-time employee (as defined in Section
31.340(c)-1 of the Internal Revenue Code of 1986, as amended) of the Company or
any of its Affiliates.
(k) "Meeting Fees" shall mean the Board Meeting Fee and the Committee
Meeting Fee.
(l) "Non-employee Director" or "Participant" means any Director who is not
an Employee and who is otherwise eligible to accrue or receive benefits under
this Amended Plan.
(m) "Plan" means the Company's Non-employee Director Compensation and
Retirement Plan.
(n) "Plan Committee" shall mean the committee of the Board of Directors of
the Company as defined in Section 3(a) hereof.
(o) "Retire" or "Retirement" shall mean the termination of service of a
Non-employee Director as a Director by resignation, expiration of office without
reelection, or for any other reason except death or removal of the Non-employee
Director for "cause."
(p) "Retirement Benefits" shall mean the retirement benefits payable to
Non-employee Directors under Section 7 hereof.
(q) "Stock Options" shall mean options to purchase shares of the Company's
Class B Common Stock granted to Non-employee Directors under the Company's
Amended 1992 Non-Officer Director Stock Option Plan.
(r) "UniHealth" shall mean UniHealth, a California non-profit public
benefit corporation.
(s) "Year(s) of Service" shall mean the number of full years (i.e., 365
days) of service of a Director as a Non-employee Director for the Company and
its predecessors.
3. ADMINISTRATION OF THE AMENDED PLAN
(a) GENERAL ADMINISTRATION; POWERS OF ADMINISTRATION. This Amended Plan
shall be generally administered by the Board. The Board may delegate the
general administration of this Amended Plan to a committee of the Board (the
"Plan Committee"). The Company shall pay all costs of administration of this
Amended
-2-
<PAGE>
Plan. The Board or, if applicable, the Plan Committee, shall have and may
exercise such powers and authority as may be necessary or appropriate to carry
out the administration of this Amended Plan. Without limiting the generality of
the foregoing, the Board or, if applicable, the Plan Committee shall have full
power and authority to: (i) determine all questions of fact and law that may
arise under this Amended Plan; (ii) interpret this Amended Plan and to make all
other determinations necessary or advisable for the administration of this
Amended Plan; and (iii) prescribe, amend, and rescind rules and regulations
relating to this Amended Plan, including, without limitation, any rules which
the Board or, if applicable, the Plan Committee determines are necessary or
appropriate, as the case may be, to ensure that the Company complies with all
applicable provisions of any federal, state, or local law, including laws
relating to the withholding of tax, including both prospective and retroactive
changes in tax laws. All interpretations, determinations, and actions by the
Board or Plan Committee, as the case may be, shall be final, conclusive, and
binding upon all Participants.
(b) PLAN COMMITTEE. The Plan Committee shall consist of the compensation
committee of the Board. The Plan Committee shall only act by a majority vote of
its members. The Plan Committee may act either by a vote at a meeting or by
memorandum or other written instrument signed by a majority of the Plan
Committee members.
(c) LIABILITY. All actions taken and all interpretations and
determinations made by the Board or the Plan Committee, as the case may be, in
good faith shall be final and binding upon all Participants, the Company and all
other interested persons. No member of the Board or the Plan Committee, as the
case may be, shall be personally liable for damages, costs or expenses resulting
from any action, failure to act, determination or interpretation made in good
faith with respect to this Amended Plan and all members of the Board and Plan
Committee shall be fully protected by the Company in respect to any such action,
determination or interpretation.
(d) NONAPPLICABILITY TO STOCK OPTIONS. Notwithstanding anything contained
herein, any action, determination, or interpretation with respect to Stock
Options, including, but not limited to, the administration of or grants of Stock
Options under the Company's Second Amended and Restated 1989 Stock Option Plan
for Officers and Key Employees, as amended, and the Amended 1992 Non-Officer
Directors Stock Option Plan, as the case may be, shall be governed exclusively
by the terms and conditions of said stock option plans.
(e) COMPENSATION AND RETIREMENT AGREEMENTS. The Board or Plan Committee,
as the case may be, in its sole and absolute
-3-
<PAGE>
discretion, may cause the Company to enter into a written compensation and
retirement agreement with each Participant which agreement shall be executed by
the Participant and an authorized Officer of the Company and which shall contain
such terms and conditions as the Board or Plan Committee, as the case may be,
shall determine, consistent with this Amended Plan. Each such agreement shall
expressly incorporate by reference the provisions of this Amended 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 Amended Plan shall govern.
4. ANNUAL RETAINER
(a) AMOUNT. The amount of the Annual Retainer payable by the Company to
each Participant other than the Chairman of the Board of the Company shall be
$20,000 per year. In recognition of his additional administrative duties and
responsibilities, the amount of the Annual Retainer for a Participant who is
also the Chairman of the Board of the Company shall be equal to 150 percent of
the Annual Retainer amount payable to all other Participants. The Board may
change the amount of the Annual Retainer at any time by a duly adopted
resolution.
(b) ELIGIBILITY. A Non-employee Director shall be eligible to receive the
Annual Retainer only if he or she has been duly elected as a Director and
serving in such capacity on April 1 of the particular year for which the Annual
Retainer is payable by the Company.
(c) PAYMENT DATE. Each Participant shall be paid the Annual Retainer on
April 1 of each year commencing on April 1, 1995.
5. MEETING FEES
(1) AMOUNT.
(i) The amount of the Board Meeting Fee for eligible Non-employee
Directors other than the Chairman of the Board of the Company shall be $1,000
per Board meeting. In recognition of his additional administrative duties and
responsibilities, the amount of the Board Meeting Fee for a Participant who is
also the Chairman of a Board Committee shall be equal to 150 percent of the
Board Meeting Fee amount applicable to all other Participants.
(ii) The amount of the Committee Meeting Fee for Participants other
than the Chairman of each respective committee
-4-
<PAGE>
of the Board shall be $1,000 per Board committee meeting. In recognition of his
or her additional administrative duties and responsibilities, the amount of the
Committee Meeting Fee for an eligible committee chairman shall be equal to 150
percent of the Board Meeting Fee amount applicable to all other Participants.
(iii) Meeting Fees for any Participant shall not 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.
(iv) The Board may change the amount of the Board Meeting Fee and the
Committee Meeting Fee at any time by a duly adopted resolution.
(b) ELIGIBILITY. A Participant shall be eligible to receive a Board
Meeting Fee and/or Committee Meeting Fee only if he or she attends the Board
meeting or Board committee meeting, as the case may be, to which the Board
Meeting Fee or Committee Meeting Fee, as the case may be, applies.
(c) PAYMENT DATE. Each Participant shall be paid the applicable Board
Meeting Fee or Committee Meeting Fee, as the case may be, at the commencement of
the Board meeting or Board committee meeting to which the Board Meeting Fee or
Committee Meeting Fee applies.
6. DEFERRAL OF ANNUAL RETAINER AND MEETING FEES
A Participant may elect to defer all or a portion of the Annual Retainer or
Meeting Fees payable to such Participant by the Company. In the event that a
Participant elects to defer all or a portion of the Annual Retainer or Meeting
Fees, he or she shall enter into a written agreement with the Company, which
agreement shall contain such terms and conditions of the deferral arrangement as
the Board or Plan Committee, as the case may be, shall determine, consistent
with this Amended Plan.
7. RETIREMENT BENEFITS
(a) ELIGIBILITY.
(i) Upon Retirement, a Participant shall be eligible to receive
Retirement Benefits under this Amended Plan if such Participant has at least
five consecutive Years of Service as a Non-employee Director (i.e., without any
break in service for any
-5-
<PAGE>
reason). The amount and the manner of payment of such Retirement Benefits will
be as provided below in clause 7(c).
(ii) A Non-employee Director who serves or has at anytime served
(before or after the effective date of the Plan) as an Employee shall not be
eligible to receive Retirement Benefits under this Amended Plan if such Non-
employee Director is eligible to receive retirement benefits under a Defined
Benefit Plan (as such plans are defined by the Employee Retirement Income
Security Act) established by the Company.
(b) DISQUALIFICATION. A Non-employee Director shall not be entitled to
receive Retirement Benefits under this Amended Plan if he or she is removed for
"cause" from the Board even if such Non-employee Director otherwise satisfies
the requirements for receiving Retirement Benefits and even if Retirement
Benefits have already accrued.
(c) AMOUNT OF RETIREMENT BENEFITS.
(i) If a Participant Retires, the Company shall pay the Participant
Retirement Benefits equal to the average of the Annual Retainer paid to such
Participant for the three year period immediately preceding Retirement or the
average of the Annual Retainer paid to such Participant if the Annual Retainer
has been paid by the Company for less than three years. Unless a Participant
becomes ineligible, disqualified or his or her Retirement Benefits terminate as
provided herein, the payment of Retirement Benefits by the Company shall be made
annually for the number of Years of Service accumulated by a Participant at the
time of his Retirement. Each Participant shall be fully liable for payment of
any local, state or federal income or other taxes associated with the receipt of
Retirement Benefits.
(ii) If a Participant Retires and later resumes Non-employee Director
status, payments of Retirement Benefits shall be automatically suspended as of
the date of resumption of Non-employee Director status and until such time as
the Non-employee Director again Retires and is eligible to receive Retirement
Benefits. If the Non-employee Director again Retires, the Company shall pay the
Non-employee Director Retirement Benefits equal to the average Annual Retainer
paid to such Non-employee Director for the immediately preceding three year
period, or the average of the Annual Retainer paid to such Non-employee Director
if such has been paid for less than three years, provided such Non-employee
Director remains eligible to receive Retirement Benefits. Unless a Participant
becomes ineligible, disqualified or his or her Retirement Benefits terminate as
provided herein, payment of Retirement Benefits shall be made by the Company
annually for the number of Years of Service accumulated by the Non-employee
Director (less any period of time for which payments
-6-
<PAGE>
of Retirement Benefits were previously made under this Amended Plan) at the time
of his or her Retirement, including Years of Service which may have accrued
since the resumption of the Non-employee Director as a Director or in any other
capacity for any period of time or at a particular retainer or other rate of
compensation. Nothing in this Amended Plan or in any written instrument related
to this Amended Plan shall confer upon any Participant any legal or other right
to continue as a Director or in any other capacity, or as limiting, interfering
with or otherwise affecting the right to terminate a Participant in his or her
capacity as a Director or otherwise at any time for any reason, with or without
cause, and without regard to the effect that such termination might have upon
him or her as a Participant under this Amended Plan.
(d) ACCELERATION OF RETIREMENT BENEFITS
Any Retirement Benefits which a Participant has accumulated under clause
(a) hereof shall immediately vest and be payable upon the effective date of a
Change of Control (as defined herein). Notwithstanding clause (a) above,
acceleration of a Participant's retirement benefits under this clause (d) shall
occur even if the Participant does not satisfy the eligibility requirements of
clause (a) above.
The Retirement Benefits to be paid hereunder shall be based on the number
of Years of Service of the Participant at the effective time of the Change of
Control and shall be calculated in the same manner as provided in clause 7(c)
hereof, however, the Retirement Benefits to paid to each Participant shall be
calculated based on the present value of the Retirement Benefits at the
effective time of the Change of Control. Any Participant who is Retired and is
receiving Retirement Benefits pursuant to this Amended Plan shall upon a Change
of Control receive the present value of the remaining, unpaid balance of such
Participant's Retirement Benefits. The present value of any Retirement Benefits
to be received by any Participant upon a Change of Control shall be calculated
by an independent actuary, who is a Fellow in the Society of Actuaries, selected
by the chairman of the Committee.
As used in this Section 7(c), the term "Change of Control" shall mean the
occurrence of any of the following: (i) a business combination effectuated
through the merger or consolidation of the Company with or into another entity
where the Company is not the Surviving Organization; (ii) any business
combination effectuated through the merger or consolidation of the Company with
or into another entity where the Company is the Surviving Organization and such
business combination occurred with an entity whose market capitalization prior
to the transaction was greater than 50 percent of the Company's market
-7-
<PAGE>
capitalization prior to the transaction; (iii) the sale in a transaction or
series of transactions of all or substantially all of the Company's assets; (iv)
any "person" or "group" (within the meaning of Sections 13(d)and 14(d) of the
Securities Exchange Act of 1934, as amended (the "Exchange Act")) other than
UniHealth, a California non-profit public benefit corporation ("UniHealth"),
acquires beneficial ownership (within the meaning of Rule 13d-3 of the Exchange
Act), directly or indirectly, of 20 percent or more of the voting common stock
of the Company and the beneficial ownership of the voting common stock of the
Company owned by UniHealth at that date is less than or equal to the beneficial
ownership interest of voting securities attributable to such other person or
group; (v) a dissolution or liquidation of the Company; or (vi) the Company
ceases to be subject to the reporting requirements of the Exchange Act as a
result of a "going private transaction" (within the meaning of the Exchange
Act). For purposes hereof, "Surviving Organization" shall mean any entity where
the majority of the members of such entity's board of directors are persons who
were members of the Company's board of directors prior to the merger,
consolidation or other business combination and the senior management of the
surviving entity includes all of the individuals who were the Company's
executive management (the Company's chief executive officer and those
individuals who report directly to the Company's chief executive officer) prior
to the merger, consolidation or other business combination and such individuals
are in at least comparable positions with such entity. The Committee may make
such determinations and interpretations and adopt such rules and conditions as
it, in its absolute discretion, deems appropriate in connection with a Change in
Control. All such determinations and interpretations by the Committee shall be
conclusive. Each Participant shall receive at least 10 days' notice prior to
the effective date of a Change in Control that their Retirement Benefits will
vest upon the effective date of the Change in Control.
10. COMPLIANCE WITH GOVERNMENT REGULATIONS
Neither the Plan Committee nor the Company shall be obligated to make any
payments pursuant to this Amended Plan at any time unless and until all
applicable requirements under federal and state laws, rules, and regulations, or
by any regulatory agencies, have been fully met.
11. NONTRANSFERABILITY OF RIGHTS
No Participant may assign the right to receive Retirement Benefits under
this Amended Plan or any other right or interest under this Amended Plan,
contingent or otherwise, or to cause or permit any encumbrance, pledge, or
charge of any nature to be imposed on any such right or interest.
-8-
<PAGE>
12. AMENDMENT AND TERMINATION OF AMENDED PLAN
The Board shall have the power, in its discretion, to amend, suspend, or
terminate this Amended Plan at any time, provided, however, that no amendment,
suspension, or termination of this Amended Plan will, without the consent of the
Participant, terminate, reduce or adversely affect any benefits which have
accrued under this Amended Plan, unless such amendment, suspension, or
termination is required by applicable law.
13. GOVERNING LAW
The laws of the State of Delaware shall govern and control the
interpretation and application of the terms of this Amended Plan.
14. EFFECTIVE DATE THE PLAN
The Plan originally became effective as of April 1, 1991. Non-employees
who Retired prior to such date are not entitled to receive Retirement Benefits
under the Plan. This Amended Plan shall be effective as of October 12, 1995.
-9-
<PAGE>
Exhibit 11A
PacifiCare Health Systems, Inc.
Computation of Net Income per Share of Common Stock -
Primary
(Dollars and shares in thousands, except per share amounts)
<TABLE>
<CAPTION>
Three months ended Six months ended
March 31, March 31,
----------------------------------------------------
1996 1995 1996 1995
- -----------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Shares outstanding at the beginning of the
period 30,987 27,594 30,883 27,528
Weighted average number of shares issued
during the period in connection with a
public offering, compensation awarded
in stock and exercise of stock options 48 359 96 220
Dilutive shares issuable, net of shares
assumed to have been purchased (at the
average market price) for treasury with
assumed proceeds from the contingent
exercise of stock options and registered
equity purchase contracts 723 648 656 666
- -----------------------------------------------------------------------------------------------------------
Total shares - primary 31,758 28,601 31,635 28,414
- -----------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------
Net income $ 31,869 $ 27,359 $ 59,848 $ 47,416
Primary earnings per share $ 1.01 $ 0.96 $ 1.89 $ 1.67
- -----------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------
</TABLE>
17
<PAGE>
Exhibit 11B
PacifiCare Health Systems, Inc.
Computation of Net Income per Share of Common Stock -
Fully Diluted
(Dollars and shares in thousands, except per share amounts)
<TABLE>
<CAPTION>
Three months ended Six months ended
March 31, March 31,
----------------------------------------------------
1996 1995 1996 1995
- -----------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Shares outstanding at the beginning of the
period 30,987 27,594 30,883 27,528
Weighted average number of shares issued
during the period in connection with a
public offering, compensation awarded
in stock and exercise of stock options 48 359 96 220
Dilutive shares issuable, net of shares
assumed to have been purchased (at the
higher of ending or average market
price) for treasury with assumed
proceeds from the contingent exercise
of stock options and registered equity
purchase contracts: 724 691 676 703
- -----------------------------------------------------------------------------------------------------------
Total shares - fully diluted 31,759 28,644 31,655 28,451
- -----------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------
Net income $ 31,869 $ 27,359 $ 59,848 $ 47,416
Fully diluted earnings per share $ 1.01 $ 0.96 $ 1.89 $ 1.67
- -----------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------
</TABLE>
18
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> SEP-30-1996
<PERIOD-START> OCT-01-1995
<PERIOD-END> MAR-31-1996
<CASH> 190,207
<SECURITIES> 527,007
<RECEIVABLES> 141,669
<ALLOWANCES> 891
<INVENTORY> 0
<CURRENT-ASSETS> 895,765
<PP&E> 183,086
<DEPRECIATION> 83,914
<TOTAL-ASSETS> 1,323,053
<CURRENT-LIABILITIES> 510,773
<BONDS> 10,105
0
0
<COMMON> 312
<OTHER-SE> 801,471
<TOTAL-LIABILITY-AND-EQUITY> 1,323,053
<SALES> 0
<TOTAL-REVENUES> 2,221,494
<CGS> 0
<TOTAL-COSTS> 1,859,836
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 30
<INTEREST-EXPENSE> 1,342
<INCOME-PRETAX> 100,181
<INCOME-TAX> 40,333
<INCOME-CONTINUING> 59,848
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 59,848
<EPS-PRIMARY> 1.89
<EPS-DILUTED> 1.89
</TABLE>
